Student Transportation Inc. (STB) in Violation of SEC Regulation G?

Student Transportation Inc. (STB) in Violation of SEC Regulation G?

Student Transportation Inc. (STB) in Violation of SEC Regulation G?

Is Student Transportation, Inc. Improperly Calculating EBITDA in Violation of SEC Regulation G?


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Disclosure: You should do your own research and due diligence before making any investment decision with respect to any of the securities mentioned herein. As of the publication date one or more of the following: Strubel Investment Management, our clients, our employees, and/or funds we advise are short Student Transportation, Inc. (STB) and stand to realize significant gains in the event that the price of STB declines. Following the publication of this article we intend to continue transacting in STB and we may be long, short, or neutral any time after the date of publication. We undertake no obligation to update or supplement this article or disclose changes in our position in STB securities.

Student Transportation Inc. (TSE:STB) (NASDAQ:STB) (“Student Transportation”) recently released their fiscal 2012 earnings. In a press release dated September 25, 2012, available here, the company included a calculation of EBITDA (earnings before interest, taxes, depreciation, and amortization) for their 2012 and 2011 fiscal years. Student Transportation’s calculation of EBITDA does not appear to comply with the definition of EBITDA given by the Securities and Exchange Commission (“SEC”) under Regulation G. For both 2012 and 2011, it appears that Student Transportation’s method of computing EBITDA has led to an overstatement of EBITDA. Additionally, the company has reported two different EBITDA numbers for fiscal 2011.

While Student Transportation Inc. (TSE:STB) (NASDAQ:STB) is a “foreign private issuer” as defined by the SEC, Regulation G still applies subject to one limited exception as the SEC states:

Regulation G applies to registrants that are foreign private issuers, subject to a limited exception. Specifically, Regulation G does not apply to public disclosure of a non-GAAP financial measure by, or on behalf of, a registrant that is a foreign private issuer if:

  • the securities of the foreign private issuer are listed or quoted on a securities exchange or inter-dealer quotation system outside the United States;
  • the non-GAAP financial measure is not derived from or based on a measure calculated and presented in accordance with generally accepted accounting principles in the United States; and
  • the disclosure is made by or on behalf of the foreign private issuer outside the United States, or is included in a written communication that is released by or on behalf of the foreign private issuer outside the United States.

While Student Transportation’s common stock is quoted on the Toronto Stock Exchange the non-GAAP measure it is reporting, EBITDA, is derived from net income which the company calculated and presented in accordance with US GAAP. Additionally, the disclosure was made via press release that was distributed inside the United States. Thus we believe that Regulation G applies to Student Transportation.

In a Compliance & Disclosure Interpretations (“C&DIs”) bulletin, the SEC gives this guidance on how to calculate and present EBITDA:

Section 103. EBIT and EBITDA

Question 103.01

Question: Exchange Act Release No. 47226 describes EBIT as “earnings before interest and taxes” and EBITDA as “earnings before interest, taxes, depreciation and amortization.” What GAAP measure is intended by the term “earnings”? May measures other than those described in the release be characterized as “EBIT” or “EBITDA”? Does the exception for EBIT and EBITDA from the prohibition in Item 10(e)(1)(ii)(A) of Regulation S-K apply to these other measures?

Answer: “Earnings” means net income as presented in the statement of operations under GAAP. Measures that are calculated differently than those described as EBIT and EBITDA in Exchange Act Release No. 47226 should not be characterized as “EBIT” or “EBITDA” and their titles should be distinguished from “EBIT” or “EBITDA,” such as “Adjusted EBITDA.” These measures are not exempt from the prohibition in Item 10(e)(1)(ii)(A) of Regulation S-K, with the exception of measures addressed in Question 102.09. [Jan. 11, 2010]

The correct way to calculate EBITDA is to start with net income and add back only interest, taxes, depreciation, and amortization. You are not allowed to add back other items, such as foreign exchange gains or losses, stock based compensation, or any other items and call the measure EBITDA. You can, however, add back other items if you call the measure something other than EBITDA, such as “Adjusted EBITDA” as suggested by the SEC.

Below is the reconciliation of net income to EBITDA that Student Transportation provided to investors and the public in the aforementioned press release. I have drawn a red box around items that are prohibited from being included in EBITDA calculations as per SEC Regulation G.


Student Transportation Inc. (TSE:STB) (NASDAQ:STB) appears to have erroneously included more than half a dozen items in its calculation of EBITDA. According to my calculations, Student Transportation overstated EBITDA by $13,995,000 in fiscal 2012 and $7,199,000 in fiscal 2011. Student Transportation should have reported EBITDA of $56,075,000 in fiscal 2012 and EBITDA of $51,679,000 in fiscal 2011.

 Below is my reconciliation of Student Transportation’s reported EBITDA and EBITDA calculated in compliance with SEC Regulation G.

Student Transportation Inc. (TSE:STB) (NASDAQ:STB) also tells investors that EBITDA increased 20 percent from fiscal 2011 to fiscal 2012. From the same September 25, 2012 press release Student Transportation says:

“Fiscal 2012 was another important and strong year in the Company’s development,” said Denis J. Gallagher, Chairman and Chief Executive Officer. Our disciplined growth strategy continued with seven key acquisitions and nine targeted new bid contracts. Revenues and EBITDA for the fiscal year increased 20 percent.” [emphasis mine]

Student Transportation also touts its EBITDA growth in its 2012 Annual Report to Shareholders. This time, however, the company claims EBITDA increased only 19 percent. A screenshot of the relevant section of the annual report (from page 2) is below.

 If Student Transportation calculated EBITDA in compliance with SEC Regulation G, then EBITDA would have grown from $51,679,000 in fiscal 2011 to $56,075,000 in fiscal 2012. That is an increase of only 8.51 percent, not the 19 or 20 percent increase that Student Transportation reported.

In addition to not being sure how much EBITDA increased, it also seems that Student Transportation is unable to accurately compute its own version of what should be called adjusted EBITDA. In the press release referenced above, Student Transportation reports $58,878,000 of EBITDA for fiscal 2011. But on a graphic that is prominently displayed on Student Transportation’s investor relations website, they report $59,500,000 of EBITDA for fiscal 2011, a discrepancy of $622,000. The graphic from Student Transportation’s website is shown below.


 (Source:, screenshot from 10/12/2012)

While Student Transportation Inc. (TSE:STB) (NASDAQ:STB) is a Canadian company, on September 2, 2011 it chose to list its stock on the NASDAQ Global Select Market and it became a “foreign private issuer” under U.S. federal securities laws. As such, it must comply with SEC rules, including the calculation and presentation of non-GAAP financial measures to investors. Additionally, company executives should work on their math skills as there are discrepancies among the non-GAAP numbers the company reported for fiscal 2011.


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Ben Strubel earned a Master’s in Business Administration in Investment Management from Drexel University’s LeBow College of Business in Philadelphia, PA. He was inducted into the Beta Gamma Sigma honor society, the highest academic honor society for master’s degree students. While at Drexel, Mr. Strubel founded the LeBow Graduate Investment Management Club and the DragonFund Large-Cap Fund, which was responsible for investing $250,000 of Drexel University’s endowment. He also holds a Graduate Certificate in Financial Planning from Florida State University. He earned a B.S. in Information Technology from Rochester Institute of Technology in Rochester, NY. He teaches classes on finance and investing at Harrisburg Area Community College and for Manheim Township. Mr. Strubel also writes for several investing websites including and He resides in Lancaster, PA.

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