Adjusted earnings call: Meaning, Criticisms & Real-World Uses

What Is Adjusted Earnings Call?

An Adjusted Earnings Call is a teleconference or webcast held by a public company where management discusses its financial results for a reporting period, often providing a view of profitability that includes or excludes certain items deemed non-recurring or non-operational. This practice falls under the broader category of Financial Reporting. While companies are required to report their financial results according to Generally Accepted Accounting Principles (GAAP), an Adjusted Earnings Call frequently delves into "adjusted" figures, which are Non-GAAP Financial Measures. The aim is to present what management considers a clearer picture of the company's core Financial Performance by stripping out unusual or one-time events that might distort the standard Net Income figures³², ³³.

History and Origin

The tradition of public companies discussing their financial results with investors and Financial Analysts via conference calls has evolved significantly. Quarterly earnings calls became a widespread practice, with a 2014 survey by the National Investor Relations Institute (NIRI) indicating that nearly all member companies conducted them. Companies use these calls to communicate financial health and strategy, often accompanying them with official press releases summarizing results and mandatory filings under securities laws³¹.

The concept of "adjusted earnings" gained prominence as businesses sought to present a smoothed-out, longer-term view of their performance, particularly as accounting changes introduced more non-realized gains and losses that could create volatile swings in audited financial statements³⁰. The use of adjusted financial measures became more prevalent, leading the Securities and Exchange Commission (SEC) to introduce specific regulations, such as Regulation G and Item 10(e) of Regulation S-K, to ensure transparency and prevent misleading disclosures of non-GAAP measures²⁸, ²⁹. These regulations, established in 2003 in response to the Sarbanes-Oxley Act, mandate that non-GAAP measures be reconciled to their most directly comparable GAAP measure and not be given undue prominence²⁶, ²⁷.

Key Takeaways

An Adjusted Earnings Call provides management's perspective on a company's underlying financial performance by adjusting for certain non-recurring or non-operational items.
These calls complement official GAAP Financial Statements and are part of a company's broader Investor Relations efforts.
Adjustments often include one-time gains or losses, restructuring charges, or non-cash expenses like stock-based compensation²⁴, ²⁵.
Companies must reconcile non-GAAP figures to their GAAP equivalents during these calls and in accompanying disclosures, as mandated by the SEC²², ²³.
Analysts and investors use the information from Adjusted Earnings Calls, alongside GAAP data, for a comprehensive Valuation and to inform investment decisions.

Formula and Calculation

The "Adjusted Earnings Call" itself does not have a formula, as it is a communication event. However, the adjusted earnings figures discussed during such a call are derived through a calculation. Adjusted earnings typically begin with GAAP Net Income (or a similar GAAP profit measure) and then add back or subtract specific items that management considers non-representative of ongoing operations.

A general representation of adjusted earnings can be:

\text{Adjusted Earnings} = \text{GAAP Net Income} \pm \text{Non-Recurring Gains/Losses} \pm \text{Non-Cash Expenses} \pm \text{Other Management Adjustments}

Where:

GAAP Net Income: The company's profit as reported under Generally Accepted Accounting Principles.
Non-Recurring Gains/Losses: Income or expenses from one-time events such as asset sales, litigation settlements, or significant restructuring charges.
Non-Cash Expenses: Costs that do not involve a cash outflow in the current period, such as depreciation, amortization of acquired intangible assets, or stock-based compensation.
Other Management Adjustments: Additional items that management chooses to exclude or include to reflect its view of core operations, subject to regulatory scrutiny.

For example, a company might report Adjusted Earnings Per Share by excluding amortization of acquired intangible assets or restructuring charges²¹.

Interpreting the Adjusted Earnings Call

During an Adjusted Earnings Call, management aims to guide listeners toward a particular interpretation of the company's financial results. When interpreting the figures presented, listeners should pay close attention to the specific adjustments made. Companies often use adjusted earnings to highlight what they perceive as their "core" operational performance, excluding elements that might obscure this view, such as one-time charges related to acquisitions or divestitures¹⁹, ²⁰.

It is crucial to understand why certain adjustments are made and to evaluate whether these exclusions provide a genuinely clearer picture or potentially mask underlying issues. Financial Analysts and Equity Research professionals often scrutinize these adjustments to ensure they are consistent over time and across comparable companies. A common practice for analysts is to reconcile the adjusted figures back to the reported GAAP numbers to gain a complete understanding of a company's profitability and Cash Flow ¹⁷, ¹⁸.

Hypothetical Example

Consider "Tech Innovations Inc." preparing for its quarterly Adjusted Earnings Call.
Scenario: Tech Innovations Inc. reports a GAAP Net Income of $50 million for the quarter. However, during the quarter, the company incurred a one-time restructuring charge of $15 million due to the closure of a non-core division and recognized a $5 million non-cash gain from a change in the fair value of a specific financial instrument.

Step-by-step Adjusted Earnings calculation for the call:

Start with GAAP Net Income: $50 million.
Add back the restructuring charge: Management views this as a one-time, non-operational expense. So, $50 million + $15 million = $65 million.
Subtract the non-cash gain: This gain is also considered non-operational and non-recurring. So, $65 million - $5 million = $60 million.

Result: During the Adjusted Earnings Call, Tech Innovations Inc. would highlight its "Adjusted Net Income" of $60 million. The CEO and CFO would explain that this figure provides a more accurate representation of the company's ongoing operational profitability, excluding the impact of the one-time restructuring and the non-cash financial instrument gain. They would also provide the required reconciliation to the GAAP Net Income in their accompanying Financial Statements. Investors and Shareholders listening to the call would then compare this adjusted figure against their expectations and analyze the rationale behind each adjustment.

Practical Applications

Adjusted Earnings Calls are a regular feature in financial markets, serving as a primary communication channel between a company's management and its stakeholders. These calls are essential for:

Investor Communication: Companies use these calls to articulate their strategic direction and explain quarterly or annual results in depth, beyond what static financial statements can convey. For example, a company like Flex (NASDAQ: FLEX) will highlight both GAAP and adjusted financial metrics, such as "Adjusted Earnings Per Share," during its earnings call to provide a comprehensive view of its performance and updated guidance¹⁶.
Analyst Briefings: Financial Analysts and Equity Research teams participate to ask questions, clarify financial figures, and refine their models and investment recommendations. They often focus on the consistency of adjusted metrics over time.
Performance Evaluation: Management often uses adjusted earnings internally for performance evaluation and to determine executive compensation, believing these metrics better reflect operational results without the distortion of unusual events¹⁵.
Market Sentiment and Price Discovery: The information shared in an Adjusted Earnings Call can significantly influence market sentiment and a company's stock price, as it provides forward-looking guidance and management's perspective on future prospects¹⁴.
Regulatory Compliance: While "adjusted earnings" are non-GAAP, companies are still subject to regulations from the Securities and Exchange Commission (SEC) regarding their presentation. The Sarbanes-Oxley Act of 2002 led to stricter rules, ensuring that companies provide clear reconciliations and do not present non-GAAP measures in a misleading way¹², ¹³. The SEC provides detailed guidance to ensure that non-GAAP financial measures are not misleading and that the most directly comparable GAAP financial measure is presented with equal or greater prominence.¹¹.

Limitations and Criticisms

While Adjusted Earnings Calls can offer valuable insights into a company's underlying operations, they are not without limitations and criticisms. A primary concern is the potential for management to use these adjustments to present a more favorable picture of the company's Financial Performance than what GAAP figures alone might suggest¹⁰. Critics argue that the flexibility in defining "adjustments" can lead to inconsistent reporting across companies or even within the same company over different periods, making peer comparisons difficult⁹.

For instance, some adjustments might exclude "normal, recurring, cash operating expenses" that are necessary for the business, which the SEC views as potentially misleading⁸. Stock-based compensation is a frequently debated item; while non-cash, it is a real cost to Shareholders through dilution and is often added back in adjusted earnings calculations⁷. Academic research has also raised questions regarding management's motivations behind these adjustments and their impact on firm performance, with some studies suggesting that firms with large differences between reported and adjusted earnings might have weaker underlying operational performance⁶.

Investors should exercise caution and always compare adjusted figures with the corresponding GAAP numbers provided in official Financial Statements. Analyzing the reconciliation of non-GAAP to GAAP measures, as mandated by the SEC, is crucial for understanding the nature and impact of each adjustment⁵. The use of adjusted earnings, particularly when they consistently exceed GAAP earnings by a wide margin, has drawn scrutiny from regulators and the media, as seen in past cases involving companies where such adjustments later came under fire⁴.

Adjusted Earnings Call vs. Earnings Call

The terms "Adjusted Earnings Call" and "Earnings Call" are closely related but highlight different aspects of a company's financial communication. An Earnings Call is a general term for the quarterly or annual teleconference where a public company's management discusses its financial results. This typically includes a review of the official GAAP financial statements, an outlook for the future, and a question-and-answer session with analysts and investors³.

An Adjusted Earnings Call, on the other hand, specifically emphasizes the discussion of adjusted earnings and other Non-GAAP Financial Measures during that conference. While all adjusted earnings calls are earnings calls, not all earnings calls place significant emphasis on, or even include, adjusted non-GAAP figures. The distinction lies in the additional layer of financial reporting that management chooses to present—namely, a modified view of profitability that aims to exclude or include items to provide a "truer" operational picture. Companies engaging in an Adjusted Earnings Call will dedicate time to explaining the rationale behind these adjustments, their impact on Financial Performance, and how they believe these adjusted metrics should be interpreted alongside the standard GAAP results.

FAQs

1. Why do companies present adjusted earnings during an earnings call?

Companies present adjusted earnings to offer what they believe is a clearer view of their core operational Financial Performance. They often exclude one-time or non-recurring items, such as large restructuring costs or gains from asset sales, that might otherwise distort the regular financial results.
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2. Are adjusted earnings regulated by the SEC?

Yes, while adjusted earnings are considered Non-GAAP Financial Measures, their public disclosure by U.S. companies is regulated by the Securities and Exchange Commission (SEC) through rules like Regulation G. Companies must reconcile these figures to their most directly comparable GAAP measures and ensure they are not presented in a misleading way.
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3. How should investors use information from an Adjusted Earnings Call?

Investors should use information from an Adjusted Earnings Call as a supplementary tool to gain deeper insight into a company's operations. It is important to compare the adjusted figures with the official GAAP results from the company's Financial Statements and carefully review the reconciliation of any adjustments made. This holistic approach can help in making more informed investment decisions.