Non-GAAP Financial Measures in SEC Regulations

Use of Non-GAAP Financial Measures in Light of the SEC s Renewed Focus

Recent Guidance by the SEC Recent remarks by the SEC have given a number of warnings about the SEC s renewed focus on non-GAAP measure presentations. This area [of Non-GAAP measures] deserves close attention, both to make sure that [its] current rules are being followed and to ask whether they are sufficiently robust in light of current market practices. SEC Chair Mary Jo White, AICPA national conference, December 2015 For lack of a better way to say it, we are going to crack down The pendulum has swung. Mark Kronforst, Chief Accountant of Division of Corporation Finance, Baruch College Financial Reporting Conference, May 2016 This next quarter will be a great opportunity for companies to self-correct. Mark Kronforst, Chief Accountant of Division of Corporation Finance, PCAOB s Standing Advisory Group Meeting, May 2016 Revised Compliance and Disclosure Interpretations published May 17, 2016

History and Background of Regulation G and 10(e) Sarbanes-Oxley Act signed into law July 2002 SEC adopts new rules for non-GAAP measure disclosures, including Regulation G and Item 10(e) of Regulation S-K Mar. 2003 SEC announces its first enforcement action under Regulation G Nov. 2009 SEC updates C&DIs on disclosures of non-GAAP measures June 2010 SEC updates C&DIs on disclosures of non-GAAP measures May 2016

Penalties and Enforcement Actions Private causes of action: No express private cause of action under Regulation G Could provide basis for claims under Sections 10(b) or 18 or Rule 10b-5 of Exchange Act or Sections 11 or 12 of Securities Act SEC Enforcement Section 3(b) of Sarbanes Oxley provides that a violation of SEC rules is a violation of the Exchange Act Antifraud provisions of Securities Act and Exchange Act Examples SafeNet (2009): Settled for $1MM civil penalty and disgorgement of profits against registrant. Officers settled with additional civil penalties, including fines, barring CFO from acting as an officer or director of a public company for 5 years, and barring CEO, CFO and three internal accountants from acting as accountants before the Commission for various periods Trump Casinos (2002): Brought before Reg G/Item 10(e). Settled with cease and desist violations without admitting or denying the SEC s findings

REGULATION G

What is a Non-GAAP Financial Measure? Reg G defines a non-GAAP financial measure as a numerical measure of past or future financial performance, financial position or cash flows that excludes amounts included in the most directly comparable GAAP measure; or includes amounts excluded from the most directly comparable GAAP measure Also includes all measures that have the effect of depicting either: a performance measure that is different from those in the financial statements; or a liquidity measure that is different from cash flow or cash flow from operations Common non GAAP financial measures: EBIT, EBITDA, Adjusted EBITDA, CAFD, DCF, FCF and FFO a measure of operating income that excludes non recurring items Common examples of items that are NOT non-GAAP financial measures: Same store sales; number of subscribers or employees; segment profit Debt amounts or expected repayments of debt or estimated revenues or expenses of a new product line

Required Disclosure in Regulation G Rule 100(a) of Regulation G generally requires that whenever a registrant, or person acting on its behalf, publicly discloses material information that includes a non-GAAP financial measure, it must be accompanied by the most directly comparable GAAP financial measure and a reconciliation to that GAAP measure. The SEC typically expects: For performance measures, reconciliation to GAAP net income or GAAP income from continuing operations from the income statement For liquidity measures, reconciliation to amounts from the statement of cash flows (cash flows from operating, investing and finance activities) Oral statements can satisfy the Rule 100(a) requirements if the required information is on the registrant s website and the website address is provided in the same presentation

Prohibition on Misleading Measures in Regulation G Rule 100(b) of Regulation G states: A registrant, or a person acting on its behalf, shall not make public a non- GAAP financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading. Rule 10b-5 liability may also apply

ITEM 10(E) OF REGULATION S-K

Required Disclosures in SEC Filings If an SEC filing discloses a non-GAAP financial measure, the filing must include: the most directly comparable GAAP financial measure(s) set forth with equal or greater prominence the required reconciliation the reasons why management believes the non-GAAP measure provides useful information to investors regarding the company s financial condition and results of operations to the extent material, a statement disclosing the additional purposes (if any) for which management uses the non-GAAP measure In addition to SEC filings, Item 2.02 of Form 8-K requires the foregoing in connection with earnings releases furnished to the SEC

Prohibited Disclosures in SEC Filings Information prohibited in an SEC filing: Non-GAAP liquidity measures that exclude charges or liabilities that required, or will require, cash settlement or that would have required cash settlement absent an ability to settle in another manner EBIT and EBITDA are expressly exempt from this particular prohibition Adjustments of a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when (1) the nature of the charge or gain is such that it is reasonably likely to recur within two years or (2) there was a similar charge or gain within the prior two years Prohibition applies to describing such a charge or gain as non-recurring, infrequent or unusual. (Question 102.03) The adjustment can still be presented using a different description if otherwise appropriate and in compliance with Regulation G and Item 10(e). However, May 2016 updated guidance emphasizes that this may still be misleading! (Question 102.03)

Prohibited Disclosures in SEC Filings (contd) Other information prohibited in an SEC filing (cont d): Non-GAAP financial measures presented on the face of: GAAP financial statements (or accompanying notes) or Pro forma financial information required under Article 11 of Reg S-X Titles or descriptions for non-GAAP financial measures that are the same as or confusingly similar to those used for GAAP measures

RECENT SEC GUIDANCE

Guidance of General Applicability The May 17, 2016 C&DIs begin by reminding us that certain adjustments, although not explicitly prohibited, [can] result in a non-GAAP measure that is misleading and violate Rule 100(b) of Regulation G. (Question 100.01) The C&DIs then proceed to give examples of non-GAAP measures that may be misleading Many of these are just putting down on paper examples the staff has commented on before

Guidance of General Applicability (contd) Presenting a performance measure that excludes normal, recurring cash operating expenses necessary to operate a registrant s business could be misleading. (Question 100.01)

Guidance of General Applicability (contd) A non-GAAP measure can be misleading if it is presented inconsistently between periods (Question 100.02) A non-GAAP measure that adjusts a particular charge or gain in the current period and for which other, similar charges or gains were not also adjusted in prior periods unless the change between periods is disclosed and the reasons for it explained could be misleading In addition, depending on the significance of the change, it may be necessary to recast prior measures to conform to the current presentation and place the disclosure in the appropriate context

Guidance of General Applicability (contd) A non-GAAP measure can be misleading if it excludes charges, but does not exclude any gains (Question 100.03) For example, a non-GAAP measure that is adjusted only for non-recurring charges when there were non-recurring gains that occurred during the same period could be misleading

Guidance of General Applicability (contd) Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could be misleading (Question 100.04) Question: A registrant presents a non-GAAP performance measure that is adjusted to accelerate revenue recognized ratably over time in accordance with GAAP as though it earned revenue when customers are billed. Can this measure be presented in documents filed or furnished with the Commission or provided elsewhere, such as on company websites? Answer: No. Other measures that use individually tailored recognition and measurement methods for financial statement line items other than revenue may also be misleading (Question 100.04)

Guidance on Per Share Measures [N]on-GAAP liquidity measures that measure cash generated must not be presented on a per share basis in documents filed or furnished with the Commission (Question 102.05) Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure. When analyzing these questions, the staff will focus on the substance of the non-GAAP measure and not management s characterization of the measure

Guidance on Per Share Measures (contd) The C&DIs caution against presenting specific non-GAAP measures on a per share basis: Free cash flow is a liquidity measure that must not be presented on a per share basis (Question 102.07) EBIT and EBITDA, even when discussed in the context of a performance measure, must not be presented on a per share basis. (Question 103.02) Funds From Operations depending on the nature of the adjustments may trigger the prohibition on presenting this measure on a per share basis (Question 102.02)

Guidance on Equal or Greater Prominence Equal or greater prominence is required in documents filed with the SEC and also items furnished with the SEC under Item 2.02 of Form 8-K. The C&DIs state the staff would consider the following examples of disclosures of non-GAAP measures as more prominent (Question 102.10): Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures

Guidance on Equal or Greater Prominence (contd) Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption) Describing a non-GAAP measure as, for example, record performance or exceptional without at least an equally prominent descriptive characterization of the comparable GAAP measure Providing tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table

Guidance on Equal or Greater Prominence (contd) Excluding a quantitative reconciliation with respect to a forward- looking non-GAAP measure in reliance on the unreasonable efforts exception in Item 10(e) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence

Income Tax Effects on Non-GAAP Measures Income tax effects on non-GAAP measures should be provided depending on the nature of the measures (Question 102.11) If a measure is a liquidity measure that includes income taxes, it might be acceptable to adjust GAAP taxes to show taxes paid in cash. If a measure is a performance measure, the registrant should include current and deferred income tax expense commensurate with the non-GAAP measure of profitability. Adjustments to arrive at a non-GAAP measure should not be presented net of tax. Rather, income taxes should be shown as a separate adjustment and clearly explained. (Question 102.11) This is a change from prior guidance that permitted showing adjustments net of tax if the tax effect of each item was disclosed parenthetically or in a footnote (Question 102.11 (Jan 11, 2010))

PRACTICAL SUGGESTIONS

Practical Suggestions Review staff guidance when preparing SEC filings, earnings releases, and IPO registration statements Pay attention to the equal or greater prominence examples Avoid violating the examples of misleading presentations without good reason Avoid presenting non-GAAP financial measures that can be used as a liquidity measure on a per share basis Review your disclosure of the non-GAAP financial measure s usefulness Reevaluate why you use the non-GAAP measure and how it provides investors with useful information Avoid boilerplate explanations Non-GAAP measures in investor presentations not filed or furnished with SEC and roadshows are still subject to "not misleading" requirement Conduct a peer analysis Ensure proper oversight/controls by audit committee and management

Specific Notes for MLPs Continue showing Adjusted EBITDA, Cash Available for Distribution & Distributable Cash Flow Do not present these metrics on a per unit basis Although used as performance measures, they show ability to generate cash Present units outstanding Present any income tax adjustments on a separate line in the reconciliation Reconcile performance measures to net income and liquidity measures to cash from operations Continue to present distribution coverage ratio

Specific Notes for MLPs (contd) Accommodate updated guidance on prominence When discussing CAFD, also discuss net income or cash from operations In headlines of earnings releases, present net income before Adjusted EBITDA or CAFD/DCF In tables, do not boldface Adjusted EBITDA or CAFD/DCF unless also boldface net income Impact on forecast / backcast unclear; continue to include line items that walk from revenue to net income

Shareholder Activism 2015 was a record for shareholder activism With AUM increasing from $508 in 2010 to $2008 in 2015, activists are now part of the "mainstream" of institutional investor alternatives 355 announced campaigns against public companies Focus has been on: Board seats (in 2015, 117 campaigns resulted in board seat via settlement; 10 campaigns via vote) Value creation/strategic direction

Shareholder Proposals According to ISS, there were more than 1,030 14a-8 shareholder proposals across 540 public companies at 2015 meetings Of those, 45% of the resolutions related to environmental and social issues, 43% related to corporate governance issues and 12% dealt with compensation matters Most common were: Political and lobbying activities Proxy access, and Independent chair of the board

Shareholder Proposals (cont'd) Proxy Access Proposals/Engagement - New York City's pension funds (72 for 2016), CalPERS, CalSTRS (30 for 2016), the Florida State Board of Administration and Vanguard (60 in 2015) each will be sending 14a-8 proposals or engaging with companies regarding proxy access During 2015 proxy season, United Brotherhood of Carpenters send letters to 91 Fortune 500 companies seeking expanded disclosure regarding audit committee oversight and process

SEC Dodd-Frank Proxy Rules Update CEO Pay Ratio Rule - Final (effective for full years beginning on and after Jan. 1, 2017 - therefore will need to be disclosed in proxy statement for 2018 annual meeting) Pay for Performance Disclosure - Proposed Mandatory Clawback Rule - Proposed Hedging Disclosure - Proposed Nothing required for 2017 Proxy Statement

Proxy Advisor Updates - Overboarding Both ISS and Glass Lewis lowered the maximum number of public company directorships a director (other than CEO) may have before being considered "overboarded" from 6 to 5 For CEO, ISS kept limit at 3, with Glass Lewis lowering to 2 Although all of a CEO's subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote from the CEO of a parent company board or any of the controlled (>50% ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50% controlled and boards outside the parent/subsidiary relationship One year transitionary period during 2016 in which advisor will note this issue; in 2017 will recommend against director's election