Following up on our prior blog post regarding 2020 first quarter COVID-19 adjustments in connection with the presentation of non-GAAP financial measures, we surveyed 102 S&P 500 companies who presented Adjusted EBITDA in their earnings release filed from October 1, 2020, to December 31, 2020.

We focused on Adjusted EBITDA in this survey (recognizing that such measure is utilized more frequently in some industries than others) because such measure is commonly utilized by public companies to measure their operational performance and frequently includes adjustments for items that are believed not to reflect the ongoing operational performance of the company.  While we limited our survey to S&P 500 companies that presented Adjusted EBITDA, we believe that the survey results have relevance for companies that present other types of non-GAAP performance measures that are adjusted for special items or items outside of the ordinary course of business.

Survey Results

Of the surveyed companies, 16 companies, or approximately 16%, included an adjustment in their calculation of Adjusted EBITDA related in some form to the COVID-19 pandemic, and 84% did not. The companies that included a COVID-19 adjustment in their Adjusted EBITDA calculation span across various industries, including, but not limited to, oil & gas, real estate, telecom services, lodging/hotel, and medical/scientific instruments.

Notably, 63% of the 16 companies that included COVID-19-related adjustments in their calculation of Adjusted EBITDA opted to use a “COVID-19-related charges” line item without further specifying what these costs entailed. Conversely, 37% of the companies that included COVID-19-related adjustments in their calculation of Adjusted EBITDA, whether they introduced a new COVID-19 expense category or modified an existing category to include COVID-19 costs, included an enhanced explanation of the COVID-19-related costs (usually by adding an explanatory footnote that disclosed the nature of these costs). Among the S&P 500 companies that explained the nature of the COVID-19 adjustment, see below for a sampling of the COVID-19-related adjustments that were highlighted:

• Enhanced employee compensation and benefits arising from the COVID-19 pandemic (for example, special COVID-19 bonus for the operational workforce).
• Costs related to workforce optimization efforts as part of cost containment efforts.
• Costs related to sanitizing/disinfecting facilities.
• Costs related to personal protective equipment.
• COVID-19-related charges.
• COVID-19-related restructuring costs.

(When considering how to describe and quantify a COVID-19 adjustment, we are reminded of the prior blog we issued on this topic where the SEC Staff issued a comment letter to the registrant asking it for more information concerning its adjustment titled “COVID-19 shelf in place restrictions on manufacturing activities.”)

Takeaways for Public Companies

Taking into account the fourth quarter non-GAAP disclosure practices summarized above and our prior survey of first quarter non-GAAP disclosure practices, it appears that most public companies are not making COVID-19-related adjustments in their calculation of non-GAAP financial measures.  However, even though it has not become common practice for public companies to include COVID-19 adjustments in connection with the calculation of their non-GAAP financial measures, public companies will want to give continued consideration with respect to how they highlight the impact of COVID-19 on their results, which may involve providing disclosure about the quantitative impact of COVID-19 (for example, by disclosing the estimated expense impact of COVID-19 in any particular period) and/or a more qualitative discussion of COVID-19 impacts.

In addition, when the first impact of COVID-19 laps in the reporting cycle (which may be the case for some companies in connection with a first quarter 2021 vs. first quarter 2020 comparison), companies that have been materially impacted from COVID-19 will need to consider whether and how to give a meaningful comparison in its earnings package to the prior-year period, or whether supplemental disclosure would be meaningful to investors to compare results. For example, some companies may choose to provide a comparison against the comparable period two years ago when COVID-19 did not have any impact.

If you have questions about the issues discussed above, please email the authors directly, or if applicable, contact your primary Bass, Berry & Sims relationship attorney in our corporate and securities practice.

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