2020 financial outlooks are proving unreliable and companies are disclosing liquidity measures to face the economic impact of the Coronavirus outbreak.
On March 11, 2020, the World Health Organization (WHO) declared the COVID-19 virus, also known as Coronavirus, a pandemic. More companies are issuing 8-Ks to disclose the adverse effects of the outbreak on their business and their outlook for the year, some of them doing so not that long after they filed their annual 10-Ks including forward-looking statements. Many companies are now retracting their 2020 financial outlooks and disclosing liquidity measures to face the economic impact of the Coronavirus outbreak.
Some industries are more impacted than others. This is particularly the case for the travel sector, where a number of companies have suspended their outlook for the year.
The economic impact of the Coronavirus outbreak
The airline industry is suffering from restrictions in travel to certain locations as well as from trip cancellations, resulting in what United Airlines Holdings, Inc. calls “a material decline in demand” in its 8-K dated March 10, 2020. The company is also taking liquidity measures, such as reducing or postponing capital expenditures, reducing its flight schedules significantly, suspending its share buyback program, and securing new loans.
Similarly, Delta Air Lines, Inc. announced in an 8-K filed on March 10, 2020 that they “have made the difficult, but necessary, decision to immediately reduce capacity and are implementing cost reductions and cash flow initiatives across the organization.” These initiatives include a hiring freeze and voluntary leave options, the deferment of capital expenditures and voluntary pension funding, the suspension of share repurchases, and an increase in debt. Delta Air Lines also highlighted that they will benefit from the current low fuel prices, which will help them with liquidity.
Other companies are in the same situation. Royal Caribbean Cruises Ltd. issued an 8-K on March 10, 2020 to comment on their liquidity actions and to withdraw their 2020 outlook. They are looking to increase liquidity by $1.7 billion in 2020, by growing their revolving credit capacity and reducing capital expenditures and operating expenses in 2020, among other measures. The company indicated that some of these actions may even extend into 2021.
NEW SPECIAL REPORT:
SEC financial reporting under the microscope: Coronavirus risk disclosures
In a different but related industry, on March 10, 2020, Hilton Worldwide Holdings Inc. also withdrew its 2020 outlook in response to COVID-19’s impact. Previously announced guidance for the first quarter and full year 2020 can no longer be relied upon, the company said in its 8-K, because the potential negative impact of the outbreak could be greater than previously estimated. Hotels and other travel companies are all in the same situation.
These are just a few of the companies that issued 8-Ks during the week of March 9, 2020, and this is not limited to the travel industry. Many companies with significant business in high prevalence countries such as China or Italy also announced adverse effects on their businesses in the last few days. The economic impact of the Coronavirus outbreak is felt by many industries. Technology and retail companies come to mind. Other businesses involving gatherings of people, such as the wedding industry or the entertainment business are also feeling effects on their financial forecasts. Even companies that you may think would do well, such as Pfizer (manufacturer of Purell) or streaming companies (Netflix, for instance), saw a drop in share price, although not as pronounced as the rest of the market.
Because conditions are rapidly changing, it is now difficult for companies to predict earnings a year out, and even a quarter out for certain industries. Whether you are a tax preparer, an auditor, or a user of financial statements, this is certainly becoming a new challenge. Forward-looking information is always subject to uncertainty, but the current volatility in financial markets, coupled with the unknown duration of the pandemic, its geographic reach, or its severity, make it even more difficult to rely upon long-term or even short-term forecasts. The economic impact of the Coronavirus outbreak is being felt by all.
For more information about what public companies are disclosing about the impact of the coronavirus on their business, read our special report.
Learn how the coronavirus is increasing audit risks this year.