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business newsDiscretion Is the Better Part of Earnings
By
Peter Atwater
Jul 07, 2010 12:00 pm
Life isn't selective, and the reporting of corporate earnings shouldn't be either. State Street's announcement exemplifies how companies pick and choose what they publicize.
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To be blunt, I've come to hate the whole concept of non-GAAP "operating results". To me they should just be called "arbitrary results" as corporate managers arbitrarily play "keep or toss" with what they opt to include in these figures.
From State Street's announcement this morning, here's how they chose to define "operating results" for the second quarter:
On an operating basis, State Street expects to report second-quarter earnings per share of $0.93 on revenue of $2.2 billion. Operating-basis results include approximately $(48) million of net losses related to investment securities and a provision for credit losses of approximately $10 million and exclude the charge [$251 million after-tax] and one-time tax benefit [$180 million after-tax] as well as discount accretion of $172 million, merger and integration costs associated with acquisitions of $41 million, and expense of approximately $21 million due to a tax on bonus payments in the United Kingdom. Operating-basis revenue includes net interest revenue on a fully taxable-equivalent basis.
Talk to any small business owner about "one-time charges" and "non-operating expenses" and they'll laugh at you. From their perspective everything matters.
And I feel the same way. Corporations are living entities. They're in the business of buying and selling things over and over. Sometimes they make mistakes; and sometimes the rules change. That's business.
To me, "operating results" suggests an arrogant immunity from the realities that the rest of us face. When my stocks went down in value in 2008 and I sold them at a loss, I didn't tell my wife that we were "taking a non-cash charge" (like the banks did with their TruP CDOs). And I sure didn't take a "merger and integration charge" when we got married or when we had kids (which corporations like State Street do routinely when buying and selling businesses).
Life isn't selective, and neither should be the reporting of corporate earnings. "Operating results" suggests that management was either a beneficiary or victim. There's no ownership or accountability in the result.
Yesterday I wrote about the credit card industry's inability to distinguish luck from skill. (See How Is the Credit Card Industry Making Money?) And, to me, the longer managers, corporate directors, and shareholders rely on (and reward) operating results, rather than the real bottom-line results, the longer luck will mask the lack of real underlying risk management skills.
Position in SPY options, SH, and JPM
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