Avoiding Confusion
To prevent such misunderstandings, Wellesley, Massachusetts-based PerkinElmer Inc. began including First Call estimates in its earnings releases last fall, making reference to the estimate in the opening of the release and providing it as a line item in its non-GAAP-to-GAAP reconciliation tables. "When the media spit out 'PerkinElmer misses' because they were confused, we had to do something," says company spokesman Dan Sutherby.

And many point out that pro forma numbers are still perfectly defensible, if used for the right reasons. In fact, John Kenny, CFO of Boston-based document-management firm Iron Mountain Inc., says it was at the SEC's request that the firm began to use the term "Adjusted EBITDA" for its primary earnings metric three years ago. After a routine review of the highly leveraged firm's filings, says Kenny, the SEC asked Iron Mountain to publish the adjusted form so that investors could better track the firm's performance against its bond covenants using that metric.

When Reg G emerged, however, Iron Mountain's adjusted measure suddenly became unusable, thanks to the new S-K/S-B amendment stipulating that neither GAAP nor pro forma results in filings may exclude items if similar ones have been excluded in the previous two years, or are expected to be excluded within the following two years. "The problem with Adjusted EBITDA was that some of the things we were adjusting out — the foreign-exchange gains and losses, some merger-related costs, and costs associated with refinancing — were occurring on a fairly regular basis," says Kenny.

As a result, the company dropped Adjusted EBITDA and introduced operating income before depreciation and amortization (OIBDA) in both its releases and its filings. This measure does not exclude any recurring charges, Kenny says, and is easier to reconcile to GAAP net income.

Given what seems to be a more judicious use of pro forma numbers — the spread between GAAP and operating earnings for the S&P 500 narrowed to 11 percent for 2003 and dropped to 4 percent in the first quarter of 2004 — and the rigorous disclosure that accompanies them, at least one longtime critic of pro forma is happy with the changes Reg G has sparked. "What we do have today is absolutely better than what we had before the regulation," says Turner, who dubbed pro forma earnings as "everything but the bad stuff" during his tenure at the SEC. "Now at least people are getting reconciliations to GAAP, and they're doing things consistently."

Alix Nyberg is a freelance writer based in Boston.

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