The government shutdown in SEC filings

October 15, 2013

It’s now been two weeks since the government shutdown began. While the number of companies mentioning the crisis in Washington in their routine filings to the SEC can’t quite be described as a thundering roar, we did count about 15 companies that have had something to say about the mess in Washington DC in their filings over the past two weeks.

As you might guess, many of the companies are dependent on decisions from the Food and Drug Administration. And many of these companies are so small that any type of delay seems like it could have some pretty serious consequences, though to be fair, anyone who invests in small biotech stocks probably has a pretty strong stomach to begin with. Still, as time has passed, we’ve started to see larger companies begin issuing warnings too.

The first two companies out of the gate — they filed only a day after the shutdown, on Oct. 2 —  were CalAmp and Zogenix. For CalAmp, it was a new disclosure in the forward-looking statements section of the earnings release that was attached to their 8-K. The company repeated the same  line — warning about  “any potential adverse effects associated with the federal government shutdown” in the 10-Q that they filed that day. At Zogenix, the company warned in this 8-K that a drug that it had hoped to have approved by March 2013, could likely to be subject to further delay due to the shutdown.

A day later, tiny Echo Therapeutics warned about an important meeting being delayed due to the shutdown in this exhibit attached to its 8-K, noting “The FDA has notified the Company that the meeting scheduled for the 4th quarter of 2013 may be postponed due to a lapse in appropriations resulting from the recent U.S. Federal Government shutdown.” A day later, another small biotech company called Atossa Genetics has a similar warning in this press release attached to its 8-K.

But more recently, we’ve started to see bigger companies jump into the fray as the shutdown has continued. Last week, for example, healthcare giant Humana Inc. put out this 8-K which focused squarely on the shutdown’s impact on the company, though Humana said this was unlikely to have a material impact on them. Here’s a snip:

“On October 2, 2013, DHA notified the Company that, as a result of the current federal government shutdown, DHA cannot make disbursements to the Company under the contract until it has received a signed appropriation, continuing resolution or other legal authority.  According to the Notice, once funding authority has been received by DHA, all payments due will be accelerated with interest to ensure conformance with the payment terms of the TRICARE contract.
Under the Notice, DHA has authorized the Company to continue to administer the contract for approximately two weeks (the “Notice Period”) to ensure continuity of operations, although payment or reimbursement will not occur during such time.  Therefore, during the two-week Notice Period, the Company expects to receive claims from providers providing services to beneficiaries, which under the terms of the TRICARE contract are to be ultimately reimbursed or paid by DHA.  In the unlikely event that such reimbursement or payment by DHA is not ultimately made once government funding resumes, the Company could be liable for such claims.  The Company expects the aggregate amount of claims submitted during the Notice Period to be approximately $175 million.”

Another large company that mentioned the shutdown in their filings was housing developer Lennar Corp., which, like CalAmp, included it in a laundry list of forward-looking statements n the 10-Q that they filed last week. That was the same day that URS Corp. issued this press release announcing the furlough of 3,000 employees due to the government shutdown. CFO H. Thomas Hicks minced few words in that release: “The government shutdown, the continuing effects of sequestration, and uncertainty about the federal budget are all having negative impacts on URS and many other government contractors.”

As for the potential of a default on US government debt, we could find only one company — Red Hat Inc. — that raised this in a filing. In the 10-Q that they filed on Oct. 4, Red Hat warned that “A significant part of our investment portfolio consists of U.S. government and agency securities. If global credit and equity markets experience prolonged periods of decline, or if there is a default or downgrade of U.S. government or agency debt, our investment portfolio may be adversely impacted and we could determine that some of our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our financial condition and operating results.”

But if things drag on much longer without a resolution, we expect that there will be a lot more companies talking about this in their filings. Earnings are in full swing and Q season is just around the corner.

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