December 13, 2002
Mr. Jonathan G. Katz
Subject: Release No. 33-8145, Conditions for Use of Non-GAAP Financial Measures, File No. S7-43-02
Dear Mr. Katz:
Thank you for allowing Pfizer the opportunity to respond to the proposed rules regarding:
Pfizer is a research-based global pharmaceutical company that discovers, develops, manufactures, and markets innovative medicines for humans and animals. For 2001, total revenues and assets exceeded $32 billion and $39 billion, respectively.
Pfizer recognizes the timeliness of the U.S. Securities and Exchange Commission's (SEC or Commission) proposal to increase investor confidence, which has been dampened by a number of recent accounting and disclosure scandals, and we commend the Commission for its efforts to propose meaningful solutions.
We believe that Release No. 33-8145 forms the basis for an important improvement in the quality and transparency of corporate disclosure.
We agree that non-GAAP financial measures should not be given greater prominence than comparable GAAP financial measures.
We agree that non-GAAP financial measures should be reconciled to the comparable GAAP financial measures.
We believe that an exception for prospective measures should be permitted when the necessary information cannot be obtained without unreasonable effort.
We disagree with the suggestion that non-GAAP financial measures should be limited to historical financial measures.
We do not support a requirement that auditors audit or review all non-GAAP financial measures.
We urge the SEC to resist prohibiting non-GAAP per share measures prior to undertaking a study to ascertain the usefulness of these measures to the investor community.
We urge the SEC to resist prohibiting the presentation of any non-GAAP financial measures that management deems necessary for the fair presentation of its results or prospects. We believe that it is the reconciliation aspect of the proposal that makes it the most powerful in achieving transparency rather than a mandating of what should or should not be an adjustment to non-GAAP measures. With that reconciliation, users have information available which they can assess and can either choose to agree or disagree with how management views the non-GAAP measure. When management determines that such information is needed to assist the user in understanding the present operating results, financial condition or future opportunities or risks, known or estimated, then restricting the content of such information could inadvertently prevent users from obtaining valuable insight into management's perspective on the results of operations or financial condition of the company.
We share the same purpose of the SEC - - that of maintaining and strengthening the integrity, quality and transparency of financial statements - - even as we challenge some of the suggestions in the SEC's proposal.
Our more specific comments to several of the items in the proposal are set forth in the attachment.
We appreciate your consideration of these comments. We would be happy to discuss these matters further or to meet with you if it would be helpful.
David L. Shedlarz
Alan G. Levin
Detailed Responses to the Proposed Rules on
Conditions for Use of Non-GAAP Financial Measures
As noted in our letter, we agree with the intent of the proposal and the need to help users focus on important information, but have some specific concerns about some of the proposed definitions and restrictions of disclosures of non-GAAP financial measures.
Questions Regarding Proposed Regulation G
Yes. We believe that all companies that publicly disclose non-GAAP financial measures should be subject to the requirements under proposed Regulation G. Whether a company is large or small, investors must be able to understand such non-GAAP financial measures.
No. We support the current proposal requiring that non-GAAP financial measures be reconciled to the most directly comparable financial measure. However, we do not believe that specific GAAP measure(s) should be required as this could prove cumbersome and would restrict management's ability to provide information it considers necessary to allow users to look through the eyes of management.
No. We believe that the pro forma financial statement requirements of Article 11 work well in practice and provide users meaningful information when applied in the currently specified circumstances. We cannot envision circumstances outside of Article 11 that should trigger the presentation of a reconciled (full or summary) consolidated balance sheet, income statement and cash flow statement. Such a requirement could overwhelm the reader and could represent an unnecessary burden for preparers. This burden on preparers is of particular concern in light of the additional filing requirements under proposed Item 1.04 of Form 8-K and the recent accelerated filing requirements for Forms 10-K and 10Q.
Yes. We agree with the commission that, in these cases, the registrant must identify any information that is unavailable and disclose its probable significance.
For example, suppose a company routinely has significant gains and losses on securities investment securities. Management of that company may wish to disclose a prospective, non-GAAP financial measure called "Net income excluding gains/losses on investment securities" to convey expected net income without having to project capital market trends. A reconciliation process would require the company to prepare a prospective, GAAP financial measure of Net income, which would have to include management's estimate of future securities gains/losses. We believe that the more meaningful approach would be a narrative description about what is missing from the prospective, non-GAAP financial measure, why management cannot project the missing information and its probable significance.
Should we limit the definition of non-GAAP financial measures to historical financial measures?
No. Any presentation of financial information, whether historical or prospective, should be clearly identified and explained such that a user of the financial information can clearly understand where the information was derived. We believe that a non-GAAP financial measure should not be limited to historical information. While disclosures of forward looking information would be covered by the safe harbor rules, if management determines that such forward looking information is needed to assist the user in understanding the future opportunities or risks, known or estimated, then such non-GAAP financial measures should be clearly reconciled to the related GAAP financial measure and properly explained. Prospective non-GAAP financial measures are currently used to communicate prospective earnings information to investors as unpredictable elements such as divestitures, gain/losses on equity investments or restructuring charges. We are concerned that such information will not be available to investors should a limitation to historical be selected.
The SEC should not restrict one of the main goals of MD&A - - that of allowing the users to view the company through the eyes of management.
We believe that the basic definition of "non-GAAP financial measures" is appropriate. We do not agree with Item 10 proposal which would restrict a registrant from adjusting a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonable likely to recur. If management looks to view an operation on the basis of "core earnings" and therefore wishes to eliminate those items which are not part of their regular business, we believe that it is appropriate that investors are able to obtain this information and be able to assess it. By prohibiting such adjustments, the impact may be a decrease in transparency of such transactions which might include gains/losses on equity securities, gains/losses on sales of brands/product lines, restructuring charges or a large gain/loss due to a strategic alliance transaction. We believe that the reconciliation provides the transparency necessary and that companies must apply consistency in the application of items to non-GAAP measures (i.e. adjust both for gains as well as losses). Rather than having a reconciled and clearly articulated view of management, investors might have to "hunt" through the MD&A for such information and do such a reconciliation themselves.
No. The public disclosure of non-GAAP financial measures, whether communicated orally or in writing, should be included under the guidelines established through proposed Regulation G. The disclosure of this information falls under the guidelines of Regulation FD and therefore would be consistent with the terms of the Sarbanes-Oxley Act. However, we strongly recommend the SEC clarify what constitutes an oral disclosure of financial information or provide specific examples of what level of oral communication is subject to Regulation G.
For example, does a conference call with analysts or similar presentation subject a registrant to Regulation G if non-GAAP financial measures discussed are unrelated to an earnings release or similar announcement?
No. We believe that the current format of audit opinions are quite clear as to what they cover (financial statements and accompanying notes) and, by difference, what they do not.
Non-GAAP financial measures, as defined in the proposed rule, can be presented in various formats: those currently subject to SEC filing requirements (e.g. Forms 10-K, 10-Q, etc.) and those that are not (e.g. analysts' presentations, Form 8-K, etc.). If every non-GAAP measure were required to be specifically labeled "un-audited," the SEC may actually succeed in impugning the integrity of the company's management and undermining its discussion and analysis of results and prospects - - to the detriment of overall investor confidence.
Further, we are concerned that an independent auditor would not have enough time to complete the additional procedures that would be necessary in order for an opinion, or other statement of approval, to be rendered. This level of involvement, whenever a company publicly discloses or releases any material information that includes a non-GAAP financial measure, does not appear practicable nor would the cost of such involvement be justifiable.
We also believe, and have expressed this concern previously, that there continues to be an expectation gap between what users perceives an "audit" or a "review" is and the procedures an auditor may actually be able to apply. As such, auditor involvement in non-GAAP financial measures may actually give users a false sense of comfort as they could be lead to believe that no other reasonably likely non-GAAP financial measure(s) exist other than those stated. Finally, we note that auditor involvement would be limited to historical measures, which could prove confusing.
Yes. We believe that requiring a discussion of the purpose for why the non-GAAP financial measure is presented and what the information purports to represent is appropriate and prudent. While the majority of non-GAAP financial measurements (e.g. EBITDA, etc.) will be clearly explained through the components of the reconciliation, such additional disclosure will provide the user with management's rationale as to the relevance and importance of such information.
Yes, for oral, telephonic, web cast, broadcast or similar communications. We agree with the Commission that in such cases, the registrant should be required to disclose the location and availability of the required accompanying information during its presentation.
For written communications, the disclosure of non-GAAP financial measures and the related reconciliation should be required to be incorporated into the document through which the presentation is provided.
Yes. We believe that requiring a discussion of the purpose for why the non-GAAP financial measure is presented and what the information purports to represent is appropriate and prudent. While the majority of non-GAAP financial measurements (e.g. EBITDA, etc.) will be clearly explained through the components of the reconciliation, such additional disclosure will provide the users with management's rationale as to the relevance and importance of such information.
No. We strongly believe that there should be no restrictions on the type of non-GAAP financial measures used and disclosed. Management is responsible for the preparation and fair presentation of financial information disclosed to the public. Accordingly, if management determines that such information is needed to assist the user in understanding the present operating results, financial condition or future opportunities or risks, known or estimated, then restricting the content of such information could inadvertently prevent users from obtaining valuable insight into management's perspective on the results of operations or financial condition of the company.
We agree strongly with the sentiments expressed in FR-59, Cautionary Advice Regarding the Use of "Pro Forma" Financial Information in Earnings Releases. "Pro forma financial information can serve useful purposes. Public companies may quite appropriately wish to focus investors' attention on critical components of quarterly or annual financial results in order to provide a meaningful comparison to results for the same period of prior years or to emphasize the results of core operations. To a large extent, this has been the intended function of disclosures in a company's Management's Discussion and Analysis section of its reports. There is no prohibition preventing public companies from publishing interpretations of their results, or publishing summaries of GAAP financial statements. Moreover, as part of our commitment to improve the quality, timeliness, and accessibility of publicly available financial information, we believe that - with appropriate disclosures about their limitations - accurate interpretations of results and summaries of GAAP financial statements taken as a whole can be quite useful to investors."
We agree that, in certain situations, significant latitude has been taken in the disclosure of non-GAAP financial measures. However, we believe that when the presentation of non-GAAP financial measures are clearly reconciled and discussed such that a user of the financial information can understand where the information was derived and the purpose of its presentation that this represents good disclosure as it allows the user to look through the eyes of management. Furthermore, we remain concerned about limitations placed on management's ability to communicate prospective information in terms of a non-GAAP earnings per share measure along with the historical non GAAP earnings per share. To discount such a measure, fails to give credit to a company's capital structure and the potential impact of stock repurchase programs or other contemplated changes in capital structure. Moreover, we are aware that many of the analysts which cover Pfizer utilize such measures in their consensus earnings projections. If management is unable to communicate its prospective view of a non-GAAP earnings per share measure and its historical progress on such a basis, we believe that it will be to the detriment of investors rather than to their benefit. Investors should be permitted to assess and evaluate such information and make their own decisions as to whether they agree with the non-GAAP measure.
As currently presented, it will not limit the use of a non-GAAP measure in press releases, but will limit non-GAAP earnings per share measures. The use of non-GAAP financial measures, when properly applied, provides users with valuable insight into management's perspective of certain components of a company's performance, either historical or prospective. We believe that the basic requirement of proposed Regulation G to reconcile and discuss the nature and purpose of non-GAAP financial measures will force management to present non-GAAP financial measures that are reasonable and meaningful adjustments to the related GAAP financial measures. The requirements in proposed Regulation G should therefore limit the use of improper and misleading non-GAAP financial measures.
We believe that post transaction measures and other measures filed as information under the business combination rules should be exempted from Regulation G as the required disclosures are currently covered by Article 11 and Items 301 and 303 of S-K. In addition, Regulation G should apply to the disclosure of information regarding potential benefits to be achieved through a business combination when the information contains non-GAAP financial measures.
We believe that Regulation G should be enforceable by the Commission only and that explicit language as to how it is to be enforced should be provided.
We believe that the proposed Regulation G meets the goals of Section 401(b) of the Sarbanes-Oxley Act. We believe that the required disclosures under Regulation G should mirror those of proposed Item 10 of Regulation S-K to reconcile and discuss the nature and purpose of non-GAAP financial measures. This will consistently force management to present non-GAAP financial measures that are reasonable and meaningful adjustments to the related GAAP financial measures.
Finally, we strongly believe that there should be no restriction on the type of non-GAAP financial measures disclosed. When the presentation of non-GAAP financial measures are clearly reconciled and discussed such that a user of the financial information can understand where the information was derived and the purpose of its presentation that this represents good disclosure as it allows the user to look through the eyes of management.
Questions Regarding Proposed Amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F
We strongly believe that prohibiting the use of non-GAAP per-share measures would be unresponsive to the wants and needs of users. We observe that preparers, investors and analysts all make frequent use of non-GAAP per-share measures. To exclude this single element of a presentation restricts management's communication with its shareholders; ignores impacts on capital structure such as stock repurchase programs; forces investors and analysts to perform the calculations themselves (increasing the chance for error and misinterpretation); and ignores the fundamental realities of capital market analyses. An arbitrary prohibition could undermine investor confidence.
A striking example of the benefit to investors of non-GAAP per-share measures is illuminated in the December 12, 2002 edition of The Wall Street Journal, reporting on a company who may be restating its financial reports. In discussing certain transactions supposedly utilized by that company to meet earnings estimates The Wall Street Journal reported that assets sales were being initiated to increase operating profits rather than being flagged as one-time gains. The Wall Street Journal further reported, "Such moves added a penny or two to per-share earnings quarter after quarter...and thus made the business appear healthier than it actually was." The Wall Street Journal is communicating with investors in the language they most readily understand - - that of earnings per-share. As such, we believe that readers of financial statements would want these and other types of one-time gains or losses carved-out of the results of operations and reflected in per-share amounts to better understand a company's core earnings.
The SEC should recognize that users would be protected through the application of the proposed guidelines. For example, in applying the proposed requirements, the presentation of non-GAAP per-share financial measures would require management to provide a reconciliation of the non-GAAP per-share financial measure to the related GAAP per-share measure (both the numerator and denominator components). As the information will be clearly explained; the reconciling items fully disclosed; and, as required, presented in a manner that is not given more prominence than the GAAP information, we continue to believe that it would be appropriate and helpful to the user to provide the non-GAAP per- share financial measure.
We observe also that the earnings press release guidelines jointly developed by the Financial Executives International (FEI) and the National Investor Relations Institute (NIRI) specify a plain English disclosure of how the announced results deviate from GAAP, as well as the amounts of those deviations. We believe that these guidelines reflected a practical approach that didn't deny the wants and needs of investors.
No. The presentation of non-GAAP financial measures in filings should be left to the discretion of management. In practice, the disclosure of non-GAAP financial measures typically coincides with the disclosure of the related GAAP measures. The proposed requirements to provide a quantitative reconciliation and related statements disclosing the purpose and reasons for the presentation of non-GAAP financial measures will provide consistent guidance for the disclosure of such information. Requiring non-GAAP financial measures and the related proposed disclosures in a separate section could prove cumbersome and cause users to focus, solely and unnecessarily, on the information in the section, rather than in the context which it is meant - a view of the business through the eyes of management.
The presentation, reconciliation and related statements regarding the purpose and intention of non-GAAP financial measures should be disclosed in all instances where such information is provided. We believe that a consistent requirement applicable to all methods of communication, whether filed with the SEC or not, should be applied. This will provide users with a clear understanding of the importance and relevance of both the GAAP and the non-GAAP financial measures and provide management with clear and concise requirements when such information is disclosed.
Yes. See comments above.
No. We believe that the proposed disclosures are sufficient and no additional disclosures should be required in filings.
No. While we agree with prohibiting the presentation of a non-GAAP financial measure in a manner that would give it greater authority or prominence than the comparable GAAP financial measure(s), we strongly disagree with prohibiting specific disclosures as this could restrict management's ability to provide information it considers necessary for the user to understand the respective company's results. We believe that, when presented appropriately, non-GAAP financial measures provide investors with an opportunity to look through the eyes of management.
We note that Item 303 of Regulation S-K identifies a basic and overriding requirement of MD&A: to "provide such other information that the registrant believes to be necessary to an understanding of it financial condition and results of operations." We do not believe that prohibitions of certain measures are consistent with the philosophy of Item 303. Further, we understand that in the past, the Commission has said that the MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long term analysis of the business of the company.
Specifically, we disagree with prohibiting the presentation of 1) charges or liabilities that required, or will require, cash settlement or would have required cash settlement absent an ability to settle in another manner, from non-GAAP liquidity measures, 2) adjusting a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur, 3) presenting non-GAAP financial measures on the face of the registrant's financial statements prepared in accordance with GAAP or in the accompanying notes and 4) a non-GAAP per-share measure.
We again emphasize that management is responsible for the fair presentation of its financial information. And, we note past success in permitting a blend of GAAP and non-GAAP measures. For example, the SFAS 131, Disclosures about Segments of an Enterprise and Related Information, requires disclosure, in the notes to the financial statements, a reportable segment's profit or loss presented on a management basis. By definition, this basis of presentation does not have to conform to GAAP. We have not observed situations where investors have been harmed by this non-GAAP information. On the contrary, we believe that investors have benefited greatly from these disclosures, which include a reconciliation to GAAP. We believe that SFAS 131 is a testament to the advantages of management being permitted to convey both GAAP and non-GAAP measures that it deems appropriate - - as long as the information is presented in a balances and explanatory manner.
We also observe that including non-GAAP financial measures in the financial statements and footnotes will encounter natural, external force - - the audit opinion. Many non-GAAP financial measures may not be easily subject to audit, and will naturally find there way out of the primary financial statements.
In applying the proposed requirements, the presentation of non-GAAP measures would require management to provide a reconciliation of the non-GAAP measure to the related GAAP measure. As the information will be clearly explained, the reconciling items fully disclosed and the information will not be given more prominence than the GAAP measure, we to believe that it would be not appropriate or helpful to the user in understanding the respective business to prohibit the presentation of non-GAAP financial measures.
However, we agree with prohibiting the presentation of non-GAAP financial measures on the face of the primary financial statements.
We believe that post transaction measures and other measures filed as information under the business combination rules should be exempted from Regulation G as the required disclosures are currently covered by Article 11 and Items 301 and 303 of S-K. In addition, Regulation G should apply to the disclosure of information regarding potential benefits to be achieved through a business combination when the information contains non-GAAP financial measures, however, these types of disclosures would not be required to be filed as information under the business combination rules.
We believe that the disclosure of a non-GAAP measure would require the subsequent disclosure of the non-GAAP measure or until there is a change in the way that management views the business. Presenting the same non-GAAP measures will provide the user with a consistent basis from which to evaluate the results as viewed by management. However, we must be mindful that the business environment is quite dynamic and therefore such a non-GAAP measure may change from time to time and we would anticipate companies reporting only on the current non-GAAP measure rather than trying to put in too many uncomparative measures for each year. We believe that such a change must be highlighted in the MD&A along with a discussion of why the new measure is preferable.
Proposed New Item 1.04 of Form 8-K
Yes. Proposed Item 1.04 is necessary as it formalizes the disclosure of public announcements of material non-public information.
Yes, a formal definition of the phrase "public disclosure" would reduce misinterpretation for management. We recommend that public disclosure be defined as, "disclosure of information to third parties either orally, telephonically, by web cast, broadcast, or similar means."
No, the disclosure of material updates to estimates for current or future periods are already covered by Regulation FD and, therefore, any guidance provided by management would be required to be publicly disclosed. The method of disclosure of such information typically is by press release, which is appropriate for estimates of future financial results. Requiring the disclosure of preliminary information to be disclosed in Form 8-K would reduce the level of communication of such information by management.
The requirements proposed by Item 1.04 will not reduce the extent to which public companies disclosure information regarding completed fiscal periods. The expectations of investors and analysts for information on completed fiscal periods are understood by companies' management and, under Regulation FD, the disclosure of such information has been provided on a consistent basis. However, we believe that prohibiting the use of certain non-GAAP measures in earnings releases would limit the nature and usefulness of such disclosures. Providing investors and analysts a more detailed understanding of the results of a completed fiscal period, as viewed by management, provides valuable and needed insight of a company's performance. We believe that the requirements in proposed Regulation G, when applied to earnings releases, will limit the use of improper and misleading non-GAAP financial measures.
We believe that requiring the earnings releases or public announcements relating to completed fiscal periods to be filed on Form 8-K would not cause an unnecessary burden on companies.
The posting of complimentary information on a company's website is sufficient disclosure and in accordance with Regulation FD. Requiring such information to be filed on Form 8-K would elevate this level of information to greater prominence that otherwise intended by companies' management.
The requirement to provide information covered under Regulation G be available on a website at the time of communication is sufficient. The information provided subject to Item 1.04 would already be available, presumably on a website or by other means, pursuant to Regulation FD. Allowing management two days to file the information subject to Item 1.04 is a reasonable timeframe to draft, review and file Form 8-K.
Forward looking information, which can include both quantitative and qualitative information, is currently covered by the safe harbor rules. This information is provided by management to provide the user insight as to potential issues, both positive and negative, affecting the company. The information is management's best interpretation of such issues at the time the information is provided. By requiring such information to be incorporated by reference into a registration statement, proxy statement or other report, management is being asked to prognosticate and may potentially be held accountable for normal changes in facts and circumstances. This would potentially expose management to a higher level liability and result in disclosing less information about its expectations.
Yes, a consistent presentation of non-GAAP financial measures in all public disclosures, whether filed with the Commission or not, will strengthen the usefulness of such information.
No, the disclosure of intra-period information would be subject to Regulation FD and if non-GAAP financial measures are provided in such disclosures, Regulation G. As previously stated, the expectations of investors and analysts for information on completed fiscal periods is understood by companies' management such information has been consistently provided.
Costs and Benefits