By Francine McKenna at MarketWatch
The New York Times has highlighted the use of made-up financial metrics that have resulted in “phony-baloney financial reports.” However, even the New York Times Company can’t resist using a few non-GAAP numbers each quarter to present its earnings in a flattering way.
In its press release accompanying first-quarter earnings The New York Times Company says that the measures “provide useful information to investors.”
The New York Times NYT, -1.65% does what many other companies do and creates new metrics that ignore the impact of non-cash expenses like depreciation and amortization and subtract expenses that are one-time, non-recurring costs.
The New York Times Company’s “adjusted diluted earnings per share” metric eliminates costs associated with employee layoffs and contract buyouts, even though they have been occurring with some regularity the last few years. The New York Times also presents a non-GAAP operating costs figure that deducts severance and non-operating retirement-related costs as well as depreciation, amortization and charges resulting from the withdrawal from multiemployer pension plans. Pulling out all those expenses helps creates a profit instead of a loss.
During a period of declining print advertising and subscription revenues, recurring layoffs, and significant challenges in making its digital initiatives profitable, these adjustments have certainly helped make the New York Times numbers appear to look better.
For the first quarter of 2016, 2015, 2014, and 2013 as well as the full fiscal years 2015, 2014, and 2013 the adjustments made by the New York Times to GAAP numbers at times doubled positive results and, recently, turned losses into profits.
The New York Times used a non-GAAP metric to turn a 5 cent loss per share in the first quarter of 2016 into a gain of 10 cents per share. The same thing happened in the first quarter of 2015— a 9 cent loss became an 11 cent gain— but that doesn’t change the fact that the company is still losing money.
This quarter the nonrecurring loss that The Times wanted investors to ignore came from the closure of a Madison Paper Industries paper mill. Exiting that joint venture cost $41.4 million. But there’s been a loss like that, or a “non-recurring” expense for severance and employee buyouts, almost every quarter for the last few years.
In April The Times announced cuts of 70 jobs when it moves some editing and production operations from Paris to Hong Kong and New York. There were buyouts in November 2015 in its video section and buyouts/layoffs of more than one hundred staff at the end of 2014. The late 2014 cuts, said President and CEO Mark Thompson, would “safeguard the long-term profitability of the Times” and were not the result of any short term business difficulties. In early 2013, the company cut about thirty newsroom employees, including several very senior editors.
In a recent column, New York Times columnist Gretchen Morgenson explored the issue of “fantasy math” helping spin losses into profits.
Morgenson, in her column, cited a recent study in The Analyst’s Accounting Observer that says 90% of companies in the Standard & Poor’s 500-stock index reported non-GAAP results last year, up from 72% in 2009.
Morgenson said she can not comment on the paper’s use of non-GAAP metrics. A New York Times spokeswoman told MarketWatch, “Our view is that by reporting non-GAAP measures, we’re able to give our investors the best insight into the true nature of our continuing operations. These are measures that our management team reviews on a regular basis to evaluate and manage the performance of the Company’s business.”
In a speech to the U.S. Chamber of Commerce in mid-March, Securities and Exchange Commission Chairwoman Mary Jo White told the audience she is considering whether to draft new regulations to restrict the use of non-GAAP financial measures. Despite the fact “[y]our investor relations folks, your CFO, they love the non-GAAP measures because they tell a better story…” White told attendees, “We have a lot of concern in that space.”
In 2003, the Securities and Exchange Commission approved new regulations intended to rein in public disclosure of misleading non-GAAP financial measures. Those rules require equal or more prominent presentation of comparable numbers prepared according to generally accepted accounting principles as well as reconciliations of the management-defined non-GAAP to the GAAP numbers.
The New York Times, and most S&P 500 companies, do a pretty good job of following the rules. The SEC’s focus is more on the companies that use non-GAAP metrics to tell a misleading story, that give too much prominence to non-GAAP numbers, or promote a non-GAAP metric that excludes relevant, recurring costs. For example, in 2011, pre-IPO Groupon Inc. had to pull back on its use of a metric that excluded marketing costs expended to attract new subscribers,in response to the SEC’s concerns.
Some companies, like Apple, resist the urge to enhance their earnings attributes with extra metrics. Apple didn’t use them until this year. But some non-GAAP metrics are so commonplace that investors and analysts have come to expect them. They are consistently defined and widely used by public companies of all sizes in every industry. One metric that almost everyone uses in some form is EBITDA— earnings before interest, taxes, depreciation and amortization, and variations of it. EBITDA metrics ignore the impact of expenses related to major capital expenditures.