Editor’s note: This is general educational information about how United States companies report results against analyst estimates and against their own forecasts. It is not investment advice and does not concern any particular company. It draws on the SEC rule releases, staff interpretations and statute listed at the end.
Analysis: why the two scoreboards diverge
The divergence is structural rather than accidental. A company controls the definition of its own target and the adjustments behind the measure it reports, subject to the constraints described below. It does not control the analyst estimate, and since Regulation FD it cannot lawfully steer that estimate through private communication with the analysts who build it. The two numbers are produced by different people under different rules, so a result can sit above one and below the other in the same release.
The rules do not close the gap, and reading them shows why. Regulation G requires a reconciliation to the most directly comparable GAAP measure, not to the analyst consensus or to the company’s earlier forecast. Nothing requires a company to show its result against its own previous guidance in a prescribed form, or to explain a change in that guidance in a defined table. The mandated bridge runs between the adjusted number and the GAAP number, and stops there.
Compliance with Regulation G also settles less than it appears to. Rule 102 provides that neither the requirements nor a person’s compliance or non-compliance affects liability under Exchange Act Section 10(b) or Rule 10b-5. A materially deficient disclosure can violate Regulation G and give rise to a Rule 10b-5 action if the elements are present, and a violation of the Sarbanes-Oxley Act rules is treated as a violation of the Exchange Act. Presenting a reconciliation is a floor, not a defence.
What a careful reader can check is narrow and useful. The reconciliation schedule in the release shows exactly which items were added back and whether the same items were added back last period. The prominence requirement in filings shows whether the GAAP figure is being carried at equal weight. The cautionary language accompanying a forecast identifies the factors the company itself said could move the outcome. Those three documents come from the company under rules that specify their form, which is more than can be said for the estimate the result is usually reported against.
What the documents say
Two scoreboards run at the same time on the morning a company reports. One compares the result with an estimate assembled outside the company by analysts. The other compares it with a forecast the company itself published, on its own definitions. A single quarter can clear the first and fail the second, and nothing about that is contradictory. The two numbers are built from different inputs under different rules, and the rules say so.
Two measures, one release
The measure a company highlights in its release is frequently not a measure defined by generally accepted accounting principles. The SEC’s disclosure regime for those measures came out of the Sarbanes-Oxley Act of 2002 and defines a non-GAAP financial measure as one that excludes amounts, or is subject to adjustments having the effect of excluding amounts, that are included in the most directly comparable GAAP measure in the statement of income, balance sheet or statement of cash flows, or that includes amounts excluded from that comparable measure.
Regulation G attaches two obligations to publishing such a measure. The general requirement is that 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 it, contains an untrue statement of a material fact or omits a material fact necessary to make the presentation not misleading. The specific requirement is a reconciliation: the release must present the most directly comparable GAAP measure and a quantitative reconciliation, by schedule or other clearly understandable method, of the differences between the two. Where the measure is released orally, by webcast or by broadcast, the accompanying information can be posted on the registrant’s website provided the location and availability are disclosed during the presentation.
For measures that appear in filings with the Commission, the parallel item of Regulation S-K goes further and requires a presentation, with equal or greater prominence, of the most directly comparable GAAP measure. It also prohibits excluding charges or liabilities that required or will require cash settlement from non-GAAP liquidity measures, with EBIT and EBITDA specifically exempted from that prohibition.
Where the company’s own number can move
Staff interpretations set out how an adjusted measure becomes misleading, and each example describes a way two apparently similar quarters can stop being comparable. Presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate the business is one example. A measure presented inconsistently between periods can be misleading. So can one that excludes charges but does not exclude any gains.
The staff also treats adjustments that change the recognition and measurement principles GAAP requires as individually tailored, and therefore capable of making a presentation misleading. Labelling matters on its own terms: without an appropriate label and clear description, a measure or an adjustment can mislead, because non-GAAP measures are not always consistent across, or comparable with, the measures other companies disclose. The staff’s view is that a measure can mislead to such a degree that even extensive, detailed disclosure about the nature and effect of each adjustment would not cure it.
Free cash flow illustrates the labelling problem. The staff notes the measure has no uniform definition and its title does not describe how it is calculated, warns against implying that it represents residual cash available for discretionary spending when many companies have mandatory debt service or other non-discretionary outflows that are not deducted, and states that it is a liquidity measure that must not be presented on a per share basis.
The forecast, and the protection around it
A company’s own target is a forward-looking statement, and the federal securities laws give those a defined shelter. The statutory safe harbour provides that in a private action based on an untrue statement or a material omission, the person is not liable with respect to a forward-looking statement, written or oral, to the extent it is identified as forward-looking and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially. The safe harbour is not universal. It does not apply, among other exclusions, to a forward-looking statement made in connection with an offering of securities by a blank check company, a rollup transaction or a going private transaction.
Reconciliation obligations follow guidance forward as well. For a forward-looking non-GAAP measure, the rules require a schedule detailing the differences from the appropriate forward-looking GAAP measure. If the GAAP measure is not accessible on a forward-looking basis, the registrant must say so, provide the reconciling information available without unreasonable effort, identify what is unavailable and disclose its probable significance.
The outside estimate is built under a different constraint. Regulation FD addresses selective disclosure: when an issuer or a person acting on its behalf discloses material nonpublic information to securities market professionals or to holders who may trade on it, the issuer must make public disclosure, simultaneously for an intentional selective disclosure and promptly for a non-intentional one. Promptly means as soon as reasonably practicable and no later than the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange, after a senior official learns of the disclosure and knows, or is reckless in not knowing, that the information was material and nonpublic. The persons covered are senior officials and those who regularly communicate with market professionals or security holders. Regulation G and Regulation FD were designed to operate in tandem: a private communication of material information triggers public disclosure, and if that public disclosure contains a non-GAAP measure, the reconciliation rules apply to it.
