We’re at the tail end of earnings season — the next Q deadline is on Monday, Nov. 9. What that means is that Team Footnoted has been reading an awful lot of filings. As we tweeted on Friday, 139 8-Ks and 95 10-Qs were filed after 4 pm last Friday. Any guess on how we spent our weekend?
Yesterday, another 160 10-Qs came crashing on our electronic shore. While we don’t read all of those filings — after all, we’re not total masochists — one thing comes across loud and clear: the number of companies using the term “adjusted EBITDA” appeared to be swelling. We tweeted this too, last week, and got some interesting responses.
So we decided to run the numbers and here’s what we found: the bloat in adjusted EBITDA is real, even at the largest of large-cap companies. We searched for the term “Adjusted EBITDA” in 8Ks, 10-Qs and 10-Ks going back to the very first year that EDGAR was available, 1994. And we decided to limit it to large caps, which we defined as companies over $25 billion in market cap. What we found surprised even us: there were zero mentions between 1994 and 1997. But, then, all of a sudden…
Source: SEC filings/EDGAR
Now keep in mind that while there were 164 examples of companies using adjusted EBITDA in their SEC filings, that doesn’t mean that 164 companies over $25 B in market cap used the term. Often, we found the same companies using it over and over again. For example, American Tower used the term in 10 filings made so far this year (all numbers are through Nov. 2, to keep the numbers consistent over the years). Verizon mentioned the term in nine filings; 3M mentioned it in only two filings.
What’s also interesting to us is the way the numbers change based on how well the market is doing. By 2007, there were 54 examples of adjusted EBITDA in filings for the period that we looked at. But in 2008 — when the market dropped sharply and there was more of an emphasis on real numbers — that number slipped to 36.
It’s been growing ever since and has now tripled since the market returned to bull territory.
Some people might be fine with that. Many of those are the same people you hear on earnings calls congratulating some executive on a “Great Quarter,” which happens to be the name of my new favorite twitter handle.
But everyone else ought to think long and hard about why the use of adjusted EBITDA has grown so sharply and perhaps even ask, what exactly is being adjusted? And why have these adjustments become so commonplace?
We weren’t reading SEC filings as closely — or as frequently — back in 1994. But we do recall that the world still spun: companies reported earnings, they were digested by the investment community and the markets advanced.
Charlie Munger has famously described EBITDA as “bullshit earnings”. And Seth Klarman rang the EBITDA alarm bells all the way back in 1991 in “Margin of Safety”. So what does that make adjusted EBITDA? And all of us, for continuing to swallow and digest?