Hidden Items Understate Growth In This Chemical Company

&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-1076536912&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/1076536912/960x0.jpg?fit=scale&q; data-height=&q;720&q; data-width=&q;960&q;&g; KIEV, UKRAINE - 2019/01/01: The Chemours Company Chemicals company logo seen displayed on a smart phone. (Photo by Igor Golovniov/SOPA Images/LightRocket via Getty Images)

For February 20, this forensic accounting needles in a haystack come from a chemicals company with significant hidden non-operating expenses.

Analyst Hunter Anderson found two unusual items in The Chemours Company&a;rsquo;s (CC) 2018 10-K.

On&l;span&g;&a;nbsp;&l;/span&g;&l;a href=&q;https://www.newconstructs.com/wp-content/uploads/2019/02/CC_Change_In_Reserves.png&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;page 32&l;/a&g;&l;span&g;&a;nbsp;&l;/span&g;of the&l;span&g;&a;nbsp;&l;/span&g;financial footnotes, CC disclosed a $35 million increase to its&l;span&g;&a;nbsp;&l;/span&g;&l;a href=&q;https://www.newconstructs.com/change-in-total-reserves/&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;LIFO reserves&l;/a&g;.

On&l;span&g;&a;nbsp;&l;/span&g;&l;a href=&q;https://www.newconstructs.com/wp-content/uploads/2019/02/CC_ENOPTIO.png&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;page 60&l;/a&g;, CC disclosed $91 million in non-recurring legal and transaction costs.

Combined, these items decreased pre-tax reported earnings by $126 million (11% of reported pre-tax earnings). Without these adjustments, CC grew GAAP net income at an impressive 33% in 2018. However, when we remove these non-operating items, we see that CC grew net operating profit after tax (NOPAT) by 47%. Without analyzing the footnotes, investors would significantly understate CC&a;rsquo;s true profits.

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My firm&s;s analysts analyzed 89 10-K filings yesterday, from which the&l;span&g;&a;nbsp;&l;/span&g;&l;a href=&q;https://www.newconstructs.com/technology/&q; target=&q;_blank&q; rel=&q;noopener noreferrer&q; target=&q;_blank&q;&g;Robo-Analyst&l;/a&g;&l;a href=&q;https://www.newconstructs.com/hidden-items-understate-growth-in-todays-filing-season-find/#_ftn1&q; target=&q;_blank&q;&g;&l;/a&g;&l;span&g;&a;nbsp;&l;/span&g;technology collected 9,139 data points. The analyst team used this data to make 1,599 forensic accounting&l;span&g;&a;nbsp;&l;/span&g;adjustments&l;span&g;&a;nbsp;&l;/span&g;with a dollar value of $1.3 trillion. The adjustments were applied as follows:

&l;/p&g;&l;ul&g;&l;li&g;649 income statement adjustments with a total value of $78 billion&l;/li&g; &l;li&g;675 balance sheet adjustments with a total value of $624 billion&l;/li&g; &l;li&g;275 valuation adjustments with a total value of $551 billion&l;/li&g; &l;/ul&g;&l;em&g;Disclosure: David Trainer, Hunter Anderson, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.&l;/em&g;

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