Recent SEC Emphasis on Results of Operations MD&A

Background

In 2024 the SEC issued a higher volume of comment letters relative to recent history. In the year ended June 30, 2024, the SEC issued 1700 comment letters to registrants. From 2020-2022, the SEC issued on average a little over 1000 comment letters per year. Amid this rise in comment letter issuance, management discussion and analysis (MD&A) has emerged as the greatest focus of these letters.

MD&A was a point of emphasis in at least 34% of 2024 comment letters. Among these letters, over half of the comments were related to the results of operations. The relevant literature governing MD&A disclosure requirements is Item 303 of Regulation S-K (S-K 303).

MD&A is a central component of financial disclosures. According to S-K 303, “The objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant”. With regards to focus and content, S-K 303 states the following: “The discussion and analysis must focus specifically on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition”. Thus, MD&A should help paint a picture to investors of material events and concerns that reflect the views and perspective of management.

S-K 303 prescribes three specific instances where MD&A is needed in the disclosure of results of operations (S-K 303(b)(2)). This article will focus on each of these 3 requirements and show recent examples of SEC comments in these areas.

Unusual or Significant Events

When an unusual or infrequent event takes place that materially affects the results of operations, MD&A is required (S-K 303 (b)(2)(i)). A natural disaster or a halt in operations that is due to an infrequent event should be discussed. Similarly, significant economic changes that have a material impact on the results of operations should be discussed and disclosed.

A recent example of this emphasis can be found in the SEC correspondence with Getty Images (Getty), a media company specializing in stock photos, dated December 13, 2023. The SEC noted that in Getty’s earnings call for Q3 2023, Getty’s CFO disclosed that the disappointing results were impacted by the SAG-AFTRA strike, and that Getty’s Q4 guidance was updated to reflect the continued impacts of the strikes.

This unusual event was not discussed in Getty’s Q3 quarterly filing and the SEC responded with this comment, “Please enhance your discussion in your periodic filings for any unusual or infrequent events and/or significant economic changes that have impacted or are reasonably likely to materially impact your revenue and income from operations in future periods”. Getty advised the SEC that in future filings Getty would “enhance its discussion of any unusual or infrequent events and/or significant economic changes that have impacted or are reasonably likely to materially impact our revenue and income from operations”.

Getty Correspondence

Known Trends or Uncertainties Likely to Have Material Impact

Registrants are required to discuss trends and uncertainties that are reasonably likely to occur or have already occurred which will materially impact net sales, revenues, or income from continuing operations (S-K 303 (b)(2)(ii)). A recent example of a comment on this topic can be found in a correspondence dated August 29, 2024, from the SEC to Flywire Corporation (Flywire), a global payment software company.

In the correspondence, the SEC notes that in recent quarterly and annual earnings calls and releases Flywire discussed impacts of changes in their Canada business segment; however, this known trend wasn’t covered in Flywire’s MD&A for the year ended Dec. 31, 2023, “We note references in your earnings releases and earnings calls for the year ended 2023 and first and second quarters of fiscal 2024 regarding the impact of changes in your Canada business. However, it appears you did not disclose this as a known trend or uncertainty in the MD&A of your periodic filings.”

Flywire acknowledged the error and confirmed that they “will continue to monitor for known trends or uncertainties that have had or that are reasonably likely to have a material impact on its operating results…[if] the Company identifies any such trends or uncertainties with respect to its Canada business that is expected to continue and is material it will expand its existing disclosure”

Flywire Correspondence

Material Change in Net Sales or Revenue

When there is a material change in net sales and/or revenue from period to period, the registrant should discuss the factor(s) that contributed to the change (S-K 303 (b)(2)(iii)). For example, if sales increased by 15% from the prior period, the registrant should discuss how much of the change is attributable to a change in prices, how much of the change is attributable to customer base growth, or the amount that any other factor contributed to the material change. The SEC has made clear that merely disclosing factors is not sufficient. Factors that are discussed should be discussed in conjunction with the amount that they impacted the material change.

A recent example of an emphasis on this requirement can be found in a SEC correspondence dated September 19, 2024, to Globus Medical (Globus), a medical device manufacturer. In their 10-K for the year ended December 31, 2023, Globus reported an increase in net sales of $407.8 million domestically. In their results of operations section of MD&A, Globus indicated that this increase in U.S. sales was attributable to “the addition of NuVasive”, a merger that took place in the fiscal year, as well as “increased spine product sales”. Even though Globus broke out net sales by the relevant factors that caused the increase, the standards require that each factor’s impact be quantified.

The SEC noted this in the correspondence saying, “We note you have identified multiple factors that impact your operating results but it does not appear that you have separately quantified each factor identified. In future filings, when you describe two or more business factors that contributed to a material change in a financial statement line item between periods, please quantify, where possible, the extent to which each factor contributed to the overall change in that line item, including any offsetting factors”.

In their response, Globus indicated that they would revise this section of their MD&A in future filings to quantify factors that played a role in material changes in line items.

Globus Correspondence

Summary and Impacts

MD&A has become a clear point of emphasis recently for the SEC. This is likely due to the value and perspective effective and accurate MD&A can have to users of the financial statements. The requirements set forth in Regulation S-K Item 303 are meant to provide shareholders with relevant information to help them understand a company’s results of operations. Companies can leverage these requirements as opportunities to help investors understand their business and the environment they operate in and how the company has been impacted by factors that may not be communicated elsewhere in the financial statements.