Companies turn losses to profits with hypothetical accounting

By Michael Liedtke ,AP Business Writer
Monday October 01, 2001

“Pro forma” results usually look better than official GAAP numbers; tech companies looking at  

downturn after Sept. 11 attacks 



SAN FRANCISCO – With more than $70 billion in losses already on the books, a dismal year in Silicon Valley is expected to get even bleaker in the next few weeks as high-tech companies report the results of a quarter disrupted by the Sept. 11 terrorist attacks. 

If their approach of recent quarters is any indication, many companies will try to downplay the severity of the financial damage by emphasizing a set of hypothetical numbers known as “pro forma” results, which are supposed to focus on the profits and losses of ongoing operations. 

These numbers, which show up in corporate press releases announcing earnings, often paint a much different picture from the official results calculated under Generally Accepted Accounting Principles. 

The GAAP results, which the Securities and Exchange Commission considers to be a company’s official bottom line, are often buried in earnings announcements. 

The historically small gap between pro forma and GAAP earnings has widened into a chasm, according to an Associated Press analysis of earnings reports by Northern California’s 100 largest technology companies. 

The companies reported a combined $70.9 billion in losses this year under GAAP standards, but announced a $10 billion profit using their pro forma figures, the AP found. 

At the same time last year, the same companies reported a combined GAAP profit of $22.3 billion versus a combined pro forma profit of $27.5 billion. 

The difference primarily reflects the $82.8 billion in bad investments, layoffs and other special charges that the tech companies have reflected on their books this year, up from $5.6 billion last year. 

For its analysis, the AP tabulated earnings reports for quarters ending in 2001 for technology companies with the largest market value in Silicon Valley. 

Just one company, San Jose-based JDS Uniphase, accounted for $50.6 billion in losses, but the red ink has been widespread. 

Half of the 100 surveyed tech companies lost money this year. At this point last year, only 26 had suffered losses. 

So many companies are emphasizing pro forma results in their earnings releases that the Financial Accounting Standards Board thinks it might be time to set some definitive rules for the hypothetical numbers. The board, a private-sector group that makes the nation’s accounting rules, is accepting comments on the issue until Oct. 5. 

And the SEC has confirmed that is investigating whether the pro forma results released by several unnamed companies misled investors. If the SEC uncovers misconduct, the offending businesses can be fined. 

While analysts and accountants understand the nuances between the GAAP and pro forma figures, the distinctions aren’t always clear to everyday investors. Even some sophisticated observers say executives should not be allowed to stray so far away from the accounting methods mandated by securities regulators. 

“GAAP is there for a reason. A lot of money has just gone down the drain, but a lot of companies don’t want to be held accountable for their massive losses,” said stock market analyst David Kathman of Morningstar Inc. 

GAAP and pro forma results are just a couple of the many factors that analysts draw upon to appraise a business, said Perry Boyle, deputy director of research for Thom Weisel Partners. 

“We are looking for information that will help us figure out where a business is headed over a five or even 15-year horizon,” Boyle said. “Ultimately, people will look beyond any accounting shenanigans and figure out what is really going on. But pro forma numbers in context of full disclosure can be very useful data.” 

Some tech executives said the pro forma results are calculated to satisfy institutional investors and securities analysts who look beyond the bottom line of financial statements to evaluate a company. 

“There is a feeling out there that by reporting pro forma results we are trying to ignore GAAP, but nothing could be further from the truth,” said Anthony Muller, chief financial officer of JDS Uniphase. “We try to be as above board as possible. The pro forma results are just something that our investors requested.” 

JDS Uniphase, a maker of fiber optics equipment, buried its $50.6 billion GAAP loss — and a pro forma profit of $67 million — for the fiscal year ended June 30 deep inside a news release that led with the company’s increased sales. 

JDS hasn’t filed a complete breakdown of the GAAP loss, but its management has indicated that all but $1 to $2 billion of the fiscal-year loss will be applied to the first half of 2001. 

Pro forma figures are designed to exclude extraordinary events that can distort how a business is really performing. That’s because many expenses, such as money spent on another company’s intangible assets, involve little more than ledger entries rather than hard cash losses. 

But many slumping companies, especially in the hard-hit Silicon Valley, are using pro forma reporting to exclude items like inventory write-offs routinely considered to be a part of the ongoing business, said Chuck Hill, director of research for Thomson Financial/First Call. 

Thomson Financial/First Call gathers the quarterly earnings estimates from analysts that serve as a pivotal benchmark on Wall Street. 

“Part of this is a cyclical problem,” Hill said. “Whenever there is a downturn, you always get some companies pushing the envelope trying to make their earnings look better. Because we are coming out of a much bigger bubble this time, a lot of companies are pushing the envelope more than ever.”