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Spin it, baby, spin it.

I marked my 14th anniversary as editor of Arkansas Business earlier this month. Let me share with you a lesson I've learned from studying hundreds upon hundreds of quarterly earnings statements from publicly traded companies: If the company leads with anything other than net income, it means net income was nothing to brag about.

Some companies are up-front even with losses, although they will couch the losses in the best possible light:

"Arkansas Best Corporation (ABFS) today reported a first quarter 2013 net loss despite continued encouraging trends in its emerging businesses."

Others will engage in the most amazing gymnastics in order to divert attention from the bottom line. A recent example is the first-quarter release from Inuvo Inc., which relocated from New York to Conway earlier this year.

After leading its release with an 82 percent increase in revenue--unquestionably an impressive figure--Inuvo then wowed investors and potential investors with the news that its "gross profit" had improved by 147 percent compared with the first quarter of 2012.

Pity the reader who thought gross profit was the same as profit. It turns out that gross profit for Inuvo doesn't include things like salaries and rent. Only after bragging on revenue and gross profit did the company acknowledge a net loss of $291,000 (a big improvement from the $1.9 million net loss from a year earlier).

Then the company also acknowledged that its big increase in revenue included the acquisition of another company, so the comparison wasn't really apples-to-apples.

If you think I'm a little too cynical, consider this: When Inuvo announced its second-quarter results last week, the headline on the press release was this: "Inuvo, Inc. Reports Net Income of $0.02 per share on Higher Revenue in the Second Quarter."

Revenue was only barely higher (about 1.5 percent) and gross profit wasn't even mentioned until many sentences later. But that doesn't matter: When a company can brag about its net income, it does so. (I am delighted for Inuvo. I think our economic development folks ought to point out that a company that loses money in New York makes money when it relocates to Arkansas.)

Simmons First National Corp. used another clever approach when it "announced second quarter 2013 net income of $6.6 million and diluted earnings per share of $0.40, an increase of $0.02, or 5.3%, compared to the same quarter last year. Year-to-date net income was $12.5 million, or $0.76 diluted earnings per share, an increase of $0.01 [over] the same period last year."

While being absolutely correct and truthful, Simmons' release used earnings per share to distract the reader from net income. While its quarterly EPS was 5.3 percent higher than in second quarter of 2012, its net income was up by only 0.6 percent. And while EPS for the first half of the year was up by a penny, actual earnings--net income--were down by 2.9 percent.

You see, Simmons has been buying back shares of stock, a time-honored way of improving stockholder value by slicing the same pie into fewer pieces. Buying back stock tends to improve the stock price and definitely improves EPS, but it doesn't change the bottom line. And in Simmons' case, earnings were essentially flat in the second quarter, definitely not up enough to make up for lower earnings in the first quarter.

The all-time champion in the category of making lemonade came from Windstream Corp. last month. The telecom, headquartered in Little Rock, announced that stockholders who had claimed Windstream's vaunted $1-per-share dividend as taxable income in 2012 might be able to get a tax refund.

Suddenly, two-thirds (66.417 percent) of the payout to shareholders was nontaxable income. I haven't heard a good explanation for why Windstream made this "change in the tax treatment" of the dividends, but I know this: When a company pays out part of its profit to shareholders as dividends, that income is taxable. If a shareholder receives money from the company that isn't taxable, then it isn't a dividend in the traditional sense of the word.

Sure enough, if one digs around on Windstream's website, one finds this sentence in the "important tax information" about the revised tax treatment: "Non-dividend distributions are considered a return of capital and are generally not taxable; however, the recipient must adjust their cost basis to reflect the distribution."

When is a dividend not a dividend? When you are getting back your own money rather than profit.

I don't blame public companies, or anyone else, for accentuating the positive. Cutting through the spin keeps people like me employed year after year.

Gwen Moritz

Gwen Moritz has been editor of Arkansas Business since Aug. 2, 1999. Email her at
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Title Annotation:Editor's Note
Author:Moritz, Gwen
Publication:Arkansas Business
Date:Aug 12, 2013
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