Restoration Hardware 2012 Annual Report Download - page 105

depreciation and amortization, interest expense and provision for income taxes. We define adjusted
EBITDA as consolidated net income (loss) before depreciation and amortization, interest expense and
provision for income taxes, adjusted for the impact of certain non-recurring and other items that we do not
consider representative of our ongoing operating performance.
We believe that EBITDA and adjusted EBITDA are useful measures of operating performance, as they
eliminate expenses that are not reflective of the underlying business performance, facilitate a comparison of
our operating performance on a consistent basis from period-to-period and provide for a more complete
understanding of factors and trends affecting our business. We also use adjusted EBITDA as one of the
primary methods for planning and forecasting overall expected performance and for evaluating on a
quarterly and annual basis actual results against such expectations, and as the basis of our Management
Incentive Plan (“MIP”), which is our cash based-incentive compensation program designed to motivate and
reward annual performance for eligible employees. Additionally, EBITDA is frequently used by analysts,
investors and other interested parties to evaluate companies in our industry. We use EBITDA and adjusted
EBITDA, alongside other GAAP measures such as gross profit, operating income (loss) and net income
(loss), to measure profitability, as a key profitability target in our annual and other budgets, and to compare
our performance against that of peer companies.
EBITDA and adjusted EBITDA are not GAAP measures of our financial performance or liquidity and
should not be considered as alternatives to net income (loss) or net income (loss) per share as a measure of
financial performance, cash flows from operating activities as a measure of liquidity, or any other
performance measure derived in accordance with GAAP and they should not be construed as an inference
that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and
adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as
they do not consider certain cash requirements such as tax payments and debt service requirements and
certain other cash costs that may recur in the future. EBITDA and adjusted EBITDA contain certain other
limitations, including the failure to reflect our cash expenditures, cash requirements for working capital
needs and cash costs to replace assets being depreciated and amortized. In addition, these non-GAAP
measures exclude certain non-recurring and other charges.
In evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses that
are the same as or similar to some of the adjustments in these non-GAAP measures. Our presentation of
these non-GAAP measures should not be construed to imply that our future results will be unaffected by any
such adjustments. Management compensates for these limitations by relying primarily on our GAAP results
and by using these non-GAAP only supplementally. These non-GAAP measures are not necessarily
comparable to other similarly titled captions of other companies due to different methods of calculation.
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Form 10-K