Are profits at ARM Holdings (LSE: ARM) distorted by unusual items?
Right now I'm trawling through the FTSE 100 (UKX) and double-checking for blue chips that may be flattering their profits.
You see, many companies these days report 'underlying' earnings, which are calculated by excluding costs the firm deems to be 'exceptional'. Trouble is, some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.
Today I'm looking at ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US) to see if its reported earnings have been distorted significantly by exceptional, one-off or unusual items. I've extracted the following statistics courtesy of S&P Capital IQ:
|Year to 31 December||2007||2008||2009||2010||2011|
|Profit before unusual items (£m)||46.1||65.1||55.7||109.7||160.1|
|Restructuring charges (£m)||(1.0)||(1.9)||(8.5)||0.4||(3.2)|
While annual figures can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible problems in relation to one-off costs.
So between 2007 and 2011, my stats tell me ARM Holdings reported cumulative profits before exceptional items and tax of £437 million. However, aggregate exceptional costs came to £14 million -- equivalent to just 3% of cumulative 'underlying' profits.
ARM Holdings has the cleanest set of accounts we've seen so far in this series. To some extent, that's not too surprising, as it is a much younger company than the others we've looked at, and it has a much simpler business model.
ARM has grown partly by acquisition, though, and just this week tied up another deal, where it lead a consortium taking over a portfolio of patents from MIPS. So restructuring charges are something to keep an eye on in the future, although we hope that ARM continues to keep its accounts clean and tidy.
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> Stuart does not own any share mentioned in this article.