Timeline of Quarterly News “earnings” announced in press release 10Q filed with SEC press...
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Transcript of Timeline of Quarterly News “earnings” announced in press release 10Q filed with SEC press...
Timeline of Quarterly News
“earnings”announced inpress release
10Q filedwith SEC
press releases,analyst meetings
blackout period,no insider trading
1 week
sometimes a “pre-announcement”
fiscal qtrend
1 week 3-8 weeks
Rare Earth - Get Ready
What are ‘Earnings’?What are ‘Earnings’?
Known as ‘pro forma’ or ‘street’ earnings
Pros and Cons of Pro FormaPros and Cons of Pro Forma
Pro forma earnings “give a better Pro forma earnings “give a better insight into the fundamental insight into the fundamental operations of our business than does operations of our business than does the bottom line.” AMZNthe bottom line.” AMZN
Pro forma earnings is “earnings Pro forma earnings is “earnings before the bad stuff.” Lynn Turner, before the bad stuff.” Lynn Turner, SECSEC
What gets excluded from pro What gets excluded from pro forma?forma?
Restructuring chargesRestructuring charges Asset write-downsAsset write-downs Losses on the sale of assetsLosses on the sale of assets In-process R&D from an In-process R&D from an
acquisitionacquisition Goodwill amortizationGoodwill amortization Stock compensation expense Stock compensation expense Equity Method Gains/LossesEquity Method Gains/Losses Legal settlement costsLegal settlement costs Operations from stores Operations from stores
scheduled to be closed in the scheduled to be closed in the futurefuture
Special items
Other exclusions
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. ANNOUNCES FOURTH QUARTER AND YEAR END RESULTS
Strong Sales Trend Continues With 4.8% Comparable Store Sales GainsStrategic Initiatives Program on Track
MONTVALE, NJ--MARCH 16, 1999--The Great Atlantic & Pacific Tea Company, Inc. (NYSE: GAP) ("A&P") announced today fourth quarter and year end results for fiscal 1998 ended February 27, 1999.
Sales for the twelve-week quarter were $2.43 billion versus $2.50 billion for the corresponding thirteen-week quarter last year. Comparable store sales increased by 4.8%.
For the quarter, the Company posted a net loss of $88.6 million or $2.31 per share, versus the prior year's net income of $13.4 million, or $.35 per share. Excluding the impact of charges related to strategic initiatives under the previously announced "Project Great Renewal" and operating losses of the stores identified for closure, the Company would have earned $7.3 million or $.19 per share.
Great A&P tea company for Q4 GAAP adjustments to get Street StreetSales 2,426,323 from exhibit 2,276,316Gross margin 679,943 -25,400 from note 654,543Store operating, general and adm. (702,229) -77,600 from note (624,629)Project great renewal charge (213,153) 0gain(loss) from operations (235,526) get 29845 from exhibit 29,914interest expense (18,742) (18,742)interest revenue 1,418 1,418gain(loss) before tax (252,580) 12,860tax benefit 103,730 plug using NI from exhibit (5,539)valuation allowance reversal benefit 60,300 0
net income(loss) (88,550) 7,321EPS (based on 38,308,002 shrs) (2.31) 0.19
The following tabular reconciliation summarizes the activity related to the aforementioned third quarter charges of $11 million and the fourth quarter charges of $215 million. Reserve Balance at Original Utiliz- Addition Adjustment Feb. 27, Dollars in thousands Charge ation (1) (2) 1999 - -------------------- -------- ------- -------- ---------- --------- Store Occupancy $113,732 $ (1,100) $1,900 $ - $114,532 Fixed Assets 93,355 (92,639) - (716) - Severance and benefits 15,102 (3,794) - (1,242) 10,066 Facilities occupancy 4,018 (311) - 331 4,038 -------- -------- ------ ------- -------- Total $226,207 $(97,844) $1,900 $(1,627) $128,636 ======== ======== ====== ======= ======== (1) The addition represents an increase to the store occupancy reserve for the present value interest accrued. (2) The adjustment represents changes in estimates from the original date the respective charges were recorded. The adjustment to severance and benefits relates to a change in the estimate of the calculated pension withdrawal liability. As of February 27, 1999, the Company has closed 66 of the 132 stores identified, including all 31 stores in the Richmond, Virginia market. The remaining 66 stores will be closed over the next three quarters of fiscal 1999. At February 27, 1999, $45.4 million of the reserve is included in "Other accruals" and $83.2 million is included in "Other non-current liabilities" in the accompanying consolidated balance sheet. Based upon current available information, Management evaluated the reserve balance as of February 27, 1999 and has concluded that it is adequate. Included in the accompanying statement of operations are the operating results of the 132 underperforming stores which the Company is exiting. The operating results of such stores are as follows: Fiscal Fiscal Fiscal (Dollars in thousands) 1998 1997 1996 - ---------------------- -------- -------- ---------- Sales $788,014 $928,671 $1,000,364 ======== ======== ========== Operating Loss $(57,462) $(34,448) $ (14,543)
======== ======== ==========
Pro
ject
Gre
at
Renew
al C
harg
e
if SI follows cash flow (e.g. asset write-if SI follows cash flow (e.g. asset write-off)off)
lowers the book value of the firm (lowers the book value of the firm (which lowers which lowers future cash flows to equityholdersfuture cash flows to equityholders))
artificially inflated past results (artificially inflated past results (so don’t use past so don’t use past to predict futureto predict future))
if over-accrue can artificially inflate future results if over-accrue can artificially inflate future results ((so don’t be surprised by improved future resultsso don’t be surprised by improved future results))
Anatomy of a Special ItemAnatomy of a Special Item
reported results
true results
special item
pro forma results
timeperf
orm
ance
if SI precedes cash flow (e.g. severance pay)if SI precedes cash flow (e.g. severance pay) if over-accrue can inflate future results (if over-accrue can inflate future results (so don’t be so don’t be
fooled by improved future performancefooled by improved future performance))
even if SI and cash flow are in same periodeven if SI and cash flow are in same period can misclassify normal operating expenses into the SI can misclassify normal operating expenses into the SI
((so the “core operating margin” looks betterso the “core operating margin” looks better).). 7% of SI are misclassified core expenses in a sample from 7% of SI are misclassified core expenses in a sample from
1989-2000 (McVay 2004) (1989-2000 (McVay 2004) (so expect operating margin to so expect operating margin to decline in futuredecline in future).).
Anatomy of a Special ItemAnatomy of a Special Item
oper
atin
g m
argi
n
special itemtime
reported operating margin
A&P operating margin through A&P operating margin through timetime
-0.02
-0.015
-0.01
-0.005
0
0.005
0.01
0.015
0.02
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
pro forma operating margin
Intel Third Quarter Revenue $7.3 Billion, Up 9%
Earnings excluding acquisition-related costs* $0.55 per share, up 22%EPS $0.42, down 5%
SANTA CLARA, Calif., October 12, 1999 - Intel Corporation announced third quarter revenue of $7.3 billion, up 9 percent from third quarter 1998 revenue of $6.7 billion. Third quarter revenue includes post-acquisition revenue of companies acquired in the third quarter. Third quarter revenue was up 9 percent from second quarter 1999 revenue which was also $6.7 billion. The company said that shipments of microprocessors, chipsets, and flash memory all grew substantially to new records during the quarter.
Net income excluding acquisition-related costs was $1.9 billion in the third quarter, up 21 percent from the third quarter of 1998 and up 7 percent sequentially. Third quarter earnings excluding acquisition-related costs were $0.55 per share, an increase of 22 percent from $0.45 in the third quarter of 1998, and up 6 percent sequentially.
Including acquisition-related costs in accordance with generally accepted accounting principles, net income was $1.5 billion, down 6 percent from third quarter 1998 and down 17 percent sequentially. Earnings per share were $0.42, down 5 percent from $0.44 in the third quarter of 1998 and down 18 percent sequentially.
Intel Q3 GAAP adjustments to get Street StreetRevenue 7328 7328Cost of Sales 3026 3026Research and Development 840 840Marketing, general and adm. 952 952Amortization of goodwill and other 121 removed per press rls 0purchased in-process R&D 333 removed per press rls 0Operating costs and expenses 5272 4818OPERATING INCOME 2056 2510Interest and other 316 316INCOME BEFORE TAXES 2372 2826Income taxes 914 plugged per NI in prs rls 922
NET INCOME 1458 per press rls 1904EPS 0.42 0.55
What were GAAP earnings? $30M or $0.07/share
What were pro forma earnings? $50M or $0.12/shareWhat was consensus forecast? $0.13/sharehttp://www.zacks.com/research/report.php?type=estimates&t=AMZN http://0-research.thomsonib.com.lib.bus.umich.edu/gaportal/ga.asp
33rdrd Quarter 2005 Quarter 2005
?
?
?
Consensus Earnings Forecast Q3 2005 Consensus Earnings Forecast Q3 2005 (Thompson Research and Zacks)(Thompson Research and Zacks)
AMAZON COM INC AMZN (NASDAQ)
http://www.zacks.com/research/report.php?type=estimates&t=AMZN
Reported Earnings 09/2005 06/2005 03/2005 12/2004 09/2004
Reported 0.12 0.12 0.12 0.35 0.17
Estimate 0.13 0.12 0.23 0.40 0.17
Difference -0.01 0.00 -0.11 -0.05 0.00
Surprise -7.69% 0.00% -47.83% -12.50% 0.00%
-0.66
-0.47 -0.46
0.01
-0.06
-0.25
-0.09
0.01
-0.03-0.11
0.04
0.170.26
0.180.13
0.82
0.180.12
0.07
-0.21-0.16 -0.16
0.09
-0.01 -0.01
0.00
0.190.1 0.1 0.11
0.290.23
0.17
0.35
0.12 0.12 0.12
0.18
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
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GAAP EPS
PF EPS
Amazon.com Amazon.com Historical GAAP and proforma quarterly EPSHistorical GAAP and proforma quarterly EPS
-0.005
0.000
0.005
0.010
0.015
0.020
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Street
GAAP
In Q2 2001, 300 of S&P 500 had exclusions, accounting for 60 cents of every dollar of pro forma earnings. (WSJ)
Trends in EPS: Trends in EPS: GAAP versus The StreetGAAP versus The Street
Skinner and Sloan “Don’t let an earnings torpedo sink your portfolio”
Why do managers care?
Panel B: Components of Total Exclusions: Future CFO = 0 + 1Pro Forma Earningst + 2 Special Itemst + 3Other Exclusionst + 4Sales Growtht + 5 Accrualst + t
Dependent Variable
Intercept Pro Forma Earnings
Special Items
Other Exclusions
Sales Growth
Accruals Adj. R2
CFO_SUM1 0.053 (25.63)
2.795 (49.81)
0.199 (0.86)
-2.185 (-25.34)
-0.117 (-5.94)
-0.491 (-16.19)
0.374
CFO_SUM2 0.119
(32.34) 5.473
(49.83) 0.309 (0.63)
-4.263 (-22.49)
-0.122 (-2.06)
-0.971 (-15.11)
0.387
CFO_SUM3 0.196
(48.89) 8.184
(56.61) 0.781 (0.84)
-6.422 (-13.56)
-0.040 (-0.43)
-1.454 (-13.47)
0.358
Future cash flow implications of Other Exclusions is almost as large as for Pro Forma Earnings!
Doyle, Lundholm and Soliman (2002 Review of Accounting Studies)
Are Excluded Expenses Unimportant?
A dollar of pro forma earnings predicts 8.184 dollars of future CFO over next 3 years.
BUT a dollar of Other Exclusions predicts -6.422 dollars of future CFO.
Return Interval = 0 + 1 Earnings Surpriset + 2 Special Itemst + 3 Other Exclusionst + 4 Book to Markett + 5 Log of MVEt + 6 Firm Betat + 7 Accrualst + 8 Momentumt + t
RMA_3DAY -0.008 (-2.62)
0.049 (24.29)
-0.005 (-2.10)
-0.019 (-8.12)
0.002 (1.18)
0.001 (0.59)
-0.001 (-0.47)
-0.003 (-2.39)
-0.008 (-3.40)
0.0499
RMA_YR1
-0.070 (-2.38)
0.132 (6.91)
-0.004 (-0.27)
-0.083 (-6.67)
0.049 (1.12)
-0.059 (-1.02)
0.103 (1.74)
-0.101 (-5.63)
0.104 (4.03)
0.0478
RMA_YR2
-0.006 (-0.08)
0.203 (7.29)
-0.032 (-0.69)
-0.149 (-9.10)
0.065 (0.62)
-0.119 (-1.45)
0.219 (1.53)
-0.171 (-6.37)
0.029 (0.74)
0.0365
RMA_YR3
0.026 (0.19)
0.290 (4.71)
0.004 (0.07)
-0.312 (-9.04)
0.122 (0.72)
-0.171 (-1.92)
0.319 (2.38)
-0.200 (-4.04)
-0.039 (-1.42)
0.0261
Dependent Variable
Intercept Earnings Surprise
Special Items
Other Exclusions
Book to Market
Log of MVE
Firm Beta (i)
Accruals Momen- entum Adj. R2
Is the Market Fooled by Exclusions from Pro Forma Earnings?
There is a small reaction to excluded expenses, but it is not nearly large enough. Future returns vary systematically with exclusions.
The coefficient is the return on a portfolio that is long in the highest decile of the variable and short in the smallest decile.
Figure 1b: 3-Year Hedge Returns Based on Other Exclusions
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Hed
ge
Ret
urn
Rare Earth - I just want to celebrate