As companies continue to evaluate the impact of the novel coronavirus (COVID-19) pandemic on their business, public companies will be facing challenging disclosure considerations in connection with their upcoming first-quarter earnings calls and earnings releases.
As a backdrop, a significant number of public companies, concentrated in industries which have felt the strongest immediate impact of the crisis (such as companies whose business is tied to the travel industry), have either updated (e.g., Mastercard) or withdrawn (e.g., Hyatt Hotels, MGM Resorts, Twitter) their 2020 guidance due to the economic fallout and the uncertainty surrounding this pandemic.
Whether or not a public company has updated or withdrawn its 2020 guidance based on COVID-19 considerations, public companies will face challenging disclosure decisions as they approach their first-quarter (for calendar year-end companies) earnings releases and earnings calls. A key reference point in this regard is CF Disclosure Guidance, Topic No. 9, issued by the Division of Corporation Finance on March 25, which highlights the perspective of the Staff regarding various disclosure considerations related to the COVID-19 pandemic.
Key disclosure considerations in connection with this first-quarter earnings release process include the following:
How to Approach Existing Guidance
For companies that previously issued 2020 guidance which remains in place, a gating issue is the extent to which the registrant believes that it can continue to project (with a reasonable basis) its 2020 forecasted results, taking into account the COVID-19 pandemic (which pandemic itself has a broad range of best-case and worse-case reasonable scenarios from a public health and economic perspective).
The issue of whether a registrant has a reasonable basis to potentially continue guidance will differ by industry, with companies in certain industries whose business (at least in the short term) has been so fundamentally harmed by the COVID-19 pandemic likely concluding that there is no practical ability to continue to provide guidance until there is greater macroeconomic certainty, while companies in other industries may have a closer judgment call.
Overall, we expect that a significant number of registrants, across a wide range of industries, will elect to withdraw guidance based on a determination that the uncertainties associated with COVID-19 are so significant that it is not practicable and/or advisable to continue to provide guidance.
We believe that in many cases, the negative market reaction that is typically associated with withdrawing guidance will be more muted in this earnings release cycle as the result of the number of companies that are likely to withdraw earnings guidance (particularly so, if other companies in the industry of the registrant have been following this path).
We expect that many companies withdrawing guidance will not want to provide any specific assurance about when future guidance might be provided to maintain flexibility in this regard and avoid any implication that there may be a duty to update guidance from a legal perspective at a future time.
Among registrants that continue to provide guidance in their first-quarter earnings release, we would expect to see the following:
- A broader range of guidance (i.e., a greater gap between the high and low range of guidance), taking into account potential COVID-19 downside scenarios.
- Expanded disclosure concerning caveats and/or assumptions in the guidance about the COVID-19 where appropriate.
Review Peer Company Disclosures
Although a good disclosure practice, in any event, we believe that it will be particularly helpful for registrants to review any earnings releases/earnings call transcripts or other disclosures made by their peer companies in the wake of COVID-19 (ideally, disclosures made after mid-March 2020) to assess the disclosure approach being taken by peers (of course, depending on a registrant’s disclosure calendar and those of its peers, there may be limited peer company precedent that is available at the time of the registrant’s earnings release or earnings call).
Concerning forward-looking statements in earnings release materials (including guidance), the safe harbor of the PLSRA provides significant protections for forward-looking statements accompanied by meaningful cautionary language.
Nevertheless, case law interpreting this safe harbor is not uniform (and has not always applied the PLSRA safe harbor as written); additionally, we are in a litigious public company disclosure environment taking into account current market conditions.
For those registrants that include risk factor bullets in their earnings release materials highlighting how actual results may differ from forward-looking statements, registrants will want to consider how this litany of risks will need to be updated to take into account COVID-19 developments (foreshadowing the exercise of these public companies in potentially updating their risk factors in their Quarterly Report on Form 10-Q as the result of COVID-19 developments).
Timing of Earnings Releases
Registrants will also want to consider the timing of issuing their earnings release. We expect that some companies will pre-release results for the quarter, taking into account investor considerations and expectations, as well as the fact that such a pre-release (if it sufficiently addresses all material non-public information) may allow a company to engage in stock repurchases and/or allow company insiders to engage in securities transactions earlier than otherwise possible.
However, companies considering this course of action should contemplate whether they have sufficient information to pre-release results (without the risk of further adjustment before the time that the earnings release is issued), and should also consider whether this pre-release includes all material non-public information of the registrant given the broad array of considerations regarding COVID-19.
In contrast, we expect that most registrants will not pre-release results, and will release earnings at a customary time for their company, taking into account a desire to have sufficient time to assess potential disclosure considerations related to COVID-19.
Registrants will want to provide an assessment in their earnings calls of qualitative and, potentially, quantitative considerations regarding the anticipated impact of COVID-19, including liquidity and capital resources considerations, anticipated impacts on operations, capital expenditures, long-term business goals, etc.
Registrants and their legal counsel should carefully consider how to address COVID-19 considerations in the earnings call script and try to anticipate questions of analysts in the earnings call (in certain cases, registrants may want to get ahead of particularly important or challenging potential analyst questions by addressing such topics on an affirmative basis in the script to have pre-scripted wording for any such questions).
Registrants should be mindful of the fact that key trends or developments related to COVID-19 discussed in the earnings call may also need to be disclosed in the MD&A of the registrant’s upcoming Quarterly Report on Form 10-Q in light of the requirements under Item 303 of Regulation S-K to discuss known material trends impacting liquidity, results of operations, etc.
Depending on their industry, registrants will want to consider the extent to which any aspects of the CARES Act are anticipated to impact the registrant’s analysis of current or future liquidity or operational trends or guidance. In this regard, the CARES Act is far-reaching and expansive in scope and may have a significant (direct or indirect) impact on companies in certain industries, although there may be some uncertainty regarding the application and scope of certain provisions of the CARES Act in light of the current lack of regulatory guidance and other considerations.
Non-GAAP Financial Measures and Key Performance Metrics
Registrants will want to consider whether any non-GAAP financial measures or other metrics, will be presented that adjust for COVID-19 or are otherwise correlated with or otherwise tied to COVID-19.
In this regard, registrants will want to be mindful of the commentary provided by the Staff in CF Disclosure Guidance, Topic No. 9 with respect to the disclosure of non-GAAP financial measures in the current environment, which guidance provides that “where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments,” the Division “would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.” The guidance further states that this approach is only permitted for non-GAAP financial measures that are used in reporting financial results to the board of directors.
In any case (as highlighted by CF Disclosure Guidance, Topic No. 9), registrants should ensure that they comply with equal prominence requirements under Item 10(e)(1) of Regulation S-K when presenting non-GAAP financial measures in earnings releases (this equal prominence requirement does not apply to non-GAAP financial measures presented in earnings calls).
Registrants will also want to be mindful of the Staff’s disclosure guidance regarding key performance metrics which was issued effective as of February 25, and requires potential expanded MD&A disclosures regarding key performance measures.
While the Staff’s key performance metrics disclosure guidance by its terms only applies to the MD&A, registrants will want to consider whether any portion of the expanded disclosure in the MD&A should similarly be disclosed in earnings release materials.
In light of stock price declines and business deterioration among many companies, and the potential risk of goodwill impairment for the first-quarter associated therewith, registrants will want to engage with their independent audit firms and audit committee to assess any potential goodwill impairment affecting results of operations for the quarter in advance of issuing any pre-release or earnings release.
Board/Audit Committee Oversight
In light of the sensitive and challenging disclosure considerations which registrants will be facing in connection with this quarter’s earnings release process, registrants will want to be particularly focused this quarter on ensuring that their boards and/or audit committees are significantly involved in considering high-level disclosure issues in this process (including, related to guidance, non-GAAP financial measures, etc.).
If you have any questions regarding the upcoming earnings release process, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
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