standard & poor’s core earnings
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Standard & Poor’s Core Earnings. Revised November 8, 2002. Agenda. What it is Why we publish Standard & Poor’s Core Earnings How it’s defined Plans for Standard & Poor’s Core Earnings . Standard & Poor’s . - PowerPoint PPT PresentationTRANSCRIPT
Standard & Poor’s Core Earnings
Revised November 8, 2002
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Agenda
• What it is
• Why we publish Standard & Poor’s Core Earnings
• How it’s defined
• Plans for Standard & Poor’s Core Earnings
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Standard & Poor’s
• Standard & Poor’s Core Earnings is supported by Standard & Poor’s three major units:– Developed by Investment Services– Prepared in consultation with Corporate Value Consulting– Utilized by Credit Market Services as part of its debt
analysis
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Standard & Poor’s Core Earnings
• Standard & Poor’s Core Earnings is– a standardized calculation of earnings from a
company’s core business, designed to capture long-term true earnings power of the business
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Something Was Needed
• Investors want an earnings measure they understand and trust. Without any definition of earnings measures, there is no consistency across companies or through time.
• Standard & Poor’s recognized that inconsistency and confusion were hurting investor confidence.
• Just calling for change was not enough – someone had to propose a definition, listen to comments and build a consensus.
• Standard & Poor’s has stepped up.
604/22/23
Standard & Poor’s Core Earnings vs. GAAP
• Concerns about GAAP:– GAAP net income doesn’t tell the whole story.– GAAP lets companies write their own definitions for operating earnings.– GAAP tries to be all things to all people.
• Standard & Poor’s response:– Standard & Poor’s Core Earnings targets a company’s core business.– Standard & Poor’s Core Earnings focuses on consistent comparisons.– Standard & Poor’s Core Earnings is used in investment analysis.
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Standard & Poor’s Core Earnings vs. GAAP
• Unlike GAAP, Standard & Poor’s Core Earnings does not smooth out the volatility that is really present in earnings and operations. However, the Standard & Poor’s Core Earnings history we have developed will mute that volatility. In addition, we have provided guidance on how investment managers can easily take pension interest costs – i.e., market-induced volatility – out of the Standard & Poor’s Core Earnings calculation.
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Standard & Poor’s Core Earnings and Analysis
• Standard & Poor’s supports analysis using Standard & Poor’s Core Earnings:– Data in Standard & Poor’s Compustat – Recognition of the S&P 500– Analysis that will be added in Standard & Poor’s Stock
Reports and other Standard & Poor’s services for brokers, analysts and institutional investors
• Standard & Poor’s is an independent source of analysis, information and data; Standard & Poor’s does not have apparent or potential conflicts.
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How to Define Standard & Poor’s Core Earnings
• Begin with as-reported earnings, a widely used measure defined with GAAP
• Make adjustments to focus on the company’s core business
• As-reported EPS is GAAP net income excluding discontinued operations and extraordinary items.
• It is the longest time series for S&P 500 EPS, extending back over decades.
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Standard & Poor’s Core Earnings Defined
Included in Standard & Poor’s Core Earnings
Excluded from Standard & Poor’s Core
Earnings Employee stock option grant expense
Goodwill impairment charges
Restructuring charges from on-going operations
Gains/losses from asset sales
Write-downs of depreciable or amortizable assets
Pension gains
Pensions costs Litigation or insurance settlements
Purchased R&D Reversal of prior-period charges and provisions for bad debt
Unrealized gains/losses from hedging activitiesM&A-related expenses
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Earnings Measures Compared
Standard & Poor’s Core
Earnings
GAAP Net Income (S&P As-Reported)
Operating Earnings
Stock option expense Included Excluded Excluded
Net pension Income Excluded Included Included
Restructuring charges Included Included Excluded
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Our Perspective…
• Standard & Poor’s is not rewriting GAAP or trying to do FASB’s job.
• Standard & Poor’s is not suggesting new SEC regulations or new legislation.
• We are using existing accounting and reporting concepts to give investors and analysts a better understanding and more complete information about companies.
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Stock Option Grant Expense
• Stock options are compensation, just like wages, salaries and benefits. Therefore: – Expenses related to stock option grants should be treated like other
compensation costs in calculating earnings.– Expenses should be reported quarterly rather than annually.
• Employee stock option grant expense is included in Standard & Poor’s Core Earnings.
• Standard & Poor’s takes no position on the tax treatment of stock option grants.
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Times Are Changing…
Companies expensing options as of May 1, 2002: Wynn Dixie (WIN) and Boeing (BA)Companies expensing options as of November 4, 2002:
128 companies; for updates see www.coreearnings.com
Allstate Corp(ALL) Amazon.com(AMZN) AMB Property(AMB) Ambac Financial Group(ABK) Amer Express(AXP) Amer Intl Group(AIG) AmeriTrade Holding(AMTD) AT&T Corp(T)Bank of America(BAC) Bank of New York(BK) BANK ONE Corp(ONE) Baycorp Holdings(MWH) Block (H&R)(HRB) Boeing Co(BA) BRE Properties Cl'A'(BRE) Calpine Corp(CPN) Camden National(CAC) CBL & Associates Prop(CBL) Celanese AG(CZ) Cendant Corp(CD) Centex Corp(CTX) Charter Communic'A'(CHTR) Choice Hotels Intl(CHH) Chubb Corp(CB) CINergy Corp(CIN) Citigroup Inc(C) Coca-Cola Co(KO) Comerica Inc(CMA) Computer Assoc Intl(CA) ConocoPhillips(COP) Contango Oil & Gas(MCF) Cooper Indus'A'(CBE) Costco Wholesale(COST) Dole Food Co(DOL) Dow Chemical(DOW) Duke Realty(DRE) Emerson Electric(EMR) Everest Re Group(RE) FBL Financial Group 'A'(FFG) Federal Home Loan(FRE) Federal Natl Mtge(FNM)FleetBoston Financial(FBF) Fleming Cos(FLM) Ford Motor(F) Gabelli Asset Management'(GBL) Genl Electric(GE) Genl Motors(GM) Goldcorp Inc(GG) Goldman Sachs Group(GS) Grey Global Group(GREY) Guaranty Bancshares(GNTY) Handleman Co(HDL) Hartford Finl Svcs Gp(HIG) Home Depot(HD) Home Properties of NY(HME) Household Intl(HI) Iomega Corp(IOM) iStar Financial'A'(SFI) J.P. Morgan Chase & Co(JPM) Johnson Controls(JCI) Kellwood Co(KWD) KeyCorp(KEY) KeySpan Corp(KSE) Lear Corp(LEA) Lee Enterprises(LEE) Lennar Corp(LEN) Level 3 Communications(LVLT) Lincoln Electric Hldgs(LECO) Lincoln Natl Corp(LNC) Lowe's Cos(LOW) Lyondell Chemical(LYO) M&T Bank(MTB) MacDermid, Inc(MRD) Marathon Oil(MRO) Max Re Capital(MXRE) May Dept Stores(MAY) MBIA Inc(MBI) Mellon Financial(MEL) Merrill Lynch(MER) MetLife Inc(MET) Morgan Stanley(MWD) Natl City Corp(NCC) Neuberger Berman(NEU) New Jersey Resources(NJR) PACCAR Inc(PCAR) Papa John's Intl(PZZA) Plum Creek Timber(PCL) Pogo Producing(PPP) PPL Corp(PPL) Predictive Systems(PRDS) Premcor Inc(PCO) PriceSmart Inc(PSMT) Principal Financial Grp(PFG) Procter & Gamble(PG) Prudential Financial(PRU) PS Business Parks(PSB) Raven Indus(RAVN) RCN Corp(RCNC) Realty Income(O) RenaissanceRe Holdings(RNR) SAFECO Corp(SAFC) Saks Inc(SKS) Schlotzsky's Inc(BUNZ) Scotts Co'A'(SMG) ServiceMaster Co(SVM) Smithfield Foods(SFD) Sovereign Bancorp(SOV) State Street Corp(STT) Steelcase Inc'A'(SCS) Sun Life Fin'l Svc Canada(SLC) Sunoco Inc(SUN) SunTrust Banks(STI) Tarragon Realty Investors(TARR) Technitrol Inc(TNL) Temple-Inland(TIN) Travelers Prop & Casualty(TAP.A) Tupperware Corp(TUP) United Parcel'B'(UPS) USA Interactive(USAI) Valley Natl Bancorp(VLY) Vornado Realty Trust(VNO) Wachovia Corp(WB) Wal-Mart Stores(WMT) Washington Post'B'(WPO) Webster Financial(WBST) Winn-Dixie Stores(WIN) World Fuel Services(INT) WPP Group ADS(WPPGY)
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Pension Accounting in 1-1/2 Lessons
• Net pension gains (pension income after pension-related expenses) are funds held in a trust for retirees and future retirees. These gains are not corporate funds. Therefore, net pension gains should not be included in Standard & Poor’s Core Earnings.
• Pension expenses include service costs and interest costs:– Service costs are deferred compensation, representing the benefits that
accrue from the current year’s labor services.– Interest costs are financing costs, reflecting the passage of time as the
moment when benefits will be paid draws closer.
These costs should be covered by the pension fund. Specifically, the actual return on pension plan assets should cover interest costs.
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More Pension Accounting
• For Standard & Poor’s Core Earnings, pension costs include: – Service costs– Interest costs to the extent that they are not covered by actual returns
on plan assets• Because any pension gains become part of the pension fund
assets for the benefit of retirees and employees, these are not corporate funds and are not part of Standard & Poor’s Core Earnings.
• Companies do not benefit from funds reserved for pension beneficiaries.
• However, pension plan assets can, actual returns permitting, cover pension interest expense.
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Questions on Pension Accounting and Pension Interest Costs
• Interest costs are charges in years when the pension plan makes little money. Doesn’t this make earnings very volatile? – It can have that effect. Interest costs are real costs
and, if the pension plan returns can’t cover these costs, the company is responsible.
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Questions on Pension Accounting and Pension Interest Costs
• How does FASB treat interest costs? – FASB looks to the pension plan first to cover interest costs,
as Standard & Poor’s Core Earnings does. Then FASB uses expected returns rather than actual returns. While the expected returns eliminate the volatility, they also obscure the true impact of pensions on earnings. An important note: Pension interest charges this year can be a warning that a company’s cash flow and net earnings next year could be reduced by a required contribution to its pension fund.
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Questions on Pension Accounting and Pension Interest Costs
• Is there another way to measure pension costs without making earnings volatile? – As long as one wants a year-by-year measure of the true
earnings, the volatility will be there. However, in most years, actual pension gains cover most or all of the interest costs. For analysts who want to make other adjustments, such as using a multi-year moving average, Standard & Poor’s Core Earnings data show pension interest as a separate item. It is easy with Standard & Poor’s data to take this cost out of Standard & Poor’s Core Earnings for each company and each of our indices.
– If the S&P 500 is up 7.8% in 2003, Standard & Poor’s estimates, there will be no pension interest costs charged against Standard & Poor’s Core Earnings for the S&P 500.
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Restructuring Charges
• Operating earnings often exclude restructuring charges that are part of ongoing operations.
• GAAP defines discontinued operations.• Charges that are not related to discontinued operations should
be included in Standard & Poor’s Core Earnings.• If a company subsequently reverses a prior provision, that
reversal is not credited to Standard & Poor’s Core Earnings.
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Other Provisions
• Discussed in detail in the white paper published in May 2002 and the Technical Bulletin published in October 2002
• Available at www.standardandpoors.com
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Plans for Standard & Poor’s Core Earnings
• Standard & Poor’s Core Earnings and detailed information will be provided in Compustat.
• Standard & Poor’s will continue to publish and use as-reported and operating data for the S&P 500 and our other indices, in addition to Standard & Poor’s Core Earnings.
• We will forecast Standard & Poor’s Core Earnings for companies we follow analytically through our Equity Research Department.
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Standard & Poor’s Core Earnings Data
• S&P 500 earnings measures compared• Table showing as-reported earnings and Standard & Poor’s
Core Earnings for the S&P 500, and the pension interest costs• Table showing Standard & Poor’s Core Earnings for GICS
Sectors in the S&P 500 (per share data)• Table showing Standard & Poor’s Core Earnings for GICS
Sectors in the S&P 500 (return on sales data)• Chart showing option expense by GICS Sector for the S&P 500 • Chart showing pension adjustments by GICS Sector for the S&P
500
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S&P 500 Earnings Measures Compared
Operating Earnings
As-Reported Earnings
Standard & Poor's Core
Earnings
Standard & Poor's Core
Earnings Before
Pension Interest
Expense
Pension Interest
Expense
2001:1 10.73 9.18 6.15 7.30 -1.152001:2 9.02 4.83 4.15 5.29 -1.142001:3 9.16 5.23 3.55 4.69 -1.142001:4 9.94 5.45 2.92 4.05 -1.13
FY 2001 38.85 24.69 16.76 21.32 -4.56
2002:1 10.85 9.19 6.62 7.74 -1.122002:2 11.64 6.87 5.40 6.51 -1.11
4Q's to 2002:2 41.59 26.74 18.48 22.98 -4.50Trailing P/E 6/30/02 23.8 37.0 53.6 43.1
$/Share
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As-Reported Earnings and Standard & Poor’s Core Earnings
($/Share) As-Reported EPS 26.74 Standard & Poor’s Core Earnings Adjustments:
Employee Stock Option Grants -5.21 Net Pension Adjustments -6.54
Pension Interest Expense: -4.50 Other net pension adjustments: -2.04
Goodwill Impairment Charges 1.46 Gains/(Losses) on Sales of Assets 2.15 Other Post-employment Retirement Benefits -0.42 Settlements and Litigation 0.43 Reversal of Prior Period Charges -0.14
Standard & Poor's Core Earnings Before Pension Interest Cost 22.98 Standard & Poor's Core EPS 18.48
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Standard & Poor’s Core Earningsby GICS Sector
For the 12 months ended June 30, 2002
As Reported
S&P Core Earnings
Stock Option
Expense
Pension Interest Cost
Standard & Poor's Core
Earnings Before
Pension Interest Cost
SectorConsumer Discretionary 3.07 1.58 -0.54 -0.96 2.55Consumer Staples 4.44 3.79 -0.23 -0.23 4.03Energy 2.26 1.88 -0.09 -0.26 2.15Financials 10.53 9.81 -0.68 -0.18 9.99Health Care 5.25 4.57 -0.45 -0.21 4.79Industrials 3.66 1.68 -0.29 -1.14 2.82Information Technology -3.66 -5.48 -2.52 -0.58 -4.89Materials 0.63 -0.51 -0.08 -0.42 -0.09Telecommunication Services -1.93 -1.26 -0.26 -0.50 -0.77Utilities 2.49 2.41 -0.07 -0.01 2.42S&P 500 26.74 18.48 -5.21 -4.50 22.98
$/share
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Standard & Poor’s Core Earnings by GICS Sector
For the 12 months ended June 30, 2002
As Reported
S&P Core Earnings
Stock Option
Expense
Pension Interest Cost
Standard & Poor's Core
Earnings Before
Pension Interest Cost
SectorConsumer Discretionary 1.9% 1.0% -0.3% -0.6% 1.6%Consumer Staples 6.8% 5.8% -0.4% -0.4% 6.1%Energy 3.8% 3.2% -0.2% -0.4% 3.6%Financials 10.1% 9.4% -0.6% -0.2% 9.6%Health Care 9.0% 7.9% -0.8% -0.4% 8.2%Industrials 4.6% 2.1% -0.4% -1.4% 3.6%Information Technology -6.3% -9.4% -4.3% -1.0% -8.4%Materials 2.2% -1.8% -0.3% -1.5% -0.3%Telecommunication Services -6.2% -4.1% -0.9% -1.6% -2.5%Utilities 4.0% 3.8% -0.1% 0.0% 3.8%S&P 500 3.8% 2.6% -0.7% -0.6% 3.3%
Return on Sales
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Option Expense as a Percent of Revenues
0% 1% 2% 3% 4% 5%
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
S&P 500
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Pension Interest Expenseas a Percent of Revenues
0.0% 0.5% 1.0% 1.5% 2.0%
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
S&P 500
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Further Steps
• Standard & Poor’s will continue to work with key leaders in the investment community to develop consensus to support more informative and accurate earnings information.
• Standard & Poor’s will support Standard & Poor’s Core Earnings with data and analysis, including full data in Compustat, EPS data on indices, forward EPS estimates on over 1,200 companies in Standard & Poor’s equity analytical universe, and other efforts.
• Standard & Poor’s CVC will provide assistance to corporations in the use of Standard & Poor’s Core Earnings in their financial reporting.
