One of my daughters is learning her alphabet. The other day we were reading a book that displayed an animal for each letter (U and V stumped even Sesame Street). The next morning I found myself doing something similar. Reading through SEC filings, I am amazed at how many non-GAAP acronyms have sprouted up to replace a simplistic display of earnings. I am curious if we could create an alphabet book to teach youngsters through all the “expenses” that management wants to “add-back.” I started the process, but in an attempt to be judicious with my time, I stopped with the letter E. Let’s just use E and shorten the whole process to EBE–Earnings Before Expenses. I believe year-over-year earnings would sky-rocket using my new alphabet-simplified reporting process. This may sound like an exaggeration, but EBITDAR excludes rent? I am still unclear how rent is not an expense. Correction, I understand the theory proposed by the companies, I merely agree with these companies’ landlords when they demand payment each month.
Since this is a rock-throwing exercise, I thought I would provide a useful counter-measure to my cynicism. Tootsie-Roll is a company whose press releases and lack of conference calls depart from the mainstream view that investors want to learn their alphabet from SEC filings. Its press releases include only Sales, Earnings, and Earnings Per Share (and no conference calls where analysts get to endlessly ask about “color”). There are other things not to like about Tootsie-Roll (investing its cash in now defunct Jefferson County Alabama Sewer Revenue Bonds being one of them) and I am not a shareholder, nor have I ever been one. However, I do very much enjoy its straightforwardness in its press releases. (It may come as no surprise that the CEO and President are a husband and wife team in their 90s and 80s, respectively).
I guess reading SEC filings is like having a teenager. If your teenager is fudging the truth about where they were on Friday night, I think you have a right to be skeptical about where they said they were on Saturday night. If the company is using an alphabet soup approach to its earnings disclosure, what else are they trying to hide?
*Postscript: To provide evidence that I am not exaggerating my claims, I present the opening paragraph of a press release from yesterday’s earnings report of a certain company. For context, the entire market capitalization of this company has ranged from approximately $300m to $550m over the past year. So, when they discuss a fine of $145m, this is no small amount.
“After adding back for the 2013 period $145.0 million ($90.2 million, net of tax) or $2.86 per diluted share for the U.S. Department of Justice settlement, proceeds from our D&O insurance and certain other items* and deducting for the 2012 period $1.4 million ($1.8 million, net of income tax) or $0.06 per diluted share for certain other items*, our adjusted results were as follows…”
This company was a little more creative than my EBE, they are using the always favorite, “COI” certain other items. To recap, EBIDTACOI. They have 25% of the alphabet covered here and this is just from the opening paragraph of the press release. I am now trying to be judicious with your time and won’t go further into the footnotes.