Public Company Filings
The filing of these forms promptly and completely is ensured by the Securities and Exchange Commission (SEC).
What is public company filings?
Publicly traded companies, registered broker-dealers, and specific company insiders are responsible for creating and publishing various audited financial statements to be released to the public.
The filing of these forms promptly and completely is ensured by the Securities and Exchange Commission (SEC). These statements give a detailed account of the company's financial activities and help investors make confident investment decisions.
These statements are provided at set intervals based on the company's choice of fiscal year. The opinions within these filings, which include the Balance Sheet, Cash Flows, and Income Statement, serve as the basis for most fundamental analysis and modeling techniques.
These forms are the most extensive and verifiably accurate information about a company's performance and financial standing. Any revenue forecast or investment decision should consider these forms.
These forms also provide shareholders with information on pending acquisitions, legal action, or non-standard information that could affect the company's value. Reading these statements punctually shows that you don't get in a precarious position.
Company filings can also show insiders' feelings about the company's future and indicate if executives have faith in long-term growth. As a result, investors can make much more informed investment decisions when they learn to "Read between the lines" of public company filings.
The most well-known statement, the 10-K, is often the starting point when conducting investment research as it is the most comprehensive of the filings. These filings can be found on company websites or by searching the SEC's EDGAR online database.
The 10-K
Companies with $700 million or more shares outstanding have 60 days to file their form, companies between $75 and $700 million have 75 days, and companies with less than $75 Million have 90 days to file.
Form 10-K is the bread and butter of financial analysis and the filings' most information-dense. This form must be submitted to the SEC within 90 days of the company's fiscal year-end and is required annually.
The company's annual report and 10-K share similar information but are still not the same. The company's 10-K is broken down into these major sections:
1. Business Summary
Here is where management gives a brief overview of the company history, a breakdown of company segments and operations, and a description of the company's competitive advantage.
This section serves as a starting point to familiarize yourself with the company's operations and range of products or services, as well as its competitors and market share.
2. Management Discussion and Analysis (MD&A)
This is an often overlooked but special section of the 10-K. Unlike the rest of the form, this section is not audited and allows management to paint their picture of the company's performance over the past year.
This can be used to sense the "mood" of company leadership and provide the keen reader with an insight into the company's executives and what company goals will look like moving forward.
3. Financial Statements
Since this section of the form contains the most relevant information to create financial forecasts, analysts will often jump directly to it. Within this section are the statement of cash flows, income statement, and balance sheet, all audited by an external firm for accuracy.
When combined with other sources, these statements can be precious, but when used in a vacuum, they can lead many novice investors astray. Therefore, these forms are most valuable when used in conjunction.
Each financial statement uses a different method of accounting to produce the data. This method is stated in the footnotes. Therefore, before making decisions based on financial statements, it's essential to read and understand their way of accounting.
4. Supplemental Sections
Though the 10-K is standardized mainly, some filings have discrepancies outside the main three sections. Often included in this section is a letter from the company's auditor certifying the accuracy of their review.
The sector or company-specific data or disclosures can be found in this section. This would be where any legal action, unique values, or information the shareholders have not been informed of is disclosed.
Why read the 10-K
This form is the backbone of modern financial analysis, so taking the time to understand the nuances behind the state and its contents can give aspiring and experienced investors an edge.
Many financial ratios are calculated using the information within the financial statements, which can be used to compare similar companies on operating metrics. The most common is Return on Equity (ROE) and Earnings per Share (EPS).
When reading through the 10-K, it's essential to read the footnotes thoroughly, as the accounting method that the company uses is disclosed there. This can tip off any investors if there are unethical practices within the accounting process.
The 10-K is also the only public filing required to be audited by an external firm, giving analysts confidence when making forecasts based on their information. These audits are usually conducted by large firms such as EY, KPMG, Deloitte, or PWC for large companies.
Though the document may be daunting at first, understanding how the form is organized can lead to a much more thorough understanding of a company's financial health.
10-Q
As you may have guessed, the Q in 10-Q stands for quarterly. Unlike the 10-K, this form is submitted quarterly to the SEC and is somewhat less dense than its bigger brother.
The form is submitted three times throughout the year, with the 10-K representing the fourth form to round out the year. The 10-Q is an unaudited, abridged version of the 10-K, seeking mainly to update investors on the current state of the company's financial condition.
An external auditor does not verify the 10-Q for accuracy, but any discrepancies made by the company to knowingly misrepresent their financial standing is considered fraud. The Securities and Exchange Commission enforces the validity of the statements and their information.
The filing deadline for companies is structured similarly to the 10-K, with three tiers based on the company's float. For example, companies with $75MM+ must file within 40 days, and companies with less must file within 45.
Why read the 10-Q
Investors find value in the 10-Q mainly because it allows them to update their valuation metrics more frequently. This reduces the lag in information between annual statements when only forecasting based on 10-K's.
More updates on the company's inventory levels or free cash flow can be valuable determinants in recommending buy, sell, or hold decisions, making the 10-Q equally, if not more valuable than the 10-K in forecasting value.
This form can also be used for comparative analysis between competitors, allowing analysts to see how different companies react to similar market conditions. This can help weed out weaker companies that may have fooled analysts in the past.
With more frequent information, investors can also compare the company to its competitors more frequently to assess its progress. Therefore, keeping up to date with all company filings is essential, with the 10-Q no exception.
8-K
This form serves as a catch-all to report any significant changes in the company's financial health that may occur between forms 10-K or 10-Q. The 8-K is not issued at set intervals and must be filed with the SEC for several reasons, some of which are listed below.
- Bankruptcy: If a company files for bankruptcy, the form must be filed with the SEC for shareholders to be notified punctually.
- Acquisitions: If the company purchases a portion or the entirety of another company, a Form 8-K must be filed to inform the shareholders.
- Delisting: If a company's stock is trading too low or no longer meets the standards for being exchange-listed security, it can be delisted. This must be reported through the filing of an 8-K.
- Accounting firm status: Any change in the accounting firm used to verify the validity of company filings must be reported to the SEC by filing form 8-K.
The 8-K is not explicitly required to be filled out if no significant events are reported between the two required filings. The most common uses of form 8-K are to report bankruptcies, mergers & acquisitions, and appointments of company executives.
Why read the 8-K
The primary value found in the 8-K is in conducting case studies to understand how corporate events affect stock prices. Statisticians and analysts combine data from these periods to run a regression analysis, which can be used to predict future performance.
The form also provides essential details about the legal and financial standing of the company, such as bankruptcies or stock delisting. All of these can have significant effects on share price and the company's future.
While the 8-K does not provide the same value as other forms when creating financial models, it gives invaluable qualitative information about companies. Therefore, when an 8-K is filed, it should be read entirely to capitalize on the market's reaction.
Many reasons for filing an 8-K are required and defined by the SEC, whereas others are filed at the company's discretion due to events they deem significant to their shareholders. This is commonly a new product, a merger, or any legal action involving the company.
Proxy Statement
The proxy statement provides salaries and total compensation of company management to the public. Like the 8-K, this form is not required to be filed regularly but is filed before shareholder meetings and before shareholders conduct any voting activity.
Owning common stock provides the right for individuals to vote for new board members or several corporate actions. The proxy statement details the issues to be voted on during the shareholder meeting.
Physically attending shareholder's meetings is often not possible, so shareholders are allowed proxies to vote on their behalf. Reading the proxy statement helps investors decide how to instruct their reps to vote.
This filing also discloses conflicts of interest between executives or auditors and the company. This makes the form a one-stop shop for any personal information regarding directors, board members, auditors, or internal stakeholders.
Information over administrative expenditures is also disclosed here, allowing the public to decide if some company resources are being mismanaged or abused.
These statements can be found with other company filings on the SEC's EDGAR database and are known officially as form DEF 14A. Any executive compensation, including equity awards, will be listed for shareholders to inspect on this form.
Forms 3, 4, and 5
These forms are required of company insiders and disclose information about the ownership or trading of the company's securities. Company insiders are considered the officers and directors, and any investor owns more than 10% of that company's equity.
The three forms are specifically described and required as follows:
- Form 3: This is the insider's initial filing and discloses the securities and amounts owned by the insider. This form is only required when the insider first acquires company stock, and form 3 must be filed within ten days of the individual becoming an insider.
- Form 4: This form covers any insider trading activity buying or selling company stock. The form must be completed and filed within two days of the transaction to the SEC.
- Form 5: Form 5 covers all trading activity that failed to be reported via a Form 4 filing. If form 5 is not filed within 45 days, the insider could face criminal or civil actions against them.
However informed the public may be, we will never be as knowledgeable as the company's management. Keeping track of insider trading patterns may help retail investors better understand the company's future.
It is essential to understand that insiders buying and selling shares around a corporate event are subject to a 6-month trading restriction. When insiders believe, they do so based on assumptions for long-term growth.
Schedule 13D
This form is required when any shareholder acquires 5% or more of the company's ordinary voting shares. Once the 5% threshold has been reached, the shareholder has ten days to report their purchase and file form 13D with the SEC.
This form is also known as a "beneficial ownership report" and is commonly an indication of a corporate takeover. Informing shareholders of this possibility on time is extremely important, which is why the form has the shortest filing date.
Schedule 13D was added with the passing of the Williams Act, an amendment to the Securities Exchange Act of 1934. This amendment is designed to help investors prepare for future company structure or management changes.
The amendment was passed following the increasing frequency of tender offers to shareholders and gives advance notice for shareholders to expect these offers from corporate raiders.
There are certain instances where shareholders can file a Schedule 13G form instead of their mandated 13D form based on several exemptions. These rare exemptions make schedule 13D a much more common filing than 13G.
One of the unique requirements of form 13D is the listing of funds and the purpose of the transaction. This requires the beneficial owner to report where the funds used to purchase stock came from and why they chose to buy it.
Form 144
Similar to forms 3,4, and 5, Form 144 is required of insiders who wish to sell their ownership of company stock. The difference with form 144 is that it covers restricted stock or stock not widely available to the public.
The form must be filed within 90 days of the transaction when selling more than 5,000 shares or $50,000 within three months.
This form was created to protect shareholders from high levels of insider trading, which was a significant factor in the market crash of 1929.
Initial Public Offering (IPO) shares are subject to a lock-up period after they are issued to the public. A form 144 filing can signify to investors that these restricted shares will be available for purchase soon.
Lock-up agreements are typically between underwriters and insiders that get the first chance to purchase the stick. The contracts reduce the volatility of a newly issued stock and allow investors to sell after 120, 180, 0r 365 days.
There are several ways in which the selling of restricted stock can influence its price, but if a large number of these shares are sold quickly, the price will almost certainly drop.
Summary
These SEC filings help investors, researchers, and analysts find quality information on which to base investment decisions. In addition, they provide transparency to the securities industry and serve to level the playing field for retail and institutional investors.
When reading through the forms, remember that the 10-K is the only form with a mandate to be externally audited. While this still means the information can be fraudulent, ala WorldCom, it will almost certainly be accurate for the vast majority of companies.
Combined, these filings can provide investors with a holistic understanding of a company's financial health. Experienced investors can find important information in these documents, which can lead to a buy, sell, or hold decision.
Most company filings are listed on company websites under their "investor relations" section or can be found through the SEC's EDGAR database. No matter the source used, the forms will be identical in format and information.
If you are interested in creating models from these forms, several companies provide the information in spreadsheets to get a jump on your model. However, given the length and complexity of most states, it is essential to ensure your information matches with the SEC.
Each form has its unique purpose, and reading through these documents purposefully can help create accurate forecasts and investment decisions.
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