Called to Account: Earnings releases are still a confusing mess, and it’s investors who pay the price Express News
Just two weeks into the fourth-quarter earnings season, and companies, including big blue chips, are producing some unusual and confusing releases that are certainly making life difficult for investors.
On Thursday, Ford Motor Co.
released one of the most unclear quarterly reports MarketWatch has seen, failing even to offer a year-earlier number for its earnings — or, in this case, loss — per share. The car company even flipped its financial table to show the prior-year numbers before the current ones. It’s a basic financial-reporting principle that tables are read from left to right, so some readers could easily have mistaken the 2016 numbers for the 2015 ones.
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The Ford release did not have any purpose other than to direct investors to the company’s website to see the results. By the time several clicks had finally produced a report, the share price had moved. The commentary provided by Chief Executive Mark Fields and Chief Financial Officer Bob Shanks was only about the full-year performance, which showed the company swinging to a profit from 2015, with no mention of the company’s $800 million loss for the fourth quarter.
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MarketWatch has written before about the delay caused when companies make investors, and the reporters who serve them, search for earnings on a website, which almost invariably crashes under the strain of so many attempting to access it at the same time.
See also: T-Mobile’s accounting slammed by investor group in letter to SEC
The worst offender, in our view, is the video-streaming giant Netflix Inc.
This season, Netflix shares had moved almost 10% by the time most news services had started reporting the numbers, suggesting a clear advantage for institutional investors with machine-readable trading services that can scrape websites for relevant information at high speed. Retail investors are losing out.
And that’s not all. Even as the Securities and Exchange Commission steps up its efforts to make companies produce clean, easily understood earnings, companies are ignoring best-practice conventions in the way numbers are presented.
This earnings season, General Electric Co.
and International Business Machines Corp.
both listed their diluted earnings per share above basic earnings per share. While the companies are not doing anything technically wrong, one industry expert said it is still a surprising approach.
Read: GE and IBM have ‘unusual’ earnings reports in common
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“It’s fairly unusual that a company is reporting diluted EPS before basic EPS,” said Urooj Khan, Class of 1967 associate professor of business at Columbia Business School. “There’s nothing wrong with it. But it’s interesting why they are making the choice to be different from the majority of other companies.”
Basic EPS is calculated using the weighted-average number of common shares outstanding for the period, while diluted EPS takes into account all dilutive potential common shares, such as exercised options. Therefore, diluted EPS tends to be a smaller figure than basic EPS. An unknowing investor might at first glance conclude that earnings per share were greater than actual bottom-line earnings.
“We present EPS in a way that we think is most representative of the company for investors,” a GE representative told MarketWatch. IBM did not respond to request for comment.
See also: Wal-Mart’s earnings report is still missing something
On Wednesday, another member of the Dow Jones Industrial Average
, United Technologies Corp.
, did something even more baffling, presenting earnings that obliged investors and reporters to do their own math. Under the “diluted earnings (loss) per share of common stock” heading, the line item for continuing operations showed $1.26, but the line for discontinued operations just showed a loss of 1 cent. For investors to ascertain net earnings per share, they are required to subtract a penny from $1.26, to get $1.25.
That might seem like a simple calculation, but United Technologies is the only Dow component that forces investors to figure it out themselves. And it isn’t always so simple: EPS from continuing operations in the same period a year ago was a loss of 30 cents, and the line item for discontinued operations was $4.16, meaning net EPS was $3.86.
“We’ve always only focused on continuing operations,” a United Technologies spokesperson told MarketWatch.
Meanwhile, Lockheed Martin Corp.
unveiled a problem this week with Sikorsky, the helicopter maker it acquired from United Technologies in 2015. Lockheed said it expects to report a material weakness in internal control over financial reporting for Sikorsky in its 2016 annual report at the end of February. The company said management had determined that Sikorsky did not “adequately identify, design and implement appropriate process-level controls for its processes and appropriate information technology controls for its information technology systems.” Its internal control over financial reporting was, therefore, “ineffective” as of Dec. 31, 2016, according to the filing. The auditor’s opinion in the annual report is expected to reflect management’s conclusion.
See: Lockheed says numbers from Sikorsky are unreliable due to control weakness
The SEC has been cracking down on the use of metrics that don’t conform with Generally Accepted Accounting Principles in earnings in an effort to make them clearer. The regulator issued updated guidelines on that practice last May and has followed up with comment letters to offenders.
The SEC rules allow companies to use non-GAAP numbers to supplement the GAAP ones, but they must provide the GAAP numbers first, give both sets of numbers equal prominence and explain how they are reconciled. The SEC has sent comment letters to companies including GE, General Motors Co.
, Coca-Cola Co.
, Hertz Global Holdings Inc.
, Medtronic PLC
, Whirlpool Corp.
and Tesla Motor Inc.
, to name a few. The SEC called ConocoPhillips
out on its use of a non-GAAP revenue number, just weeks after MarketWatch highlighted the issue.
“In response to the May guidance, companies adopted changes in the way they present non-GAAP metrics, especially in the area of the ‘prominence’ and ‘reconciliation,’ ” said Olga Usvyatsky, a CPA who is vice president of research at Audit Analytics. “But there is still work to be done to achieve full compliance.”
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See: How the biggest companies in the S&P 500 use made-up earnings numbers