1	Standard & Poor’s Core Earnings
2	Agenda What it is Why we publish Standard & Poor’s Core Earnings How it’s defined Plans for Standard & Poor’s Core Earnings
3	Standard & Poor’s Standard & Poor’s Core Earnings is supported by Standard & Poor’s three major units: Developed by Investment Services Prepared in consultation with Corporate Value Consulting Utilized by Credit Market Services as part of its debt analysis
4	Standard & Poor’s Core Earnings Standard & Poor’s Core Earnings is a standardized calculation of earnings from a company’s core business, designed to capture long-term true earnings power of the business
5	Something Was Needed Investors want an earnings measure they understand and trust. Without any definition of earnings measures, there is no consistency across companies or through time. Standard & Poor’s recognized that inconsistency and confusion were hurting investor confidence. Just calling for change was not enough – someone had to propose a definition, listen to comments and build a consensus. Standard & Poor’s has stepped up.
6	Standard & Poor’s Core Earnings vs. GAAP Concerns about GAAP: GAAP net income doesn’t tell the whole story. GAAP lets companies write their own definitions for operating earnings. GAAP tries to be all things to all people. Standard & Poor’s response: Standard & Poor’s Core Earnings targets a company’s core business. Standard & Poor’s Core Earnings focuses on consistent comparisons. Standard & Poor’s Core Earnings is used in investment analysis.
7	Standard & Poor’s Core Earnings vs. GAAP Unlike GAAP, Standard & Poor’s Core Earnings does not smooth out the volatility that is really present in earnings and operations. However, the Standard & Poor’s Core Earnings history we have developed will mute that volatility. In addition, we have provided guidance on how investment managers can easily take pension interest costs – i.e., market-induced volatility – out of the Standard & Poor’s Core Earnings calculation.
8	Standard & Poor’s Core Earnings and Analysis Standard & Poor’s supports analysis using Standard & Poor’s Core Earnings: Data in Standard & Poor’s Compustat Recognition of the S&P 500 Analysis that will be added in Standard & Poor’s Stock Reports and other Standard & Poor’s services for brokers, analysts and institutional investors Standard & Poor’s is an independent source of analysis, information and data; Standard & Poor’s does not have apparent or potential conflicts.
9	How to Define Standard & Poor’s Core Earnings Begin with as-reported earnings, a widely used measure defined with GAAP Make adjustments to focus on the company’s core business As-reported EPS is GAAP net income excluding discontinued operations and extraordinary items. It is the longest time series for S&P 500 EPS, extending back over decades.
10	Standard & Poor’s Core Earnings Defined
11	Earnings Measures Compared
12	Our Perspective… Standard & Poor’s is not rewriting GAAP or trying to do FASB’s job. Standard & Poor’s is not suggesting new SEC regulations or new legislation. We are using existing accounting and reporting concepts to give investors and analysts a better understanding and more complete information about companies.
13	Stock Option Grant Expense Stock options are compensation, just like wages, salaries and benefits. Therefore: Expenses related to stock option grants should be treated like other compensation costs in calculating earnings. Expenses should be reported quarterly rather than annually. Employee stock option grant expense is included in Standard & Poor’s Core Earnings. Standard & Poor’s takes no position on the tax treatment of stock option grants.
14	Times Are Changing…
15	Pension Accounting in 1-1/2 Lessons Net pension gains (pension income after pension-related expenses) are funds held in a trust for retirees and future retirees. These gains are not corporate funds. Therefore, net pension gains should not be included in Standard & Poor’s Core Earnings. Pension expenses include service costs and interest costs: Service costs are deferred compensation, representing the benefits that accrue from the current year’s labor services. Interest costs are financing costs, reflecting the passage of time as the moment when benefits will be paid draws closer. These costs should be covered by the pension fund. Specifically, the actual return on pension plan assets should cover interest costs.
16	More Pension Accounting For Standard & Poor’s Core Earnings, pension costs include: Service costs Interest costs to the extent that they are not covered by actual returns on plan assets Because any pension gains become part of the pension fund assets for the benefit of retirees and employees, these are not corporate funds and are not part of Standard & Poor’s Core Earnings. Companies do not benefit from funds reserved for pension beneficiaries. However, pension plan assets can, actual returns permitting, cover pension interest expense.
17	Questions on Pension Accounting and Pension Interest Costs Interest costs are charges in years when the pension plan makes little money. Doesn’t this make earnings very volatile? It can have that effect. Interest costs are real costs and, if the pension plan returns can’t cover these costs, the company is responsible.
18	Questions on Pension Accounting and Pension Interest Costs How does FASB treat interest costs? FASB looks to the pension plan first to cover interest costs, as Standard & Poor’s Core Earnings does. Then FASB uses expected returns rather than actual returns. While the expected returns eliminate the volatility, they also obscure the true impact of pensions on earnings. An important note: Pension interest charges this year can be a warning that a company’s cash flow and net earnings next year could be reduced by a required contribution to its pension fund.
19	Questions on Pension Accounting and Pension Interest Costs Is there another way to measure pension costs without making earnings volatile? As long as one wants a year-by-year measure of the true earnings, the volatility will be there. However, in most years, actual pension gains cover most or all of the interest costs. For analysts who want to make other adjustments, such as using a multi-year moving average, Standard & Poor’s Core Earnings data show pension interest as a separate item. It is easy with Standard & Poor’s data to take this cost out of Standard & Poor’s Core Earnings for each company and each of our indices. If the S&P 500 is up 7.8% in 2003, Standard & Poor’s estimates, there will be no pension interest costs charged against Standard & Poor’s Core Earnings for the S&P 500.
20	Restructuring Charges Operating earnings often exclude restructuring charges that are part of ongoing operations. GAAP defines discontinued operations. Charges that are not related to discontinued operations should be included in Standard & Poor’s Core Earnings. If a company subsequently reverses a prior provision, that reversal is not credited to Standard & Poor’s Core Earnings.
21	Other Provisions Discussed in detail in the white paper published in May 2002 and the Technical Bulletin published in October 2002 Available at www.standardandpoors.com
22	Plans for Standard & Poor’s Core Earnings Standard & Poor’s Core Earnings and detailed information will be provided in Compustat. Standard & Poor’s will continue to publish and use as-reported and operating data for the S&P 500 and our other indices, in addition to Standard & Poor’s Core Earnings. We will forecast Standard & Poor’s Core Earnings for companies we follow analytically through our Equity Research Department.
23	Standard & Poor’s Core Earnings Data S&P 500 earnings measures compared Table showing as-reported earnings and Standard & Poor’s Core Earnings for the S&P 500, and the pension interest costs Table showing Standard & Poor’s Core Earnings for GICS Sectors in the S&P 500 (per share data) Table showing Standard & Poor’s Core Earnings for GICS Sectors in the S&P 500 (return on sales data) Chart showing option expense by GICS Sector for the S&P 500 Chart showing pension adjustments by GICS Sector for the S&P 500
24	S&P 500 Earnings Measures Compared
25	As-Reported Earnings and Standard & Poor’s Core Earnings
26	Standard & Poor’s Core Earnings by GICS Sector
27	Standard & Poor’s Core Earnings by GICS Sector
28	Option Expense as a Percent of Revenues
29	Pension Interest Expense as a Percent of Revenues
30	Further Steps Standard & Poor’s will continue to work with key leaders in the investment community to develop consensus to support more informative and accurate earnings information. Standard & Poor’s will support Standard & Poor’s Core Earnings with data and analysis, including full data in Compustat, EPS data on indices, forward EPS estimates on over 1,200 companies in Standard & Poor’s equity analytical universe, and other efforts. Standard & Poor’s CVC will provide assistance to corporations in the use of Standard & Poor’s Core Earnings in their financial reporting.
31	Thank You. 800-523-4534 www.standardandpoors.com www.coreearnings.com Core_earnings@standardandpoors.com