GE Cuts Transparency & More From The Real Earnings Season

This week’s Filing Season Finds report highlights some of the most interesting footnote disclosures in the 247 10-Ks and 10-Qs my firm’s Robo-Analyst analyzed last week.

1. General Electric’s (GE) move towards less transparency and
2. hidden insights found in the 10-Ks of T-Mobile (TMUS) and Illinois Tool Works
   ITW
   .

Since 2005, I’ve reported how traditional earnings measures are unreliable due to accounting loopholes that allow companies to manage earnings.

General Electric Says Goodbye to Transparency

In General Electric’s 2021 10-K, analyst Hunter Anderson highlighted how the Robo-Analyst found the company will no longer separate GE Capital, the company’s financial arm, from its Industrial businesses in its financial filings. Instead, all results will be consolidated. The explanation of this change is found on Page 6 of the company’s 2021 10-K.

Eliminating the breakout of the company’s financial division removes transparency needed for investors to truly understand the profitability of the entire business. Financial companies and non-financial companies have very different capital structures and operating activities, and investors need to treat these divisions differently when analyzing all aspects of profitability. For instance, financial companies are in the business of selling money; so there is no such thing as Excess Cash for them.

The elimination of this transparency is especially alarming given how misleading General Electric’s reported results have been in the past. My 2016 report How General Electric Can Prevent A $125 Billion Decline In Market Value was among the very first to warn of the huge fall in the company’s stock. More recently, in a March 2021 Filing Season Finds report, I pointed out how overstated General Electric’s GAAP earnings were due to unusual hidden and reported items. After adjusting for unusual items, I found that General Electric’s 2020 Core Earnings were -$2.37/share compared to 2020 GAAP earnings of $4.77/share.

In 2021, General Electric’s results saw a swing in the opposite direction. After adjusting for all unusual items, I find that General Electric’s 2021 Core Earnings are $0.02/share compared to 2021 GAAP earnings of -$6.15/share.

Because General Electric is eliminating transparency and providing worse disclosure in its filings, I have suspended its rating so investors are aware that current results may no longer be comparable to prior periods.

Other Material Earnings Distortions & Insights Found

From disclosures in the footnotes and MD&A:

T-Mobile U.S. (TMUS) – Hidden Merger Related Costs Create Understated GAAP Earnings

• In T-Mobile’s 2021 10-K, analyst Robin Ortega noted that the Robo-Analyst found on page 29 that the company bundled $3.1 billion in merger-related costs within cost of services, cost of equipment, and selling, general and administrative costs. My firm removes this non-operating charge from the measure of net operating profit after-tax (NOPAT) and Core Earnings to calculate the true recurring profits of the business. After removing all that Earnings Distortion and more (-$3.2 billion, or 105% of GAAP Earnings), I reveal that T-Mobile’s 2021 Core Earnings of $6.2 billion, or $4.94/share, are much higher than GAAP Earnings of $3.0 billion, or $2.41/share.

Illinois Tool Works (ITW) – Applause for Detailed ROIC Calculation Disclosures

• Analyst Hunter Anderson noted that the Robo-Analyst found one of the most detailed breakouts of how a company calculates return on invested capital (ROIC) on page 35 of Illinois Tool Works’ 2021 10-K. There is no adjustment to make here, just a hat-tip to quality disclosure. Better yet, Illinois Tool Works goes one step further and ties 33% of executives’ performance share units and long-term performance cash awards to an after-tax ROIC goal. I applaud companies that tie executive compensation to ROIC, and doing so ensures that executives’ interests are aligned with shareholders’ interests and there is a strong correlation between improving ROIC and increasing shareholder value.

The Power of the Robo-Analyst

From the 247 10-K and 10-Q filings analyzed by the Robo-Analyst last week, it collected 34,469 data points. This data led to 5,017 Core Earnings, balance sheet, and valuation adjustments with a combined dollar value of $3.8 trillion. The adjustments were applied as follows:

• 2,033 income statement adjustments with a total value of 218 billion
• 1,949 balance sheet adjustments with a total value of $1.5 trillion
• 1,035 valuation adjustments with a total value of $2.1 trillion

Figure 1: Filing Season Diligence for the Week of February 14 – February 18

Disclosure: David Trainer, Robin Ortega, Hunter Anderson, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.