More than half of the biggest public companies in Arkansas reported adjusted profits in recent quarterly reports that dwarfed their net incomes -- the amount a company makes minus its expenses. Most put an emphasis on their adjusted profits, while downplaying smaller net income figures, or losses.
A recent Associated Press analysis of 500 companies, based on data provided by a research firm, found that in the past five years the gap has widened between the "adjusted" profits commonly cited by analysts and net income -- the bottom-line earnings figures that publicly traded companies are required to report.
"There's a really big problem with that," said Roddy Boyd, founder of the Southern Investigative Reporting Foundation. "It's profoundly disingenuous."
Laws created after the stock market dot-com crash of 2000 were supposed to curb the practice. When the bubble burst, the Securities and Exchange Commission required companies to report how they arrived at adjusted profit numbers.
The SEC also requires companies to include net income in their earnings reports. But the agency does not specifically designate where companies have to mention it, or how prominently.
"The fact that a company does this doesn't mean it's a bad investment or that the people are frauds," Boyd said. "It just means that they are engaging in a standard practice that isn't entirely truthful."
Most companies emphasize another number that excludes nonrecurring costs. This number -- the adjusted profit -- is usually trumpeted in earnings reports and passed along by analysts in notes to investors.
The companies surveyed for this story are included in the Arkansas Index, a price-weighted index of the 18 largest publicly traded Arkansas-based companies.
Wal-Mart Stores Inc., in its first-quarter report, had the biggest gap between net income and adjusted profit, more than $2 billion.
Acxiom Corp., a Little Rock-based data marketing company, lost money in its fourth quarter, which ended March 31, but highlighted an adjusted income figure in the millions of dollars.
In the quarter, according to generally accepted accounting principles (or GAAP, a uniform standard of calculating net income), Acxiom posted a loss of more than $6 million. But before the loss is noted in the report, Acxiom states it had a "non-GAAP operating income" of $31 million.
The company lists the $6 million loss much lower in the report, in a statement of operations.
Acxiom spokesman Lauren Russi Dillard said that including one-time only, or nonrecurring, expenses in profit figures doesn't give a accurate picture of the company's finances.
"We would never just report the adjusted number," she said. "I don't believe we are misleading anybody."
The one-time expenses often include restructuring costs, which can include the cost of laying off employees, selling a manufacturing plant or shifting production to another location.
"We have probably had pretty consistent restructuring charges over the last couple of years," Dillard said.
But if expenses are showing up consistently in reports, they aren't nonrecurring, Boyd said.
He said restructuring costs and other expenses normally excluded from adjusted profit are the normal cost of running a business, not one-time events.
"That's your business," he said. "That's not exceptional. That's standard."
Michelle Leder, the founder of Footnoted, a website that follows SEC filings, said pulling out charges that pop up every quarter can confuse investors.
"When you start not counting expenses as actual expenses, it becomes an issue," she said.
Analysts have little incentive to break the trend.
Leder said analysts could risk their paycheck if they pass along unflattering numbers.
"If you think about the dance analysts play, they aren't necessarily compensated if they say the emperor is wearing no clothes," she said.
Boyd said if an analyst affects company's stock performance by emphasizing net income rather than adjusted profits, the analyst could lose that company's business for himself or his firm.
"Wall Street is a very group thinking place," he said. "There is zero profit to be had by being an individual in the banking industry."
The practice can hurt investors who don't understand the nuances of adjusted profits and net income.
"Investors who don't have access to highly specialized, highly trained accounting or operational analysts, they would never understand that," Boyd said.
Leder said only sophisticated investors understand what's happening with adjusted profits, but the average, individual investor probably doesn't.
"I think about my mom," she said. "Is she really going to notice those nuances?"
She said the average investor pays attention to the profit number on the earnings release without understanding how the company arrived at it.
"You look at the headline on an earnings release and you focus on what that number is without necessarily looking at what's behind the number," Leder said.
Companies that include adjusted profit in their earnings releases say it gives investors a way to judge the company's finances quarter to quarter.
"What we are trying to do with the core earnings is to tell Wall Street and our investors, here's an idea of the normal, ongoing expectations for the company," said Bob Fehlman, chief financial officer at Simmons First National Bank.
Simmons earned about $8.1 million in the first quarter, according to the release. The adjusted profit nearly doubled that number at $15.7 million. On Thursday, Simmons reported a second-quarter adjusted profit, or "core earnings," of $22.4 million and a net income of $20 million. Both figures are reported in the report's first paragraph.
George Makris, the company's chief executive officer, said Simmons includes an adjusted profit to give investors a sense of the company's operations. The company has also adjusted for unusual gains, he said.
"We think it's full disclosure to talk about those numbers," he said. "We don't just report one-time expense items, we also exclude one-time income items."
Simmons, like all the companies in the Arkansas Index, shows how the company arrived at the adjusted profit.
"We itemize all the items that we exclude from our income so readers know what those are," Makris said. "Generally they are going to agree with us, and if they don't, then that's their prerogative."
Nik Fisken, the executive vice president and director of research at Stephens Inc., an Arkansas-based financial firm, said it is reasonable to pull out one-time expenses to explain a company's finances to investors.
It's the nonrecurring expenses that show up every quarter that should concern investors, he said.
"Let's say a company is backing out restructuring charges," he said. "If those restructuring charges are recurring, we would see that as an operating expense."
Leder said companies, analysts and investors are "frankly complicit" in the practice.
"It's nobody's fault, it's just the way things work," she said. "But that doesn't mean it's a good thing."
SundayMonday Business on 07/26/2015