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The need to consider updating earnings guidance through a pre-release usually arises because management expects that the company’s results may depart significantly from its previous guidance. Deciding whether to issue a pre-release is a high-stakes decision that requires management to weigh often significant liability and credibility risks. Despite that, this isn’t a topic that I’ve seen a lot written about, at least until now.

Fortunately, this recent Sidley memo provides helpful guidance to companies that find themselves thinking about issuing a pre-release. It addresses some of the key considerations surrounding an earnings pre-release, including the applicable legal requirements, management credibility issues, Reg FD compliance & litigation and risk management.  This excerpt highlights the need to ensure that management has a high degree of confidence in the information it discloses in a pre-release:

If a company has determined to pre-release its results, it should do so only when management is highly confident in the accuracy of the numbers, or at least a relatively narrow range. Having to make more than one pre-release, or ultimately reporting final financial results that materially differ from those reported in the pre-release, may backfire and end up harming rather than helping the company’s credibility with investors and analysts. When preparing the pre-release, companies should ensure that no material information is omitted that might render the disclosure materially misleading or inaccurate.

The memo reminds companies that a decision to issue an earnings pre-release is one that requires input from several different constituencies, including the CEO, CFO, CLO, head of investor relations, key board members (including the audit committee) and, typically, outside legal counsel. It also points out that once a company decides to pre-release, its actions will likely be viewed as creating a precedent for the future by investors and analysts.

– John Jenkins