Serial Restructuring Charges and Recurring One-Offs
A restructuring charge that shows up every single year isn't really non-recurring — it's a cost of doing business that's been relabeled to keep it out of the earnings number everyone actually looks at.
Prerequisites: Cookie-Jar Reserves and Big-Bath Charges, Pro-Forma vs GAAP Earnings
Every restructuring charge is labeled non-recurring when it's announced. The test of whether that label is honest isn't the word on the press release — it's whether the same company books another one next year, and the year after that. A charge that recurs on a schedule is, definitionally, a recurring cost, whatever management calls it.
Check restructuring and "one-time" charges over five to ten years, not one. A company booking a similarly sized "non-recurring" charge every year is disclosing a chronic cost of running the business — closing underperforming units, reorganizing management layers, writing off failed initiatives — that adjusted earnings should not keep excluding.
Why it happens
Restructuring is genuinely sometimes a one-time event: a single plant closure tied to a specific strategic shift. But it's also an easy category for management to lean on repeatedly, because analysts and the market have been trained to look past it when valuing the business on "adjusted" earnings. A company with a structurally troubled segment, a habit of overhiring and then trimming back, or a business model that requires continuous product-line pruning can run this charge every year almost as a matter of course — and each year's press release describes it the same way its predecessor did: a decisive, isolated action.
Academic work on this (Doyle, Lundholm and Soliman, among others) found that items companies exclude from pro-forma earnings, especially when they recur, are often better predictors of future operating performance than the "clean" adjusted number is supposed to be — the market tends to underreact to the information content of repeatedly excluded charges.
Worked example
A company excludes a restructuring charge of $30-50m from adjusted earnings every year for six straight years, cumulatively about $250m. Each year's adjusted EPS, computed by excluding that year's charge, looks meaningfully higher than GAAP EPS — but summed over six years, the exclusions have removed a cost roughly equal to a normal year and a half of net income from the "adjusted" picture. An analyst normalizing earnings by simply averaging the last six years' actual restructuring spend, rather than excluding it entirely, would treat roughly $35-40m per year as an ordinary, recurring cost of the business.
What this means in practice
Before excluding a charge from a normalized earnings estimate, sum the same line item over as many prior years as are available; if it shows up almost every year at a similar order of magnitude, treat a run-rate average as part of ongoing operating costs rather than backing it out entirely.
Management has every incentive to keep re-labeling recurring costs as one-time — the burden is on the analyst to check the multi-year pattern, because the current year's press release will never volunteer that this is the sixth "unusual" charge in a row.
Related concepts
Practice in interviews
Further reading
- Doyle, Lundholm & Soliman, 'The Predictive Value of Expenses Excluded from Pro Forma Earnings', Review of Accounting Studies (2003)