PR TECHNIQUE: Earnings releases and the right balance

While new regulations and market forces are causing companies to rethink how they write earnings releases, many of the old rules still apply.

While new regulations and market forces are causing companies to rethink how they write earnings releases, many of the old rules still apply.

Writing earnings releases in the wake of Sarbanes-Oxley and other regulation raises some new concerns, but analysts, investors, and reporters still want a release that's easy to read. For financial reporters, that means one that can be digested in the mere minutes they often have to do a rewrite. But with increased scrutiny by auditors, lawyers, and boards, those who draft the release have to start earlier, or work longer hours. Phyllis Dantuono, SVP of national bureaus for BusinessWire, says that putting together the earnings release is "a difficult process that's become a difficult and frustrating process." The timing is also affected by requirements stating that the information in the release, the conference call, and the SEC filing match up. If you're going to include a short version of the SEC filing's management discussion and analysis (MD&A), you need to have a good idea of what that MD&A, which comes out weeks later, will address. (The MD&A is a roundup of trends and issues the company and its industry are facing.) Amid a down market and financial scandals, the tone of such releases should be more sober, avoiding puffery and refraining from burying the bad news. Most experts advise companies to structure their releases the same way each quarter, so audiences become familiar with them. Use subheads and bullet points to make navigation easier. Matthew Doherty, VP and senior writer at Ketchum Pittsburgh, suggests having a theme run through all earnings releases. "If your company's big initiative is innovation, every earnings release should have examples of innovation, about what role it played in the quarter," he says. The headline starts telling the story. Don't just say in the headline (or in the body text) that revenues rose or fell - give some indication of why. At the same time, don't be unnecessarily alarmist. Ron Graziano, VP of Ashton Partners, says one client recently drafted a headline that read: "Company X Provides Guidance Among Current Economic Uncertainty." But then the company feared the headline looked as if it were downgrading its situation. So the headline was changed to "Company X Updates Its Outlook." According to David Armon, president of PR Newswire Americas, 38% of the Fortune 500 companies now include a summary below the headline. After an opening sentence in its 2002 year-end release, McDonald's has four bullet points highlighting numbers, followed by a key highlights table, and only then comes the commentary. In its earnings release for last year's third quarter, Duke Energy had a bold-faced deck under its headline pointing out that its 27 cents earnings per share included "25 cents of charges related to strategic actions and market conditions in [the] company's merchant energy and franchised electric businesses." Those charges are detailed after the second paragraph. "We said we need to shoot straight, and make people aware of what's impacting the business," says Terry Francisco, manager of financial media relations at Duke. The use of pro forma numbers, which don't conform to official accounting standards, and typically exclude one-time costs, is a hot topic. Under the SEC's new Regulation G, companies that include pro forma figures in their releases must explain why they differ from the generally accepted accounting principles (GAAP) numbers. This is causing a trend away from pro-forma use. The National Investor Relations Institute (NIRI) suggests that if both are used, the GAAP numbers should appear first. Several experts suggest putting the CEO's quote as high as possible. The quote shouldn't simply regurgitate the numbers, but highlight the company's message. "Get the financial information to succinct bullets, and then have an opening paragraph that reports the numbers," suggests Howard Zar, partner and head of the IR practice at Porter Novelli. "Below that, have a quote from the CEO that explains why the quarter was how it was." Zar, who notes that most releases are now read on computer, not paper, also advises that the quote should appear in the first computer screen. Either way, the quote should come before the year-to-date numbers, which for most companies aren't as noteworthy as the quarterly figures. Some companies still put a paragraph up high, right after the quarterly numbers, with the year-to-date performance. NIRI suggests that companies include a summary MD&A in the quarterly release. "We look for a simplified statement all investors can understand," says Lou Thompson, NIRI president and CEO. Other experts feel that a complete summary is overkill, but some discussion of the company's situation should appear. Whether to offer earnings guidance on how the company will do in the next quarter, or even the next year, is a sticky issue. Companies are getting skittish and tend to rein that in. Coca-Cola announced last fall that it would no longer provide earnings guidance. (It will discuss trend information that affects its business). Ketchum's Doherty says companies "should advance the story so it sets the stage for the next quarter. If the quarter was lackluster or had no surprises, is there a nugget [such as an impending new product launch] that you can put in the release that might give the financial media another reason to advance the story?" Though an earnings release's safe-harbor section, cautioning about forward-looking statements, might seem almost boilerplate, experts say it in fact should be updated to account for new conditions. NIRI also recommends including an income statement and balance sheet, and more companies seem to be doing so. And if you think all these changes mean earnings releases are getting longer, you're right. According to PR Newswire, the average length of a release that came out between January and October 2002 was 3,600 words. That - in the spirit of earnings releases - was an increase of 28.42% over the same period in the previous year. ----- Technique tips Do start drafting the release as early as possible, even if you don't have numbers. Increased internal scrutiny means the process takes longer Do use plenty of subheads to make the document easier to navigate Do use the CEO quote to explain how the company intends to combat a poor performance Don't view the earnings release in isolation. It's a vital instrument with which to communicate a company's vision, story, and even brand Don't bury bad news deep in the release - or, worse yet, only in the SEC filing Don't use pro forma numbers without reconciling them with GAAP numbers

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