Posted on: Sunday, February 1, 2004

'02 write-offs muddle earnings comparisons

By Matt Krantz
USA Today

The huge write-offs companies took after the tech bubble burst may be largely over, but they're causing one last headache for investors.

Because of these charges, which peaked in the fourth quarter of 2002, investors can't reasonably compare financial results based on official accounting rules with year-ago numbers.

The charges depressed results in the fourth quarter of 2002 so much that earnings growth last quarter now looks completely out of whack.

The problem reached massive proportions Wednesday when Time Warner reported its fourth-quarter results.

Time Warner took a $45.5 billion charge in the fourth quarter of 2002, in compliance with a new accounting rule, to reduce AOL's value on its books.

That charge depressed overall earnings so much for Standard & Poor's 500 companies that year-over-year growth last quarter appears to be 14,143 percent, now that Time Warner's results are in.

This is frustrating investors who are trying to calculate how well companies did in the fourth quarter.

"How many spreadsheets do you need to just figure out how much a company is earning?" says Howard Silverblatt, stock market analyst at Standard & Poor's.

Wall Street looks at earnings in two ways: "as reported," the real bottom line using generally accepted accounting principles, and "operating," an adjusted bottom line that throws out one-time charges and doesn't follow strict accounting guidelines.

The as-reported number is causing the confusion, and Time Warner isn't the only company that's causing the distortion. Excluding Time Warner, as-reported earnings still jumped 55.5 percent, S&P says, largely due to write-downs taken by other firms in the S&P 500 in the fourth quarter of 2002.

That's much higher than the 19.6 percent increase in operating earnings, which excludes the effects of most charges and is used to determine the stock market's current valuation.

The widening difference between as-reported and operating results forces investors to rely on operating earnings more than ever. That's troubling to some, because operating earnings have many problems. Not only are they measured differently by most industries, but companies are able to choose which charges are included or excluded from operating results.

Even so, now that half the companies in the S&P 500 have reported fourth-quarter results, many investors are pleased that operating earnings are strong. Those results indicate that bullish predictions of an economic recovery are on track, no matter how the earnings are counted, says Marc Gerstein, head of investment research at Reuters Research.

"Everything is (following) the script," Gerstein says.