Non-GAAP More Common than Previously Thought?

Trendy topics come and go, and the financial reporting industry is no exception. Lately, the trending topic in financial reporting has been the use of non-GAAP metrics. Non-GAAP got a new spin after SEC Chairman Mary Jo White in her December 2015 speech outlined the widespread use of these metrics as a concern. Since then, the trend has been gaining momentum.

According to a recent WSJ report by Dave Michaels, the agency may start pushing back on companies that use aggressive non-GAAP metrics. Quoting the SEC’s Mark Kronforst, the article asserts that using non-GAAP metrics for revenue is especially troubling.

Based on our December 2015 analysis, 88% of S&P 500 companies used at least one non-GAAP metric in their SEC filings, with some using as many as 30 metrics. One take away from these results is that, while a vast majority of the S&P 500 companies do use non-GAAP, at least some of them do not. That poses an interesting question. Who are these companies and why don’t they use non-GAAP metrics?

Well, maybe they do after all. In a recent Market Watch article, Francine McKenna looked at Apple as an example of a company that for the most part uses GAAP-only numbers. The last time Apple reported non-GAAP metrics in SEC filings was back in 2009. Interestingly, for its Q2 2016 results, Apple posted a supplemental non-GAAP presentation on their website, but not in its SEC filings.

The metric, called Installed Base Related Purchases, was clearly marked as non-GAAP and reconciled to Installed Base Related GAAP Services Revenue. According to Apple, the supplemental non-GAAP revenue metric is useful for investors “as it provides a more complete picture of the transactions generated by the installed base”.

So, how unique is a situation where a company files GAAP-only reports with SEC, but presents non-GAAP results elsewhere, for instance in their press releases or on their websites?

Based on our analysis, this is actually quite common. Audit Analytics identified at least nine such companies. For instance, neither Home Depot (HD), nor Tractor Supply (TSCO) used non-GAAP metrics in their 8-K filings, yet Home Depot presented EBITDAR on their website, while Tractor Supply presented Free Cash Flow (a very common liquidity metric).

An interesting aspect with Home Depot and Tractor Supply (as with other companies that present non-GAAP on their websites or in their press-releases only) is that the use of non-GAAP is typically limited to only a small number of metrics with only a few reconciling items.

Non-GAAP metrics are used to portray the financial state of a company through the eyes of its management. As such, it should come as no surprise that some of the metrics are likely to find their way not only into 8-K and annual reports, but also into press releases and/or investors presentations on their corporate websites. What we were surprised to find, however, is that the use of non-GAAP metrics may in fact be more prevalent than originally thought – higher even than the 88% that we reported in December 2015.