As companies’ earnings stream in, they bear all the tension and anticipation of the World Series. Companies already wrestling with Regulation FD, which insists that the press and public receive the same information at the same time as Wall Street, now have an added reporting obligation. Industry experts say publicly-listed companies should release their quarterly earnings at the same time as they file their quarterly statements, or 10Qs, with the SEC. While the idea of simultaneously releasing earnings and the 10Q has its proponents, in light of Reg FD and the market’s massive downturn, its detractors say companies are already scrambling to meet Wall Street’s expectations.
‘In a perfect world, the shareholder would get the hard copy to go with the earnings press release, but if there’s a long lag between the end of the quarter and getting your 10Q out – say two weeks – it won’t serve the shareholder to wait,’ says Patrick McGurn, vice president of Institutional Shareholder Services in Maryland. McGurn adds that within the past year, changes in audit committee rules make it even harder for companies to speed up the 10Q release process.
Nevertheless, there is a method to the madness, say advocates for simultaneous release of 10Qs and earnings. While public companies traditionally release their earnings to the public 15-20 days after the close of a quarter, they may legally take 45 days to file their 10Qs. In the meantime, the markets often react – sometimes impetuously – to the headlines generated by the earnings release. And by the time the Street gets the full story – 25 days later – analysts have already moved on. They are not likely to give full attention to the whole story, which they get only when the 10Q is released, since by then the next quarter is well underway.
The problem of timing is compounded by a new standard of ‘performance measurement’, whereby anyone with a computer can access earnings via e-mail, receive blast faxes, and tune into webcast conference calls to find out about earnings. Among the worst offenders are businesses that have adopted their own pro forma earnings measurements, which often include beneficial items to make their performance appear stronger and exclude the bad news. In light of these issues and recent Financial Accounting Standards Board (FASB) changes, industry advocates are pushing for simultaneous release of 10Qs and earnings. The benefits, they say, are immediate substantiation of press releases and conference calls, refutation of overinflated pro forma statements, termination of companies’ stock reacting violently to headlines, and an overall improvement in financial reporting.
Create a common practice
‘My feeling is that companies should be required to release 10Qs simultaneously with earnings; from a long-term investor’s point of view, everyone will be better off,’ says Joe Beaulieu, a technology analyst with Morningstar in Chicago. He adds that simultaneous releases will give companies more breathing room to present a broader picture of their business and eliminate the bird’s-eye focus on whether they hit their numbers that quarter. While from a typical shareholder’s point of view there may not be much advantage, Beaulieu says, ‘As analysts, we can do better valuation work from the cash flow statement when companies are in the middle of restructuring or changing their business model.’
Beaulieu gives the example of Motorola, a company that refused to give out its operating cash flow for the quarter, but told analysts to look at its 10Q. In cases such as this, Beaulieu says, companies would benefit investors by releasing their earnings statements and 10Qs together.’We do release earnings simultaneously with 10Qs, and I am a little surprised that it’s not a common practice,’ says Elinore Powell, executive director of IR at Estee Lauder. She notes that her former company, Duracell, also used simultaneous releases prior to its acquisition by Gillette. From an internal perspective, Powell notes, it’s a more streamlined process, though Estee Lauder does tend to report its earnings perhaps a week later than most other companies in its industry group. ‘We work very closely with our controller’s department, which prepares the 10Q, and we do the releases in tandem.’
Independent IR consultant Dirk Koerber agrees. ‘My advice is that every company should publish its cash flow statement with its earnings release,’ says Koerber, who handles IR for his former employer, Unova, a $2 bn industrial automation mobile computing company, among others. ‘If you don’t give that, you don’t disclose full information.’
Logistical nightmare?
Investor relations practitioners like Josh Young, director of IR at Aspen Technology in Cambridge, Massachusetts, say the simultaneous release of 10Qs and earnings, while a good idea, would likely prove a logistical nightmare. ‘It would be a significant operational challenge to issue the two things at once,’ Young says, noting that it is difficult for companies to gather the voluminous data necessary for the comprehensive 10Q within the narrow time period allotted to produce an earnings statement.
‘Is it even feasible to release 10Qs simultaneously with quarterly earnings?’ wonders Patricia McConnell, an accounting analyst for Bear Stearns. She explains that she would hate to see the release of information delayed until 10Qs come out.
In addition, the many recent FASB accounting changes have complicated financial reporting. Companies’ bottom-line numbers are a mishmash of adjusted and unadjusted figures. ‘Many companies’ managements are simply trying to help investors and analysts understand the results in a form where they are comparing apples to apples,’ McConnell says, so the need for accuracy prevails over rigid timing measures.
Take responsibility
Even those IR practitioners who vehemently oppose simultaneous release of 10Qs and earnings – and there are some – see a silver lining to the cloud. ‘We’re doing everything we can to offer good, reliable financial information to the investor community as IR professionals,’ says Sarah Wilkins, vice president of IR and corporate communications for Marex, a Florida-based e-commerce company. She notes that Marex puts out its earnings as near as possible to the 10Q filing date, which allows shareholders to get the information at close intervals.
Nevertheless, Wilkins believes it would be unfair to require companies to release 10Qs and earnings simultaneously. Plus, trying to force buy-side and sell-side analysts to digest all that information at once is unfair and ridiculous, Wilkins says. ’10Q filings can be very sophisticated; there are many investors who don’t understand the legal content, so they will be disadvantaged.’
‘I can see the conflict that companies are trying to balance out since they must try to tell shareholders right away how they are doing, but in terms of a flood of information, that’s already happening,’ says Morningstar’s Beaulieu. Companies in each industry usually report within a very tight time frame. For instance, four or five of the technology companies he covers may all report earnings in one day.
Wilkins feels, however, that the 10Q and earnings release work well as separate documents. ‘It should be up to the individual company to determine this; otherwise, it puts far too much of a burden on the responsible parties to meet deadlines that are very rigorous.’
‘Everyone is better served if companies have slightly different timing for their earnings releases,’ Koerber explains. He adds that Reg FD has changed how companies pre-report their earnings. In the current environment where earnings are lower than expected, ‘You now see some free reporting of earnings warnings.’ Prior to this, some companies might have given hints about their numbers at meetings, before the official release. ‘Reg FD has set up the press release as a pre-recording of earnings; it’s the safest thing that could have happened to the IR professional.’
In the final analysis, most IR professionals agree: it is not the SEC that is responsible for companies’ credibility, it is the companies themselves. Ultimately, Young notes, companies that release rosy though inaccurate earnings will suffer their just punishment from the Street. ‘In times like these, the days of companies playing games with creative accounting are over. When the market rebounds, they won’t find investors,’ Young says.
‘Any inconsistencies between the 10Q and the earnings press release are just plain bad IR,’ says Jerry Hostetter, head of investor relations for Smithfield Foods in New York. ‘We remain incredibly consistent; our earnings statement is virtually the first draft for the 10Q.’ Hostetter notes that Smithfield Foods tries to release earnings to investors as soon as possible via a press release. ‘We use our 10Q as an opportunity to provide more analysis of results.’
‘If companies offer very different interpretations of their operational and financial status in their earnings releases compared to their 10Qs, within a few weeks they’ll feel it in their stock valuations,’ Koerber says. ‘When they do it, they create an artificial environment for themselves. When they lose credibility, it’s the worst thing that can happen to a company. The market does its own damage to companies that make this a practice.’
‘Even companies with negative cash flow can explain that their burn rate is normal and under control. Being able to explain this adds management credibility,’ Koerber concludes.
Comprehensive releases
Like others, cosmetics and beauty-product seller Avon is investigating releasing more comprehensive balance sheet information at the same time as its earnings release, says Carol Murray-Negron, director of Avon’s IR department. While she too says the prospect of simultaneous release of 10Qs and earnings is not realistic, she adds, ‘What the Street wants is more information on the balance sheet sooner, such as a focus on cash flow from operations. These changes give investors a more comprehensive picture.’
JLG Industries, a Pennsylvania-based construction and industrial-equipment manufacturer, accompanies every earnings press release with an income statement, a balance sheet, a cash flow statement, and supplemental information on segments, product groups and geographic sales figures. ‘We strive to offer comprehensive financial information that will help our investors better understand the company’s business, markets, products and opportunities,’ says Juna Rowland, director of corporate and investor relations.
Regulation
While Estee Lauder’s executive director of IR, Elinore Powell, advocates simultaneous 10Qs and earnings releases, she doesn’t believe this practice should be regulated. ‘Do companies want their information fast or complete? Our industry, consumer products, does not tend to show a wildly varied earnings picture.
You don’t have a lot of surprises.’ Other industries like high tech, she notes, tend to be more cyclical, and companies may incur more stock volatility by waiting to release earnings. ‘If the SEC forces all companies to file their 10Qs and earnings simultaneously, it creates a volume digestion problem,’ agrees independent IR consultant Dirk Koerber. Earnings releases are controlled by unique issues from company to company, he points out. Some firms think being first shows investors that their accounting systems are in great shape, while others wait to see their competitors’ numbers, and feel competitive by releasing their numbers later on.
