June 8, 2016

Tomorrow’s Webcast: “Non-GAAP Disclosures – What Is Permissible?”

Tune in tomorrow for the webcast – “Non-GAAP Disclosures: What Is Permissible?” – to hear Meredith Cross of WilmerHale; Brink Dickerson of Troutman Sanders; Steven Jacobs of E&Y; and Dave Lynn of and Morrison & Foerster provide practical guidance about what to do now with your non-GAAP disclosures given Corp Fin’s new & revised CDIs and the attention being paid to them by the SEC, media and investors. It’s at a special time – 11 am eastern. The audio archive will be posted directly after the live program is over – and a transcript will be posted about 10 days later. The agenda includes:

A. Analysis of CDIs
1. Problematic misleading measures – adjustments, period-over-period inconsistency, offsets
2. Revenue
3. Prominence – when presenting a non-GAAP measure, present most directly comparable GAAP measure with equal or greater prominence
4. Reconciliation of forward-looking measures if available without “unreasonable efforts”
5. Free cash flow
6. Per share measures including FFO
7. Income tax effects related to adjustments

B. What to Do Now
1. What might be expected from Corp Fin during the comment process going forward
2. How hard should you push back on Corp Fin comments
3. What should be considered when rethinking whether to continue disclosing certain non-GAAP financial measures
4. How to monitor what other companies are doing – and not doing
5. What is the real SEC enforcement risk

This Cooley blog summarizes a WSJ article that lays out the increasing prevalence of non-GAAP measures in proxy statements…

Non-GAAP Measures: How They Boost CEO Bonuses

Here’s an excerpt from this WSJ article:

But these adjusted metrics aren’t just showing up in earnings releases. Pro forma figures have been proliferating in annual proxy statements, too. There, when used with compensation metrics, they can help executives draw bigger pay packets. Research firm Audit Analytics finds that the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year. Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.

There is nothing improper about using non-GAAP measures as long as they are disclosed properly. And corporate boards decide on the measures they want to use for compensation purposes. Plus, there is an argument to be made for sometimes excluding items from results for compensation purposes. If, say, a natural disaster hits a company with expensive repairs, perhaps an adjustment is in order. But other items that often get excluded in pro forma results, such as layoff-related charges, do seem like a reflection of management’s performance. And boards have too often shown a willingness to set awfully low bars for executives to clear.

That, though, can disadvantage shareholders and wreck the idea of pay for performance. In that vein, the dramatic rise in the number of companies using pro forma measures to determine bonuses would indicate the balance between shareholders and executives is being skewed in executives’ favor. Indeed, an examination of the most recent proxy statements from companies in the Dow Jones Industrial Average shows about a dozen of the index’s 30 constituents had annual pro forma earnings well in excess of GAAP ones and used the pro forma ones in annual bonus calculations.

Poll: Non-GAAP Numbers In Headlines (Without the GAAP)

Corp Fin’s new CDIs touch on the prominence of non-GAAP numbers in the headlines of earnings releases – and some members tell me that’s what they were already advising their clients to do for quite some time. Yet, there are many examples of contrary conduct. Here’s an anonymous poll about what you’ve been advising:

survey hosting

Broc Romanek