A recent SEC comment letter contained an exchange in which the Staff, in connection with a 10-K review, reminded the registrant to give equal prominence to the comparable margins computed on a GAAP basis wherever EBITDA margin and adjusted EBITDA margin were disclosed.
As a reminder, in the SEC’s Adopting Release titled “Conditions for Use of Non-GAAP Financial Measures” (Release No. 33-8176), the SEC states, “An example of a ratio that would not be a non-GAAP financial measure would be a measure of operating margin that is calculated by dividing revenues into operating income, where both revenue and operating income are calculated in accordance with GAAP. Conversely, an example of a ratio that would be a non-GAAP financial measure would be a measure of operating margin that is calculated by dividing revenues into operating income, where either revenue or operating income, or both, were not calculated in accordance with GAAP.”
This comment exchange, which is repeated below for reference, is a helpful reminder to our blog readership that non-GAAP continues to a focus of the Staff and that a margin number which is itself derived from one or more adjusted numbers will itself be a non-GAAP financial measure in many cases.
Form 10-K for the year ended December 31, 2019
Management’s Discussion and Analysis of Financial Condition and Results of Operations
EBITDA GAAP Reconciliations, page 24
- On page 26 you disclose margins for “EBITDA” and “adjusted EBITDA.” Please present with equal or greater prominence the comparable margins computed on a GAAP basis wherever these non-GAAP margins are presented. Refer to Item 10(e)(1)(i)(A) of Regulation S-K and Question 102.10 of the staff’s Compliance and Disclosure Interpretations “Non-GAAP Financial Measures.”
The Company acknowledges the Staff’s comment and will provide the requested disclosures in future filings. Specifically, the Company will present net income margin with equal or greater prominence to adjusted EBITDA margin in our reconciliation from net income to adjusted EBITDA. Further, we will disclose, with equal or greater prominence, a discussion and analysis of net income margin along with such discussion and analysis of adjusted EBITDA margin. Separately, we will no longer provide EBITDA margin in our future filings, as we believe adjusted EBITDA margin is the non-GAAP measure that is more relevant to investors. EBITDA, as a subtotal, will continue to be presented in our reconciliation from net income to adjusted EBITDA.
It can be deciphered that non-GAAP continues to be a significant focus area because there were no other comments issued to the registrant in connection with the Staff’s review of the registrant’s 10-K financial statements and related disclosures (i.e., accounting review). In other words, while the accounting staff reviewed all the financial statements and related footnotes, this was the Staff’s ONLY comment. (You can tell the review was limited to the financial statements and related disclosures because the first sentence to the initial letter says, “We have limited our review of your filing to the financial statements and related disclosures and have the following comments.”)
Non-GAAP comments can be considered “low-hanging fruit” that are, generally speaking, fairly easy to spot by the Staff given their expertise on the subject and frequent comment. (Another recent example is comment number one in this recent comment exchange where the Staff noted equal prominence and reconciliation issues involving adjusted segment EBIT disclosures in the registrant’s earnings release.) We are also aware of registrants receiving demand letters from plaintiffs firms in connection with alleged non-GAAP compliance matters.
Therefore, if you haven’t had your disclosures vetted for non-GAAP issues lately by experienced SEC counsel, now may be an opportune time.
If you have any questions regarding any of the topics covered in this blog post, please feel free to contact a member of our Corporate & Securities practice group or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.