LaCroix Company Won't Tell SEC Secret Formula Behind Custom Growth Metrics
The SEC, in a letter to the company, noted that National Beverage never disclosed what any of those metrics even mean, and never explained why the company never bothered to provide the public with an explanation. It asked: What, exactly, do these metrics represent? The company, though, refused to say. In its reply, according to the Journal, National Beverage said this information is as secret as the formula for its drinks, which it has also refused to disclose to the public. However the company tried to assure the SEC that the measure doesn't apply to the company as a whole but, rather, is used to set goals for certain customers. The company did not say what exactly it meant by that either.
The SEC has, over the past few years, expressed concern about the growing use of non-GAAP metrics by companies. In a 2015 speech, then-SEC Chair Mary Jo White expressed concern that the use of non-GAAP measurements could be a source of confusion for investors and other financial statement users, and she called for more prudent use of the figures. In another speech earlier that year, then-SEC Chief Accountant James Schnurr said he was "troubled" by the extent and nature of the adjustments used in non-GAAP measures to arrive at alternative measures of profitability and cash generation.
In 2016, MarketWatch reported that 26 S&P 500 companies were found to have a loss when using GAAP measures but a gain when using non-GAAP metrics they made for themselves. For example, it was found that, according to GAAP measures, McDonalds lost 1 percent in sales from the year before, but the company's "constant currencies" metric showed that sales increased by 3 percent. In the same year, GAAP metrics showed Twitter to have lost $80 million, but its own non-GAAP adjusted figure, which excluded employee-based stock compensation, said the company made $100 million in profit. A 2017 study from MIT has found that when companies make large positive adjustments to non-GAAP earnings, their CEOs make 23 percent more than their expected annual compensation would be if GAAP numbers were used. This is despite such firms having weak contemporaneous and future operating performance relative to other firms.
To address situations like this, the SEC released a Compliance and Disclosure Interpretation aimed at clarifying what is and is not acceptable in terms of using non-GAAP measurements. For instance, one theme discussed in the guidance was the prominence of non-GAAP metrics over GAAP metrics, such as a case where the former is in big bold print at the front of the report while, six paragraphs down, the actual GAAP information is presented in smaller print. Another issue the commission addressed in its interpretation is the way that some companies will exclude normal cash operating expenses from non-GAAP measurements. The guidance also noted the SEC will not look kindly upon cherry-picking favorable adjustments and pulling out unfavorable ones; substituting individually tailored revenue recognition measurement standards for the one in GAAP; accelerating revenue from subscriptions into a larger lump sum, including things in a non-GAAP measurement under which the company has no control; and income tax adjustments that have little, if any, connection with reality.
Since then, the SEC has made it a point to more frequently question the use of non-GAAP metrics that seem to be for massaging out bad news. For instance, at the end of 2016, it criticized Tesla Motors for adding back certain costs to the GAAP revenue calculation to come up with a custom figure, leading the company to drop the metric. It is unknown whether National Beverage will follow suit.
The SEC has, over the past few years, expressed concern about the growing use of non-GAAP metrics by companies. In a 2015 speech, then-SEC Chair Mary Jo White expressed concern that the use of non-GAAP measurements could be a source of confusion for investors and other financial statement users, and she called for more prudent use of the figures. In another speech earlier that year, then-SEC Chief Accountant James Schnurr said he was "troubled" by the extent and nature of the adjustments used in non-GAAP measures to arrive at alternative measures of profitability and cash generation.
In 2016, MarketWatch reported that 26 S&P 500 companies were found to have a loss when using GAAP measures but a gain when using non-GAAP metrics they made for themselves. For example, it was found that, according to GAAP measures, McDonalds lost 1 percent in sales from the year before, but the company's "constant currencies" metric showed that sales increased by 3 percent. In the same year, GAAP metrics showed Twitter to have lost $80 million, but its own non-GAAP adjusted figure, which excluded employee-based stock compensation, said the company made $100 million in profit. A 2017 study from MIT has found that when companies make large positive adjustments to non-GAAP earnings, their CEOs make 23 percent more than their expected annual compensation would be if GAAP numbers were used. This is despite such firms having weak contemporaneous and future operating performance relative to other firms.
To address situations like this, the SEC released a Compliance and Disclosure Interpretation aimed at clarifying what is and is not acceptable in terms of using non-GAAP measurements. For instance, one theme discussed in the guidance was the prominence of non-GAAP metrics over GAAP metrics, such as a case where the former is in big bold print at the front of the report while, six paragraphs down, the actual GAAP information is presented in smaller print. Another issue the commission addressed in its interpretation is the way that some companies will exclude normal cash operating expenses from non-GAAP measurements. The guidance also noted the SEC will not look kindly upon cherry-picking favorable adjustments and pulling out unfavorable ones; substituting individually tailored revenue recognition measurement standards for the one in GAAP; accelerating revenue from subscriptions into a larger lump sum, including things in a non-GAAP measurement under which the company has no control; and income tax adjustments that have little, if any, connection with reality.
Since then, the SEC has made it a point to more frequently question the use of non-GAAP metrics that seem to be for massaging out bad news. For instance, at the end of 2016, it criticized Tesla Motors for adding back certain costs to the GAAP revenue calculation to come up with a custom figure, leading the company to drop the metric. It is unknown whether National Beverage will follow suit.