We want to squeeze in one more post about our analysis of non-GAAP adjustments to net income, this time examining trends in non-GAAP net income by industry.

First let’s review the broader non-GAAP net income scene. As you might recall, several weeks ago Calcbench released our annual report on non-GAAP adjustments, looking at the adjustments of 260 randomly selected firms in the S&P 500. We found an average of 6.3 adjustments per company. Those adjustments pushed up non-GAAP net income by an average of $698 million per firm, 29 percent higher than traditional GAAP net income. 

You can download the full analysis from our Research page — and this year, for the first time, we also have a secondary report devoted specifically to non-GAAP adjustments by industry

So what were some of the more interesting findings in that industry report? Let’s take a look.

First, we did find that some industries had larger non-GAAP adjustments than others. We did this by sorting our sample of 260 companies into SIC category (that is, the broad industry classification companies must include when filing financial reports to the SEC) and then measuring how much non-GAAP adjustments increased GAAP net income in each industry.

SIC categories are organized as follows (the manufacturing and services categories are so broad they both straddle two numbers):

  • 0 - Agriculture

  • 1 - Mining and construction

  • 2 - Manufacturing

  • 3 - Manufacturing 

  • 4 - Transportation and public utilities

  • 5 - Wholesale & retail trade

  • 6 - Finance, insurance, real estate

  • 7 - Services

  • 8 - Services

  • 9 - Public Administration

Figure 1, below, shows the sum of adjustments per SIC category, compared against the sum of GAAP net income for each category; and then expresses the non-GAAP adjustment in percentage terms. 

In other words, the firms in our sample that fell into SIC category 5 (wholesale and retail trade) reported $11.4 billion worth of non-GAAP adjustments against $20.75 billion of GAAP net income — pushing non-GAAP net income 54.9 percent higher than GAAP net income. 

In contrast, the firms in SIC category 6 (financial services and real estate) had much larger GAAP net income ($91.9 billion), but the non-GAAP adjustments to that income were relatively smaller ($17.9 billion). So non-GAAP net income was only 19.5 percent higher than GAAP net income in that sector.

OK, cool — but what about the types of non-GAAP adjustments seen in each industry? Wouldn’t that vary too? Since some sectors have different traits in their assets, liabilities, and income than others? 

Our industry report looked at that trend too. Figure 2, below, has a lot going on, but it depicts the breakdown of non-GAAP adjustments for each SIC category listed above, sorted by dollar value.

For example, look at the column for SIC category 2, one of the manufacturing categories. It skews quite heavily toward amortization of intangibles, which accounted for 46.2 percent of all non-GAAP dollars in that category; and toward impairments, which accounted for 26.9 percent. 

That makes sense; manufacturers have lots of items such as patents, trademarks, and copyrights, which must be amortized or tested for impairment often. (By coincidence, we just explored the importance of intangible assets to manufacturing companies last week, looking at Campbell Soup Co. ($CMP), which is a category 2 company.) 

In contrast, SIC category 7, which includes tech services companies, has a much larger share of non-GAAP adjustments going to stock-based compensation — which also makes sense, given the options-crazed habits of tech companies in that category.

What does it all mean? Well, if non-GAAP adjustments vary by sector (and to be clear, they do), that could represent common industry practices. So if you’re a CFO or financial planning executive trying to figure out what makes sense to report as non-GAAP adjustments to net income, this industry-specific data can help to guide your deliberations. 

And as we’ve noted many times before, lots of companies now report non-GAAP adjustments. That might suggest that GAAP (Generally Accepted Accounting Principles) might not be as robust and useful as necessary. That’s a policy question above Calcbench’s pay grade, but we do have the data you need to have productive conversations about it.

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