’s decision to break out adjusted earnings per share is drawing concern from some analysts who view the change to how the consumer company measures its corporate value as potentially misleading.
The Oakland, Calif.-based maker of disinfecting wipes and other cleaning products forecast its adjusted EPS as ranging between $7.45 to $7.65 for the current fiscal year when it reported quarterly results on Friday. It said the move aims to provide more transparency to investors.
The adjusted EPS estimate excludes two nonrecurring charges: a $2.11 loss from a noncash impairment charge related to the company’s vitamins and supplements business and a 60-cent noncash gain stemming from revaluing its joint venture in Saudi Arabia after acquiring a majority stake in 2020, Clorox said.
Including these two charges would have made it more difficult for investors to understand the company’s operating performance, Chief Financial Officer
Adjusted EPS is a metric outside of Generally Accepted Accounting Principles, or GAAP, which are used by U.S. companies to report their financial results. Companies employ such a measure so that they can take out certain one-time charges from calculations of their earnings for the current period.
The company also introduced two other non-GAAP metrics on Friday: adjusted effective tax rate and adjusted pretax earnings for its health-and-wellness business.
In reporting non-GAAP measures, Clorox is following the lead of some of its competitors—including
Procter & Gamble Co.
—that exclude certain items from their metrics.
This isn’t the first time that Clorox is adjusting its financial metrics, a company spokeswoman said, pointing to other instances, including its reporting of organic sales in the outlook for fiscal 2020.
Going forward, Clorox will provide both adjusted EPS and EPS under GAAP, Mr. Jacobsen said. “We will always provide both,” he said. U.S. regulators require companies to give equal prominence to both types of metrics and to reconcile the numbers.
Analysts and investors view such changes to certain costs and gains with caution, fearing that companies might tweak their results to make them look better.
“Much to the dismay of investors, it has become increasingly common for large public companies to disclose ‘adjusted earnings’ or other financial measures that are not in accordance with GAAP,” said the Council of Institutional Investors, which represents pension funds and other large money managers. “While such nonstandard financial measures can be useful in understanding a company’s performance they can be misused,” the CII said.
In the first quarter of 2020, 329 firms in the S&P 500 reported EPS outside of GAAP, up from 320 in the prior year period, data provider Calcbench said. Through April 30 this year, 185 companies in the index have reported adjusted EPS, a number that is expected to go up as the earnings season continues.
Non-GAAP net income reported by a sample of 60 companies in the S&P 500 in 2020 exceeded the corresponding GAAP figure by $132.3 billion, according to Calcbench. Those companies made more than 240 adjustments to GAAP net income, the data provider said.
“Historically, Clorox has been a GAAP-reporter, which is unique and distinguishing in the consumer-staples sector,” said Lauren Lieberman, a managing director at Barclays Investment Bank. Shifting to adjusted EPS, especially as the company enters a more challenging operating environment, doesn’t look good, she added.
“We shouldn’t need to be…playing these games,” Ms. Lieberman said during Clorox’s earnings call last week. Mr. Jacobsen replied that he disagreed with Ms. Lieberman’s characterization, according to a transcript of the call.
Some public companies adjusted their 2020 earnings for Covid 19-related expenses, such as masks and other protective equipment, but Clorox didn’t.
While adjustments for one-time items can be justified, there are concerns in cases when companies adjust for recurring items, said Erin Lash, a director at Morningstar Inc.’s research division.
Clorox “could have telegraphed the move [to Wall Street] better,” said Kevin Grundy, a managing director at Jefferies Group LLC, a financial services firm.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
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