Disclosure of Non-GAAP Financial Measures: Recent SEC Comments and Enforcement Actions

The SEC has provided guidance regarding the appropriate use and presentation of non-GAAP financial measures and is actively reviewing and enforcing the rules regarding the same. Failure to comply with the rules regarding non-GAAP disclosures may result in fines, civil penalties and potentially criminal penalties. The rules and guidance for the appropriate use of non-GAAP financial measures are set forth in Regulation G (Reg. G), Item 10(e) of Regulation S-K (Item 10(e)), and the SEC Division of Corporation Finance’s Compliance and Disclosure Interpretations (C&DIs) with respect to non-GAAP financial measures. The applicability of the rules regarding non-GAAP financial measures will also depend on where such measures are presented (e.g., in an earnings release, investor presentation or other public disclosure, or in an SEC filing, such as an issuer’s annual report on Form 10-K or quarterly report on Form 10-Q.)

Regulation G and Item 10(e)
Reg. G governs public disclosures that contain non-GAAP financial measures, including investor presentations and press releases of any company that has a class of securities registered under the Securities and Exchange Act of 1934 (Exchange Act) or is required to file reports pursuant to the Exchange Act. Item 10(e) regulates all filings with the SEC under the Exchange Act or the Securities Act of 1933 (Securities Act), including annual reports on Forms 10-K and 20-F, quarterly reports on Form 10-Q, filed (not furnished) current reports on Form 8-K, and Securities Act registration statements (e.g., Forms S-1, S-3, S-4, F-1, F-3, and F-4).

When an Exchange Act registrant publicly discloses non-GAAP financial measures, Reg. G requires that the company:

• present the most directly comparable GAAP financial measure (e.g., disclose GAAP net income if disclosing non-GAAP adjusted EBITDA); and
• reconcile any differences between the non-GAAP financial measure and the most directly comparable GAAP financial measure (e.g., tabular disclosure stepping through each of the adjustments to GAAP net income to calculate non-GAAP adjusted EBITDA).

In addition, Reg. G prohibits disclosure of non-GAAP financials measures that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, includes a false statement of material fact or excludes essential material information such that the presentation of the non-GAAP financial measure is misleading.

Reg. G will not apply to a foreign private issuer’s (FPI) non-GAAP disclosure if each of the following criteria is met:

• the FPI’s securities are listed on a foreign securities exchange or inter-dealer quotation system outside the United States;
• the non-GAAP financial measure disclosed is not derived from a U.S. GAAP measure;
• the disclosure is made by or on behalf of the FPI outside of the United States; and
• the disclosure is included in written communications released by or on behalf of the company only outside the United States.

When a company discloses a non-GAAP financial measure in a Securities Act or Exchange Act filing, Item 10(e) requires that the company:

• disclose the most directly comparable GAAP measure with equal or greater prominence than the non-GAAP financial measure (e.g., discuss net income before, and in at least the same font and size as, non-GAAP adjusted EBITDA);
• provide a quantitative reconciliation between the non-GAAP and GAAP measures to explain the adjustments made (e.g., tabular disclosure stepping through each of the adjustments to GAAP net income to calculate non-GAAP adjusted EBITDA);
• disclose why management believes the non-GAAP financial measure is useful to investors; and
• to the extent material, disclose the additional purposes, if any, for which management uses the non-GAAP financial measure (e.g., that management uses non-GAAP adjusted EBITDA to measure management’s performance for evaluating the company’s core financial performance and/or for compensation purposes).

Item 10(e) prohibits companies from engaging in the following practices in their presentation of non-GAAP financial measures in their Securities Act and Exchange Act filings:

• excluding cash charges or liabilities from non-GAAP liquidity measures (except for earnings before interest and tax (EBIT) and EBITDA);
• adjusting a non-GAAP performance measure to eliminate or smooth items noted as non-recurring, infrequent or unusual (or labeling it as “infrequent,” “non-recurring” or any similar phrase) if there has been a similar charge or gain within the prior two years or where such item is reasonably likely to recur within two years (e.g., excluding a charge for legal costs from non-GAAP adjusted EBITDA when such legal costs are likely to recur within two years);
• using titles or descriptions of non-GAAP financial measures that are the same as, or may be easily confused with, titles or descriptions for GAAP financial measures (e.g., referring to a non-GAAP financial measure as “operating income” or “operating earnings” even if such title is commonly used in the company’s industry; “adjusted operating earnings” or “non-GAAP operating earnings” are preferable titles); and
• presenting non-GAAP financial measures on the face of the company’s GAAP financial statements or in the accompanying notes, or on the face of any pro forma financial information required to be disclosed by Article 11 of Regulation S-X.

While an FPI must still comply with the non-GAAP disclosure requirements in Item 10(e) for its annual report on Form 20-F and registration statements, an FPI may disclose an otherwise prohibited non-GAAP financial measures in filings with the SEC if the measure is: (1) required by the FPI’s home-country law, and (2) included in the FPI’s home-country annual report or financial statements.

In addition, the C&DIs describe other exceptions, including:

• financial measures used in forecasts provided to a financial advisor (as well as a company board or committee) for the purpose of rendering an opinion that is materially related to a business combination transaction, and which are required to be included in an Exchange Act or Securities Act filing, are not deemed non-GAAP financial measures;
• financial measures used in forecasts that are exchanged between the parties in a business combination transaction, if the forecasts are material and that disclosure of such forecasts in an Exchange Act or Securities Act filing is required to comply with the anti-fraud and other liability provisions of the federal securities laws, are not deemed non-GAAP financial measures; and
• non-GAAP financial measures disclosed in communications subject to Securities Act Rule 425 and Exchange Act Rules 14a-12, 14d-2(b)(2), and 14d-9(a)(2) are exempt from Reg. G and Item 10(e).

Summary of Requirements (PDF)

Recent SEC Enforcement Actions

DXC
On March 12, 2019, the SEC issued a comment letter to DXC Technology Company (DXC) questioning its exclusion of amortization of acquired intangible assets from its non-GAAP income from continuing operations, non-GAAP net income and non-GAAP earnings per share measures in its Form 10-Q for its fourth fiscal quarter (Q4) of 2018. In its disclosure of these non-GAAP financial measures, DXC removed certain amortized amounts for intangible assets while still including the revenue associated with these intangible assets. The SEC took the position that this resulted in operating result inconsistencies.

On March 14, 2023, the SEC charged DXC with providing materially misleading statements regarding its non-GAAP financial performance measures from Q4 2018 to Q3 2020. Specifically, the SEC alleged that DXC artificially inflated certain of its reported non-GAAP financial measures by impermissibly classifying certain expenses as non-GAAP adjustments related to transaction activity, with such misclassifications resulting in the overstatement of non-GAAP net income by at least $29 million, $30 million and $24 million in Q2 2019, Q4 2019 and Q1 2020, respectively. The SEC also alleged that DXC did not have an adequate review process for classifying such expenses and that it repeatedly ignored warnings from DXC’s former assistant controller regarding the accounting for such costs.

Newell
On September 29, 2023, the SEC charged Newell Brands Inc. (Newell) and its former CEO with misleading investors regarding Newell’s non-GAAP core sales growth, which Newell used to explain underlying sales trends. The SEC alleged, among other matters, that with respect to disclosure of non-GAAP core sales from Q3 2016 to Q2 2017, Newell impermissibly pulled sales forward from future quarters, improperly reduced accruals for customer promotions, and impermissibly reclassified consideration payable to customers without disclosure and in violation of GAAP, and that internal accounting controls were overridden.

The SEC charged each of DXC and Newell with various violations of federal securities laws, including:

• Rule 100(b) of Reg G, which prohibits a registrant from making an untrue statement of material fact or an omission of a material fact in a public non-GAAP financial measure such that it is misleading;
• Section 17(a)(2) of the Securities Act, which prohibits the offer or sale of securities by means of untrue or misleading statements;
• Section 17(a)(3) of the Securities Act, which prohibits fraud or deceit upon the purchaser of securities;
• Section 13(a) of the Exchange Act and various rules thereunder, which prohibit misleading statements in periodic reports to the SEC; and
• Exchange Act Rule 13a-15(a), which mandates that every issuer maintain disclosure controls and procedures.

DXC and Newell agreed to pay civil penalties of $8 million and $12.5 million, respectively, without admitting or denying the findings. The former CEO of Newell was also fined $110,000 in connection with alleged violations of federal securities laws related to the Newell investigation.

Recent SEC Comment Letters
Summarized below are recent SEC comment letters relating to U.S. public company disclosures of non-GAAP financial measures. In general, the SEC’s recent comment letters focused on either (1) specific adjustments in the non-GAAP financial measures, or (2) the failure to appropriately identify non-GAAP financial measures or provide the appropriate Reg. G or Item 10(e) required disclosure.

Challenges to Adjustments of Non-GAAP Financial Measures

Madison Square Garden Entertainment Corp. (MSG)
On March 12, 2024, the SEC issued a comment letter to MSG questioning whether, in calculating adjusted non-GAAP adjusted operating income, MSG’s removal of non-cash arena license fees was an attempt to substitute individually tailored measurement methods for GAAP. MSG agreed to revise its disclosure in subsequent periodic reports to include MSG non-cash arena license fees in its non‑GAAP adjusted operating income disclosure.

Commercial Metals Company (Commercial Metals)
On February 29, 2024, the SEC issued a comment letter to Commercial Metals challenging its adjustment to non-GAAP core EBITDA, non-GAAP net sales and non-GAAP core EBITDA margin for “mill operational commissioning costs” in its earnings release. Commercial Metals initially argued that these costs were not related to the Commercial Metals’ normal operating expenses for its existing mills and were instead related to specific transformative and unique testing and similar costs. The SEC took the position that the expenses constituted routine operating expenses and Commercial Metals subsequently agreed to exclude such adjustments in its non-GAAP financial measures in future filings and earnings releases.

RingCentral, Inc. (RingCentral)
On April 16, 2024, the SEC issued a comment letter to RingCentral noting that a cash adjustment for net cash paid for interest and restructuring and other payments to non-GAAP adjusted, unlevered free cash flow in Ring Central’s annual report was a violation of the prohibition in Item 10(e) on excluding charges that require cash settlement from a non-GAAP liquidity measure. RingCentral agreed to remove the adjustment in its future filings.

Failure to Properly Identify Non-GAAP Financial Measures

Lamb Weston Holdings, Inc. (Lamb Weston)
On March 13, 2024, the SEC issued a comment letter to Lamb Weston challenging what it viewed as Lamb Weston’s: (1) improper labeling of certain non-GAAP financial measures; and (2) inappropriate reconciliation of segment adjusted EBITDA. Lamb Weston ultimately agreed to, among other matters, properly label all subsequent disclosures of non-GAAP financial measures and provide appropriate reconciliations to the most comparable GAAP measures.

Accenture PLC (Accenture)
On March 5, 2024, the SEC issued a comment letter questioning Accenture’s failure to: (1) appropriately label as non-GAAP financial measures various disclosures of effective tax rate and diluted EPS, excluding business optimizations costs and investment gain, in its annual report; and (2) include appropriate line-item detail in its non-GAAP reconciliations. Accenture subsequently agreed to the SEC’s requested revisions regarding the labeling of its non-GAAP financial measures and line-item reconciliations.

Tips and Best Practices
In light of the SEC’s ongoing focus on compliance with Reg. G and Item 10(e), we recommend that companies:

• carefully analyze adjustments to confirm such adjustments are in fact both unusual and non-recurring consistent with SEC rules and guidance;
• develop and closely follow a non-GAAP policy that includes adequate disclosure controls and procedures that minimize or eliminate subjectivity, and carefully document the amounts and basis for any adjustments;
• be aware that the SEC may challenge the appropriateness of reconciliation for segment-based non-GAAP financial measures, and analyze if it has a reasonable basis upon which to defend any segment-based reconciliations;
• detail all necessary adjustments, including separate line-item adjustments, and confirm such adjustments are consistently measured from period to period; and
• review the robustness of their existing non-GAAP policies, disclosures and controls to enable them to respond appropriately to any SEC inquiry or investigation with respect to their compliance with SEC rules and guidance regarding the use of non-GAAP financial measures.