You bet they do! May be they are very busy and don’t listen in live, but they surely are scanning the earnings call transcripts.
It is earnings season again. As the analysts and investors are curious to hear how companies have fared, the regulators may be listening in to see what Non-GAAP metrics companies are disclosing & talking about.
The use of Non-GAAP is not new and neither is the SEC’s comments on the use of Non-GAAP. Recently with speeches being made by SEC Commissioner Mary Jo white (Dec 2015) and other senior staffers giving their opinions, the heat seems to be picking up.
In fairness to the SEC protecting the investors interest, they ask that companies do the following “Where non-GAAP financial measures are made public orally, telephonically, by webcast, broadcast or similar means, please ensure that you include the most directly comparable GAAP financial measure as required by Item 100(a)(1) of Regulation G and provide a cross reference to the location on your website where the reconciliation for such measures can be
How then do we know the SEC is listening/reading your earnings calls?
We looked at our SECAnalyzer™ SEC Comments Database for “earnings call” and “Non GAAP” and found the regulators refer to comments made during the earnings calls, and wrote the companies an SEC comment. Listed below are three companies that SEC staff have commented on.
So this earnings season, we will be analyzing the earnings releases to see what Non-GAAP companies are disclosing, never mind whether the sec comments or not.
COVISINT CORP SEC Comment [12/23/2015] Comment Letter
4. In your Q2 2016 earnings call, management indicates that “free cash burn” for the quarter was about $5.4 million, which appears to be a discussion of non-GAAP measures. In the future, where non-GAAP financial measures are made public orally, telephonically, by webcast, broadcast or similar means, please ensure that you include the most directly comparable GAAP financial measure as required by Item 100(a)(1) of Regulation G and provide a cross reference to the location on your website where the reconciliation for such measures can be found. We refer you to Note 1 of Item 100 of Regulation G and Question 105.02 of the Non-GAAP Compliance and Disclosure Interpretations.
6. In your Q2 2016 earnings call, management states that you expect to finish the year with a net loss of between $11 and $14 million on a non-GAAP pro forma basis. However, the Guidance Summary on slide 4 of the presentation materials does not specify that your Net Income projections are on a non-GAAP basis and they are not reconciled to the comparable GAAP measure. Similarly, the Free Cash Flow projections are not reconciled to the comparable GAAP measure. In future filings and public presentations please ensure that your non-GAAP measures are clearly identified as such. In addition, ensure that you reconcile your non-GAAP projections to the most directly comparable GAAP measure or explain to us why you cannot provide that information without unreasonable effort. Please refer to Item 10(e)(1)(i) of Regulation S-K.
TRIMAS CORP SEC Comment [05/03/2016] Comment Letter
2. We note disclosure in your earnings presentation that “free cash flow approximated 87% of net income for 2015, excluding special items.” We also note your CFO stated on your earnings call that “free cash flow approximated 87% of net income.” It appears to us: the measure you refer to as “free cash flow” is adjusted for items in addition to what is commonly referred to as free cash flow; and the 87% calculation is actually based on “Income from Continuing Operations, Excluding Special Items. ” Please revise future filings to use titles or descriptions for non-GAAP financial measures that accurately reflect the amounts presented or calculated, and are not the same as, or confusingly similar to, GAAP measures. Also, to the extent you continue to present a cash conversion percentage based on non-GAAP financial measures, it appears you should also present the most directly comparable GAAP measure.
VALEANT PHARMACEUTICALS INTERNATIONAL, INC. SEC Comment [03/18/2016] Comment Letter
1. We note that, over the past four years, you have reported approximately $9.8 billion of non – GAAP net income. During this same period, you reported GAA P net loss of approximately $330 million for a total increase from GAAP loss to non – GAAP income of over $10 billion.
In addition, you have reported taxes on $10.2 billion of non – GAAP pretax income at a rate of only 3% . During the call on February 26, 2016 between Valeant and the SEC staff, we discussed the company’s proposed change to the reconciliation between the GAAP tax provision and the non – GAAP provision. On that call, we expressed significant concern about the non – GAAP tax provision.
We learned through your March 15th earnings call that you plan to increase the tax rate used in calculating your future non – GAAP measure to between 10 and 15% in 2016. We also learned that you attributed this change to a suggestion made by the staff. At the time you publicized this change, the staff had informed you that we had concerns about whether your non – GAAP measure was potentially misleading due to the tax provision but we had not suggested any particular tax rate that would be appropriate nor that it would be appropriate to make a change only prospectively.
The measure used over at least the past four years gives the impression that you could have generated $10.2 billion in pre – tax profits during that time without paying any significant amount of tax. We find this presentation to be potentially misleading.
You should amend or supplement your earnings release to inform investors promptly that the hypothetical results suggested by this non – GAAP measure were unrealistic and show how the revised tax rates would have affected prior periods.