How to Read a 10-K — In Plain Words

This page is educational only. It is not financial advice.

What this page covers

This page explains a company's annual report on Form 10-K, in plain words. It is based on one source only: the U.S. Securities and Exchange Commission (SEC) Investor Bulletin “How to Read a 10-K.” The 10-K is the annual report. Its quarterly counterpart is called the 10-Q, and a short section near the end of this page covers that name only.

This page prints what that bulletin states, in plain words. It does not judge any company or any stock.

What a 10-K is

A 10-K is a company's annual report on Form 10-K.

It offers a detailed picture of:

• The company's business
• The risks it faces
• The operating and financial results for the fiscal year

In the 10-K, management also discusses its perspective on the results and what is driving them.

Most U.S. public companies must produce a 10-K each year and file it with the SEC.

Non-U.S. public companies usually file their annual reports with the SEC on different forms.

The 10-K and the annual report to shareholders

SEC rules require companies to send an annual report to their shareholders when they hold annual meetings to elect directors.

There is a lot of overlap between the 10-K and the annual report to shareholders, but there are also important differences.

• The 10-K typically includes more detailed information than the annual report to shareholders.
• The annual report to shareholders sometimes appears as a colorful, glossy publication.
• Some companies simply take their 10-K and send it as their annual report to shareholders. In those cases, the 10-K and the annual report to shareholders are the same document.

The roles of the company and the SEC

Where to get a 10-K

All 10-Ks filed with the SEC are available to the public on the SEC's EDGAR website.

Most companies also post their 10-Ks on their own websites.

The set order of a 10-K

SEC rules require that 10-Ks follow a set order of topics. The sections below walk through those topics in that order, as the bulletin lists them.

Part I

Item 1 — “Business”

Item 1 requires a description of the company's business, including:

• Its main products and services
• What subsidiaries it owns
• What markets it operates in

This section may also include information about recent events, competition the company faces, regulations that apply to it, labor issues, special operating costs, or seasonal factors.

The bulletin calls the “Business” section a good place to start to understand how the company operates.

Item 1A — “Risk Factors”

Item 1A includes information about the most significant risks that apply to the company or to its securities. Companies generally list the risk factors in order of their importance.

In practice, this section focuses on the risks themselves, not how the company addresses those risks.

Some risks may be true for the entire economy. Some may apply only to the company's industry sector or geographic region. Some may be unique to the company.

Item 1B — “Unresolved Staff Comments”

Item 1B requires the company to explain certain comments it has received from the SEC staff on previously filed reports that have not been resolved after an extended period of time.

The bulletin says to check here to see whether the SEC has raised any questions about the company's statements that have not been resolved.

Item 2 — “Properties”

Item 2 includes information about the company's significant properties, such as principal plants, mines, and other materially important physical properties.

Item 3 — “Legal Proceedings”

Item 3 requires the company to include information about significant pending lawsuits or other legal proceedings, other than ordinary litigation.

Item 4

This item has no required information, but is reserved by the SEC for future rulemaking.

Part II

Item 5 — “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”

Item 5 requires information about the company's equity securities, including:

• Market information
• The number of holders of the shares
• Dividends
• Stock repurchases by the company
• Similar information

Item 7 — “Management's Discussion and Analysis” (MD&A)

Item 7, known as the MD&A for short, gives the company's perspective on the business results of the past financial year. It allows company management to tell its story in its own words.

The MD&A presents:

• The company's operations and financial results, including material changes in the company's results compared to the prior period, as well as off-balance sheet arrangements and the company's contractual obligations
• Information about the company's liquidity and capital resources
• Critical accounting judgments, such as estimates and assumptions. These accounting judgments — and any changes from previous years — can have a significant impact on the numbers in the financial statements, such as assets, costs, and net income
• Any known trends or uncertainties that could materially affect the company's results

The bulletin gives these examples of how an MD&A may discuss risks that the company faces:

• A consumer company might discuss ways in which it seeks to meet changing tastes.
• A manufacturing company that relies on natural resources may discuss how it assesses commodity risks and conducts resource management programs.
• A financial institution may discuss ways that management monitors liquidity and assures adequate capital under various scenarios, such as a rise in interest rates or a ratings downgrade.
• A global company may discuss how it handles exchange rate risks.
• Companies may discuss how they handle competition, build their brands, or manage in an economic downturn.
• Companies also may discuss how they ensure compliance with laws and regulations, or how they are addressing the impact of new or anticipated laws and regulations.

Item 7A — “Quantitative and Qualitative Disclosures about Market Risk”

Item 7A requires information about the company's exposure to market risk, such as:

• Interest rate risk
• Foreign currency exchange risk
• Commodity price risk
• Equity price risk

The company may discuss how it manages its market risk exposures.

Item 8 — “Financial Statements and Supplementary Data”

Item 8 requires the company's audited financial statements. This includes:

• The income statement, which is sometimes called the statement of earnings or the statement of operations
• Balance sheets
• Statement of cash flows
• Statement of stockholders' equity

The financial statements are accompanied by notes that explain the information presented in the financial statements.

U.S. companies are required to present their financial statements according to a set of accounting standards, conventions, and rules known as Generally Accepted Accounting Principles, or GAAP.

An independent accountant audits the company's financial statements. For large companies, the independent accountant also reports on the company's internal controls over financial reporting.

The auditor's report is a key part of the 10-K. Most audit reports express an “unqualified opinion” — that the financial statements fairly present the company's financial position in conformity with GAAP.

The bulletin states that if an auditor instead expresses a “qualified opinion” or a “disclaimer of opinion,” investors should look carefully at what kept the auditor from expressing an unqualified opinion. The bulletin likewise states that investors should carefully evaluate material weaknesses disclosed on internal controls over financial reporting.

Item 9 — “Changes in and Disagreements with Accountants on Accounting and Financial Disclosure”

Item 9 requires a company, if there has been a change in its accountants, to discuss any disagreements it had with those accountants.

The bulletin notes that many investors view this disclosure as a red flag.

Item 9A — “Controls and Procedures”

Item 9A includes information about the company's disclosure controls and procedures and its internal control over financial reporting.

Item 9B — “Other Information”

Item 9B includes any information that was required to be reported on a different form during the fourth quarter of the year covered by the 10-K, but was not yet reported.

Part III

Items 10 through 14 cover the topics in the sections below.

Although these disclosures are required by the 10-K, most companies meet this requirement by providing the information in a separate document called the proxy statement, and incorporating it by reference. In that case, the 10-K directs readers to the proxy statement to find the information. The proxy statement is typically filed a month or two after the 10-K.

Cross-reference, in plain text only: This program also has a built page about shareholder voting and proxy cards. That page covers a different document. It is not the document on this page.

Item 10 — “Directors, Executive Officers and Corporate Governance”

Item 10 requires information about:

• The background and experience of the company's directors and executive officers
• The company's code of ethics
• Certain qualifications for directors
• Committees of the board of directors

Item 11 — “Executive Compensation”

Item 11 includes detailed disclosure about the company's compensation policies and programs and how much compensation was paid to the top executive officers of the company in the past year.

Item 12 — “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”

Item 12 requires information about the shares owned by the company's directors, officers, and certain large shareholders, and about shares covered by equity compensation plans.

Item 13 — “Certain Relationships and Related Transactions, and Director Independence”

Item 13 includes information about relationships and transactions between the company and its directors, officers, and their family members. It also includes information about whether each director of the company is independent.

Item 14 — “Principal Accountant Fees and Services”

Item 14 requires companies to disclose the fees they paid to their accounting firm for various types of services during the year.

Part IV

Item 15 — “Exhibits, Financial Statement Schedules”

Item 15 requires a list of the financial statements and exhibits included as part of the Form 10-K.

Many exhibits are required, including documents such as the company's bylaws, copies of its material contracts, and a list of the company's subsidiaries.

Non-GAAP financial measures

A 10-K may also contain “non-GAAP financial measures.” That means the numbers do NOT conform to GAAP.

While companies are permitted to present non-GAAP measures, they must also show how they differ from the most comparable corresponding GAAP financial measure.

The bulletin closes this point with these words: “As an investor, it is up to you to decide how much weight to give to non-GAAP measures.”

The 10-Q, in short

The 10-K is the annual report. Its quarterly counterpart is called the 10-Q. As the name suggests, it covers one quarter instead of a full year.

The SEC bulletin this page rests on walks the 10-K only, so this page does not walk the 10-Q's sections.

This page is educational only. It is not financial advice.