FASB seeks input on standards tweak

By Paula Doe

WaferNews Contributing Editor

Numerical Technologies’ second quarter results press release touted record profitability of over $1 million, or about 9% of revenues – but the company will report a $14.7 million loss (126% of revenues) when it files with the SEC under generally accepted accounting principles. Numerical emphasizes cash earnings, so it excluded the cost of amortizing good will from acquisitions, deferred stock compensation and depreciation in its pro forma results.

“We use cash earnings because it’s the best indicator of how the business is doing,” says company Spokesperson Susan Lipponcott, noting that Numerical’s software and IP business model differs from the usual equipment company.

Separating out unusual and one-time expenses from ongoing earnings helps investors see a company’s real margins in its core business, but the proliferation of different ways of reporting alternative pro forma earnings has gotten so confusing that the Financial Accounting Standards Board (FASB) has proposed rethinking the whole issue of how to measure financial performance.

“If you’re trying to deal with something on a consistent basis, you have to go with net income,” says Ron Bossio, the senior project manager at the FASB looking into the issue. “At least you have a basis for comparison. If you start pulling things out, you don’t know if all companies did it the same or not.”

The organization that sets the rules companies have to follow in their official SEC filings is seeking input from industry about how best to report financial performance so it can decide how to proceed.

Current best practice is to report both FASB/SEC-style results and an alternative version excluding big charges that have nothing to do with the ongoing business. So lots of the semiconductor tool companies this quarter also reported earnings without the costs of amortizing intangibles like good will and in-process R&D from companies they’d acquired, and without the costs of restructuring and other unusual one-time expenses.

Applied Materials noted earnings with and without a $10 million charge acquired in process R&D at Oramir Semiconductor Equipment, and $4 million in severance costs. Asyst reported what earnings would have been without a $15 million charge for impairment of land on which it had planned to build a new headquarters, and $2.9 million for writing off improvements already made there.

Others, like LTX and Advanced Energy, excluded write downs of excess inventories. And Electroglas presented a version of results excluding a $15.6 million charge for revaluation of deferred tax assets. But other companies with goodwill, severance costs and inventory write offs did not break them out of net income.

The FASB study of the issue notes the recent proliferation of reporting of alternative and inconsistent measures of financial performance is often confusing and sometimes misleading. There are no common definitions of key financial measures, and the increasing use of pro forma reporting suggests people aren’t relying on net income anymore.

“There’s good reason to explain things that are not the norm – it means management is doing its job,” says Bossio. “But some may be going beyond the norm to color the message.”

The International Accounting Standards Board also added a major project on reporting financial performance to its agenda this summer.

Adding to the confusion, securities analysts and organizations like Thomson Financial’s First Call want to look at core earnings in the ongoing business, without any unusual or one-time charges.

“We usually take everything out, like inventory charges, massive layoffs, any kind of one time expense” says Eric Ross, analyst at Thomas Weisel Partners. “My purpose is to figure out what the real operating margins are.”

He notes that “Goodwill doesn’t tell you anything about the business, just how much they paid for it.” WaferNews’ Fab 50 weekly listing from CNET Investor, however, uses SEC net income for its P/E figure.

Currently, at least, removing items tends to make earnings look better. First Call reports earnings for the S&P 500 companies are down 17% year on year by its analyst-type estimates, while by the traditional SEC/FASB net income measure they’re down 33%.

“Pro forma results are meaningless audited numbers,” says Ross. “Some people take things out, some don’t. Really the pro forma rules need to be solidified.”



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