WALL STREET JOURNAL.
U.S. Corporations Increasingly Adjust to Mind the GAAP
The use of figures that exclude certain items is becoming more
prominent in corporate filings
Wendy’s is among companies using adjusted financial metrics.
PHOTO: PATRICK T. FALLON/BLOOMBERG
Dec. 14, 2015 8:28 p.m. ET
A financial obfuscation
of the dot-com era is making a comeback: Hundreds of U.S. companies
are trumpeting adjusted net income, adjusted sales and “adjusted
These adjusted measures
paint a rosier picture of corporate earnings. Without them,
third-quarter earnings per share fell 13% for the biggest U.S.
companies, according to
Deutsche Bank research, instead
of falling 0.1% with them.
About one in 10 major
securities filings this year used the term adjusted Ebidta—or adjusted
earnings before interest, taxes, depreciation and amortization—up from
one in 40 a decade ago. About a quarter of earnings-related filings
this year included figures that don’t comply with generally accepted
accounting principles, or GAAP, as well as more standard measures,
according to a Wall Street Journal analysis of 10-K, 10-Q and 8-K
The terms now crop up in
quarterly earnings releases and securities filings for companies as
varied as Grape-Nuts-maker
Post Holdings Inc.,
Dow Chemical Co., wireless
last week was the latest big company to embrace adjusted earnings
measures. By adhering to accounting rules, “we’re actually confusing
people more than we were helping people understand what’s going on in
the business,” said CEO Greg Hayes. “This is a simplification and
really allows the investors to more easily understand what the
businesses are doing.”
The result, however, is
a new yardstick with no standard accounting definition and, often,
little comparability to other companies or even other time periods.
“Non-GAAP measures are
used extensively and in some instances may be a source of confusion,”
Mary Jo White, chair of the Securities and Exchange Commission said at
a conference last week. “This area deserves close attention.”
companies are broadly expected under securities and disclosure rules,
as well as by investors, to use such standard accounting measures as
net income and revenue when disclosing their financial results.
occasionally take companies to task for glossing over standard
accounting figures. The SEC has queried companies at least 100 times
since 2006 about non-GAAP measures, according to MyLogIQ, an
SEC-filings data and analysis firm.
Earlier this year, the
T-Mobile US Inc.
include figures that comply with accounting rules in its quarterly
earnings release. The company had only used adjusted Ebitda, and
omitted net income. That approach “appears to attach undue prominence
to the non-GAAP measure,” the SEC said.
including GAAP figures in news releases in the second quarter. The
company declined to comment, but said in securities filings that it
uses the adjusted metric internally to evaluate management and compare
its performance to rivals.
companies to strip out such expenses as asset write-downs or the
effects of foreign-currency moves that executives and many investors
consider to be outside a company’s most fundamental operations.
Companies also often omit results from newly opened and recently
closed stores to better reflect ongoing operations
Corp., a utility holding company, strips weather from its results to
smooth out the effects of unusual warm and cold spells, for example.
adjusts its earnings for “actions” and the “tax effect on actions”
that are described in footnotes and a series of tables at the end of
its earnings release.
electronic-payments company that recently went public, reported
adjusted revenue that omitted 14.5% of the company’s sales because
they came from
Starbucks Corp., which has
announced plans to stop using Square’s services.
Restaurant chains like
Potbelly Corp., burger joint
Shake Shack Inc.
and chicken-and-biscuits seller
Bojangles Inc. exclude much of
the costs of opening new stores. Telecom companies like AT&T and
Sprint Corp. omit the multibillion-dollar depreciation bills that
reflect the cost of upgrading their networks.
“There are those that
use it as a way to take out nonrecurring type of items to help people
understand how the business works,” said T.C. Robillard, vice
president of investor relations at Hanesbrands. “Then there are
companies out there like anything else in life that go out and misuse
Executives at Wendy’s
mentioned adjusted financial metrics about a dozen times on their most
recent earnings call with investors but didn’t explicitly cite
standard accounting figures.
Wendy’s said it believed
investors find non-GAAP information useful. “Based on the feedback we
get from investors, investors use this information to view different
companies’ performance on an apples-to-apples basis,” a Wendy’s
mentioned in this article echoed Wendy’s position, declined to comment
or didn’t respond to inquiries. Most said they also provide standard
accounting results prominently and explain the difference between the
two, as required by securities rules.
The difference between
standard and adjusted earnings is growing. Deutsche Bank equity
strategist David Bianco said he expected the gap to widen to 40% in
the fourth quarter, from 20% or 30% in recent periods. He blamed
lackluster operating results, with sales likely to fall 4% this year
for companies in the S&P 500 index.
“There is a lot of
concern about companies doing everything they can to keep earnings
from going negative,” Mr. Bianco said.
financial measures aren’t new. During the late-1990s tech-stock boom,
companies cited “pro forma” results that excluded costs deemed
unusual—and often did so every quarter. After the market’s crash,
Congress told securities regulators to clean up disclosure as part of
the Sarbanes-Oxley Act. The result was Regulation G, which requires
companies to explain any nonstandard financial measures they use.
“If I didn’t have to pay
for day care and I didn’t have to pay for insurance, then I would be
making a heck of a lot more money, too,” said Michelle Leder, founder
of financial-research service footnoted, who discussed the topic in a
November blog post. “If the
numbers are being massaged to this level, how do you figure out what’s
real and what’s not?”
telecom analyst Paul da Sa poked fun at adjusted accounting in an
email, saying the research house’s predictions for 2015 had an
“adjusted accuracy rate of 99.9%,” excluding “all the stuff we got
and Richard Teitelbaum contributed to this article.
Theo Francis at
email@example.com and Kate