The Securities Exchange Commission (SEC) recently issued interpretive guidance, effective February 25, 2020, regarding the disclosure of key performance indicators and metrics (KPIs) in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

While this guidance may not have been an area of significant focus for many companies in the recent periodic reporting cycle given that the effective date of this guidance was after the time that many calendar-year public companies filed their Annual Reports on Form 10-K, this guidance will need to be considered in connection with the preparation of upcoming Quarterly Reports on Form 10-Q.

Overview of the Staff’s Recent Guidance Regarding KPIs in MD&As

The MD&A is generally required to contain discussion of a company’s financial condition, changes in financial condition, and results of operations. Also, according to Item 303(a) of Regulation S-K, the MD&A is also required to contain discussion of information not specifically referenced in the item that the company believes is necessary to an understanding of its financial condition, changes in financial condition, and results of operations. Instruction 1 to Item 303(a) also provides that the MD&A should include a discussion and analysis of other statistical data that in the company’s judgment enhances a reader’s understanding of MD&A.

Given that one of the primary goals of the MD&A is to allow investors to view the company “through the eyes of management,” the SEC has previously emphasized that companies should “identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.”

The guidance explains that financial measures often comprise the principal variables through which management evaluates a company’s performance or status but often tell only part of the story. Thus, companies should consider whether other KPIs, such as operational metrics, would be material to investors and therefore required to be disclosed in the MD&A.

The guidance includes a non-exhaustive/illustrative list of metrics that may be considered KPIs, including the following:

  • Operating margin.
  • Same-store sales.
  • Sales per square foot.
  • Total customers/subscribers.
  • Average revenue per user.
  • Daily/monthly active users/usage.
  • Active customers.
  • Net customer additions.
  • Total impressions.
  • Number of memberships.
  • Traffic growth.
  • Comparable customer transactions increase.
  • Voluntary and/or involuntary employee turnover rate.
  • Percentage breakdown of the workforce (e.g., active workforce covered under collective bargaining agreements).
  • Total energy consumed.
  • Data security measures (e.g., number of data breaches or number of account holders affected by data breaches).

The guidance indicates that KPIs may be, but are not always non-GAAP financial measures. To the extent that an existing regulatory disclosure framework (GAAP, or for non-GAAP measures, Regulation G or Item 10 of Regulation S-K) does not apply, the SEC generally expects the following disclosure to accompany KPIs:

  • A clear definition of the metric and how it is calculated.
  • A statement indicating the reasons why the metric provides useful information to investors.
  • A statement indicating how management uses the metric in managing or monitoring the performance of the business.

The guidance also states that the company should consider whether there are any estimates or assumptions necessary to understand the metric or its calculation and whether disclosure of such items is necessary for the metric not to be materially misleading.

Additionally, the guidance states that if a company changes the method by which it calculates or presents the metric from one period to another or otherwise, the company should consider the need to disclose the following information, to the extent material:

  • The differences in the way the metric is calculated or presented compared to prior periods.
  • The reasons for such changes.
  • The effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported.
  • Such other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects.

Depending on the significance of the change(s) in methodology and results, the company should consider whether it is necessary to recast prior metrics to conform to the current presentation and place the current disclosure in an appropriate context.

Recent SEC Comment Letter on KPIs

As is customary when new guidance like this is issued, the Staff of the Division of Corporation Finance is incorporating such guidance into its disclosure review program, as revealed by this recent SEC Staff comment letter exchange with News Corporation made public last week. In the letter, the Staff noted that the “Business” section of the company’s Form 10-K described certain key metrics and that management referred to certain KPIs during its quarterly earnings calls, but the Staff questioned why these measures were not discussed in the company’s MD&A.

In response, News Corporation agreed to revise future filings to include disclosure of the KPIs at issue and include comparative period amounts.

The Staff’s comment and the company’s response is provided below. It appears the Staff accepted News Corporation’s response as no follow-up comment letter was issued to the company, and the Staff subsequently concluded its review.

We note that you have added a section titled “Explanatory Note Regarding Certain Key Metrics” on page 18 of the Business Section. We also note that during your quarterly earnings calls you refer to certain key performance indicators. To the extent that measures such as broadcast subscribers, unique users, or broadcast churn, are key performance indicators used in managing your business, please consider revising to include a discussion of the measures in your MD&A section, along with comparative period amounts, or explain why you do not believe this disclosure is necessary. Refer to Section III.B.1 of SEC Release No. 33-8350 and SEC Release 33-10751.

Response: In response to the Staff’s comment, the Company will revise future filings to include the comparative period amounts for broadcast and over-the-top subscribers, broadcast subscriber churn and average revenue per broadcast subscriber in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).” By way of example, using the Company’s Form 10-Q for the fiscal quarter ended December 31, 2019 (the “Q2 2020 Form 10-Q”) as a model, in future filings we intend to include the following disclosure in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Subscription Video Services,” after the table reporting the segment’s results of operations:

            [Table and related footnotes omitted.]

The Company respectfully notes that where changes in these performance indicators have materially affected its results of operations for the reporting period, the Company has historically included a discussion of such changes in MD&A. For example, on page 47 of the Q2 2020 Form 10-Q, the Company disclosed that “The revenue decrease for the three months ended December 31, 2019 was primarily due to lower subscription revenues resulting from lower broadcast subscribers and changes in the subscriber package mix….(italics added).” Similar disclosure was also included for the six months ended December 31, 2019. The Company undertakes in future filings to continue to include such disclosure whenever the impact is material.

The Company respectfully notes that it supplementally discloses various other performance indicators related to its businesses for the convenience of investors and analysts to help them build their own financial models. However, given the breadth and diversity of the Company’s businesses, which include news and information services, subscription video services, book publishing and digital real estate services, and their respective operating models (e.g., advertising versus subscription-based, consumer sales, etc.), management does not consider any of these other performance indicators to be material to the consolidated Company or an understanding of its overall financial condition, changes in financial condition and results of operations and does not use such indicators in managing its business.


Takeaways for Public Companies Regarding the New KPI Guidance

We expect that the new KPI guidance may require some incremental revisions to the MD&A for many public companies, in that (for example) many companies do not currently disclose how measures (properly viewed as KPIs) provide useful information to investors and/or are utilized by management (unless the KPI is also a non-GAAP financial measure, in which case Item 10(e)(1) of Regulation S-K already requires similar disclosures). We do not believe that is necessary to identify metrics as “key performance indicators” (by name) in the MD&A, even if incremental MD&A revisions will need to be made to address this guidance.

Moreover, as evidenced by the News Corporation letter cited above, the Staff is monitoring for disclosure discrepancies where KPIs are discussed in a company’s earnings call or earnings release, but not discussed in the MD&A.

As a result, the financial reporting team and legal advisors of public companies should carefully review the full disclosure package (SEC filings and earnings package materials) to consider what metrics may be KPIs and make any necessary updates in the MD&A of the upcoming Quarterly Report on Form 10-Q or another applicable filing. It may also be helpful as a part of this process to review peer company public disclosures (including earnings releases, investor presentation decks, etc.) to ascertain the disclosure approach of peer companies in this area as well.

If you have questions about this or other issues related to disclosure of KPIs or metrics, please contact any member of our Corporate & Securities Practice for more information.

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