A recently released SEC comment letter provides issuers additional insight into the views of the staff of the Division of Corporation Finance on the use of certain non-GAAP financial measures. The comment letter, issued in July 2016, questioned whether certain of the issuer’s non-GAAP financial measures included in its Form 10-K complied with the relevant rules and recent guidance.

  • Recurring Nature of Adjustment. Noting that the company excluded certain non-recurring items in caluclating Adjusted EBITDA, the staff requested information on the nature of those items and the basis for excluding them. The staff noted that Item 10(e) of Regulation S-K does not permit issuers to adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring or unusual when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. In its response, the issuer explained that while some of the non-recurring items had occurred in the prior two years, it did not believe that such items were reasonably likely to recur within the next two years and, as such, such items should be treated as non-recurring.
  • Characterization of Performance v Liquidity Metric. In a second comment, the staff asked whether the non-GAAP financial measure “Cash Available for Distribution” was a liquidity measure, in which case Item 10(e) would prohibit exclusion of cash settled charges or liabilities. In its response, the issuer stated that it used the measure “Cash Available for Distribution” as a performance measure, not a liquidity measure, and it was therefore not subject to the prohibition against excluding charges or liabilities that require cash settlement.

The issuer successfully addressed the SEC’s comments without having to change its disclosures.