Earnings Release Playbook
While public companies are not legally required to issue press releases to report their earnings or report guidance, most companies issue quarterly press releases to meet investor expectations. This early disclosure also enables companies to open insider trading windows sooner, based on the premise that the earnings release and the related earnings call sufficiently convey all material financial information. Although earnings press releases are voluntary disclosures, they trigger Item 2.02 of Form 8-K and implicate a number of other considerations. Below are some of the key legal requirements related to earnings releases.
Form 8-K
In practice, companies typically furnish their earnings releases—but not earnings call scripts or slide presentations—on Form 8-K with the Securities and Exchange Commission (“SEC”). Under Item 2.02 of Form 8-K, a company must furnish a Form 8-K whenever it publicly discloses material non-public information about its results of operations or financial condition for a completed fiscal quarter or year. The Form 8-K must include the date of the release, a brief identification of the release, and the full text as an exhibit. In practice, the disclosure in the Form 8-K that furnishes the earnings release is short and requires minimal review to ensure that the references were correctly updated from the language utilized in the last quarter.
Companies are not required to furnish earnings call scripts or slide presentations so long as they meet the criteria for an exception included in Item 2.02 of Form 8-K. Item 2.02(b) of Form 8-K provides that if material non-public information is shared orally, telephonically, by webcast, by broadcast or by similar means it does not need to be furnished under Item 2.02, provided four conditions are met: (1) the presentation occurs within 48 hours of a complementary related written release furnished under Item 2.02 of Form 8-K; (2) it is broadly accessible to the public; (3) the financial and statistical content in the presentation is posted on the company’s website along with any information that would be required under the rules governing non-GAAP financial measures (17 CFR 244.100); and (4) the presentation was announced in a widely distributed press release that included access details and the website information where the information would be made available. Additional information may be conveyed in the earnings call and in supplemental materials, but that information should be complementary to the material information that is included in the earnings release.
Timing is important if a company plans to rely on the exception in Form 8-K Item 2.02(b). The Form 8-K with the earnings release must be furnished prior to the presentation, so the Form 8-K with the earnings release would have to be furnished before 5:30 p.m. if the conference call would be held before EDGAR reopens the following morning. In addition, Question 106.03 of the Exchange Act Form 8-K Corporation Finance Interpretations provides that the information required to be posted on the company’s website must be available at the time the investor call occurs.
Earnings Release
Earnings releases are voluntary disclosures; therefore, there are no SEC rules requiring that specific information be included in the earnings release; however, there are a few overriding considerations described below.
Accurate Disclosure
Information in the earnings release must be accurate and complete. Earnings releases are subject to the general antifraud provisions of Section 10(b) and Rule 10b-5 of the Exchange Act, which prohibit material misstatements or omissions. When an earnings release is “furnished” and not “filed” with the SEC under Item 2.02 of Form 8-K, the earnings release is not incorporated into Securities Act registration statements that are subject to Securities Act Section 11 liability, and would not be subject to liability under Section 18 of the Exchange Act, which provides for liability for documents filed with the SEC.
Occasionally, companies may want to incorporate by reference some of the information in the earnings release into a Securities Act registration statement if they plan to conduct an offering of securities using the registration statement before the Form 10-Q is filed. If any portion of the information presented in the earnings release is filed rather than furnished, that information would be subject to liability under Section 18 of the Exchange Act and Section 11 of the Securities Act.
Non-GAAP Financial Measures
A financial measure is a non-GAAP financial measure and is subject to the SEC’s non-GAAP rules and interpretive guidance when it excludes amounts that are included in, or includes amounts that are excluded from, the most directly comparable GAAP financial measure. If non-GAAP financial measures are included in an earnings release, Regulation G and certain portions of Item 10 of Regulation S-K (by virtue of Item 2.02 of Form 8-K) apply to such information.
Regulation G applies when a company, or a person acting on its behalf, publicly discloses material information that includes a non-GAAP financial measure. Regulation G requires the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and a quantitative reconciliation of the differences between the non-GAAP financial measure and the most comparable financial measure or measures calculated and presented in accordance with GAAP. Unlike Item 10(e) of Regulation S-K (discussed below), Regulation G does not require that the comparable GAAP financial measure be at least as prominent as the non GAAP measure. Regulation G applies regardless of the format in which the non-GAAP measure is disclosed—including earnings releases, investor presentations, or earnings calls.
Item 10(e) of Regulation S-K applies when a company includes non-GAAP financial measures in an SEC filing. While Item 10 of Regulation S-K normally would not apply to an earnings release since it is “furnished” instead of “filed” with the SEC, pursuant to Item 2.02 of Form 8-K, Instruction 2 to Item 2.02 of Form 8-K states “The requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K (17 CFR 229.10(e)(1)(i)) shall apply to disclosures under this Item 2.02.” Item 10(e)(1)(i) of Regulation S-K requires: (1) the most comparable GAAP metric to be presented with equal or greater prominence, (2) a reconciliation to the most comparable GAAP metric, (3) a statement disclosing the reasons why the registrant's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant's financial condition and results of operations; and (4) a statement disclosing the additional purposes, if any, for which the registrant's management uses the non-GAAP financial measure. Please refer to Question 102.10 of the Non-GAAP Financial Measures Corporation Finance Interpretations for examples of what presentations would result in the GAAP measure not being presented with equal or greater prominence. If a non-GAAP financial measure is presented on a forward looking-basis (for example, as a part of earnings guidance), a reconciliation may be omitted if it would involve unreasonable efforts. Question 102.10(b) of the Non-GAAP Financial Measures Corporation Finance Interpretations indicates that a company should state that it is relying on the exception provided by Item 10(e)(1)(i)(B) of Regulation S-K, identify the information that is unavailable, and its probable significance in a location of equal or greater prominence.
The SEC frequently scrutinizes disclosures containing non-GAAP financial measures, making full compliance with applicable non-GAAP financial measure disclosure requirements essential to avoid Staff comment letters.
Key Performance Indicators
Guidance by the SEC with respect to key performance indicators does not state that it directly applies to key performance indicators included in an earnings release, but in order to make the use of key performance indicators not misleading, companies should include in an earnings release that discloses key performance indicators: (1) a clear definition of the metric and how it is calculated, (2) a statement indicating why the metric is useful to investors, (3) a statement indicating how management uses the metric in managing or monitoring the performance of the business, and (4) any other information to not make the metric misleading. See "Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Release No. 33-10751 (January 30, 2020).
Forward Looking Statements Safe Harbor
The Private Securities Litigation Reform Act of 1995 provides safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act for forward-looking statements. To get the benefit of the safe harbor, the statement must be identified as a forward-looking statement, and must be accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement. Legal counsel should carefully review and update the forward-looking statement safe harbor contained in an earnings release. The forward-looking statement disclosure should also include specific areas of risk or uncertainties that relate to statements made in the earnings release. If earnings guidance is included in the earnings release, the forward-looking statement language should specifically call out that the guidance, and any identified assumptions on which the guidance is based, are forward-looking statements. Legal counsel should also carefully examine statements to ensure that any statements subject to uncertainties are not written as statements of fact. For example, statements such as “we ensure” or “we will” should be rewritten to be aspirational such as “we are working to ensure” or “we aim to.”
Dissemination
The earnings release must be issued in a Regulation FD compliant manner. Most registrants disseminate the earnings release through wire services and simultaneously post it on the company’s website, in addition to filing it as an exhibit on Form 8-K. As a reminder, NYSE-listed issuers must give the NYSE at least ten minutes prior notice of the issuer’s intended announcement of material news during the period between 7:00 a.m. and 4:00 p.m. Eastern Time. If posted after market close, the NYSE prohibits the publishing of material news until the earlier of 4:05 p.m. ET or the publication of the official closing price of the listed company’s security (except when publicly disclosing material information following a nonintentional disclosure in order to comply with Regulation FD). Nasdaq requires at least ten minutes notification of material news during the hours of 7:00 a.m. to 8:00 p.m. ET and notification on the electronic disclosure submission system outside of those hours.
Earnings Call
Similar to the earnings press release, there is no requirement to conduct an earnings call and some companies choose not to conduct an earnings call.
Announcement of the Earnings Call
Companies usually issue a press release announcing the upcoming earnings call that includes information on when the call is, how to join the call and where to obtain presentation materials for the call in order to satisfy Item 2.02(b) of Form 8-K and Regulation FD. Question 102.01 of the Regulation FD Corporation Finance Interpretations provides guidance regarding adequate notice for a conference call in accordance with Regulation FD. The earnings call also must occur within 48 hours of the release of earnings in order to satisfy the criteria under Item 2.02(b) of Form 8-K.
Forward-Looking Statements Safe Harbor
The call script for an earnings call should always contain a statement with respect to forward-looking statements at the start of the call. The safe harbor with respect to forward looking statements states it will only apply to oral forward-looking statements that are accompanied by a cautionary statement that the particular oral statement is a forward-looking statement and also that actual results might differ materially from those projected in the forward-looking statement. The script should also include a statement that additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in another readily available written document, identify the document that contains that information and the document referenced should include a cautionary statement that satisfies the standard for written information protected by the safe harbor.
Non-GAAP Financial Measures
If any non-GAAP financial measures are disclosed on the earnings call, an additional statement should be included at the start of the script with respect to non-GAAP financial measures. Note 1 to Rule 100 of Regulation G states that if non-GAAP financial measures are disclosed orally, the requirement to present the most directly comparable GAAP metric and include a reconciliation will be satisfied if (1) the required information is provided on the company's website at the time the non-GAAP financial measure is made public; and (2) the location of the website is made public in the same presentation in which the non-GAAP financial measure is made public. Therefore, if a reference to a non-GAAP metric is made on the earnings call, the script should include a line that a reconciliation to the most directly comparable GAAP metric is posted on the registrant’s website and indicate where on the website that information is posted.
General Considerations
Consistency in Reporting
Often, companies have different people reviewing or drafting different documents used in reporting earnings whether it be the script, earnings release, investor presentation or Form 10-Q. It is important as legal counsel to review each of these documents for consistency between them. For example, if the reasons mentioned for a significant change in a financial metric were different between the Form 10-Q and the earnings release, the descriptions should be reconciled. As legal counsel, we should be reviewing the descriptions of changes in the financials in the earnings release and in the earnings call against MD&A and financial statements included in the Form 10-Q or Form 10-K for consistency and to ensure that any known trends or uncertainties are described.
This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.