You are here

Behold Accounting Magic 101: This Is How Alcoa Just "Beat" Consensus EPS

Some companies are notorious for buying back billions in stock in order to mask the decline in their earnings by reducing the number of shares outstanding. Alcoa, which still has a major debt overhang from the last financial crisis, is unable to do that as it simply does not have the free cash flow to dedicate to shareholder friendly activities. Instead, Klaus Kleinfeld's company is forced to resort to an even more primitive form of EPS fudging: massive quarterly EPS addbacks.

And while we noted recently that companies are running out of accounting gimmicks with pro-forma EPS addbacks in recent quarters rising to the highest since Lehman, Alcoa still is still not done.

Not even close.

Moments ago, Alcoa reported adjusted EPS of $0.04, or $65 million in adjusted net income, beating consensus expectations of $0.02 handily (nevermind that it missed consensus revenues of $5.3 billion by $50 million, an 18% decline from the $64 billion a year ago).

There is, alas, a problem with these adjusted "earnings", because on a actual, GAAP basis, Alcoa actually reported a whopping $500 million loss.

How did Alcoa "fill the gap?" Simple: with an unprecedented $534 million in "one-time" charges. We put one time in brackets, because the chart below shows that for Alcoa, charges are anything but one time, although in Q4 the company quite literally has outdone itself.

In other words, more than 100% of Alcoa's "EPS" in the quarter was due to what management thought was another quarter of recurring "non-recurring", non-one time "one-time" charges.

What about for the full 2015 year?

Here, things get downright comincal, because whereas Alcoa's GAAP Net Income for the LTM period ended December 31 was a net loss of $121 million, when one adds back all the charges incurred over the past 12 months, the "net income", on a non-GAAP Basis of course, soars to a ridiculous $787 million... which still is down 30% from a year ago!

Said otherwise, more than all of Alcoa's earnings in 2015 were the result of "non-recurring" addbacks, "one-time" charges, and other proforma changes to the non-GAAP net income number.

And that, ladies and gentlemtn, is accounting magic 101.

Oh, we almost forgot: here is the history of Alcoa's $0.02 EPS "consensus" which the company had to take a record addback in order to "beat"...

Chart courtesy of @not_jim_cramer