Examples of Non-GAAP Financial Measures in MD&A

Introduction to Non-GAAP Financial Measures in MD&A

Non-GAAP (Generally Accepted Accounting Principles) financial measures are often used in Management Discussion and Analysis (MD&A) to provide a clearer picture of a company’s financial health. These measures can supplement GAAP figures and help stakeholders understand a company’s operational performance. By presenting data in a way that reflects management’s perspective, non-GAAP measures can offer valuable insights beyond traditional accounting metrics. Below are three diverse examples of non-GAAP financial measures typically found in MD&A sections.

Example 1: Adjusted EBITDA for a SaaS Company

In the rapidly growing Software as a Service (SaaS) industry, companies often rely on non-GAAP measures like Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to present a clearer picture of their profitability. This metric excludes irregular expenses related to stock-based compensation and one-time charges.

A SaaS company, XYZ Corp, reports:

• GAAP Net Income: $1 million
• Depreciation: $200,000
• Amortization: $150,000
• Stock-based Compensation: $300,000
• One-time Restructuring Costs: $100,000

Adjusted EBITDA is calculated as follows:

Adjusted EBITDA = GAAP Net Income + Depreciation + Amortization + Stock-based Compensation + One-time Restructuring Costs
Adjusted EBITDA = \(1 million + \)200,000 + \(150,000 + \)300,000 + \(100,000 = \)1.75 million

This figure provides investors with a better sense of operational performance by removing the effects of accounting noise.

Notes:

• Variations of this measure may include “Adjusted Operating Income,” which may exclude additional items such as foreign exchange losses.

Example 2: Free Cash Flow in a Manufacturing Firm

Manufacturing firms often use Free Cash Flow (FCF) as a non-GAAP measure to assess cash generated after capital expenditures. This metric is crucial for understanding a company’s ability to generate cash and fund operations, pay debts, or return capital to shareholders.

For example, ABC Manufacturing reports:

• Cash Flow from Operations: $5 million
• Capital Expenditures: $2 million

Free Cash Flow is calculated as follows:

Free Cash Flow = Cash Flow from Operations - Capital Expenditures
Free Cash Flow = \(5 million - \)2 million = $3 million

By presenting this non-GAAP measure in their MD&A, ABC Manufacturing indicates a strong financial position with sufficient cash to invest in growth.

Notes:

• Companies may also adjust FCF by including or excluding certain non-recurring capital expenditures.

Example 3: Core Earnings for a Retail Chain

Retail companies frequently utilize Core Earnings as a non-GAAP measure to strip away unusual or non-recurring items that may distort their earnings picture. This measure focuses on the profitability derived from core business operations.

Consider LMN Retail, which reports:

• GAAP Net Income: $4 million
• One-time Store Closure Costs: $500,000
• Non-recurring Legal Expenses: $300,000
• Gains from Asset Sales: $200,000

Core Earnings are calculated as follows:

Core Earnings = GAAP Net Income - One-time Store Closure Costs - Non-recurring Legal Expenses + Gains from Asset Sales
Core Earnings = \(4 million - \)500,000 - \(300,000 + \)200,000 = $3.4 million

This calculation allows LMN Retail to showcase its ongoing profitability, making it easier for analysts and investors to assess operational effectiveness.

Notes:

• Some firms may define Core Earnings differently based on their unique operational structures or industry standards.