Wednesday, June 14, 2023

Today we have more news about non-GAAP adjustments to net income, with more analysis of which industries tend to make what types of adjustments — plus a list of the 50 companies in our research that made the largest adjustments!

These new reports are updates to the 2022 Non-GAAP Reconciliations Report that Calcbench released last week, which examined the non-GAAP adjustments to net income that 200 companies in the S&P 500 had made to their annual financial reports.

The primary findings from that first report were that non-GAAP adjustments to net income are growing larger (an average of $184 million, up 53 percent from the prior year); and that in the vast majority of cases those adjustments push non-GAAP net income higher than “traditional,” GAAP-approved net income.

Our new industry-by-industry analysis, which you can download for free, surfaced even more interesting nuggets for financial analysts. Among our new findings:

  • Several sectors cast a long shadow in the non-GAAP adjustment world. For example, adjustments made by companies in the manufacturing and transportation & public utilities sectors account for roughly half of all adjustments amount we found, even though companies in those industries represent less than a third of all companies in our (randomly selected) sample group.
  • Some non-GAAP adjustments were much more common in certain sectors than others. For example, most impairment adjustments came from companies in the transportation & public utilities sector; most litigation adjustments came from companies in the wholesale and retail trade sector. Was that because those sectors are more prone to those types of adjustments generally, or due to some specific trend in the industry last year? We’re not sure.
  • The significance of a single company’s adjustments for its whole sector can vary greatly. For example, Fidelity National Information Services ($FIS) represented 63 percent of all adjustments made by companies in the services sector. On the other hand, IBM’s ($IBM) adjustments were only 13.7 percent of total adjustments made by the manufacturing sector.

So what were the adjustment breakdowns by category? Let’s take a look.

SIC Codes and Non-GAAP Insights

To perform our analysis, Calcbench randomly selected 200 companies in the S&P 500 and grouped them by SIC code, a standard identifier companies use when submitting data to the Securities and Exchange Commission. The codes are organized as follows.

It’s important to know that structure so you can understand the dispersal patterns of our next two charts. Figure 1, below, compares the percentage of total adjustments per sector against that sector’s weight in our sample size.

As you can see, some sectors punched above their weight for non-GAAP adjustments. For example, the total dollar value of non-GAAP adjustments in the manufacturing sector (SIC 2) accounted for 26.6 percent of all non-GAAP adjustments in our entire sample — but manufacturing companies themselves were only 18 percent of our sample.

Conversely, adjustments from companies in financial services and real estate (SIC 6) accounted for only 4.48 percent of total; but the companies themselves were 13 percent of our sample size. So this sector punched under its weight for non-GAAP adjustments in 2022.

Figure 2, below, presents that same industry-by-industry breakdown by dollar amount instead of percentage.

For example, transportation and public utilities (SIC 4) reported non-GAAP adjustments of $52.28 billion, which is 28 percent of GAAP net income that same group reported.

Our second report also looked at how many companies within each industry reported non-GAAP net income that was either higher or lower than GAAP net income. Recall that in our total sample, 83 percent of companies reported non-GAAP net income higher than net income.

That same basic pattern held true industry-by-industry. Figure 3, below, is a scatterplot color-coded by SIC code.

You can make some broad observations here. For example, companies in SIC 2 (manufacturing, in gray) did have plenty of upward adjustments — but more companies in SIC 4 (transportation and public utilities) had truly eye-popping adjustments, where non-GAAP net income was at least 200 percent higher than net income.

That’s enough non-GAAP analysis for today, but we will have more soon. Clearly companies are trying to convey some sort of message with all these adjustments; Calcbench is with you every step of the way to understand exactly what that message is.

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