People walking by Telus store in Toronto.Gloria Nieto/The Globe and Mail
I deeply, deeply dislike the cliché "win-win situation," but it may apply to the recent deal between Telus Corp. and its workers to pay $300-million in future pay raises all at once. The employees get cash in hand right away, the company gets a deal with its unions and cost certainty. All good stuff.
Me being me, I'm going to pick a loser, though: Investors who look at the company's earnings numbers in the next three years and think they paint a true picture of what it takes to run the company.
I've drawn this conclusion from the work of the folks at Veritas Investment Research, who flagged the issue not long after Telus reported earnings last month. Here are the details: The Telus agreement, driven by its negotiations with its unions, calls for it to pay out $300-million now to represent salary increases that would have otherwise taken place in July of this year as well as in 2017 and 2018. Employees need not stay that long in order to get the money; they can leave after they get their cheques and owe none of it back. Telus will record a $300-million expense in this quarter to reflect the payment.
Here is where things get interesting, if you're a regular reader of my Veritas encapsulations: The research firm, which focuses on accounting and often questions companies' choices on how they adjust earnings, doesn't have a quibble with how Telus chose to account for the expense under International Financial Reporting Standards. Instead, Veritas suggests that Telus would best serve investors, going forward, if it presents an "adjusted EBITDA" figure that puts all those increased salary costs in the period where they would normally belong.
"In our opinion, the substance of the $300-million payment relates to future salary increases," analyst Desmond Lau wrote. "Therefore, we believe that the most appropriate treatment would be for Telus to amortize this amount into expense over the 30-month period for EBITDA purposes. This would result in expenses lining up with the period to which they would normally apply."
If investors use Telus' EBITDA, or earnings before interest, taxes, depreciation and amortization, in the coming quarters to analyze the company, they may miss its true compensation costs, Mr. Lau argues.
He believes Telus is now avoiding $10-million a month in salary costs thanks to the one-time expense. Some of the other ramifications: Investors who don't build back in that expense may think Telus' EBITDA growth is up to a percentage point higher and may calculate its dividend payout ratio – which Veritas believes is already high – at nearly four percentage points lower.
What does Telus have to say? Well, foremost, it says that because it is not requiring workers to stay until 2018 to keep the special payment, accounting rules require the company to expense the $300-million now, rather than spread it out over the multi-year period, in its IFRS-compliant financial statements. (Veritas points to General Motors as an example of a company that amortized lump-sum payments over the life of a union contract, but General Motors required the workers to stay employed to get all the payments, which would prompt a different accounting treatment, according to Telus' argument.)
Telus spokesman Richard Gilhooley is also able to point to the company winning the "Overall Award of Excellence in Corporate Reporting" award from the Chartered Professional Accountants of Canada on Dec. 7, the seventh time in the past nine years. This, Mr. Gilhooley says, "demonstrate[s] our strong commitment to accurate reporting and disclosure." And, the company agrees with Veritas that the labour deal will "ensure more labour cost certainty," he adds.
Asked directly, however, whether its EBITDA in 2017 and 2018 "will accurately reflect its costs of doing business," Mr. Gilhooley says "we have no comment on how someone else would like to create an adjusted number beyond the GAAP reconciliation. We have been very transparent on the accounting treatment of this event."
Veritas has been a sharp critic of companies that have used "adjusted EBITDA" and other non-GAAP financial metrics; that was the thrust of a major report The Globe and Mail highlighted in September, in which Veritas found 59 of the companies in the S&P/TSX 60 using such measures. So on the surface, it seems odd that the firm is encouraging Telus to put out an "adjusted EBITDA" measure in its upcoming earnings releases.
The distinction, however, is that the companies almost always manage to make their earnings numbers better via "adjusted EBITDA." Here, Veritas has a compelling case that investors will get a clearer picture of the economics at Telus if it does adjust its GAAP earnings – it's just that the tweak would take EBITDA down every quarter, not up. Will Telus provide this number? Let's see.