January 16, 2014
2013 is over and filing deadlines are looming. Issuers with securities registered under the ’34 Act must file a 10-K within 90 days of the end of their fiscal year (e.g. March 31st for a fiscal year ending December 31, 2012). Registrants meeting the Accelerated Filer criteria have only 75 days (e.g. March 16th). In hopes of giving registrants a sense of what to expect from the 10-K review process, we looked back at last year’s season by reviewing SEC comments letters and issuer responses for 20 of the largest companies in the S&P 500 index.
Our 20 issuers were all Accelerated Filers in 2012. On average, they filed their 10-Ks within 47 days of the end of their fiscal year. Amazon had the fastest turnaround, filing only 30 days after year-end, while Citigroup, the slowest, took 60.
The average wait for the SEC’s first comments averaged 90 days, but that figure does not accurately depict the broad range of response times experienced. Procter & Gamble, for example, waited less than one month for comments, but Apple had to tough it out for nearly eight. Once comments were received, it took an average of 67 days before the review process was complete.
There was some variety in the length of review periods, from 16 days for AT&T to 147 for Schlumberger Limited. The most grueling reviews feature an initial SEC request for general information focusing in subsequent letters on one aspect of the original request.
The SEC’s comments covered a broad range of topics, from Apple and Intel’s un-repatriated assets to Home Depot’s e-Commerce reporting, but a few themes emerged.
Black boxes grab the SEC’s attention, especially when issuer-controlled metrics lead to large value adjustments. In a number of letters, the agency sought detailed clarification of assumptions and methods underlying opaque metrics. Citigroup is asked to, “disclose how each of the [previously disclosed] factors contributes to the increase in the Interest Rate Expense on a quantitative basis, either in dollar or percentage terms” (CITIGROUP, SEC Staff Comment Letter, 10-K, April 23, 2013).
Comcast must provide information “regarding your calculation of the average monthly total revenue per video customer,” including, “the components used in the numerator and denominator in deriving the metric”(COMCAST, SEC Staff Comment Letter, 10-K, May 16, 2013).
To Procter & Gamble the SEC asks plaintively that the company, “please help us better understand the facts and circumstances that led to [a goodwill] impairment,” including “a specific and comprehensive discussion regarding changes in the significant assumptions that led to the impairment charge” (Procter & Gamble, SEC Staff Comment, 10-K, September 4, 2012).
General Electric is questioned closely about “specific changes made in your loan loss allowance,” and, “how these changes impacted your loan loss allowance for the U.S. installment and revolving credit financing receivables” (GENERAL ELECTRIC CO, SEC Staff Comment, 10-K, April 25, 2013).
Retail businesses like Wal-Mart, Amazon, and Home Depot were asked to break out specific business segments, particularly international sales and Internet sales. The SEC observed that “given Walmart International’s continued growth,” consideration should be given, “to disclosing comparable store sales for this segment” (WAL MART STORES INC, SEC Staff Comment, 10-K, June 10, 2013). The SEC enjoined Amazon to “state any material revenues from external customers attributed to any individual foreign country” (AMAZON COM INC, SEC Staff Comment, 10-K, DEF 14A, April 24, 2013). Wal-Mart was also asked to “present your comparable store and club sales metric on both the basis of excluding eCommerce sales and including eCommerce sales for each of the periods presented … or alternatively, separately quantify the eCommerce activity included in this metric for each period presented” (WAL MART STORES INC, SEC Staff Comment, 10-K, June 10, 2013). The SEC requested that Home Depot augment a discussion its of online platform by disclosing, “the percentage of your net sales that are online sales or disclose that your online sales are immaterial for the periods presented” (HOME DEPOT INC (THE), SEC Staff Comment, 10-K, August 08, 2013).
And the SEC pays attention to the news: last year it sought considerable further disclosure from issuers employing offshore subsidiaries to minimize US tax. Much of the scrutiny fell on Apple. The SEC’s first comment letter to Apple contained four questions, all addressing offshore tax haven disclosure. A follow-up letter contained three requests for elaboration. The SEC also scrutinized Intel, noting that the company “indicated that a sizable amount of … cash and cash equivalents … is held by your foreign subsidiaries.” The agency then requested, “tell us separately the amount of cash and cash equivalents … held by your foreign subsidiaries at December 29, 2012 and at March 30, 2013” (INTEL CORP, SEC Staff Comment, 10-K, May 03, 2013). Even Wal-Mart was not spared. The SEC sought “further detail on how the global funding structures (described by the issuer) work in order to lower your effective income tax rate” (WAL MART STORES INC, SEC Staff Comment, 10-K, June 10, 2013).