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The WSJ Looks At "Non-GAAP" Earnings, Is Horrified By What It Finds
There is a reason why, when looking at S&P 500 earnings, we only care about GAAP numbers: the reason is that any non-GAAP "data" has become as meaningless as "adjusted EBITDA" - a goalseeked, procyclical placeholder which gives zero indication of the true financial state of the company and is merely a propaganda tool used by management and its preferred investment bank to raise capital or its stock price (and hence, equity-linked executive compensation) to naive investors.
A recent example of this was in December, when we found that "Surprise, GAAP S&P500 EPS Set To Decline 1.3% In 2014", suggesting that all that euphoria about corporate profitability growth was only due to addbacks and accounting adjustments of "one-time, non-recurring" expenses... such as $178 billion in recurring, non one-time legal charges for the Libor, FX, Gold and everything else-rigging crime syndicate better known in common vernacular simply as "banks".
Well, we are delighted that finally others too are starting to look at the real gimmicks used and abused by corporations everywhere to "report" better than expected numbers. Enter the WSJ, which came, saw at Non-GAAP "numbers", and was horrified to find the costs companies are "stripping out of those measures to enable themselves to show profits seem to be getting ever more eyebrow-raising."
The scam is so simple it would have continued to slide under the radar for years to come if someone didn't finally dare to call the emperor naked: "As The Wall Street Journal reported Thursday, 40 companies that had initial public offerings in 2014 reported losses under standard accounting rules. Yet those companies showed profits using their own tailor-made measures, according to consulting firm Audit Analytics – the highest level of such companies in at least the past several years.
For anyone who has had to "adjust" EBITDA even once, none of this is news, and as the WSJ also notes, "companies have long used such metrics, often omitting costs like interest, taxes and employee stock compensation, and thus boosting their results. But now, more companies are taking out more types of costs that would seem to belong in earnings calculations. During the past year, some companies going public have excluded from their nonstandard measures costs like regulatory fines, “rebranding” expenses, pension expenses, costs for establishing new manufacturing sources, fees paid to the board of directors, severance costs, executive bonuses and management-recruitment costs."
In fact it may soon be time to call uber non-GAAP EPS simply enough as... revenue.
“Whatever it takes to get that (customized earnings) number up to support a valuation, is what they’ll back out,” said Anthony Catanach, a Villanova University accounting professor.
To be sure, companies are still required to prominently disclose their results under traditional accounting rules, a good example being our recent comparison of Tesla's laughable parallel income statements, one GAAP one non-GAAP, for both EPS and revenue (yes non-GAAP revenue):
But as the WSJ adds, companies contend that the additional non-standard “non-GAAP” measures they provide – those that don’t follow generally accepted accounting principles, the official set of U.S. accounting rules – give investors a clearer picture of their ongoing performance. They say it’s proper to strip out what would seem to be ordinary costs if they’re non-cash or one-time expenses that distort the official GAAP numbers.
Actually the reason is far simpler: companies know they are lying, and investors know they are being lied to, but at the end of the day it simply a case of Mutual Assured Destruction if anyone dares pull their head out of the sand, because the simple admissions that everything is a lie threatens to bring the entire house of cards crashing down!
And while we have done so many times over the years, we are surprised that the WSJ dares to stir the hornets' nest. Some of its case studies:
Adeptus Health Inc.ADPT -0.75%, an emergency medical services provider that went public in June, stripped out $2.4 million in management bonuses to help get from a $15.8 million loss in the first nine months of 2014 to an $18 million profit under “adjusted Ebitda,” or earnings before interest, taxes, depreciation and amortization, modified further to exclude other costs like the bonuses, $6.1 million in preopening costs for new facilities, and $156,000 in “management recruiting expenses.”
An Adeptus spokesperson said the company uses non-GAAP metrics “to provide investors with a more complete understanding of our underlying business performance,” and that it was “consistent” with many other companies’ practices.
LendingClub Corp.LC +1.60%, a peer-to-peer lender which went public in December, uses a non-GAAP performance measure called “contribution margin” intended to measure the profitability of its loans. But the earnings figure the company uses to compute that margin strips out general and administrative expenses – ordinary corporate overhead costs, in other words.
If those expenses had not been excluded, LendingClub’s contribution margin for the first nine months of 2014 would have been negative, instead of the positive 44.1% it reported. LendingClub declined to comment.
So what happens if one ignores the lies that non-GAAP brings and focuses on real, accounting-based numbers? For the answer we repost our article from late November when the S&P was at 2070, and when the S&P500 EPS was well higher than where it will be in 2015 as a result of the collapse in Energy EPS:
Goldman may have been right that there will be no more multiple expansion in 2015, but there sure was quite a bit overnight thanks to the latest verbal and actual central bank interventions by the ECB and the PBOC. And as a result, the biggest beneficiary is the S&P500, which is set to open just around 2070, or about 30 points shy of Goldman's 2015 S&P500 year-end target.
And for those who still care about such things, the chart below shows that fundamentally, the S&P is now trading at 17.5x non-GAAP LTM EPS, and, drumroll, 19.2X GAAP PE!
At the current daily pace of increase, David Tepper can finally pop that champagne bottle early next week, because his long-held dream of a 20X P/E (GAAP that is) will have finally materialized (he may have to wait until Christmas for 20x non-GAAP).
And all it took was the coordinated intervention of every single developed and developing central bank.
At this moment, net of the consensus plunge in Energy earnings, the S&P is precisely at 20x GAAP P/E. Which, according to Charlie Evans is "catastrophically" cheap.
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If you remember the bottom for the market in 2009 was preceded by a major accounting change; no longer mandating mark to market but rather allowing mark to fiction..
Yes, once you start shooting the messengers,
why would you stop?
"In fact it may soon be time to call uber non-GAAP EPS simply enough as... revenue."
Winner, winner, chicken dinner. That's exactly where this is headed. Of course, by then revenue won't mean what you think it means, either.
Let me know when I can stop beating my head against the wall
non-GAAP (now obviously normalized Grifting Accommodations, Abstractions, and Propaganda), also known as mark-to-bonus accounting.
does it, lots remains little to not known, i.e.
President George W. Bush has bestowed on his intelligence czar broad authority, in the name of national security, to
excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.
The memo Bush signed on May 5, which was published seven days later in
the Federal Register, had the unrevealing title "Assignment of Function
Relating to Granting of Authority for Issuance of Certain Directives:
Memorandum for the Director of National Intelligence." In the document,
Bush addressed Negroponte, saying: "I hereby assign to you the function
of the President under section 13(b)(3)(A) of the Securities Exchange
Act of 1934, as amended."
A trip to the statute books showed that the amended version of the 1934 act states that "with respect to matters concerning the national security of the United States," the President or the head of an Executive Branch agency may exempt companies from certain critical legal obligations.
These obligations include keeping accurate "books, records, and accounts" and maintaining "a system of internal accountingcontrols sufficient" to ensure the propriety of financial transactions and the preparation of financial statements in compliance with
"generally accepted accounting principles."
Yes, but if one really wished to get to the root of the problem, one need only go back to Nov, 12th 1999. Bill Clinton made an active choice to sign, thou he didn't need to. He could have veto'd and the super majoity would have bypass his veto. But alas, Bill Clinton wanted to get the creadit for the repeal of Glass Steagall, and thus he gets it. Fuck Bill Clinton
and people still think there's a real difference between Democrats and Republicans......
let the sheep think they have a 'choice'........
I suppose the real root of the problem is that we have "accounting principles" that can be changed or manipulated so easily. In my more ideal world, there is no "goodwill", and you post how much money you actually received and put out. Oh, and I'd also stop distinguishing between the long term expense of FT employees vs the short time expense of contractors doing the same work, even tho they can be on a job for 18-24 mos too.
Of course the above, along with true calculations of earnings per share and a host of other things, would prove disastrous for pointless and unmerited executive compensations. Heaven help us if the dumb retail investors saw that we actually haven't made much money at all in the last ten years. Though you could probably still get CalPERS and other dumb pension funds to buy damn near any piece of dreck.
The primary function of corporations is to enrich the executive class. Then the company blows up and the executives move on to the next.
With enough pressure from citizens Wall Street Banks could be prevented from gambling with other peoples' money. It's like those in office in D.C. are pretending there never was a time when the banks weren't allowed to gamble OPM...and get paid for doing so. Forward to the past, quickly.
I thought the 2009 bottom was preceeded by QE
I believe you are correct. The FED's $16T bailout began in Jan. of 2009 ($700B was the official number used at the time).
Back then, I think it was called TARP
Would that be recipe #156...?
If hookers and blow are good enough for the UK GDP, they’re good enough for US Non-GAAP accounting.
Caved
The accounting "profession" is extinct. Has been for some time.
It became the noncounting profession....much like the nonaccountability profession.
It's a form of dishonesty when a story is reported five years later than it should have been, do we really think WSJ just discovered this now?
Catholic League's Donohue: cartoonists got what was coming to them!
http://tinyurl.com/lkjqgt3
Do you think I could ask my bank manager to accept my non-GAAP accounts?
My girlfriend recently issued to me new guidelines relating to non-GASP
Non-Generally Accepted Sexual Practices
Reminds me of the FOMC meeting that did not really happen yesterday, well at best it was a 5 minute meeting about a meeting that happened last month. The real FOMC meeting is later this month!!
It was well played, I must say.
http://www.federalreserve.gov/whatsnext.htm
http://www.federalreserve.gov/newsevents/press/monetary/20140605b.htm
.
Gee, thanks FASB (Fictional Accounting and Swindling Board).
Exactly. "What? Accounting gimmicks? I'm shocked!"
Where is Arthur Andersen when you need them!?!?
+ 1 you're right. The Mark Haines bottom (RIP), - yup that was the day the market rallied hard - and never looked back.
Great, really great, point!
And to any readers/commenters here interested in the LIBOR (and EURIBOR and TIBOR) rates fixing, Erin Arvedlund has a great book out on it, with really fantastic reporting, called:
Open Secret
An outstanding and comprehensive take on it.
Just wait until Ozero finds out. Boy is he going to be pissed.
I was SHOCKED! to find out this guy was in France a couple weeks ago...
http://www.israelnationalnews.com/News/News.aspx/189492#.VK7KX3usS9J
For those of you who do not wish to be trolled into clicking the link, it is about a possible visit between the Israeli foreign minister and some Palestinian mucky-muck in Paris. Very shocking that the FM would have Mossad agents along to protect him in a land filled with crazy fanbelts.
I presume the implication is that Israel went out and shot everybody at the cartoon place because two high level diplomats had a confidential meeting on neutral ground.
Or it could be that they were in Paris for a forbidden love tryst or perhaps to discuss mutual defense obligations against a looming UFO attack.
Agreed.
For a false flag to be effective there has to actually be a gaggle of mad moonbats who do evil things.
A false flag in Paris? Nah.
Quote:
"According to Maariv Online, Liberman met an unnamed Arab personage – not Dahlan – at the prestigious Raphael Hotel in Paris on Christmas day. Officials from Mossad were also present at the meeting. The trip was authorized by the government but all the people who were aware of it signed confidentiality vows."
If you bothered to read the article, you would have noticed that he did NOT meet with the Paletinian mucky-muck. But of course, you did read the article didn't you? *wink*
an unnamed Arab personage +
Israeli Foreign Minister +
signed confidentiality agreement +
prestigious Raphael Hotel +
Mossad security team =
Meeting between Israeli FM and high-ranking Palestinian mucky-muck that is not allowed to be named and any name that is suggested must be denied.
But you go ahead with your suppositions, nobody's going to stop you.
“Who profits from killing Charlie?
By Pepe Escobar ”
http://www.atimes.com/atimes/World/WOR-01-080115.html
Quite a coincidence that this should happen a few days after France recognizes Palestinian statehood and Hollande demands the winding down of sanctions against Russia.
Dirty games are going on.
The truly BIG story (not to dismiss the horror in Paris out of hand, a monstrous event) being ignored, with the exception of several highly intelligent bloggers, is the news surrounding the Senate's summary of their CIA torture report.
Namely, that the same several people (Alfreda Bikowsky, Jose Rodriguez, Jr., and I believe the third guy is named Petras) have been controlling the 9/11 script from beginning to end.
They were the ones who sat on the knowledge of the hijackers (probably considered them all CIA assets until they hit the towers).
They were the ones who released the Osama video tapes (remember them?).
They were the ones who destroyed those 92 torture tapes requested by the Senate in their investigation.
They were the ones responsible for lying to the Senate about the torture of innocents (mostly).
Of course, we can't question Osama bin Laden, since he's dead.
Far more importantly, we can't question the anti-Taliban Northern Alliance leader, Ahmad Shah Massoud, who warned of an impending terrorist attack on US soil, and gave that information, along with evidence implicating the CIA and Unocal (former oil company) with financing and arming the Taliban/al Qaeda.
He was assassinated on 9/09/01, by two al Qaeda suicide bombers posing as journalists.
Say, doesn't that sound like a recent plot of a Sony movie?
Three individuals, in a $44 billion per year budgeted outfit (CIA) with far more than three jackholes, controlling the entire 9/11 script?
At the FBI, there were only two: Frasca and Maltbie.
Frasca and Maltbie were promoted for interdicting all important and incriminating evidence from the field agents.
Alfreda Bikowsky and company were promoted again and again for "fucking up"!
Julie Sirrs, that former DIA analyst who brought back the evidence and information from Afghanistan and Pakistan, had her security clearance pulled and was forced out of the DIA.
That is the BIG PICTURE AND BIG STORY.
Something rotten here?
Accounting standards and discipline are so 20th Century.
The fact that two major industries use EBITDAR and EBITDAX tells you the scam that is EBITDA. Oh yeah, when I add back my maintance capex, we really look like this.
IMO, the utilities industry is the absolute worst with this. I get banks and reg fines. But bank balance sheets are works of fiction anyway. Show me someone that has been moving fixed costs around.
I remember the days when Reliant used Open Ebitda. That pissed every peer off something fierce. Like let me wash trading gains and losses from this... Fun times.
FINANCIAL GIMMICKRY! BLASPHEMY!
lulz @ adeptus
. .
0
the mathmatics went out the window a long time ago. and then the window was kicked in and the house, torched.
subsequently, journalists covering the story blamed it on north korean libertarian gun owners.
CrAAP
non-CrAAP
Tesla ! Lending Club ! .... LOL
Too bad Pets.com didn't cook the books like this . They'd be a Fortune 500 by now !
Uber and subprime auto loans.
Notice the confluence?
Gee WSJ has a short memory I guess and doesn't recall the changing of accounting standards way back in 2009....probably cheerfully supported it I'd guess.
A system that must grow in perpetuity to survive will die. What can be done has already been tried and done many times over. Hoping for growth fueled by printed money is stupid. Stick a fork in it, and start over. Better yet, start with understanding that enough is enough - "growth" is no longer even desirable, is it? We need simply to learn how to be content with what we've got, and it wouldn't hurt to learn to use what we've already got a little more productively and sustainably. Killing the planet and everything on it to achieve one more percentage of growth just to prop up the system is stupid. Stupid! I'm tired of the stupidity. I'm tired of the wars and the murder that goes on to start wars. I'm tired of contrived enemies. I'm tired of the fear. I'm tired of arguing over how to "fix" a system that instigates stupidity. I'm just tired of it.
I hear ya...loud and clear.
It's not just that the numbers by the government and coporations are so obviously bogus which bothers me, it's the fact that no one except (except Zero Hedgers and a few journalists/bloggers) really seems to care.
What these fools need is a serious financial whoopin like a great depression in which they lose everything, and then they'll see why GAAP were put in practice and adhered to years ago.
That's just the nature of the human sheeple, they don't want anything spoiling 'the good times' chewing their cud all day, then when the wolves show up they bleat 'how could this happen! someone save us!'
Glass Steagall was put into practice and adhered to years ago too.
They have been following the gubmints own GDAP for many years!
~ Generally Deceptive Accounting Principals ~
Cue the pic of Moynihan riding the unicorn with the rainbow in the background . . . . . . . .
Actually just might be my favorite pic for this entire era. PD CEO smirking while cashing in at the expense of the taxpayer gliding along with mark-to-unicorn accounting rules firmly in hand.
Earnings? Now there is a barbaric concept in today's modern monetary world. It's the new normal bitchez!
One time expenses are a great fraud upon us all.
I think I might pick-up a zero percent interest Cadillac this weekend and leave it off budget.
I deserve a Cadillac and if someone will just hand over a set of keys to me, shame on them.
WSJ needs more blue pills.
It is not fit for ass wipe
Not kidding here - there are already some companies reporting revenues that exclude "currency impact" and bury that negative number somewhere hidden in the disclosures.
so if you don't like the fact that your global sales in dollars are 10% lower than last year, you simply use some formula to "normalize" that what you wish for (i.e. last year's exchange rate) and, voila, you beat on the top line.
A future case study in GAAP to Non-GAAP reconciliation
Tesla AGAIN ! ... hell yeah !
I don't see the issue here. On the leases Tesla gets full purchase price up front, but they have to spread it out through the term of the lease. So they have the cash but cant claim all of it as revenue. Adding that in gives one a better sense of the business during the quarter.
Analysts however should not be using these non-gaap measures.
Why would someone lease a Telsa? Unless he was a hedgefund manager who has a reverse mortgage on a 10 million dollar home. Pitching another ponzi scheme. Maybe the the other scheme is to have life insurance in case Telsa automobile burst into flames. Alot of shaddy fucks out there. US Bank Financing at $600/month? After 36 months, you don't own it. Fuck that noise. $21,600 plus, tax, insuruance, and electric bill boost.
For example, my utility unit switches. A/C electric in summer. Gas heat in winter. All one unit! Its huge, but efficient. What is the projected recharge bill to operate this car on 500-1,000 mileage/month? Any takers to breakdown?
Well done!
Often, the second book careers the first set. Winks. Keep secrets in a metal box. Don’t let Pandora’s box open. Welcome to 2015 Politics. Start in 1978, propel into 2015, ask what has changed within Government corruption tactics.
Public Image Ltd.- Careering
Always good to see a Tyler reads the comments for content. Keep up the great work. We are truly near the endgame. If only all the companies TBTJ are squeezing with these currency moves (all fiat / financial assets are wildly overvalued in real asset terms) would simply convert TBTJ asset into gold, we could move on. There's only 1 way this all plays out...
Creative accounting started with the adoption of credit derivatives, and it has never ceased!
A clown recently wrote a book called, The Death of Money (not recommending it -- stay away).
Same clown (James Rickards) who was with LTCM when they almost blew up the entire world economy (would have if not for government intervention).
One hedge fund, using credit derivatives, and oh yeah. . . Rickards was responsible there for creating a $1 billion CDS!
What poor John Williams (shadowstats) has been posting/hammering on for years, only to be ridiculed as 'statistically irrelevant' by the 'government numbers' crowd. Because after all, 'those are the numbers we have and they are the series which are relevant to current trends' and what 'influence the market and investors alike'...
These Fuckers are in for the comeuppance of a lifetime.
So you CAN make this stuff up!
We have been explaining this to the Wall Street Urinal for the past 5-6 years. Why are they concerned now?
The KVB - Into The Night
It was a slow nuze day.
The illusion of prosperity is quickly fading in America. Be prepared it won't be pretty. Have a plan
http://newamerica-now.blogspot.com/2014/02/beyond-collapse.html
Credit bubbles always burst, most quite violently. Hiding your debt is always tried but never works.
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
"goalseeked"
PROOFREADER, GET OVER HERE!
Do you say "I seeked my car in the parking lot?"
No? Then don't use it anywhere. Past tense of seek is SOUGHT.
Think about "goal-sought". I know it sounds foreign, but it's correct. You'll get used to it.
The right neologism would be "goalsought". Of course, the right words would be "fraudulent misrepresentation".
Being in accounting and finance I puke nearly every day at what I see. It's kind of like being a rock star. Yeah it's like that
It's a good way to rip-off Internal Revenue.Crooks are always finding accounting scams in order to steal from Uncle Sam.Trouble is,the money that they con out of the tax system is most likely to be shipped out to offshore tax havens,similar to what Walmart and Microsoft do.That's the way it works in The States because of double taxation.The offshore money never re-enters for economic stimulas because of extra taxes paid on re-entry so everybody has found other loopholes in order to scam the Government.First you rip them off easily because everybody understands the Government is as slow moving as the former Soviet system.If you have a Government job guarantee it's like your job is on slow-mo.Even the moronic politicians cater to this socialism.Greece is no different.You then you ship out the bread,get it out of the U.S. as quickly as possible which is the most important factor.Big deficits at over 18 trillion,you'd figure the stupid morons running Capital Hill could add 2&2.(but you'd be wrong)
GAAP is crap, but its still the best thing we have.
You are correct sir. What we have now is the firm of Arthur Andersen doing everyone's books, with most companies listed on the NYSE, NASDAQ cooking their books so fraudulently that it would give those listed on the Vancouver Stock Exchange of the 1980s a run for their money.
I'll take three non-GAAPs please, with chocolate sauce and nuts.
pc page 3 girl for spineless yuppies
Just goes to show how completely and totally out of touch with reality the media is with the actual state of the nation. To them, what's reported in govt. reports is just accepted as true. There is really no distinction between govt. and media anymore anyway.
"corporations must win"
when Jack Welch said it - he meant it
not enought people were listening
r
https://enronnext101.wordpress.com/
Executive bonuses are considered non-recurring costs? WTF?
Elon Musk could have written this article.
The WSJ looks at "Non-GAAP" earnings and is horrified... horrified by what it finds.
I simply cannot get behind the idea that the Wall Street Journal dresses up as Captain Obvious and we should all applaud it.
GAAP= Generally Accepted Accounting Principles. Non-GAAP= "adjusted" or pro forma earnings.
EBITDA= Earnings Before Interest, Taxes, Depreciation, and Amortization.
(For lehman such as myself and are wondering wtf they are talking about?)
excellent work zero hedge