Has "Adjusted EPS" Become Too Adjusted? The SEC Thinks So

Ann Hynes and Sheryl R. Skolnick, Ph.D.
Ann Hynes and Sheryl R. Skolnick, Ph.D.
July 26, 2016



The SEC is more focused on the excessive use of non-GAAP reporting measures given the recent C&DIs on the subject, and so are we. Based on our analysis, many company's adjustments are questionable and, as result, our models now reflect a "MSUSA adjusted EPS". We suspect that over time the SEC could be forced to issue regulations surrounding non-GAAP reporting if company's behavior does not change post the guidelines.

Key Points

SEC Is Focused On Non-GAAP. The SEC has made it increasingly clear in recent months that they think companies are being excessive when reporting using non-GAAP measures. With the additional guidelines, we think the SEC want to limit the company’s discretion on reporting non-GAAP measures going forward and wants to ensure that companies are not overly aggressive by applying adjustments that are normal operational in nature, recurring, cash operating expenses necessary to operate a company’s business as well as recurring non-cash items.

Sheryl Skolnick Analysis. Three of our companies guide to GAAP or near-GAAP EPS (HCA, UNH & HLS) and we make no adjustments to those high quality estimates. With the exception of KND, the rest of our companies do not yet add-back intangible amortization: we do not introduce this add-back to those companies either. KND is by far the most difficult company to model given a host of complex 'adjusted' concepts and add-backs, so we focus most on KND and make modest adjustments to those add-backs to EPS and would make more if we could have better detail.

Ann Hynes Analysis. Based on the guidelines, we think the only valid non-cash recurring adjustment is acquisition-related goodwill amortization. However, various companies in our coverage universe adjust other non-cash items (e.g. LIFO and stock comp). More concerning, many companies adjust out recurring cash expenses (e.g. recurring restructuring costs, expenses related to the implementation of cost-savings programs and acquisition-related expenses post a year after a deal close). Based on our analysis, we think ABC, TMH, MCK, DGX and WBA non-GAAP adjustments are “overly-adjusted”, while we view CVS and ACHC as the highest quality.

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