Recently, I canvassed my advisory board for their concerns about quarterly earnings releases. Some of the pet peeves related to Regulation FD or other compliance concerns. Some were merely drafting or process issues. Here are the top 31 pet peeves (there might be some overlap but I thought it was important to couch a few of these in different ways to ensure the point was made):
1. Failure to pre-announce a scheduled earnings call.
2. Failure to pre-announce a change in the date/time of the scheduled earnings call (or merely selectively announcing the change).
3. Failure to identify forward-looking information & providing tailored cautionary language.
4. Including boilerplate cautionary language regarding forward-looking statements.
5. Including safe harbor language that has been cut & pasted from a different document and has little relevance to the forward-looking statements that actually are in the earnings release (and do not identify them adequately).
6. Including statements that say that the company “will” do something when it’s more appropriate to say they “expect” or “anticipate.”
7. Failure to update PSLRA risk factors/meaningful cautionary statements for the specific forward-looking statements that are made in the earnings release or are to be made in the earnings call.
8. Guidance/outlook that isn’t included in the earnings release; only provided orally on the earnings call.
9. No mention in the earnings release that management plans to discuss matters other than past results on the earnings call (like guidance).
10. Not remembering that there are multiple constituencies that read earnings releases. Even though earnings releases are targeted toward the investor community, they are obviously accessible to your employees, customers, etc.
11. Reconciling with your earnings release & your periodic report. Many companies provide more “color” in the release than in MD&A, which then can draw a comment from the Corp Fin Staff that you should have disclosed the same “trends” in your MD&A.
12. Missing non-GAAP reconciliation.
13. Including non-GAAP financial measures without addressing the requisite Reg G/Item 10 required information, such as not complying with Instruction 2 to Item 2.02 of Form 8-K, which states that the requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K shall apply to disclosures under this Item 2.02. This is for when the earnings release is furnished as Item 2.02 to Form 8-K.
14. Not fully complying with Item 10(e) by using the non-GAAP numbers with greater prominence & not presenting with “equal or greater prominence” the most directly comparable GAAP measure.
15. Highlighting a non-GAAP measure in the earnings release headline. This raises an unsolvable equal prominence problem since there is no way you can give the GAAP measure comparable equal prominence unless it also is in the headline.
16. Including non-GAAP measures in the bullet points, an equal prominence problem (but a more solvable one compared to headlines as you might be able to live with including the GAAP measures in the first textual paragraph before the bullets).
17. Way too many non-GAAP measures and an inconsistency from period-to-period in using them.
18. Failure to explain why certain non-GAAP measures are useful to investors.
19. Including a full non-GAAP income statement. As reflected in CDI 102.10, Corp Fin clearly does not like this.
20. Failure to update – or comply with – Item 10(e) of Regulation S-K for non-GAAP numbers. For instance, they may use non-GAAP numbers in the call and then say the reconciliation is in the release attached to the 8-K but sometimes it is not there or there is an incomplete reconciliation.
21. Incorrectly stated explanation of a change in financial metric.
22. Including text from a concurrent filing (e.g., the 10-Q or an 8-K) without conforming “the Company” to “us” or “we” (or vice versa).
23. Earnings releases that simply are too long. If it is more than a couple of pages, even for the large companies, the incremental information starts to become marginal.
24. Earnings releases that highlight only the positive news that will be published in the 10-Q. Mostly happens with development stage companies, but surprisingly there are some S&P companies that seemingly try to “manage” expectations carefully by how they structure their releases.
25. Selective emphasis in the headline from quarter to quarter to exclude any “bad news.” For example, if the company had a net loss for the quarter, the headline might say only “XYZ Reports Record Revenues” (only the good news and not any bad news). But the next quarter, if the company had income, the release would say “XYZ Reports Earnings Per Diluted Share of $0.12 in Second Quarter.” This practice becomes even more worrisome when a company uses selective emphasis from quarter to quarter when non-GAAP measures are involved, particularly when there are new types of excluded charges.
26. Comparisons between periods that are unnecessarily complex and hard to follow (e.g., “Sales for the twelve months ended September 30, 2015, were $100 million, or and increase of $10 million, or 11%, compared to sales for the twelve months ended September 30, 2014” versus “Sales for the twelve months ended September 30, 2015, increased by 11%”).
27. Statements suggesting a mere transaction signing represents the closing of the transaction.
28. Quotes from CEO or other senior managers that are “lame” and don’t add value.
29. Draft earnings releases prepared by the IR department or IR vendor that don’t match up with a draft MD&A prepared by the internal accounting/finance team. The two groups need to communicate with each other and coordinate before they send out any drafts.
30. Audit committee not reviewing earnings releases or not having adequate time to review.
31. Ignoring comments from the Legal Department or the outside lawyer who reviewed the earnings release.
This list doesn’t cover the earnings release mistakes that sometimes happens, such as hacking incidents; accidentally releasing them early or posting them online on a URL that is not so hidden. Send me your peeves! And thanks to these members of my advisory board for their input: Troutman Sanders’ Brink Dickerson; Faegre Baker Daniels’ Amy Seidel; Hunton & Williams’ Scott Kimpel (& his friends at H&W); Weil Gotshal’s Howard Dicker; Orrick’s Ajay Koduri; Maslon’s Marty Rosenbaum and Gibson Dunn’s Jim Moloney.
– Broc Romanek