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Companies in the Dow made bigger-than-normal adjustments to their profits in Q4, analysis shows

Earnings Watch: Target leads another week of retailer-heavy earnings. ‘Expect sales to remain challenged,’ analyst says. When public companies tell the world how much money they made over a quarter, they have to follow accounting guidelines intended to keep those financial figures honest and consistent.

However, for better or worse, alongside the profit figures that comply with those standards, many companies also report more forgiving, “adjusted” versions of those figures. Those adjustments are intended to show what a company’s bottom line might have looked like if those standards — and the financial impact related to any number of issues like taxes, litigation, layoffs, the impact from the war in Ukraine, changes in the value of currencies or cannabis plants or whatever else — essentially didn’t apply.

In the fourth quarter, among the 30 companies in the Dow Jones Industrial Average, the gap between those two types of profit was far wider than normal, according to a FactSet analysis published Thursday.

That analysis found that the median difference between per-share profit reported based on generally accepted accounting principles, or GAAP, and the adjusted kind — non-GAAP — stood at 31%. That’s far above the norm for that difference — 11.7% — based on five-year averages.

It’s also the fourth biggest difference between GAAP and non-GAAP earnings per share for Dow companies since FactSet began tracking it in 2016. And the last time that spread surpassed 31% was during the second half of 2020, when the pandemic upended the economy.

The biggest such differences in the most recent quarter could be found in companies like drugstore chain Walgreens Boots Alliance Inc. WBA, +1.08%, at 925%. The company, in its earnings release, cited “challenging retail market trends in the U.S. and a 21 percentage point headwind from a higher tax rate.”

The spread for chemical and materials giant Dow Inc. DOW, -0.20% was 386.7%, as it digested the effects of restructuring, litigation, pension settlements the devaluation of Argentina’s peso and other matters. Companies like Verizon Communications Inc. VZ, +0.45%, Merck & Co. MRK, -0.15%, Salesforce Inc. CRM, +2.61% and Johnson & Johnson JNJ, +0.46% rounded out the top 10.

The adjustments that companies make to their profit figures — which tend to take more priority among the Wall Street analysts whose commentary can drive stock action — have long been a matter of debate among executives and investors.

Many companies say those adjustments allow them to express their profit in a purer form that factors out the impact of “once-in-a-lifetime” events and random noise. But many others say the practice gives company leadership too much leeway to say what does and doesn’t count when calculating profits.

“Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that companies deem to be one-time events or nonoperating in nature are typically excluded from the non-GAAP (earnings per share) numbers,” FactSet Senior Earnings Analyst John Butters said in the report on Thursday.