Swine flu spreads to corporate reporting
May 08, 2009
SEC filings get the bug
The panic has subsided over the past week but swine flu has already made a permanent mark on corporate reporting. Harkening back to 2003 and the SARS outbreak, the current scare has been mentioned in dozens of 10Qs and other filings.
‘This quarter there is a lot of IR focus on whether swine flu should be added as a risk factor in the 10Q risk factor update,’ says Michael Littenberg, partner at Schulte Roth & Zabel in New York. ‘Even if it is not a risk factor, this is something companies in many sectors and geographic areas will need to be sensitive to from an IR perspective.’
Littenberg says companies in the travel, hospitality, retail and restaurant industries have been considering whether to add swine flu as a risk factor.
‘Some businesses really are going to see this as a known uncertainty that has to be discussed – not just as a risk factor update, but in their MD&A,’ says Steven Emerick, chair of the corporate finance and securities practice at law firm Quarles & Brady.
The first disclosure of swine flu as a risk appears to have been the April 28 20F from a NASDAQ-listed Chinese company, AirMedia Group, which runs an air travel advertising network in China. Companies in Asia may have reacted faster because of how seriously SARS affected the region.
Burger King was the first US company to hint at a material impact from swine flu when it ratcheted down next quarter’s earnings guidance in an April 29 earnings release. CEO John Chidsey said in the release: ‘Due to ongoing market challenges and unknown potential effects of the swine flu situation, we are taking a more conservative outlook to our fourth quarter fiscal year 2009 earnings estimates.’
Then Expedia, Starwood Hotels & Resorts, American Express and Universal Travel included swine flu as a risk factor in their 10Qs filed in the last week. Yesterday AIG mentioned it from an insurer’s perspective. Less obvious filers include Harsco Corp, an engineering company, and Celadon, a trucking company. Microsemi, a semiconductor maker in Silicon Valley, mentioned swine flu among the ‘risks inherent in doing business internationally.’
Some of the language is not tailored to individual companies, as risk factors are meant to be. Disclosures are supposed to steer clear of boilerplate language and any mention of risks that apply to all businesses. ‘But this is a hard one for companies to drill down on,’ says Littenberg. ‘Swine flu is in the early stages and no one knows the effect, if any, on their business.’
Most mentions of swine flu over the last week have been pasted into the text of existing risk factors talking about pandemics that date back to the SARS outbreak. ‘[Securities lawyers] kept that language in over the quarters and over the years,’ Emerick says. ‘We still have the vestiges of SARS-specific risk factors.’
Even at companies that don’t include swine flu in their risk factors or MD&A, IROs should be prepared for it in earnings calls and annual meetings. The swine flu question was raised by an analyst on Pharmathene’s April 29 conference call, and by a shareholder at Merck’s annual meeting the previous day – both times regarding treatments.
If swine flu escalates instead of leveling off, the question is bound to come up for a wide range of companies. ‘It’s one of those things that as an issuer you want to have thought about,’ Littenberg says.
By Neil Stewart