E3-36. ANALYST ADJUSTMENTS 3.4 Compare GAAP and non-GAAP Measures FMC Corporation reports the following non-GAAP information in its 2018 form 10-K. Use this infor- mation to answer the requirements. The following chart, which is provided to assist the readers of our financial statements, depicts certain after-tax charges (gains). These items are excluded from the measures we use to evaluate business performance and determine certain performance-based compensation. Additionally, the chart below discloses our Non-GAAP financial measure Adjusted after-tax earnings from continuing operations attributable to FMC stockholders." We believe that this measure provides useful information about our operating results to investors. We also believe that excluding the effect of certain charges allows man- agement and investors to compare more easily the financial performance of our underlying businesses from period to period. Year Ended December 31 ($ in millions) 2018 2017 $502.1 259.6 (59.4) $535.8 250.0 (67.5) (1.5) Net income (loss) attributable to FMC stockholders (GAAP) Corporate special charges (income), pre-tax . Income tax expense (benefit) on corporate special charges (income). Adjustment for noncontrolling interest, net of tax on corporate special charges (income) Discontinued operations attributable to FMC stockholders, net of income taxes... Non-GAAP tax adjustments . Adjusted after-tax earnings from continuing operations attributable to FMC stockholders (non-GAAP) 143.4 10.5 (621.7) 271.7 $854.7 $368.3 Required a. Compute the return on equity for each year. Average equity was $2,901.5 million and $2,319.8 million for 2018 and 2017, respectively. b. The company reports a non-GAAP measure of net income. Explain why FMC would want to report this type of information. What concerns might analysts have about this and similar types of non- GAAP disclosures? c. Compute the year over year change for (i) net income and (ii) non-GAAP earnings. Which measure do we believe more accurately captures the trend in FMC's earnings? Do we agree with FMC's claims about the usefulness of the non-GAAP number? d. Re-compute the return on equity for each year using the non-GAAP earnings number. Compare this to the ROE we computed in part a. Are the two returns materially different? Which ratio do we believe investors would rely on more? Explain. E3-36. ANALYST ADJUSTMENTS 3.4 Compare GAAP and non-GAAP Measures FMC Corporation reports the following non-GAAP information in its 2018 form 10-K. Use this infor- mation to answer the requirements. The following chart, which is provided to assist the readers of our financial statements, depicts certain after-tax charges (gains). These items are excluded from the measures we use to evaluate business performance and determine certain performance-based compensation. Additionally, the chart below discloses our Non-GAAP financial measure Adjusted after-tax earnings from continuing operations attributable to FMC stockholders." We believe that this measure provides useful information about our operating results to investors. We also believe that excluding the effect of certain charges allows man- agement and investors to compare more easily the financial performance of our underlying businesses from period to period. Year Ended December 31 ($ in millions) 2018 2017 $502.1 259.6 (59.4) $535.8 250.0 (67.5) (1.5) Net income (loss) attributable to FMC stockholders (GAAP) Corporate special charges (income), pre-tax . Income tax expense (benefit) on corporate special charges (income). Adjustment for noncontrolling interest, net of tax on corporate special charges (income) Discontinued operations attributable to FMC stockholders, net of income taxes... Non-GAAP tax adjustments . Adjusted after-tax earnings from continuing operations attributable to FMC stockholders (non-GAAP) 143.4 10.5 (621.7) 271.7 $854.7 $368.3 Required a. Compute the return on equity for each year. Average equity was $2,901.5 million and $2,319.8 million for 2018 and 2017, respectively. b. The company reports a non-GAAP measure of net income. Explain why FMC would want to report this type of information. What concerns might analysts have about this and similar types of non- GAAP disclosures? c. Compute the year over year change for (i) net income and (ii) non-GAAP earnings. Which measure do we believe more accurately captures the trend in FMC's earnings? Do we agree with FMC's claims about the usefulness of the non-GAAP number? d. Re-compute the return on equity for each year using the non-GAAP earnings number. Compare this to the ROE we computed in part a. Are the two returns materially different? Which ratio do we believe investors would rely on more? Explain
