How To Mislead Investors With New Non-GAAP Measures

Includes: BA, F, GM, T, VZ
by: Robert Allan Schwartz

The Wall Street Journal (on 1/30/13 and 1/31/13) reported on a proposal by Boeing (NYSE:BA) to report a new non-GAAP (Generally Accepted Accounting Principles) measure called "core operating earnings."

This measure does not include unfunded pension liabilities, which are significant at Boeing ("Boeing reports accrued pension liabilities of about $19.7 billion"), "Ford Motor Co. (NYSE:F) and General Motors Co. (NYSE:GM), which still have significant old-school pension funds," Verizon (NYSE:VZ), which "reported a $4.23 billion fourth-quarter loss earlier this month mainly because big non-cash pension charges overwhelmed operating profits," and AT&T (T), which "has said it would take a $10 billion charge for the last quarter of 2012 related to changes in its calculations on pension and post-employment benefit plans."

For Boeing, "earnings from operations for 2012 were $6.3 billion, up 8% from the year before. Take out that pension expense, and 'core operating earnings' were $7.2 billion, up 13%."

What's the difference between "operating earnings" and "core operating earnings?" Core operating earnings make your results look better by ignoring your liabilities. It's like saying, "If I don't have to pay those bills, look how much profit I made!"

Exactly who is affected by this, at Boeing? Boeing Chief Financial Officer Greg Smith "noted that salaried Boeing employees - like himself - have already been moved to a defined contribution plan." So who hasn't already been moved? I wonder if he means union members.

I wish someone would publish a correlation between companies with unfunded pension liabilities and companies with high union membership. I bet the correlation is significant and high.

The Wall Street Journal warns: "With interest rates set to stay low for a couple more years, expect to see another division in the way big legacy companies report their financials; before and after the big hits they are taking on pension plans that are looking more problematic every day."

Personally, I do not own such "big legacy companies" with "significant old-school pension funds" such as Boeing, Ford, GM, Verizon and AT&T, as I expect huge share price declines when they announce that they can no longer afford to pay for their pension obligations.

If anyone knows of other such companies, please post them to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: Earnings
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here