FEATURE-Under the gun, earnings reports come clean
By Deepa Babington
NEW YORK, Jan 24 (Reuters) - Now here's something investors will be pleasantly surprised to see popping up in corporate earnings press releases: Easier-to-understand financial reports.
The use of the widely criticized pro forma earnings -- figures that strip out items like advertising expenses and blockbuster restructuring charges -- has mushroomed in recent years and has continued into the present reporting period.
But there is a growing trend toward better explaining the use of the ``exceptional'' figures, if they are put into reports. At the same time, net profit, the traditional ``bottom line'' view of earnings, is making a comeback.
That's largely because the nation's top market regulator has vowed to crack down on the abuses of pro forma reporting, which can transform a dismal loss into a pretty profit. The Enron debacle, fueled in part by the energy trader's lack of disclosure, has also raised pressure on firms to give clear information to investors.
``I've noticed that firms are being more clear in their earnings announcements now,'' said Mark Bradshaw, an assistant professor of business administration at Harvard Business School, who has done research on pro forma reporting. ``Most firms are being quite particular and are telling investors: 'We're creating this number for your benefit and this one is what the accountants do.'''
Last week, the Securities and Exchange Commission in its first such enforcement case, settled with Trump Hotels & Casino Resorts Inc (NYSE:DJT - news) after accusing it of misleading investors through the use of pro forma reports.
In December, the agency had warned companies to be careful in how they present earnings data to investors. As a result, companies are now increasingly referring to their official bottom-line net income figures high up in their press releases or at the very least, giving a detailed explanation of what charges are being excluded in their profit numbers.
Take media company E.W. Scripps Co (NYSE:SSP - news), for example. In its fourth quarter earnings press release issued on Wednesday, the firm mentioned its earnings from ``core operations'' which excluded charges at the beginning of the report.
But this time, the company also put net profit right at the top of its earnings commentary. Both were laid out in a detailed earnings table at the end of the news release.
A Scripps spokesman said it made that move because of the magnitude of the difference between the firm's net earnings and earnings from core operations. Also, it felt it should do so, since it had highlighted net earnings in its first quarter report last year, when they had been boosted by investment gains, he said.
Going forward, however, the firm will take into consideration the SEC's encouragement to provide net income numbers as other firms are likely to do, he said.
BACKLASH AGAINST PRO FORMA
All this is a far cry from just a few years ago when the only reference to the net income figure was often in the table at the bottom of the press release for some technology darlings.
In addition, when firms talked about their pro forma results, they often vaguely mentioned they were excluding ``certain charges'' without being specific, said Bradshaw.
Investors will be less likely now to have to scratch their heads as much to figure out how a company concocted its pro forma numbers and decide if they are justified.
Business-to-business maker Ariba Inc. (NasdaqNM:ARBA - news), is one example. It usually provides both kinds of earnings figures -- two sets of numbers, one that includes and another that excludes certain charges high up in its press release.
But in its latest quarterly earnings press release, the firm had an extra line, strategically placed at the top of its press release, explaining the exact charges excluded in its pro forma figures instead of simply tagging that description to the table at the bottom.
The company detailed that its pro forma operating results excluded expenses related to the amortization of goodwill and other intangible assets, business partner warrants and stock-based compensation.
An Ariba spokesperson did not return calls seeking comment.
Even seemingly small presentation changes like this are reflective of a more cautious outlook by companies, said Bradshaw.
In fact, nowadays even Internet companies that shunned any focus on traditional accounting numbers are mentioning one word previously unheard of during their earnings reports and conference calls: Generally Accepted Accounting Principles or GAAP. Profit numbers prepared according to GAAP are filed with the SEC and include all charges and expenses such as goodwill write-offs and taxes that companies typically implore analysts and investors to ignore.
In recent years, the use of pro forma numbers has ballooned, as companies in sectors other than technology rushed to put their best foot forward.
A survey released last week by the National Investor Relations Institute showed that out of 233 companies queried sampled, 57 percent of them were still reporting pro forma information with prominence. Generally, companies with a larger market capitalization reported pro forma results more than companies with small market capitalizations, the survey showed.
The latest hints of a move to a cleaner slate is largely good news for investors, say experts.
``The whole problem with pro forma is that message to investors is not clear,'' said Julia Grant, a professor at the Weatherhead School of Management at Case Western Reserve University. ``At least with GAAP, investors can compare apples to apples.''
At least one expert disagrees, however. GAAP earnings figures are not a better indicator of a firm's future performance and its stock prices, according to research by Lawrence Brown, a professor at Georgia State University. As a result, giving more details on net income and how it corresponds to pro forma results may not always be useful, he said.
``It's a no-brainer, of course, companies are going to listen to the SEC but how much of it is form versus substance?'' said Brown.``I'm afraid it's going to give a false sense of security to investors.''
The jury is still out on that one but investors fed up of opaque press releases can start to breathe a little easier.
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