The 10-K is one of the most important financial filings required by the SEC. All companies with publicly-traded securities must file one within 90 days of the close of their fiscal year. If you need to conduct in-depth research into a competitor, potential client or strategic partner, the 10-K is a great place to start. They are available for free via EDGAR, the SEC’s online, searchable index of filings. From EDGAR, you can download a 10-K in Word, Excel or PDF formats.
Key parts of a 10-K
10-K filings are generally divided into four sections:
- Section 1: General business overview
- Section 2: Management discussion and analysis, financial statements and notes
- Section 3: Directors and officers information
- Section 4: Exhibits
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Section 1: General Business Overview
This provides the framework for analyzing the company and its industry. It breaks out specific risks that the company faces. When reviewing the risks, it’s important to do so with a grain of salt. A 10-K is a legal and financial document. Lawyers and accounts like to err on the side of caution. Therefore many of the risks listed will seem quite obvious and don’t provide much value (“prices may fall”). But there can be valuable, company specific risks that do provide actionable intelligence.
This section also lists and summarizes on-going litigation and other important legal matters to which the company is a party. If you plan to pursue a similar marketing strategy to the company you are analyzing, it’s helpful to know if there is a class action lawsuit taking place as a result of that strategy. Or perhaps the company is facing so many lawsuits that you may want to think twice before going into business with them.
Section 2: Management Discussion and Analysis (MD&A)
This is the part that you want to read slowly. MD&A offers management’s assessment of the company’s financial and operating condition. Unlike outside analysts, the MD&A is written by the people who are actually running the business day to day. It gives you a unique perspective on the condition of the company. It’s important to read this with the financial statements handy.
The MD&A tells the “why” behind the numbers. The MD&A also provides details on non-recurring charges. This could include costs associated with a divesture, acquisition or other one-time charges. Keeping track of non-recurring charges is essential if you are conducting your research for valuation purposes. Finally, take a close look at the section on liquidity. If a company runs out of cash then it’s out of business. The discussion of liquidity provides information on cash, cash equivalents, lines of credit and debt.
Financial statements and notes are also included in Section 2. Importantly, these statements are audited and include detailed notes. The notes are filled with rich data that may not be available elsewhere. The value of reviewing financial statements without notes is diminished. While reviewing the notes be on the lookout for:
- Listing of key assumptions used to determine financial statements
- Detailed information on business segments
- Information on recent acquisitions
Part 3: Directors and officers information
This provides information on key players leading the company, their backgrounds and their compensation. This information can be useful if you need benchmarks to negotiate the sale of your company and you plan to stay on as an employee. It also provides the names of individuals that you can reach out to for advice or to play a formal role within your company.
Part 4: Exhibits
The exhibits, in many cases, consume many more pages than the actual filing itself. It’s important to be selective with regard to the exhibits you review otherwise it may not be a productive use of your time to go through too many. Look for:
- Bank credit agreements and amendments—look for information on terms, covenants and more
- Management employment agreements
- Merger agreements
Reviewing the 10-Ks of three leading companies in your industry can be done over a weekend. It’s a great (and free) way to inform yourself.