Nearly 60 percent of initial public offerings in 2011, 2012 and 2013 on the U.S. markets used at least one non-GAAP financial measure in their financial statements, according to a new study by PricewaterhouseCoopers.
PwC analyzed more than 400 IPOs and found that many of those filings focus on earnings before interest, taxes, depreciation and amortization.
The report, How non-GAAP Measures Can Impact Your IPO, includes findings from an analysis of over 400 IPOs completed between 2011 and 2013 to provide a detailed look at the various types of non-GAAP measures used over that period.
“Management teams, investors, regulators and ratings agencies are keenly focused on NGMs and how they are being used by new equity issuers,” said PwC’s U.S. Capital Markets leader Neil Dhar in a statement. “As companies prepare for an IPO, among the many choices they must make is how to utilize NGMs in their filings and in their communications with potential investors. NGMs provide meaningful insight into a company’s liquidity, cash flow, and operating performance and using the right NGMs can help new issuers highlight key facts and circumstances to positively position themselves to the investment community.”
PwC’s research showed that adjusted EBITDA NGMs appeared in 46 percent of reviewed filings. Of those, over 70 percent included an adjustment for stock, share or other equity based compensation. Other common EBITDA adjustments related to impairment (33 percent), acquisition (20 percent), and restructuring & reorganization impacts (15 percent). PwC also identified a wide diversity in EBITDA adjustments made by companies, noting that 80 percent of the filings included at least one unique adjustment, which ranged from management fees to accretion charges, to income or losses from discontinued operations.
Adjustments to EBITDA can be determined at the discretion of the company, the report noted, and can vary significantly from organization to organization, impacting comparability between companies and industries. The research also showed how some industries have developed other common NGMs in addition to or as a replacement for Adjusted EBITDA, including the asset management, banking & capital markets and entertainment, media and communications sectors.
After Adjusted EBITDA, other common NGMs in the financial statements analyzed included EBITDA (19 percent), adjusted net income (9 percent), free cash flow (4 percent) and adjusted gross profits (4 percent).
“Companies should be ready to enter the IPO markets while the window is open and having their financial reporting in order from the start is a key factor in the process,” said PwC's U.S. Public Offerings leader Mike Gould. “While NGMs are a key tool for companies planning to enter the public market, it is a complex process that must be thought through objectively to avoid potential missteps, unanticipated costs and delays in their offerings.”
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