What Is In a 10-K?

As most of you probably know, a form 10-K is the annual summary of a company’s performance that all public US companies (and some private ones or companies that trade on US exchanges even if they are based in another country) are required to file with the Securities and Exchange Commission every year.  The 10-K is similar to the annual report, but it focuses less on soothing copy  (i.e., the annual report letter to shareholders is typically useful primarily as kindling, with the exception of Berkshire Hathaway) and pictures for investors and more on hard information.  The filing is one of the best sources of information on a company, but it can be long and rather painful to go through.  I thought I’d write about what I find the most useful.

The sections of the document are always the same, so let’s walk through the main ones.  We’ll use Dun & Bradstreet, the big financial and business information provider, as an example to write about some concrete data points from their 2008 filing (the latest 10-K available since their each year’s filing most often comes out around March of the following year).

  • Description of Business: This section is the place to start to get a handle on the company and its strategy at a high level.  It mixes some of the same happy talk you’ll find in an annual report with some valuable information.  For D&B, they write about how strong their brand, financial flexibility, and winning culture are.  None of this seems very meaningful.  However, they also describe each of their main product groups, the size of their sales force in the US and globally, and provide some information about how they segment customers, among other things.  The sales force is 2,100 in total, with 600 (or about 29% of the total) being international.  With only 23% of revenue coming outside the US, D&B seems to have less than excellent market share internationally.  Depending on how you look at it, this could be a weakness and/or an opportunity.  Great to plug into your SWOT analysis!
  • Risk Factors: Speaking of a SWOT analysis, you would think risk factors would be informative.  Due to liability concerns, companies tend to throw everything including the kitchen sink in here, and it can be hard to separate real risks from the simple realities of business. You find things like “our business may be affected by how we are perceived in the marketplace.”  Really, do tell?  However, if you can skim through the boilerplate, you usually find a few good data points in here.  D&B mentions that they introduced pricing that results in more predictable costs for customers in 2005, and that it has been a big driver of growth, for instance.
  • Properties: Companies typically list their major office, factory, and warehouse locations, which may sometimes be useful.  For example, D&B mentions that their 78,000 square foot facility in Austin houses a majority of the employees at Hoover’s, which they acquired a few years ago.  This tells me that they’ve probably kept Hoover’s somewhat autonomous rather than integrating it into the larger organization.  If I needed to, I could also use the office size to do a very rough starting analysis on how many employees might work at Hoover’s.
  • Selected Financial Data: This is a brief summary of the financial statements to come later, together with some earnings per share and tax information.  I usually prefer to look at the full financial statements because I’m more familiar with the format.
  • Management’s Discussion and Analysis of Financial Condition and Results of Operations:  That’s a mouthful, right?  This section is often the mother lode of good information.  Here’s where the company explains why they are or aren’t doing very well, often going into some detail.  This is where you will often find breakdowns of revenue by customer segment, discussions of changes in operating expenses over time, and details on things like restructuring and employee layoffs.  For example, this is where D&B mentions that Internet Solutions (including Hoover’s, First Research, and AllBusiness.com) revenue grew 18% from 2007 to 2008, although part of that was due to the acquisition of AllBusiness.com.  The end of this section typically details cash flow, dividends, stock repurchases, leases, and so on, which you should feel free to skip unless they’re relevant to your work.
  • Financial Statements and Supplementary Data: This is where the income statement, balance sheet, and cash flow statement live.  This is great information for financial analysis, although these days a lot of this stuff is probably easier to find on Google’s or Yahoo’s finance sites.  Many companies provide Excel versions of their 10-K’s or just their financials alone, which helps avoid the pain and suffering of copying and pasting from the 10-K.  If you have access to a financial database like Thomson ONE, of course that’s even easier.
  • Notes to Consolidated Financial Statements: The notes cover relatively detailed points that explain how the financials were put together – things like accounting for taxes, leases, and acquisitions.  This stuff is often only useful for specialized analyses, although I usually like to skim it just to see whether there’s something good, particularly details related to acquisitions that could help clarify the company’s strategy.  For D&B, I noticed that they increased a minority stake in their Indian subsidiary to a majority ownership in 2008, and they also started several joint ventures in China over the last several years.  The company appears to be making some moves to gain a stronger foothold in high-growth emerging markets.  However, since the biggest transaction was valued at $50 MM, compared to about $1.7 billion in annual revenue, I wouldn’t exactly call these blockbuster moves.

The 10-K is a great resource, although one that can be a bit painful to slog through.  Hopefully, my pointers make the slog a little less trying.  I’d be interested to find out whether you make use of these filings and what you find the most useful.

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