Tuesday, August 15, 2023

If there’s one thing companies like to do during times of economic uncertainty, it’s restructuring. Well, the economy has plenty of economic uncertainty today, so we wondered: what are companies reporting for restructuring costs lately?

Figure 1, below, shows the answer. These are the quarterly reported restructuring costs for S&P 500 companies since the start of 2018.

Why such a long look-back period? Because we wanted to get a sense of “normal” restructuring costs back before the covid-19 pandemic. Indeed, one can see an unsurprising pattern: restructuring costs spiked in 2020 during the worst of the pandemic, and then plummeted in 2021 as we all realized that perhaps economic calamity wasn’t going to strike after all.

Then came 2022 — and specifically, second-quarter 2022. By then inflation had taken root. As we can see, restructuring costs promptly popped back up, to levels slightly higher than pre-pandemic costs but still well below the worst of costs reported in 2020.

Some may also wonder: are more companies reporting restructuring costs? Honestly, no. In any given quarter over the last 5.5 years, the number of companies reporting such costs ranged from 107 to 129. The average number of firms with restructuring costs in any given quarter was 117, and the median was 118. 

The only exception so far has been Q2 2023, with 98 companies disclosing restructuring costs — but we still have a few non-standard firms that haven’t yet reported, so a somewhat lower number isn’t surprising.

Why Restructuring Matters at All

Restructuring costs are worth watching because they’re a common adjustment to non-GAAP net income. For example, in our Non-GAAP Reconciliation Report published earlier this year, where we studied the non-GAAP net income of 200 companies in the S&P 500, 97 of those companies reported non-GAAP net income that excluded restructuring costs. The average adjustment was a $118 million increase in GAAP net income.

Astute financial analysts might also notice that some companies announce one restructuring program after another. That opens the door to make repeated adjustments to net income — but at what point does an endless series of restructuring programs become just another way to mask poor operations? 

Along similar lines, we’ve sometimes seen restructuring programs announced where the company expects to spend, say, $100 million over the next four periods. By the end of that program, however, the company might report very different totals of what it actually spent, either higher or lower. So the ability to track a company’s reported restructuring costs over time is another handy tool in the analyst’s toolkit.

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