As our analysts monitor Non-Timely filings, we sometimes get the sense that we’ve heard something before, like a tune stuck in your head that you can’t quite name.
Early this week, we read an unusual NT-10-K from OM Asset Management stating that the company had to delay the filing of its annual report. The delay was the result of an ongoing SEC review of the company’s use of a certain non-GAAP metric, namely Economic Net Income, or “ENI”.
OM Asset Management plc (the “Company”) has been in discussions with the staff (the “Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission regarding comments received from the Staff relating to the Company’s financial presentation of economic net income (“ENI”) and other non-GAAP measures. Based on these discussions, the Company believes no revisions to the Company’s financial presentation being discussed with the Staff will impact, or require any restatement of, the Company’s GAAP results or ENI results.
We don’t often see a company unable to file on time due to an SEC comment letter process, but the company’s name and especially the acronym rang a bell. We went over our records, and found that OM Asset Management had indeed had a conversation with the SEC about the use of non-GAAP metrics before, back in its 2014 S-1 prospectus.
As part of the pre-IPO review, the SEC questioned whether the company gave undue prominence to the presentation of ENI.
We note your references to ENI revenues and pre-tax ENI from 2011 through 2013 at the top of page 3. Considering the prominence of such measures, please revise your disclosure (either narratively or within a table) to present with equal prominence your U.S. GAAP revenue and U.S. GAAP net income from continuing operations attributable to controlling interests for the respective periods. In addition, expand your non-GAAP reconciliations within your summary historical consolidated and combined financial data (page 9) to include a reconciliation of your ENI revenue (similar to that provided on page F-58).
Response: In response to the Staff’s comment, the Company has revised the disclosure on page 3 of the Registration Statement to present U.S. GAAP revenue from continuing operations attributable to controlling interests and U.S. GAAP pre-tax income from continuing operations attributable to controlling interests for the respective periods. Also, the Company has expanded its non-GAAP reconciliations within the summary historical consolidated and combined financial data on page 12 to include a reconciliation of ENI revenue.
The revision apparently did not fully address the SEC’s concerns, since another round of comment letters was required to resolve the issue:
We note your response and revisions made as a result of our prior comment 3; however, it appears your revisions have added additional Non-GAAP measures (i.e. revenues excluding those generated from consolidated funds) instead of presenting the closest U.S. GAAP measures. Therefore, we are reissuing our comment in part. Please revise your disclosure to present with equal prominence your U.S. GAAP revenue and U.S. GAAP net income from continuing operations attributable to controlling interests for the respective periods.
Response: In response to the Staff’s comment, the Company has revised the disclosure on page 3 of the Registration Statement.
The controversy around the use of non-GAAP metrics was fueled in part by Groupon’s use of Adjusted Consolidated Segment Operating Income – a non-GAAP metric that removed certain marketing expenses from GAAP net loss. Following a review by the SEC, Groupon had to modify the metric and re-introduce the marketing expenses. Groupon is not the only example of this: according to a recent Bloomberg article, ConocoPhillips was also required to remove a metric, which relied on 2013 (instead of 2014) oil prices. According to the Bloomberg article, citing research by scholars at the University of Michigan, companies that strip large amounts out of GAAP results tend to underperform companies with smaller non-GAAP adjustments.
According to research published by Audit Analytics last February, more than 40% of companies that used non-GAAP metrics in their IPO prospectuses received an SEC comment letter on the issue.
But the SEC’s interest in comment letters doesn’t stop with the IPO process; according to our research, roughly 25% of these companies received further comments about non-GAAP metrics in their subsequent periodic filings (10-Ks and 10-Qs). Considering the delay in the public availability of comment letters, it is very likely that percentage will increase as more comment letters are released.
In her December 2015 speech at the AICPA Conference, SEC Chair Mary Jo White stated that the increased use of non-GAAP metrics is a substantial concern for SEC. While it remains to be seen whether the SEC will ultimately propose new regulations, it would be safe to assume that the focus on non-GAAP issues will continue to increase.