SEC Reviewing Valeant's Use of 'Non-GAAP' Financial Measures

The Securities and Exchange Commission has been reviewing Valeant Pharmaceuticals International Inc.'s use of adjusted "non-GAAP" financial measures, and criticized Valeant's disclosures at one point as "potentially misleading," according to newly public correspondence between the SEC and the company.

The SEC has taken issue with Valeant's practice of stripping out acquisition-related costs from its non-GAAP measures given that the company's business strategy was heavily dependent on acquisitions, according to comment letters the SEC sent to the company starting in December. The commission has also questioned Valeant's disclosure of the tax effects of the costs it stripped out of its non-GAAP measures.

The agency is "concerned with your overall format and presentation of the non-GAAP measures and believe revisions to your future earnings releases and investor materials are appropriate," the SEC's staff wrote to Valeant in a Dec. 4 letter.

In responses to the SEC letters, the Laval, Quebec-based company defended its use of non-GAAP measures but said it would make changes in its disclosures. A Valeant spokeswoman couldn't immediately be reached for comment Tuesday.

Valeant's shares on Tuesday were trading down about 2% to $25.69.

Non-GAAP measures are the metrics a company issues that don't comply with generally accepted accounting principles, or GAAP, the standard set of accounting rules in the U.S. Typically, they strip out a variety of noncash and nonrecurring items from a company's results, to present what companies contend is a clearer picture of their continuing earnings and financial performance.

But many critics say companies use the tailored metrics to burnish their results and make them look stronger than they really are, stripping out items that shouldn't be omitted from any measure of a company's performance. The use of non-GAAP measures is increasing, and non-GAAP results often portray a far rosier picture of companies' finances than the standard GAAP numbers, the critics note.

Valeant has faced a string of questions over its accounting and business practices in the past year, including its use of non-GAAP numbers. As the SEC noted, over the past four years Valeant has reported a total of about $9.8 billion in non-GAAP net income while it has posted a GAAP loss of about $330 million over the same period.

The SEC has recently been critical of companies' use of non-GAAP measures, and SEC Chairman Mary Jo White has suggested new regulations may be needed if companies abuse the current rules. The rules allow companies to report non-GAAP metrics as long as they also disclose the comparable GAAP numbers and detail the differences between the two.

Write to Michael Rapoport at [e-mail]

(END) Dow Jones Newswires

May 24, 2016 14:15 ET (18:15 GMT)

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