Quarterly report

What Is a Quarterly Report?

A quarterly report is a comprehensive unaudited summary of a public company's financial performance and operational activities over a three-month period. It is a fundamental component of Financial Reporting, designed to provide timely and transparent information to the public, particularly investors and analysts. In the United States, the most common form of a quarterly report is Form 10-Q, which is mandated by the Securities and Exchange Commission (SEC) for most publicly traded entities¹⁹. This report offers a snapshot of the company's financial health, liquidity, and operational results, covering the first three fiscal quarters of the year.

History and Origin

The requirement for regular financial disclosures by public companys in the United States dates back to the Securities Exchange Act of 1934, which mandated periodic disclosures for companies listed on an exchange. However, standardized quarterly earnings reporting as we know it today, specifically through Form 10-Q, was formally required by the SEC beginning in 1970¹⁶, ¹⁷, ¹⁸. This move aimed to enhance market transparency and provide investors with more frequent updates on a company's performance. The SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, which began development in 1993, further revolutionized the accessibility of these reports by making them electronically available to the public, with mandatory electronic filing for all reporting companies since May 1996.¹⁵

Key Takeaways

• A quarterly report, often filed as Form 10-Q with the SEC, provides unaudited financial information for a three-month period.
• It includes condensed Financial Statements like the Balance Sheet, Income Statement, and Cash Flow Statement.
• Public companies are generally required to file their quarterly reports within 40 or 45 days after the end of the quarter, depending on their public float¹⁴.
• Quarterly reports aim to provide timely transparency, allowing investors to monitor performance and make informed decisions.
• The fourth fiscal quarter is typically covered in the annual Form 10-K report, rather than a separate quarterly filing¹³.

Interpreting the Quarterly Report

Interpreting a quarterly report involves analyzing the financial data and narrative disclosures to gain insights into a company's recent performance and outlook. Key sections to scrutinize include the condensed financial statements, which reveal revenues, expenses, assets, liabilities, and cash flows. Comparing these figures to previous quarters and the same quarter in the prior year can highlight trends, growth, or areas of concern.

The Management's Discussion and Analysis (MD&A) section is particularly valuable, as it offers management's perspective on the company's financial condition and results of operations, including known trends, demands, commitments, events, and uncertainties. Additionally, the disclosures about market risks and internal controls provide context on potential challenges and the robustness of the company's financial reporting processes¹². Analysts often look for specific metrics, such as revenue growth, profit margins, and changes in working capital, to assess operational efficiency and financial stability.

Hypothetical Example

Consider a hypothetical technology company, "Tech Innovations Inc." For its second fiscal quarter ending June 30, Tech Innovations Inc. would prepare a quarterly report. This report would include:

1. Condensed Income Statement: Showing revenues of $500 million, cost of goods sold of $200 million, and operating expenses of $150 million, resulting in a net income of $150 million for the quarter. It would also show comparable figures for the same quarter last year.
2. Condensed Balance Sheet: Detailing assets like cash ($300 million), accounts receivable ($100 million), and property, plant, and equipment ($400 million). Liabilities might include accounts payable ($50 million) and long-term debt ($150 million). The equity section would show retained earnings and common stock.
3. Condensed Cash Flow Statement: Breaking down cash generated from operations, investing activities (e.g., purchasing new equipment), and financing activities (e.g., issuing new stock or paying dividends).
4. MD&A: Tech Innovations' management might discuss how increased demand for their new software platform drove revenue growth, explain any significant capital expenditures, and comment on the impact of supply chain issues on their costs.
5. Risk Factors: They might update disclosures on potential risks, such as increased competition in the software market or regulatory changes affecting data privacy.

Shareholders would review this quarterly report to understand if the company is meeting its financial objectives, how efficiently it's managing its resources, and what challenges or opportunities lie ahead. The report also helps in calculating metrics like Earnings Per Share.

Practical Applications

Quarterly reports are essential tools across various aspects of finance and investing:

• Investment Analysis: Investors and financial analysts utilize quarterly reports to track a company's progress, assess its financial health, and refine investment strategies. These reports provide the freshest data points for evaluating a stock's performance and potential.
• Credit Analysis: Lenders and credit rating agencies review quarterly financial performance to evaluate a company's ability to meet its short-term debt obligations and its overall creditworthiness.
• Regulatory Compliance: For publicly traded companies, filing quarterly reports is a mandatory compliance requirement set forth by the SEC. These filings, such as Form 10-Q, ensure market transparency and protect investors by providing consistent, reliable information. Details on these ongoing reporting requirements can be found on the SEC's website. https://www.sec.gov/corpfin/cf-reporting-exchange-act
• Internal Management: Companies themselves use the preparation of quarterly reports to review their operational performance, identify trends, manage internal controls, and make strategic decisions for future periods. This process reinforces strong Corporate Governance practices.

Limitations and Criticisms

Despite their role in promoting transparency, quarterly reports face several criticisms. A primary concern is the potential for "short-termism," where companies may prioritize immediate financial results over long-term strategic investments, such as research and development, to meet quarterly earnings expectations¹⁰, ¹¹. Critics argue that the intense focus on quarterly numbers can pressure management to engage in "earnings management," or accounting practices designed to smooth out or inflate reported earnings, potentially at the expense of sustainable growth.

Some argue that reducing the frequency of reporting from quarterly to semi-annually could alleviate this pressure and encourage a more long-term perspective in corporate decision-making. However, studies have shown mixed results on whether less frequent reporting actually leads to a significant shift in long-term investment behavior⁸, ⁹. Furthermore, proponents of quarterly reporting emphasize that it minimizes information asymmetry between management and investors, thereby reducing uncertainty and fostering market efficiency⁷. Without frequent updates, ordinary investors might be at a disadvantage compared to professional investors who may still receive regular information through other channels⁶. More information on this debate can be found in discussions around the frequency of earnings reports. https://www.theregulatoryreview.org/2022/02/17/assessing-the-frequency-of-quarterly-earnings-reports/

Quarterly Report vs. Annual Report

While both the quarterly report (Form 10-Q) and the Annual Report (Form 10-K) provide crucial financial information about a public company, they differ significantly in scope, detail, and audit status.

Investors often review both types of reports, using the quarterly report for current insights and the annual report for a deeper, verified understanding of the company's yearly performance and strategic direction.

FAQs

What is the primary purpose of a quarterly report?

The primary purpose of a quarterly report is to provide investors and the public with timely, unaudited financial and operational information about a company's performance for a specific three-month period. This helps maintain market transparency.

Are quarterly reports audited?

No, quarterly reports are generally unaudited. This means the financial figures presented have not been reviewed by an independent accounting firm, unlike the annual report (Form 10-K), which undergoes a thorough audit. Companies prepare quarterly reports in accordance with Generally Accepted Accounting Principles (GAAP), but without the full audit process.⁵

How often do companies file quarterly reports?

Public companies typically file quarterly reports three times a year, covering the first three fiscal quarters. The fourth quarter's financial information is then included in the comprehensive annual report.

Where can I find a company's quarterly reports?

Quarterly reports for public companies in the U.S. are filed with the SEC and are publicly available through the SEC's EDGAR database. You can search the EDGAR database by company name or ticker symbol to find their filings.³, ⁴

What kind of information is included in a quarterly report?

A quarterly report typically includes condensed financial statements (Balance Sheet, Income Statement, Cash Flow Statement), Management's Discussion and Analysis of the company's financial condition and results of operations, and disclosures about market risks and internal controls.¹, ²