Monday, May 20, 2019
Research Paper: Capex Spending

Thursday, May 16, 2019
Psst: Got Any Weed?

Wednesday, May 15, 2019
Open Letter: SEC Proposed Rule for BDCs

Friday, May 10, 2019
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Monday, May 6, 2019
How to Find Earnings Release Data

Tuesday, April 23, 2019
Following Restructuring Costs Over Time

Monday, April 22, 2019
Capex Spending: More Than You Might Think

Saturday, April 13, 2019
When AWS Takes Over the World

Thursday, April 11, 2019
Data Trends in Focus: Restructuring Costs

Sunday, April 7, 2019
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Thursday, April 4, 2019
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Tuesday, April 2, 2019
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Wednesday, March 27, 2019
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Monday, March 25, 2019
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Friday, March 22, 2019
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Thursday, March 21, 2019
Tech Data’s Goodwill Adjustment

Tuesday, March 19, 2019
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Saturday, March 16, 2019
Adventures in Tax Cuts and Net Income

Monday, March 11, 2019
Big Moves in Goodwill, Intangible Value

Friday, March 8, 2019
CVS, Goodwill, and Enterprise Value

Archive  |  Search:
Another Tale, Buried in the Footnotes
Thursday, February 21, 2019

Footnotes matter, people. Here is today’s example of how true that is.

American WaterWorks Co. ($AWK), one of the largest publicly traded water utilities in the United States, filed both its annual report and its earnings release for its 2017 operations on Feb. 20, 2018. The company reported a revenue increase of 1.36 percent from the prior year, which seems like good news at first glance.

In the earnings release, AWK reported consolidated GAAP earnings per share of $2.38 and consolidated non-GAAP earnings of $3.03 per share. It also reported GAAP and non-GAAP net income for its regulated business of $559 million and $552 million, respectively.

Read that again carefully. Non-GAAP earnings per share were considerably higher than GAAP earnings per share, but non-GAAP net income for the regulated business was lower than GAAP net income.

That’s weird. AWK is a water utility; they are supposed to be boring, stable businesses, with boring, stable earnings numbers. Why such a big gap between GAAP and non-GAAP earnings per share? Why would non-GAAP net income be lower than GAAP income? What’s with that “regulated business” qualification, anyway? Did the company have other business segments that weren’t mentioned on the earnings report?

There’s more. We had also noticed that AWK’s earnings release included a disclosure about its non-regulated “Market-Based Business.” (The earnings release didn’t say much beyond that to clarify AWK’s business structure.) For that non-regulated unit, AWK reported GAAP net income of $38 million and non-GAAP net income of $43 million — so, opposite of the regulated side of the business, where the non-GAAP number had been lower than the GAAP number. Huh?

Clearly, we had questions. So we turned to our Segments Disclosures page for answers.

That is where we discovered that AWK reports numbers separate numbers for its regulated and non-regulated business segments. The non-regulated segment is then further split into “Market-Based Business” and the ever-popular “Other.”

The Other segment had a loss of $171 million — equal to roughly 40 percent of AWK’s consolidated GAAP net income of $426 million. (The $559 million from from the regulated business, plus $38 million from the non-regulated business, minus this $171 million from Other.) See Figure 1, below.

Exactly what does this Other business segment do? AWK describes it as follows:

“Other” includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, fair value adjustments and associated income and deductions related to the acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Other as they are excluded from segment performance measures evaluated by management.

That suggests to us that Other is a AWK’s financial reporting equivalent of your favorite kitchen drawer, where you stow all the junk that you don’t know where else to put it.

Equally interesting: Other has been operating at a loss for years. Remember, you can always move your cursor over any number displayed in Calcbench to see how the filer tags that value — including a “Tag History” option that will display the value for previous periods. (See Figure 2, below.) Other had a net loss of $43 million in 2016 and $39 million in 2015. In fact, AWK reported its 2018 numbers earlier this week, and Other had a $67 million loss last year, too.

So once more, with feeling: reading the footnotes is important. Those numbers can tell a very different story from what companies choose to report in the earnings release, where executives have far more discretion to call out the good stuff.

The footnotes, however, is where all the stuff is reported. That matters.

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