Lesson 2 of 7
The one-off that recurs
Cisco reported a restructuring charge in each of ten filed fiscal years, totalling 5,566 million dollars. A cost that appears every year is not an unusual item.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Cisco reported a restructuring and other charge in every one of the ten fiscal years from 2017 to 2026, totalling 5,566 million dollars.
- The right adjustment is not to remove the charge. It is to replace this year's amount with a figure drawn from the ten-year record.
- The same run contains a genuine one-off for contrast: the 12,929 million dollar tax charge of fiscal 2018, which cut net income to 110 million.
Restructuring charges are the standard test case for normalising, because they are presented as departures from the ordinary course of business and, at many companies, arrive every single year.
Cisco restructuring and other charges, ten filed fiscal years
- Restructuring and other charges
Show the numbers
| Restructuring and other charges | |
|---|---|
| FY17 | $756m |
| FY18 | $358m |
| FY19 | $322m |
| FY20 | $481m |
| FY21 | $886m |
| FY22 | $6m |
| FY23 | $531m |
| FY24 | $789m |
| FY25 | $744m |
| FY26 | $693m |
Ten years, ten charges
The charge appears in all ten filings. The smallest is 6 million dollars in fiscal 2022 and the largest is 886 million in fiscal 2021. The ten-year total is 5,566 million dollars, and the average is 557 million a year.
A reader who removes the charge from every year on the grounds that each is unusual has added 5,566 million dollars of earnings to a decade, on the argument that ten consecutive occurrences are ten exceptions.
Why removing it is the wrong adjustment
The wrong adjustment and the naive one are the same move in opposite directions. Leaving the charge at this year's amount treats a volatile line as though this year's figure describes an average one. Removing it entirely treats a line that appears every year as though it never does.
The adjustment the record supports is the third answer from the previous lesson: it recurs, but not at this size. Replace fiscal 2026's 693 million dollars with the ten-year average of 557 million, and state that you have done so and which years the average covers.
That is defensible because it is checkable. Anyone who thinks the last five years are the better guide can recompute on 741 million, which is the average of fiscal 2022 to 2026, and the two of you will be arguing about a window rather than about a principle.
What a genuine one-off looks like
The same ten filings contain one. In fiscal 2018 Cisco reported pre-tax income of 13,039 million dollars, an income tax expense of 12,929 million, and net income of 110 million. Pre-tax income that year was higher than fiscal 2017's 12,287 million.
The cause is legislative. The Tax Cuts and Jobs Act of 2017 changed the US federal statutory rate and required a one-time remeasurement of deferred tax balances, so many companies reported an unusual tax charge or benefit in a fiscal year ending in 2017 or 2018 that had nothing to do with their operations.
That item passes the recurrence test in the clearest possible way: the rate cannot be cut from the same starting point twice, so the remeasurement cannot recur. It is removable, and the restructuring line is not.
The test to run on any company
Pull the line for every year on file, not three. Count how many years carry a charge. If the answer is most of them, the label is a presentation choice and the cost is part of how the business runs.
Check yourself
In how many of the ten filed fiscal years from 2017 to 2026 did Cisco report a restructuring and other charge?
- Four
- Seven
- All ten, totalling 5,566 million dollars
Show the answer
Answer: C.
Every one of the ten annual reports carries the line, from 6 million dollars in fiscal 2022 to 886 million in fiscal 2021.What is the defensible adjustment for a charge that appears every year at a varying amount?
- Remove it, because the company calls it unusual
- Replace this year's amount with a figure drawn from the record, and state which years the figure covers
- Leave it at this year's amount without comment
Show the answer
Answer: B.
It recurs, so removing it overstates earnings. It varies, so this year's amount does not describe an average year. Replacing it with a stated average answers both.Why is Cisco's fiscal 2018 tax charge of 12,929 million dollars removable when the restructuring charge is not?
- Because it is larger
- Because it arose from a one-time remeasurement of deferred tax balances after a change in the federal statutory rate, which cannot recur from the same starting point
- Because tax charges are always excluded from normalised earnings
Show the answer
Answer: B.
The recurrence test is about whether the item can appear in an average year. A legislated one-time remeasurement cannot; a restructuring programme demonstrably can.Sources
- Cisco Systems, Inc., annual reports on Form 10-K for fiscal years 2017 through 2026: the restructuring and other charges line, the income tax expense line and the consolidated statements of operations.
- The Tax Cuts and Jobs Act of 2017: the change in the US federal corporate rate and the one-time remeasurement of deferred tax balances it required.
What this leaves out
- The ten-year average of 557 million dollars is this course's arithmetic on the ten filed charges. It is a choice of window, stated so it can be disagreed with; the fiscal 2022 to 2026 average is 741 million.
- Cisco appears here as a source of filed figures. Nothing in this lesson says or implies anything about its reporting, and describing a charge as recurring is a statement about a line item, not about anyone's conduct.
- Restructuring charges are reported under the standards and their presentation is ordinary practice at many companies.
- Nothing here is advice about any security.