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Are Companies Using Restructuring Costs to Fudge the Numbers?

Colleague and friend, Chuck Kremer, CPA, passed along this interesting article from the Jan. 30, 1996, Wall Street Journal (front page, "Odd Numbers" column). The number of times companies are writing-off "one-time" costs is getting more frequent.

Some companies seem to do this regularly. AT&T has taken four restructuring charges in the last 10 years. These "extraordinary" charges are normally taken out in restating the company's earnings. From 1984-95, AT&T earnings grew 10% per year. However, their total $14 billion restructuring charges actually exceeded net income!

Other companies cited for frequent restructuring charges included Citicorp, Eastman Kodak, and Westinghouse Electric. One analyst says that some companies are using the restructuring charges as a piggy bank that you can later put back earnings to some degree.

Chuck Kremer's point in sending the article was to discredit some of the financial performance criteria, such as EVA (economic value added). Analysts focusing on net income performance (which has been restated for charge-offs) inflate the value of a company. Chuck suggests that we focus on cash, not net income. It is better to focus on operating cash flow which is never restated.

For business evaluation purposes, remember, "Cash is King."

--John Schuyler, June 1996