Spin Control

By Eric Fox | March 18, 2010 AAA

It's no secret that companies love to exercise spin control when they report earnings and other corporate news. This can lead to colorful and innovative uses of the English language carefully constructed to present the company or numbers in a positive light.

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When Ford (NYSE:F) releases earnings, it doesn't report cash, but something called "gross automotive cash." The company has $25.5 billion of this gross automotive cash as of the end of 2009.

At the end of 2009, Ford's gross cash actually equaled its net cash, but this isn't always the case. A look back at prior quarter's total shows significant differences between the two.

Double Eagle Petroleum (Nasdaq:DBLE), a small-cap exploration and production company, reports a metric called "clean earnings." In 2009, the company reported clean earnings of $13.4 million, or $1.35 per share. The company's GAAP loss in 2009 was $2.5 million, or $0.25 per share.

The company acknowledges that clean earnings is a non-GAAP metric and defines it as earnings before depreciation, depletion, amortization, unrealized gains and losses related to hedges, and stock options expenses.

Cumberland Pharmaceuticals Inc. (Nasdaq:CPIX) reported net income of $3.09 million, or $0.17 per diluted share in 2009. The company also reports a non-GAAP measure called "adjusted earnings" which excluded expenses related to marketing a new product and payroll expenses related to the exercise of non-qualified stock options. The effect of these adjustments, including the tax impact, leaves the company with adjusted net income of $4.9 million, or $0.27 per share.

Adjusted earnings are probably the most common form of bowdlerization practiced by public companies, as it allows the company to exclude whatever it wants from the calculation of income.

SunPower Corporation (Nasdaq;SPWRA) just reported earnings for its fiscal year ending January 3, 2010. The company reported a GAAP profit of $0.36 for the year, but with the adjustment the non-GAAP earnings came to $1.03 per share.

The adjustment on the net income line leaves out "amortization of intangible assets, stock-based compensation, impairment of long-lived assets, interest expense, a gain on purchased options related to its convertible debt offering and the tax effects" of these items.

Most of these items are non-cash expenses, and the company believes that excluding them would allow investors to more properly assess the operations of the company. In the most recent fiscal year, SunPower Corporation's adjusted earnings benefited from the exclusion of three of the five items listed above. Only the exclusion of the gain on the purchased options hurt the company.

The Bottom Line
Politicians and corporate managements both try to influence the public through nuances of the English language. Investors should read deeper into earnings releases to make sure they understand what they companies are saying. (To learn how to see through all the spin, check out Core Earnings Strip Away "Creative" Accounting.)

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