SEC comment letters often make for interesting reading in the world of financial analysis, and one recent letter to Marathon Oil ($MRO) offers numerous interesting nuggets about non-GAAP reporting.

The SEC sent the comment letter to Marathon on April 21, but the letter only became public via the EDGAR database this week. (That’s standard practice for SEC comment letters.)

And why is this letter so interesting? Because the SEC calls out numerous instances of non-GAAP metrics that Marathon included in an earnings report on Feb. 16 of this year, where Marathon either (1) did not include a reconciliation back to the closest comparable GAAP metric; or (2) calculated its non-GAAP metric beyond what investors typically see from other companies reporting that same non-GAAP metric.

So if you’re an in-house executive preparing your own earnings release and want some hints on how the SEC looks at non-GAAP disclosures, or if you're an analyst trying to understand how a company might report non-GAAP metrics that don’t give a complete picture — this comment letter to Marathon is instructive.

For example, the SEC questioned Marathon’s reporting of free cash flow, which is a non-GAAP metric. In the earnings release, Marathon touted free cash flow in a series of bullet points under a heading the company happily called “Highlights.”

Except, Marathon did not include a comparable GAAP metric. That’s a financial reporting no-no; when reporting a non-GAAP metric, you must also include the closest comparable GAAP metric. In this case, that would typically be net cash provided by operating activities; then you get your non-GAAP free cash flow with adjustments for capital expenditures.

Anyway, Marathon didn’t do that, which prompted this terse request in the SEC comment letter: “Please revise your disclosure to ensure the presentation of the most comparable GAAP measures with equal or greater prominence to your non-GAAP measures. For example, free cash flow is disclosed without the most comparable GAAP measure in the Highlight section bullet points listed at the beginning of your press release.”

The SEC also wanted more clarity from Marathon about its definition of free cash flow. Deep in the fine print of the earnings release, Marathon defined it as follows:

Free cash flow before dividend (“free cash flow”) is defined as net cash provided by operating activities adjusted for working capital, exploration costs (other than well costs), capital expenditures, and EG LNG return of capital and other.

That’s not consistent with SEC guidance, per Question 102.07 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. So, again, another terse request from the SEC: “We note that your calculation of free cash flow includes adjustments beyond the typical calculation of cash flows from operating activities less capital expenditures…  Please revise to relabel this measure or revise its computation to more accurately reflect its definition.”

Then we have a flock of other concerns about non-GAAP, too:

• Total capital expenditures as a non-GAAP measure that appears to use a title “confusingly similar” to its comparable GAAP measure;
• The company reports adjusted net income (loss) on a per share basis without reconciling to GAAP earnings per share;
• More tut-tutting about how Marathon reports expected free cash flow and related reinvestment rates, which are forward-looking non-GAAP disclosures and therefore require even more specific reconciliation and presentation.

So all in all, the SEC had plenty of questions about how Marathon reported its non-GAAP metrics. That is not the same as the SEC rebuking a company for improper use of non-GAAP metrics; a comment letter is not an enforcement action, and nobody has accused Marathon of deceiving investors.

Still, the letter’s contents are food for thought for others who report non-GAAP or read non-GAAP disclosures, and want to understand how those numbers might trigger early-warning radar at the SEC.

As always, you can read SEC comment letters on the Calcbench Comment Letter database. Don’t forget to set alerts for companies you follow, too, so you get notified of new comment letters promptly.

As anyone who watches Washington politics already knows, on Sunday afternoon the Senate passed its massive economic reform bill known as the Inflation Reduction Act. Two elements in that legislation caught Calcbench’s eye: a new minimum corporate tax of 15 percent; and 1 percent excise tax on share repurchase programs.

Can Calcbench users get an early start on considering the implications for Corporate America? You bet!

Let’s start with share repurchase programs. Calcbench has published numerous reports over the years about how much money corporations have spent buying back shares. Most recently, we did an analysis of all public companies (regardless of size), and found that they collectively spent $6.52 trillion from 2012 through 2021 on share buybacks.

Tech companies such as Apple ($AAPL), Google ($GOOG), Microsoft ($MSFT), and Oracle ($ORCL) led the way; but share repurchase programs reached a large swath of corporations great and small.

In 2021, the S&P 500 spent a collective $841.6 billion on share buybacks. Leading the way were Apple ($85.5 billion), Microsoft ($60.7 billion), Google ($50.3 billion), and Facebook ($44.8 billion).

In theory, that 1 percent excise tax would imply an additional tax cost of, well, 1 percent of whatever amount a company is spending on share repurchases. That would have been $8.4 billion for the S&P 500 based on 2021 numbers. (Before anyone gets carried away, though, let’s remember that the House still has to pass this bill too, and the president sign it into law.)

We don’t yet know what 2022 repurchase spending might be, especially since rising interest rates makes borrowing to repurchase shares a less attractive idea than it was in the 2010s. Still, Calcbench has extensive data on share repurchase programs if you want to start modeling some scenarios.

Minimum Tax Plans

The Inflation Reduction Act also contains a corporate minimum tax of 15 percent on the domestic profits of large companies. This is also known as the minimum book tax, since the 15 percent tax would be based on GAAP net income reported to shareholders in the annual 10-K. The tax would apply to companies reporting $1 billion or more in annual net income.

We jumped onto our Multi-Company page and found 303 companies within the S&P 500 that reported $1 billion or more in net income for 2021. Apple led the way with $94.7 billion, down to Campbell Soup ($CPB), which squeaked onto the list with $1.002 billion.

Total net income among this group was $1.752 trillion. A 15 percent minimum tax against that amount would be $262.9 billion.

As the Senate bill stands now, the 15 percent book tax would not automatically be the amount a company has to pay. Companies would also need to calculate their potential income tax using the traditional method of applying the current corporate tax rate (21 percent) plus various deductions and credits. Then a company would need to pay whichever amount is greater— either that traditionally calculated number, or the 15 percent minimum tax.

Again, you can skim the Calcbench research archives to see our prior reports on corporate tax payments. Other analysts have also published their own tax research based on our data, and we have some prior posts recapping their findings as well.

You can always do whatever research catches your fancy as well, using the standardized metrics on our Multi-Company page to search for net income, tax payments, or other related terms.

If any company had to navigate rough seas these last few years, Royal Caribbean ($RCL) would probably be near the top of anyone’s list. Royal, along with several other large passenger cruise companies, labored under draconian travel restrictions during the Covid-19 pandemic.

So when Royal Caribbean filed its latest quarterly report last week, we were curious: how’s business doing these days?

Figure 1, below, tells the tale. We compared Royal Caribbean’s revenues and cruise operating costs for the last 12 quarters — that is, from Q2 2019, well before the pandemic; through the awful quarters of 2020; to the rebound Royal is experiencing now.

It’s a remarkable journey, really. Royal went from quarterly revenue well above $2.5 billion just before the pandemic to essentially zero for nearly a year. Indeed, the company actually experienced negative revenue in third-quarter 2020 (negative $33.7 million, to be precise) when refunds exceeded the paltry $3.2 million it reported for ticket sales.

Let’s repeat that remarkable fact for posterity. Passenger ticket revenues went from $2.345 billion in Q3 2019 to $3.2 million one year later. That’s a drop of — hold on, we need the calculator for this one — 99.86 percent.

Today, thankfully, things look much better. Revenue jumped from $50.9 million in second-quarter 2021 to $2.184 billion in this most recent quarter — an increase of 4,291 percent. Top-line numbers still aren’t at pre-pandemic levels, but they’re marching toward that plateau.

Moreover, Q2 2022 was the first quarter in several years where Royal’s revenues started exceeding cruise operating expenses again. The company is still reporting a total operating loss (including other, land-based expenses) of $218.6 million, and a net loss of $552.5 million. But hey, at least those are only nine-figure losses, unlike the ten-figure numbers we’d seen since the start of 2020.

For comparison purposes, Figure 2, below, shows revenue fluctuations over the same period for Carnival Corp. ($CCL). Carnival is the largest cruise line in the world; Royal is second. Carnival reports its expenses in a somewhat different format from Royal so it’s not easy to show a direct comparison on cruise operating expenses, but at least on revenue the pattern is clear: Carnival still has a ways to go before it hits pre-pandemic top-line numbers.

So a long voyage remains for both companies. Maybe a musical conclusion to today’s post will help soothe the nerves.

Holy smokes, the floodgates are now open for second-quarter 2022 earnings reports, and rarely has Calcbench ever seen so many interesting data points about corporate activity arriving at one time.

Below is a quick recap of the more interesting disclosures we saw from last week’s earnings reports. These are only sample observations and may be a bit biased, so do your own research too — but watch for some of the common themes that jumped out to us.

First, fuel costs are way up year over year.

For example, Alaska Airlines ($ALK) reported a 183 percent increase in fuel costs, from $224 million in second-quarter 2021 to $776 million this year. American Airlines ($AAL) saw its fuel costs go from $1.61 billion to $4.02 billion, a 150 percent jump.

We see the same fuel pressures in the railroads. At CSX Corp. ($CSX), fuel costs went from $194 million to $446 million, an increase of 130 percent. At Union Pacific ($UNP), costs rose from $497 million to $940 million, an increase of 90 percent.

One interesting item about the railroads is that despite those cost pressures, GAAP net income did not decrease. On the contrary, Union Pacific’s net income went from $1.8 billion to $1.83 billion, and CSX edged upward from $1.173 billion to $1.178 billion.

So despite those painful increases in fuel costs, at least those two firms are still wringing out profit increases via other means — by passing along the higher costs to customers, cutting costs elsewhere, or some mixture of both tactics. Look for other firms in other industries to do the same as more earnings reports arrive this week.

In Consumer and Retail

We also noted the latest filing from Bath & Body Works ($BBWI), previously known as L Brands until L spun out its Victoria’s Secret business last year. BBW is what remains — and ouch, that company is not having a fun time right now.

The company released updated earnings guidance for Q2 and the rest of this year, warning that “we are navigating a challenging operating and macroeconomic environment with inflationary pressure affecting our customers and our business.”

Indeed. BBW now expects second-quarter sales to be down 6 to 7 percent compared to the year-ago period, versus previous guidance that expected a low single-digit percent increase. Second-quarter earnings from continuing operations per diluted share is expected to be $0.40 to $0.42, versus previous guidance of $0.60 to $0.65.

And why are things so gloomy? The guidance update then proceeds to offer 41 bullet points elaborating on why business conditions are so bad. Heck, one of those bullet points even has another nine sub-bullet points. That may well be a record for Corporate America.

On the other hand, we saw an upbeat earnings release from Mattel Inc. ($MAT), which reported revenue, operating income, net income, and EPS all up from the year-ago period. Gross margins trended downward thanks to inflation, but management essentially said that the inflation that’s out there isn’t anything Mattel can’t handle.

So overall, firms are reporting a wide range of experiences in today’s tumultuous markets: some doing fine, some staggering around like Rocky Balboa in the 9th round. As always, the footnotes, comparisons to peers, and historical data offer the complete picture.

More to Come This Week

Meanwhile, prepare for more earnings data! Numerous large tech companies will report this week (Microsoft, Facebook, Apple, Google, Amazon). So will several large consumer-facing brands (Comcast, McDonalds, Kraft-Heinz, Etsy), and big energy companies such as Exxon Mobil, Chevron, and Eversource.

Calcbench will be there with all the data every step of the way.

Earlier this week the corporate accounting overlords adopted a new rule that, starting in 2023, companies will need to disclose more information about their supply chain finance programs starting in 2023.

Have no fear — your favorite purveyor of financial data is on the case!

The decision came from the Financial Accounting Standards Board, which voted on Wednesday to require disclosure of supply chain financing programs. The vote isn’t a surprise; FASB and other regulators have talked for more than a year about wanting more disclosure around this nebulous bit of corporate finance.

Calcbench has been watching this issue for nearly two years. For example, in August 2020 we noticed that the Securities and Exchange Commission had quizzed Coca-Cola ($KO) about its supply chain financing program, and how that program might have contributed to the growing size of Coca-Cola’s accounts payable line. In 2019 the SEC sent a similar inquiry to Procter & Gamble ($PG), also asking about supply chain financing’s possible effects to cash flows and days payable outstanding.

For those unfamiliar with it, supply chain financing is a way for large companies to conserve cash. The company has a third party (usually a bank) pay its vendor invoices promptly, and the bank takes a cut of that amount as profit. Then the company repays the bank the full amount at some later date.

Supply chain financing isn’t a new idea, but the programs have become more popular in the last few years as supply chains became more prone to disruption and inventory costs rose. At the same time, however, companies have not had to report these programs in their financial statements.

Now that’s going to change. ​​As explained in a Wall Street Journal article, FASB’s new rule will require companies to disclose the outstanding balance of their financing programs every quarter and provide year-over-year comparisons.

‘So When Do We Get the Data?’

Calcbench users can get some observations about supply chain financing programs right now, with more to come soon.

First, you can always use our Interactive Disclosures database to search the footnotes for “supply chain finance.” Numerous companies already report some details about how they use such programs, with varying degrees of detail.

For example, General Electric ($GE) had this to say on the subject in its 2021 report filed earlier this year:

SUPPLY CHAIN FINANCE PROGRAMS. We evaluate supply chain finance programs to ensure where we use a third-party intermediary to settle our trade payables, their involvement does not change the nature, existence, amount, or timing of our trade payables and does not provide the Company with any direct economic benefit. If any characteristics of the trade payables change or we receive a direct economic benefit, we reclassify the trade payables as borrowings.

Likewise, Dollar General ($DG) had this to say, including the outstanding balance it had at the end of its 2021 fiscal year:

We utilize supply chain finance programs whereby qualifying suppliers may elect at their sole discretion to sell our payment obligations to designated third party financial institutions. While the terms of these agreements are between the supplier and the financial institution, the supply chain finance financial institutions allow the participating suppliers to utilize our creditworthiness in establishing credit spreads and associated costs. As of January 28, 2022, the amount due to suppliers participating in these supply chain finance programs was $328.2 million.

Calcbench users can also search SEC comment letters to see whether the agency has raised supply chain finance questions with specific companies. You can do this in two ways. First, you can search our running list of recent SEC comment letters, although that approach is hit or miss; you need to read one letter after another to see whether any of them mention supply chain finance.

You can also use our Interactive Disclosures tool for SEC comment letters, too. Just look for the “Choose disclosure type” menu on the left side of the page, and you can filter results specifically to SEC comment letters. Then search for “supply chain finance” (or “financing” and other related terms) to see what comes up.

In the fullness of time, FASB will develop specific XBRL tags for supply chain finance data. That hasn’t happened yet because the rule is brand new, but soon enough the data will be tagged and searchable in an automated way. Then you’ll be able to find it elsewhere in Calcbench, such as on the Multi-Company page or the Raw XBRL Search page.

So stay tuned; we got you covered.

Wall Street banks began to file their second-quarter earnings releases this week, giving us our first glimpse into how rising interest rates might be affecting their business.

One particular segment of business — mortgage banking — is not pretty.

Figure 1, below, shows the trend in mortgage banking revenue over the last six quarters for Wells Fargo ($WFC) and JPMorgan Chase ($JPM), which both filed their Q2 numbers this week.

Neither trend looks good, and Wells Fargo looks especially awful. Its mortgage banking business went from $1.34 billion one year ago to a measly $287 million this quarter — and no, that’s not an error. We checked. Mortgage banking revenue plummeted 78.5 percent. That's a worse performance than, like, the Chicago Cubs. At least JPMorgan saw a year-over-year decline of only 31.4 percent, from $551 million to $378 million.

Other banks did not do any better. US Bancorp ($USB), for example, saw mortgage banking revenue fall 59 percent, from $346 million one year ago to $142 million this quarter.

So far only Citigroup ($C) has held its own this quarter, with $4.1 billion in mortgage banking originations. That is flat from the year-earlier period, and even an increase from the last three quarters, when originations dipped below $3.5 billion.

None of this should be a surprise, of course. As the Federal Reserve keeps raising interest rates, mortgage rates rise as well — and then would-be homeowners either get priced out of the market, or get spooked at the higher costs.

As shown in this data from the St. Louis Fed, average rates for 30-year fixed mortgages have gone from below 2.8 percent at the start of 2021 to nearly 6 percent this spring. Nor are those rates likely to decline any time soon, since the Fed plans future rate hikes as soon as this month.

That’s not to say higher interest rates are universally bad for banks. On the contrary, higher rates allow them to charge more for loans, so interest income is likely to increase. Our point is merely that rising interest rates can be challenging for banks; rising rates help some parts of the business but hurt others, and it can take time for a bank to find its equilibrium in that volatile environment.

Financial analysts following banks will want to peer into the depths of disclosures about operating segments, revenue lines, expense lines, and the like if you want to get an accurate sense of bank performance. Thankfully the data is there — you just need Calcbench to pull it out!

By Olga Usvyatsky

We recently had a post exploring how SEC comment letters prompted several large pharmaceutical companies to reconsider their non-GAAP reporting. Those comment letters directed pharma heavyweights Pfizer ($PFE), Eli Lilly ($LLY), Bristol Myers Squibb ($BMY), and Biogen ($BIIB) to stop excluding acquired in-process research and development (IPR&D) expenses from the calculation of their adjusted earnings numbers.

That exclusion of acquired R&D expenses could significantly increase non-GAAP EPS compared to GAAP-based metrics. For example, if Bristol Myers Squibb continued to exclude IPR&D, that would have added $0.10 (or 16.9 percent) to the first quarter of 2022 GAAP EPS of $0.59, and 5.1 percent to the non-GAAP EPS of $1.96.

When high-profile players in the pharma industry address SEC concerns by materially altering non-GAAP presentations, other companies in the sector typically should follow suit — or risk getting their own SEC comments. But did all the companies get the memo?

To answer this question, we examined non-GAAP disclosures of about 50 pharma companies with annual revenue above $500 million. We found no companies with material non-GAAP acquired IPR&D expenses in the first quarter of 2022 — but roughly 15 percent of the companies in our population did report non-GAAP IPR&D charges in 2021, and did not update their non-GAAP disclosures even after that warning shot the SEC fired at Pfizer, Biogen, Eil Lilly, and Bristol Myers Squibb.

For example, look at Bausch Health Companies ($BHC) non-GAAP earnings reported on May 10, 2022. The company had $2 million in acquired in-process R&D costs in the first quarter of 2021 and no non-GAAP IPR&D expenses in the first quarter of 2022. See Figure 1, below.

OK, but notice the definition of non-GAAP metrics, including acquired in-process research and development as one of the items used by the company to arrive at Adjusted Net Income. (Emphasis is ours.):

“Adjusted net income (non-GAAP) is net income (loss) attributable to Bausch Health Companies Inc. (its most directly comparable GAAP financial measure) adjusted for restructuring and integration costs, acquired in-process research and development costs, loss on extinguishment of debt, asset impairments (including loss on assets held for sale), acquisition-related adjustments, excluding amortization, separation and IPO costs and separation-related and IPO-related costs and other non-GAAP charges as these adjustments are described above, and amortization of intangible assets…”

Now, it’s quite possible that Bausch Health may have already changed its non-GAAP policy, but didn’t recast previous years and hadn’t yet updated its non-GAAP definition.  As discussed in our earlier posts, there is no requirement to disclose changes in non-GAAP methodologies.

At the same time, about 30 percent of companies in our sample did clearly state that they complied with the new SEC guidance and will no longer exclude acquired IPR&D expenses. The remaining 55 percent of companies had no non-GAAP acquired IPR&D costs in either 2021 or 2022.

Overall, companies took the SEC directive seriously and updated their non-GAAP policies. But disclosure on this issue appears to be still evolving, and we may see more changes in the next several quarters.

Olga Usvyatsky is a PhD student in accounting at Boston College and occasional contributor to the Calcbench Blog. She can be reached at usvyatsk@bc.edu.

Non-GAAP accounting disclosures are one of the most popular topics of conversation we have with Calcbench users, and we’ve devoted a fair bit of this blog lately to non-GAAP issues. So today we just want to offer a quick recap of recent non-GAAP items we’ve published, and pointers on where Calcbench users can find non-GAAP data yourselves.

First is our latest piece of research about what non-GAAP adjustments companies claim when they report non-GAAP net income. A crack team of interns reviewed the 2021 earnings reports of 123 S&P 500 companies.

They found that in total, those firms reported adjusted, non-GAAP net income that was $86 billion greater than traditional GAAP net income; largest adjustment by dollar amount was amortization of intangibles, which accounted for $45.5 billion, or more than half of all non-GAAP adjustments. You can find our complete report and accompanying slide deck on the Calcbench research page.

Second is a look at the comparability of non-GAAP disclosures among multiple companies — or rather, the difficulty in doing so, since the details of non-GAAP disclosures often mean incomparability between firms. We use Pfizer ($PFE) as a prime example of the challenge here, plus a few other pharma firms as well.

Third, we stick with the pharma industry to see how non-GAAP disclosures might change over time. Specifically, numerous pharma companies changed how they report adjustments for in-process research and development (IPR&D) costs, once the SEC sent comment letters to the industry inquiring about the wisdom of previous disclosures.

All those non-GAAP posts are only within the last month, by the way. You can always search the Calcbench blog archive for previous non-GAAP content. Rest assured, you’ll find a lot.

Studying Non-GAAP Data on Your Own

Calcbench also offers several ways to find and analyze non-GAAP disclosures yourself.

Perhaps the best place to start is our Multi-Company page, where you can compare disclosures across large groups of companies — non-GAAP disclosures included! Simply use the standardized metrics search field on the left side of your screen, where you can choose from a host of non-GAAP metrics we’ve already pre-programmed. See Figure 1, below.

Again, you can’t automatically assume that one firm’s non-GAAP net income is the same as any other firm’s non-GAAP disclosure; each one is unique, and you’ll need to research those details. But the Multi-Company page is a great place to collect lots of raw material so you can begin that journey.

You can also search our Interactive Disclosures page to pull up a company’s earnings releases, where non-GAAP metrics typically get their most exposure. For every non-GAAP disclosure a company makes, it must include a reconciliation back to the nearest comparable GAAP metric. Those reconciliations can typically be found at the bottom of the earnings release.

Figure 2, below, shows the reconciliation statement for Carnival Corp., which filed its most recent earnings release on June 24. (Notice how Carnival had to report a non-GAAP loss larger than GAAP loss. That’s rare, but you see it sometimes since firms typically must report non-GAAP metrics consistently over time.)

Those are just a few ways Calcbench tries to stay on top of non-GAAP issues. We know it’s important for users, and we’re here to help.

Shipping giant Fedex Corp. ($FDX) filed its fiscal 2022 earnings release this week, and we were intrigued because Fedex’s operations can be a bellwether for all sorts of economic indicators, from inflation to supply chain issues to overall business activity.

Sure enough, the company delivered a few insights worth unpacking.

First (and perhaps most interesting) were Fedex’s segment disclosures about fuel costs and how those costs have affected ground shipping. Fedex provides a detailed breakdown of revenue by operating segment and of its operating expenses, so take a look at Figure 1, below.

Do you see it? Fuel costs — fifth line item in the Operating Expense category. Fuel costs for the spring quarter of 2022 soared 88 percent from the year-earlier period: $936 million to $1.76 billion. No other operating expense rose anywhere near as much. Ouch.

Those costs hammered Fedex’s ground segment so much that the company implemented a fuel surcharge, which did offset some of the pressure. Still, operating income for the Fedex ground segment fell by 23 percent, even as overall operating income rose 7 percent.

Fedex attributed that decline to higher self-insurance accruals — but also to increased purchased transportation and wage rates. So there’s our second interesting item: Fedex is battling inflation from its service providers and its own labor costs.

As you can see from Figure 1, purchased transportation costs rose 6 percent in the most recent quarter compared to the year-earlier period, while labor costs were mostly flat. But for the entire year, Fedex actually saw purchasing costs rise 11 percent, while salary and employee benefits rose 6 percent. (Fuel costs rose 77 percent for the whole year.)

Package Numbers

Fedex also reports some interesting non-financial statistics about package delivery. See Figure 2, below.

As you can see, Fedex is shipping fewer packages (11 percent fewer), but those packages are generating more revenue ($24.64 per package compared to $20.51 one year ago, an increase of 20 percent).

We at Calcbench aren’t entirely sure what that means, but then, we’re not analysts covering the shipping industry. We do know, however, that the data is there, and that Calcbench subscribers can easily find it, extract it, and model it; so that you can ask sharper questions when you’re on the next earnings call.

By Olga Usvyatsky

Marketwatch recently reported that several large pharmaceutical companies — including Pfizer (PFE), Eli Lilly (LLY), Bristol Myers Squibb (BMY), and Merck (MRK) — all recently changed how they calculate non-GAAP numbers.

Starting from first-quarter 2022, the companies no longer exclude expenses related to acquired in-process research and development (IPR&D) when calculating their non-GAAP metrics. The change in non-GAAP accounting was interesting because it was material, industry-wide and prompted by SEC comments.

We decided to follow Marketwatch’s lead and dive deeper into non-GAAP IPR&D adjustments. In addition to the Big Pharma firms identified by Marketwatch, at least three other large pharmaceutical companies also modified their non-GAAP presentations to remove IPR&D adjustments: Biogen ($BIIB), Regeneron Pharmaceutical ($REGN), and AbbVie ($ABBV).

Non-GAAP numbers can dramatically increase reported net income. According to Calcbench’s study of 123 companies, the average adjusted net income exceeded GAAP net income by about $460 million, or about 14 percent. R&D-related expenses appear to be one of the largest reconciling items for non-GAAP, totaling more than $6 billion and explaining 6.3 percent of the $85.9 billion difference between GAAP and non-GAAP net income numbers.

For the four companies identified by Marketwatch, the difference was even more significant. Adjusted net income was about $64 billion, more than 30 percent larger than GAAP net income of only $47.6 billion. Research and development adjustments totaled about $5 billion, explaining roughly 30 percent of the difference between GAAP and non-GAAP values.

In first-quarter 2022, non-GAAP numbers exceeded their GAAP equivalents by about $6 billion, or almost 40 percent. A quick look at the Q1 earnings releases confirmed that Q1 2022 R&D-related non-GAAP adjustments were material to three out of four companies:

• For Pfizer, the EPS impact of including IPR&D expenses was $0.05, against GAAP-reported EPS of $1.37;
• For Eli Lilly, the impact was $0.15, against GAAP-reported EPS of $2.10;
• For Bristol Myers Squibb, the impact was $0.10, against GAAP-reported EPS of $0.59.

Non-GAAP measurements are not defined in GAAP, and there is no uniform rule that prescribes how changes in the presentation should be reported. Although new non-GAAP methodology did not affect Merck’s (MRK) first-quarter EPS, the company recast the previously reported 2021 non-GAAP balances for comparability purposes.

So why did large pharma players choose to make a change that requires substantial explaining in earnings releases and recasting previously reported numbers? According to Eli Lilly’s April 14 8-K filing, the change was prompted by SEC Division of Corporation Finance comments:

“Beginning with the press release announcing its financial results for the quarter ended March 31, 2022 (the “Earnings Release”), Eli Lilly and Company (the “Company”) will not include adjustments for upfront charges and development milestones related to in-process research and development (“IPR&D”) projects acquired in a transaction other than a business combination in presentations of its non-GAAP financial measures. The Company is making these changes to its presentation of non-GAAP financial measures following guidance from the U.S. Securities and Exchange Commission (the “SEC”).”

The primary objection of the SEC appeared to be the recurring nature of the IPR&D expenses. Question 100.01 of Regulation G states that a non-GAAP metric could be misleading if it excludes “normal, recurring, cash operating expenses necessary to operate a registrant’s business.”

Below is an excerpt from SEC comments to Eli Lilly:

"For each type of acquired IPR&D transaction (i.e., asset acquisitions, license agreements, etc.), explain to us why you believe it is appropriate to include non-GAAP adjustments for these upfront payments given that these expenditures appear to be normal, recurring, cash operating expenses necessary to operate your business. Refer to Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.”

While reading SEC comment letters and companies’ earnings releases, we noticed several interesting disclosures.

First, one of the justifications for including IPR&D adjustments was comparability among companies that report under GAAP and under IFRS. We do not know whether divergence between GAAP and IFRS is a common explanation for the usefulness of the non-GAAP metrics, but the disclosure looked interesting enough to mention. Under GAAP, IPR&D acquired through asset acquisition is expensed if it has no alternative future use. Based on the comment letter, 14 out of 17 projects for which Eli Lilly recorded IPR&D charges were asset acquisitions.

From the Eli Lilly’s response to SEC comments:

“Some of our peers report their financial results in accordance with International Financial Reporting Standards (IFRS). Under IFRS, an entity is permitted to capitalize the upfront charges related to acquired IPR&D in an asset acquisition. Our adjustment for the “buy-in” investment related to acquired IPR&D as part of non-GAAP financial measures allows more comparability of financial results among our peers, including companies reporting under IFRS.”

Additionally, while the pharmaceutical companies above discontinued IPR&D exclusions in their earnings releases, Regulation G does not apply to metrics used for compensation purposes. At least one of the companies (namely, Pfizer) noted that the company plans to continue excluding IPR&D in setting executive compensation targets:

“Beginning in the first quarter of 2022, we no longer exclude any expenses for acquired IPR&D from our non-GAAP Adjusted results but we continue to exclude certain of these expenses for our financial results for annual incentive compensation purposes.”

In other words, while Adjusted EPS in an 8-K filing and an Adjusted EPS in the proxy statement might have a similar labeling, the values of the two non-GAAP numbers could be different. To make it clear, companies are allowed to set compensation practices of their choice. Using different metrics to explain operational results and to set compensation goals is permissible. A practical takeaway for investors is to be mindful of the differences when analyzing (and comparing) two adjusted numbers.

Generally (and without any relationship to the pharma industry and IPR&D adjustments), metrics used for compensation purposes could be difficult to understand because unlike the metrics presented in 8-K filings, there is no requirement to reconcile them to the most comparable GAAP number. As stated in a recent Bloomberg article:

“One improvement many investors want: Requiring companies to detail precisely how they calculate the adjusted, non-GAAP metrics they use for compensation purposes.”

Going back to a recent change in non-GAAP IPR&D accounting, the IPR&D expenses appear to be material, and a distinction between regular and acquired R&D expenses is arguably useful in understanding results of operations of pharma companies. A recent memo from BDO suggested what companies can do to inform investors without violating Regulation G. Although the SEC objected to presentation of the non-GAAP IPR&D adjustments, companies can still present IPR&D as a stand-alone item or as a separate line on the face of the income statement.

To summarize, investors may need to read pharma sector earnings releases carefully in the next few quarters to make sure that non-GAAP numbers are comparable. Although many large pharma companies already changed their non-GAAP accounting to follow SEC guidance, others may still exclude IPR&D expenses from their adjusted numbers, or transition to the new methodology gradually over the next few quarters.

Olga Usvyatsky is a PhD student in accounting at Boston College and occasional contributor to the Calcbench Blog. She can be reached at usvyatsk@bc.edu.

On Feb. 2 of this year, Pfizer ($PFE) filed an 8-K earnings release.  Tucked away on Page 28 of the filing, the pharmaceutical giant had this to say:

“Adjusted income and its components and Adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by GAAP and, therefore, are limited in their usefulness to investors. Because of their non-standardized definitions, they may not be comparable to the calculation of similar measures of other companies” (emphasis added).

While that statement might seem startling at first glance, it is indeed true — and not as startling as one might think. By definition, non-GAAP measures (frequently referred to as “adjusted”) are not standardized. When companies report, say, adjusted net income, the adjustments each company makes can be quite different from the adjustments that other companies make. Calcbench recently examined the types and magnitude of adjustments companies make in a special report you can find on our Research page.

What might be less known is that there are subtleties to these adjustments. For example, as the Calcbench report mentioned, the most common adjustment to net income is excluding the amortization of intangible assets. For pharma companies in particular, excluding the amortization of intangible assets can significantly increase adjusted net income.

Indeed, most pharma companies exclude the amortization of acquired intangible assets in their non-GAAP calculations of Net Income. This list includes such heavyweights as Biogen ($BIIB) and Bristol Myers Squibb ($BMY). It also includes Pfizer, which excluded the amortization of intangible assets as part of purchase accounting (M&A activity) from adjusted net income.

On Page 3 of its subsequent earnings press release later this spring, for Q1 of 2022, Pfizer wrote:

“Also in the first quarter of 2022, Pfizer implemented a change in policy to exclude all amortization of intangibles from Adjusted income, which favorably impacted Adjusted diluted EPS by $0.01 in first-quarter 2022 and by $0.02 in first-quarter 2021. Prior period amounts have been revised to conform to the current period presentation” (emphasis added).

Pfizer announced this accounting policy change in Q4 2021. At the time, the company mentioned that the guidance for full-year 2022 —

“Includes an estimated benefit of approximately $0.06 on Adjusted diluted EPS resulting from a change in policy for intangible amortization expense to begin excluding all amortization of intangibles from Adjusted income) compared to excluding only amortization of intangibles related to large mergers or acquisitions under the prior methodology. This change was effective beginning in the first quarter of 2022 and will require recasting prior period amounts to conform to the new policy” (emphasis added).

As a result, when using adjusted or non-GAAP measures, investors not only need to examine the adjustments made to GAAP net income and study the reconciliation of the two. They also need to examine the details of what is included in those adjustments!

For example, when a company excludes amortization of intangible assets, you need to pay attention to exactly which intangible assets are included in that calculation. Failing to do so might leave you comparing apples to oranges both across companies and over time. That makes for an unappetizing meal.

For the record, we examined both Biogen and Bristol Myers Squibb for similar language and found nothing to indicate that they were following Pfizer’s new adopted policy.

(’Thank you to Olga Usvyatsky, accounting PhD student at Boston College and friend of Calcbench, for giving us the idea to examine Pfizer’s disclosures. Usvyatsky herself will have a guest post taking a deeper dive into this issue next week.)

Some great stuff from the Calcbench research team this week about non-GAAP adjustments to net income: we recruited a team of accounting students from Suffolk University to help us understand the most common and most significant adjustments that large companies made in 2021.

The students (“winterns” Suffolk University calls them) examined the 2021 earnings reports of 123 companies randomly selected from the S&P 500. Under the guidance of greybeards here at Calcbench, they measured the non-GAAP adjustments to net income each company made, and then studied how those adjustments compared to the plain ol’ GAAP net income that the companies also reported.

You can find our complete report and accompanying slide deck on the Calcbench research page. The main findings are as follows:

• Adjusted (non-GAAP) net income was higher than GAAP net income by an average of $460 million per company, or about 14 percent of GAAP net income. 
• The students documented a total of 718 individual reconciling items from the sample, with a total value of almost $86 billion and an average value of almost $120 million per item.
• The single most common adjustment was gains or losses on investments (including pensions), which was cited 128 times; although the ever-popular hodgepodge of “Other” adjustments was cited 185 times.
• The largest adjustment by dollar amount was amortization of intangibles, which accounted for $45.5 billion, or more than half of all non-GAAP adjustments.

In second place was stock-based compensation, which accounted for about 16 percent of the total adjustment ($13.8 billion).

Table 1, below, shows the dollar breakdown for each category of non-GAAP adjustment.

If all of this sounds familiar, that’s because Calcbench conducted a similar non-GAAP analysis one year ago. In that instance (without interns), we examined the 2020 earnings releases for 59 companies from the S&P 500 that had the largest differences of non-GAAP net income exceeding GAAP net income.

Our complete report and slide deck include much more data and detail, so if non-GAAP is your thing, we encourage you to read them both. We also thank Suffolk University and its troop of accounting winterns, who made this exercise possible! Photo below to capture their efforts for posterity.

This month Calcbench will be taking a deep dive into segment reporting, and how analysts can quickly find such data even when that information is buried away in the footnotes.

Our first example: the beauty segments for consumer product makers Procter & Gamble ($PG) and Unilever ($UN).

We chose these two companies specifically because they file their financial data according to different sets of accounting rules. P&G, headquartered in Ohio, files according to U.S. Generally Accepted Accounting Rules. Unilever, based in London, files according to International Financial Reporting Standards.

Historically, comparing GAAP and IFRS filers required a lot of manual searching and pasting into Excel. With Calcbench, however, those days are gone!

To perform our analysis, we used our Interactive Disclosures page, which allows users to search footnote disclosures by type. One such disclosure type is Segments. We first pulled up the Segment disclosure for Unilever, and then held our cursor over the number for the beauty segment. That allows us to export previous values for that disclosure in Excel — meaning, we could quickly get a spreadsheet of Unilever’s revenue and operating profit, for its beauty segment, for the last several fiscal periods. See Figure 1, below.

Then we repeated that exercise with Procter & Gamble, exporting its beauty segment disclosures for the last few fiscal years. See Figure 2, below.

This entire exercise took us about two minutes. Then we took another 15 minutes to make the spreadsheet data look pretty, and we ended up with a comparison of operating income and operating margin specifically for the companies’ beauty segments, even though the companies file according to different accounting standards.

That’s the power of XBRL-tagged data, which is the technology Calcbench uses to manage our databases. So whatever segments you’re hoping to find, we have it somewhere, and you can pull it together with just a few keystrokes.

So there we were the other day, sitting around Calcbench headquarters and talking about goodwill assets, when someone asked, “What was the last really big impairment we’ve seen?”

One of the research assistants did a quick search, and we found it: Teladoc Health ($TDOC), a telehealth medicine company based in upstate New York, which declared a $6.6 billion (yes, with a “b”) impairment just a few weeks ago!

Any impairment north of $1 billion is usually a big deal. We wondered:  what happened there, and what might it tell us about other firms and market conditions these days?

We can begin with the numbers. That $6.6 billion impairment was 45.5 percent of Teladoc’s total goodwill assets, which stood at $14.5 billion at the end of 2021. Moreover, goodwill assets accounted for nearly 82 percent of Teladoc’s total assets at the end of 2021. Meaning, that $6.6 billion impairment reduced total assets on the balance sheet by (ooof) nearly 40 percent. Figure 1, below, shows the comparison from Q4 2021 to Q1 2022. The goodwill line is high-lighted in gray.

OK, that’s gotta hurt — but why, exactly, did Teladoc take such a large impairment?

As always, the answer could be found in the footnotes. Teladoc gave a clear description of the cause and an impressively fulsome description of how it performed its impairment calculations.

First, the cause: sustained decreases in share price. Like so many other firms, Teladoc saw sharp upward appreciation in the early days of the pandemic, rising from $83 per share at the start of 2020 to a high of $292 by early 2021. Then came the downdraft, which pushed Teladoc all the way down to $66 by the end of Q1 2022 when it decided to test for impairment. These days Teladoc is even worse, around $34 per share. See Figure 2, below.

All firms must reassess the value of goodwill assets annually, and whenever some material, external event might warrant an additional assessment. A sharp drop in share price is one such event, and Figure 2 tells us that the need for an additional assessment was warranted.

Next, Teladoc described how it performed the reassessment. We’ll just excerpt the disclosure itself:

Consistent with prior goodwill impairment testing, the Company’s March 31, 2022, testing reflected a 75%/25% allocation between the income and market approaches. The company believes the 75% weighting to the income approach continues to be appropriate as it more directly reflects its future growth and profitability expectations. For the company’s March 31, 2022 impairment testing, as compared to its December 1, 2021 testing, the company reduced its estimated future cash flows used in the impairment assessment, including revenues, margin, and capital expenditures to reflect its best estimates at this time. The company also updated certain significant inputs into the valuation models including the discount rate which increased reflecting, in part, higher interest rates and market volatility, and the company reduced its revenue market multiples, reflecting declining valuations across the company’s selected peer group.

Then Teladoc even included a table to show its math:

You don’t see such detailed disclosure of a goodwill impairment too often. We thank Teladoc for its efforts, even if investors might not like the impairment itself too much.

Lessons for Others

The broader point here is that in today’s bear market, firms with a high proportion of total assets tied up in goodwill could be in for some nasty surprises; a prolonged downward trend in your share price could lead to impairments that ruin your balance sheet.

Indeed, back in 2020 (long before the pandemic and today’s bear market) Calcbench even devised a simple impairment sensitivity test, where you could assess how much an impairment of 1 percent, or 5 percent, or 10 percent would harm earnings per share.

Analysts might want to keep that test handy these days, so you can identify which firms have a lot of value tied up in goodwill, and better anticipate which ones might disclose an impairment that ruins EPS.

Calcbench is, of course, the most incisive and well-written blog you can find about financial data — but we do still like to see what others out there are saying. So when we saw an item on ZeroHedge this weekend predicting that inflation in the retail sector is about to end, we were intrigued.

The gist of the post is that retailers cut their orders for goods sharply at the start of the pandemic, causing manufacturers and wholesalers to cut back on production. Then as consumer demand returned in 2021, retailers were caught flat-footed; that led to the inflation we see today. ZeroHedge calls all this “the bullwhip effect.”

Now, ZeroHedge argues, we’re about to see the crack of that whip, where retail prices start to plunge. Why? Because once retailers understood that they had too little inventory, they ordered dramatically more — which means they’re about to have a glut of goods on the shelves, and they’ll need to cut prices to sell it all.

ZeroHedge says that the important metric to watch here is retailers’ ratio of inventory to sales. As that ratio rises, retailers will have more goods they need to sell, which will pressure them to cut prices; then the inflation bubble bursts.

It’s an intriguing economic prediction. So Calcbench decided to look at the data and see what the numbers actually tell us.

We first looked at the overall direction of inventory-to-sales ratios for large retailers over the last several years, and found that this ratio has indeed been falling since 2019. See Figure 1, below (NOTE : all $ values in millions).

So the macro-level trend is clearly downward, which squares with ZeroHedge’s theory, which squares with what everyone is seeing when they look at a price tag. 

Calcbench also looked at 10 specific retailers and compared their income-to-sales ratios for Q1 2022 against their ratios for all of 2021. Of those 10 firms, seven had significantly higher ratios in early 2022 than they did in 2021. Only one had a lower ratio, and two were essentially flat. See Figure 2, below.

If you prefer a simpler view of the data, one could just look at change in Inventory levels at these firms from the end of ‘21 to the end of the first quarter of ‘22.  The story is of rising inventories. 

Yes, the rise in percentages for Wal-Mart and Amazon is small, at roughly 8% each but in dollar terms that is a $4.7 billion dollar increase in inventories at Wal-Mart and a $2.3 billion dollar inventory increase at Amazon.  Home Depot is up 14.6% for an increase of over $3.2 billion.  

If you believe ZeroHedge’s theory, then we’re about to see these retailers start offering clearance sales and other discounts to move all those extra goods off their hands.

Whether one actually should believe ZeroHedge’s theory is not a question for Calcbench to answer. Analysts should note, however, that if retailers start slashing prices, that presumably would lead to poor revenue growth later this year — and expectations of lower future growth push stock prices lower. Well, that’s what we’ve seen for shares of large retailers lately. So perhaps people do expect this inflationary bullwhip to crack after all.

Choose Your Own Analysis

Analysts can conduct their own research along these lines with just a few keystrokes in Calcbench. First select the retailers you want to study; then visit our Bulk Data Query page.

From there, you can select the date range you want to search. We would recommend you set your search for quarterly results, using a period range from, say, the start of 2019 through first-quarter 2022. Then check off the Revenue box on the income statement column, and Inventory from the Asset column. Figure 3, below, shows a typical setup.

You’ll then get an Excel spreadsheet with all the data you want, and you can perform whatever analysis and modeling you need.

So go get cracking!

Calcbench has a released an improved version of our Excel add-in.  Performance is drastically improved.

Download the new version @ www.calcbench.com/excel

If you have questions or difficulties installing the add-in contact us.

If you’re a hardcore, process-oriented analyst, this post is for you. Chris Petrescu is the founder and CEO of CP Capital. As a data strategist and a former corporate finance manager, he has a long-standing relationship with financial data. We talked with Petrescu about Calcbench’s point-in-time data and how you can leverage it for a competitive edge.

Q. Tell us about Calcbench’s point-in-time data. What does it do? A. Calcbench’s point-in-time data allows you to take a snapshot of a company’s past. Analysts use point-in-time analysis to assess the evolution of a particular data point.

Q. How does point-in-time analysis help you achieve more accurate financial analysis? A. Point-in-time data isn’t altered by reclassifications or restatements. For historical market analysis, using point-in-time data allows you to remove certain biases that can undermine your research.

Point-in-time data helps you avoid “survivorship bias.” Some datasets will remove companies that have gone bankrupt, or overwrite companies that have been acquired. For systematic firms, this is an issue. Your historical analysis will look rosier because you’re only analyzing companies that have “survived” into the present time.

In addition, point-in-time data helps you avoid “look-ahead bias.” Vendors can store data delivery information incorrectly. For example, a vendor might time-stamp data delivered at 9:30 a.m., when it may have been known to the public markets, but it was actually not delivered until 11:00 a.m. If you’re calibrating a model to trade at the market open, you need to build a model that is trading on data known at that time.

Point-in-time data controls for these biases by accurately storing all company data, regardless of current-day status, and accurately time-stamps the data.  It sounds simple, but some of the largest data vendors in the world don’t grasp these concepts, or don’t care to.

Q. What pitfalls should analysts watch out for? A. Certain hedge funds are more prone to point-in-time data issues than others.  The farther back in time you look, the greater potential for point-in-time data issues.  So, a discretionary investor analyzing a handful of names over a few quarters is far less likely to uncover these issues, while a systematic firm analyzing 3,000 stocks over 5 years most certainly could detect such issues.

Q. What advice would you give an investor looking to integrate point-in-time data into their financial analysis? A. For starters, ask your financial data company how they handle their historical data. Also run high-level analytics to check if your data vendor is in fact accurately storing its data correctly.  It’s extremely important to know this about a dataset early on in the research process, so you can give yourself the opportunity to evaluate alternatives.

Q. How can you get point-in-time data from Calcbench? A. Calcbench subscribers get point-in-time standardized data by downloading the Calcbench API client Python package, and then calling the standardized method. (See screenshot below.) For a demo, contact us@calcbench.com.

The war in Ukraine is a humanitarian tragedy, and even worse, it shows no signs of ending any time soon. Now corporations need to confront a tricky financial reporting question: What should you disclose to investors about how the war in Ukraine is affecting your business?

Calcbench first wrote about Russia’s invasion of Ukraine at the beginning of March, when the war first started and nobody had any idea how events would unfold. Even then, a few firms began making some disclosures about the war’s effect in their operations, typically saying something in their Management Discussion & Analysis.

The issue is on our minds again now for two reasons. First, multiple companies have started citing the war as reason for a non-GAAP adjustment to net income. Second, the Securities and Exchange Commission just published a sample comment letter asking about the war’s effect on corporate reporting — a letter that told companies to tread carefully when putting a Ukraine non-GAAP adjustment in the earnings release.

Let’s start with the disclosures themselves.

Some of the disclosures are straightforward. Owens Corning ($OC), for example, filed its latest earnings release on April 27. Included in the release was this note:

In late March, Owens Corning made the decision to exit Russia through a transfer or sale of its facilities and, earlier this month, halted all future investments in Russia. The company is working to expedite its exit, while remaining committed to the safety and security of its employees in the country. 2021 net sales in Russia were approximately $100 million, or about 1 percent of the company’s consolidated net sales.

That’s all Owens Corning had to say about things. While the company did include various non-GAAP adjustments to net income (like just about every other firm out there), an adjustment for lost business in Ukraine and Russia was not among them. But providing a sense of net sales in Russia in 2021 does give investors some sense of proportion.

More interesting is Philip Morris International ($PM). The tobacco giant filed an earnings release on April 24 and did include adjustments for lost revenue in Russia and Ukraine. See Figure 1, below.

Philip Morris then provided an updated forecast for 2022, where the company did include that $0.10 adjustment for first-quarter 2022, and then assumed no other revenue from either country for the rest of the year. See Figure 2, below.

Further down, Philip Morris also discloses that Ukraine accounted for less than 2 percent of total revenue in 2021 (Philip Morris revenues were $31.4 billion last year, so Ukraine was somewhere less than $628.1 million) and the company’s Ukrainian assets were worth about $400 million. Meanwhile, total Russia revenue in 2021 was about $1.9 billion (6 percent of revenue) and assets in country were valued at $1.4 billion.

A final example comes from heavy-industry manufacturer Cummins ($CMI), which filed an earnings release on May 3 that includes detailed breakdowns of which divisions suffered how much costs due to Russia disruptions. Total costs were $158 million, which Cummins first disclosed across its five operating segments. See Figure 3, below.

Separately, Cummins also included a narrative explanation of its Russia charges. They included inventory write-downs, asset impairments, and accounts receivables that presumably will never arrive. Within that narrative note Cummins also included another table, shown below, that breaks down the $158 million another way.

Meanwhile, the SEC Says…

We still have that sample comment letter from the SEC, published at the beginning of May. The letter raised two points about non-GAAP adjustments related to Ukraine.

First is the idea of adjusting for lost revenue due to Russia’s invasion of Ukraine. The SEC’s terse directive: “Please remove these adjustments.” Why? Here’s the full explanation in the comment letter:

We note your adjustment to add an estimate of lost revenue due to [Russia’s invasion of Ukraine and/or supply chain disruptions]. Recognizing revenue that was not earned during the period presented results in the use of an individually tailored revenue recognition and measurement method which may not be in accordance with Rule 100(b) of Regulation G. Please remove these adjustments.

Basically, if you include a non-GAAP adjustment for revenue that never actually, ya know, existed — that’s a no-no under SEC reporting rules.

Second, the SEC is also on the lookout for adjustments that a company claims are related to Ukraine, but perhaps are just normal and routine costs of business. In that case, the SEC will be looking for more fulsome disclosure about whether a company’s one-time Ukraine adjustments really are as one-time as it claims:

We note your adjustment for certain expenses [such as compensation expense or bad debt expense] incurred related to your operations in Russia, Belarus, and/or Ukraine that appear to be normal and recurring to your business. Please tell us the nature of these expenses. Explain how you have considered Question 100.01 of the Division’s C&DI for Non-GAAP Financial Measures and why you believe that the expenses excluded from your non-GAAP measures do not represent normal, recurring operating expenses.

The rest of the comment letter addresses other disclosure issues, such as what goes into Management Discussion & Analysis, cybersecurity risks, and internal control over financial reporting. All of the comment letter is food for thought for analysts; if the SEC is wary of what companies are reporting about Ukraine issues, those issues are worth keeping on your radar screen too.

You may have noticed that the stock market has been going down the tubes lately. Here at Calcbench, however, we wanted to press further. Just how far down the tubes have share prices gone, really?

To answer that question, an analyst could look at the price-to-earnings (P/E) multiple for one or more firms you follow — but that might not be the most accurate metric, because the earnings part of the equation is net income. Since scads of companies adjust net income and report non-GAAP earnings, that implies that they don’t believe “pure” net income is the most accurate measure of business performance. That, in turn, calls into question whether P/E ratios based on net income are the most reliable metric of value.

We decided to answer the question by examining the trailing 12 months of net income for 353 non-financial firms in the S&P 500, and then adding back the amortization of intangible assets to net income. Why? Because those amortization costs are the most common non-GAAP adjustment that large firms make. If companies believe that amortization costs are worth adjusting for net income, then by the same logic those costs are also worth adjusting for P/E ratios.

Once we had those adjusted earnings numbers, we then divided them into companies’ market capitalization at the end of March and at the close of business on May 5. Table 1, below, shows the results for all 353 firms we studied, tallied up as a whole.

As you can see, including the amortization adjustment produces a small but significant difference. We also calculated the earnings yield, which essentially is the inverse of the P/E ratio. It looks backwards at prior earnings, rather than anticipates future earnings; and earnings yield rises as share price falls. Again, we see a small but significant difference when amortization adjustments are included in the calculations.

What to Do Next

For the record, the long-term historical average P/E ratio for S&P 500 firms falls somewhere between 13 and 15, according to Investopedia, which suggests that the market still has a few more tubes to go down before it reaches bottom. We also found a nifty chart from Macrotrends.com that tracks P/E averages back to 1926 if you’re that much of a history buff.

In more practical terms, you could also use insights like this to sharpen your own assessments of firms’ value. For example, you could compare the adjusted P/E of firms you follow against our adjusted group averages; or you could research adjusted P/E averages of specific sample groups — say, all tech stocks. You could even add other adjustments if you like, such as for stock-based compensation.

One would do all these calculations from our Multi-Company page. There, you can select the companies you want to study and start by finding their net income. Then you can add other non-GAAP adjustments by entering them into the search field on the left-side of your screen above the company results. Calcbench tracks all the most common non-GAAP adjustments, so you can pull them up with a few keystrokes.

That gives you all the data you need to start adjusting earnings, then adjusting P/E ratios, and then estimating whether a firm’s share price still has further down the tubes to go or whether it’s time to buy.

Calcbench is devoting the month of May to non-GAAP financial disclosures — and as fate would have it, a great example fell into our laps right away. Uber filed its first-quarter earnings releases this week, with interesting non-GAAP disclosures galore.

Let’s start at the top. Uber ($UBER) filed its Q1 2022 earnings release on May 4, and according to GAAP rules the quarter looks horrible: a net loss of $5.9 billion (yes, billion) on revenue of $6.85 billion.

Except, after a number of non-GAAP maneuvers, Uber also reported an adjusted EBITDA profit of $168 million. How did that come about? Figure 1, below, is Uber’s reconciliation of non-GAAP reporting, and it tells the tale.

Almost all of Uber’s $5.9 billion loss comes from a $5.56 billion charge Uber recorded to write down investments it made in overseas ride-hailing services Grab, Aurora, and Didi. Elsewhere in the earnings release, Uber broke down the write-downs by specific investments:

• $1.9 billion unrealized loss on the Grab investment;
• $1.7 billion unrealized loss on the Aurora investments;
• $1.4 billion unrealized loss on the Didi investment;
• $462 million unrealized loss on its Zomato investment. (Zomato is a food delivery service in India.)

Uber’s Non-GAAP Through History

Uber’s non-GAAP reporting for this quarter also caught our eye because we also wrote about Uber last year. For first-quarter 2021, Uber reported an adjusted EBITDA that was actually lower than the GAAP-approved net income number. You don’t see that too often.

At the time, Uber had sold its self-driving car unit to Aurora (a tech startup that hopes to deliver self-driving cars some day in the future) for $1.68 billion, and made a $400 equity investment in Aurora to boot.

That sale, along with a few other small adjustments, led to Uber reporting a $1.71 billion gain on Other Income for the quarter. Uber had to report that as a non-GAAP adjustment, but it was an adjustment downward because you can’t always assume that other income will be a gain. Hence Uber’s adjusted EBITDA ended up being considerably lower than its GAAP net loss.

Now things have come full circle: after selling its self-driving technology to Aurora and booking a profit, which pushed its adjusted EBITDA down; Uber is now booking a loss on the investment it made in Aurora at the same time, which pushes its adjusted EBITA up.

Such a wonderful time to be alive and a financial analyst, right?