What is an SEC Filing?
The United States Securities and Exchange Commission (SEC) requires a number of forms and financial statements to be filed from public companies, insiders and broker-dealers. Each SEC filing is accompanied with specific instructions and stipulations including time deadlines. These filings have the most significant material impact on the share prices of the underlying companies, as investors, fund managers and analysts react to the information. SEC filings are meant to disclose material information to the public in the spirit of fairness and equal access to any interested party.
Who is required to File SEC Filings?
SEC filings are required for all domestic publicly traded companies listed on United States stock exchanges. Officers, directors, beneficial owners and insiders are also required to file forms in relation to acquisition or disposition of stock.
Where Can You Find SEC Filings?
Most domestic publicly traded companies are required to submit SEC filings through the SEC-developed Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The public can also search and access company filings on the EDGAR database through the SEC website at www.sec.gov.
Form 10-K and Form 10-Q
The SEC Form 10-K is an annual filing required for domestic publicly traded companies. This report is meant to provide a complete analysis of the business operations, management team and detailed financial statements. Companies must submit this report no later than 90 days after the end of the fiscal year. The 10-K contains the full-year including the last fiscal- quarter financials as part of the comprehensive financial statements.
The SEC Form 10-Q is a quarterly filing due no later than 45-days the end of the quarter. It includes the formal non-audited financial statements for company earnings report. Just like a school report card, it is easily the most anticipated filing for investors with the most material impact on share prices. The report discloses the results of the business operations for the prior three months (fiscal-quarter) and details developments and events during the quarter. The report may also contain the forward business outlook for the next quarter and full-year guidance at the discretion of the management.
How to Read It
Usually, companies will release an earnings report press release to the public through a news wire service, which tends to trigger a market reaction. However, the official filings are submitted as the 10-Q (quarterly) and 10-K (annually). A good understanding of basic accounting statements will help to go a long way when deciphering the numbers. The distinction between GAAP and non-GAAP earnings should always be understood.
GAAP and non-GAAP Earnings
Companies have gotten more creative with reporting financials to pacify analyst expectations. A company’s comprehensive earnings is reported under the Generally Accepted Accounting Principles (GAAP) which includes all expenses, including non-cash related stock options grants and restricted stock. Companies argue that non-cash based compensation may unfairly negatively distorted the view of the underlying business. For this reason, most companies also report the non-GAAP earnings which only takes into account actual cash-based transactions and excludes non-tangibles and equity-based compensation. The non-GAAP reporting almost always paints a better picture of the operations. Most analysts tend to embrace the non-GAAP numbers as well.
What to Look Out For
The meat and potatoes of the 10-K and 10-Q are the financial statements, which include the income statement, balance sheet and cash flow statement. The term “bottom line” refers to the last line on the income statement, which discloses the net profit or loss for the quarter in dollars and earnings-per-share (EPS). Additionally, most reports contain a comparative to the year-over-year (YOY) growth/decline percentage so that investors can assess how business is trending.
Company insiders and beneficial owners (shareholders who own 10% or more) are required to file a Form 4 within two days after buying or selling company shares. The Form 4 is a statement of change in ownership (of the stock). It is a two-page document that details the seller/buyer, number of shares sold/purchased, average price and date of transaction.
What to Look Out For
Since Form 4s are actual transactions and not just intent to sell like a Form 144, these can have a market reaction. There are many reasons for insider selling aside from ‘bad news’ on the horizon including tax planning, pre-determined distribution programs and retirement. However, insider buying is considered bullish especially when performed in the open market by a high-ranking insider. These transactions tend to cause price spikes in the shares immediately after they are reported.
Publicly traded companies have a fiduciary responsibility to report any significant events that can have a material impact on the business operations or corporate structure through a Form 8-K filing with the SEC. This report needs to be filed within four business days.
What are Material Events?
The various material events can range from director changes, bankruptcies/receiverships, lawsuits/regulatory, financing events (bond/stock/private placement/shelf offerings), results of shareholder votes, acquisitions/mergers, results of operations, layoffs and account/accounting changes. Significant events tend to also be accompanied with a company press release but not always. The 8-K can have very strong impact on share prices, especially if the market has not priced in the event.