A 10-K is submitted in the same format by every company and covers the same topics. It also averages 240 pages, so it pays to know what to look for, and where to look for it.
What Is a 10-K?
A 10-K is a detailed financial report and management disclosure about the business. The 10-K financials are generally audited, and they’re prepared according to SEC regulations. The disclosures can’t be misleading, or omit material information an investor would need to make an informed decision. Both the CEO and chief financial officer have to sign off on the 10-K and certify its accuracy. The 10-K is reviewed by the SEC, and staff may comment on the disclosures in a separate letter. The SEC also requires listed companies to provide shareholders with an annual report. The annual report has some similarities to the 10-K, but they are less detailed, and are intended for different purposes. Companies are required to send these annual reports to shareholders when an annual meeting is being held and the board of directors is elected. Annual reports are often prepared as marketing pieces with appealing graphics. They contain letters to shareholders from key executives such as the CEO and CFO, descriptions of the company’s activities and plans, as well as audited financial statements. Annual reports also can provide potential employees, vendors, and investors with valuable insights into the company. Annual reports as well as other company filings usually can be found on companies’ websites, and some also submit them to the SEC EDGAR system.
What Can a 10-K Tell You?
A 10-K is divided into four parts that contain a narrative about the operations of the business, financial statements, and management’s view on results and future prospects.
10-K Part I
Parts 1 and 1A introduce investors to the company, its business, and potential risk factors. It’s a general discussion of the key business segments, markets, activities, and the competitive and regulatory landscape, along with risks and legal issues the company faces. Johnson & Johnson, for example, identified health care reforms and pricing pressure as a risk to its global sales in this section of its 2021 10-K. Part 1 also lists who the company’s key executives are, and where additional information about the company can be found.
10-K Part II
Part II discloses details about the stock, how many investors hold it, corporate stock buybacks, financial data, and consolidated statements. In this section, investors can learn about specific business risks, as well as exposure resulting from changes in interest rates, currency, and other financial market conditions. Part II also contains one of the most important sections of the 10-K: management’s discussion of results and the company’s financial condition. In this section, management tells the company story. It discloses both results for the year just ended and future prospects. Here, investors can learn about management strategy and the drivers of the business. In the 2020 Ford Motor Co. 10-K, for instance, management detailed its response to COVID-19 and the impact it had on manufacturing and the workforce, in addition to how Ford made more than 50 million medical-grade face masks for employees, dealers, and community donations.
10-K Part III
Part III introduces the board of directors and the management team, their experience, qualifications, and compensation. Part III also includes details of stock ownership, and transactions between the company and directors, officers, and their family members.
10-K Part IV
Part IV is a list of all tables and exhibits that are required to be included in the 10-K. Part IV also contains the consolidated financial statements and notes, and the independent auditor’s report.
How To Use 10-K Information for Stock Analysis
A company’s 10-K contains a wealth of information to help investors make informed decisions. It also provides clues to issues that many need more research. Start with Part II, the Management Discussion & Analysis (MD&A). It also contains information on trends, events, risks, and uncertainties that management believes could have a material impact on the financial results. Returning to Ford, in its 2020 10-K under the Outlook section, the automaker identified the global semiconductor shortage as an uncertainty that would influence Ford’s results. The 10-K goes on to illustrate possible ranges of impact on earnings from this problem. Ford also talked about its global corporate redesign, which shapes how it competes in the automotive market. The MD&A section of 10-Ks also contains a Legal Proceedings item. Johnson & Johnson, in its 2017 10-K, referred in this section to details of ongoing product liability suits, including 3,100 plaintiffs with claims in pending lawsuits related to injuries allegedly due to its Baby Powder product. The problem foreshadowed there has continued to plague Johnson & Johnson for years. As of May 2020, the company announced it would no longer sell Johnson’s Baby Powder in the U.S. and Canada, although it continued to deny allegations that its talc-based products caused asbestos-related diseases. The company was ordered in a 2020 court judgment to pay $2.1 billion to a group of women who claimed its Baby Powder product caused their ovarian cancer. Next, look at the auditor’s report when reviewing a company 10-K. Two red flags are a “qualified opinion” or a “going-concern doubt.” Be sure to review the footnotes to the consolidated financial statements. They can contain important information about pension plans, income taxes, accounting policies, and employee stock option plans. All of these can have a significant impact on current or future earnings.
What a 10-K Doesn’t Tell You
While the 10-K provides detailed information, it doesn’t tell you how the company performed compared with its peers. If the company’s sales increased by 15% in the year, how does that compare with others? The 10-K can give you important insights about industry and sector trends and risks, but not many insights on how competitors are addressing the issues.
10-K and ESG Disclosures
Currently, there are no 10-K environmental, social, and governance (ESG) disclosure requirements. However, investors continue to demand more transparency from companies regarding their ESG policies and practices. SEC chairman Gary Gensler has asked staff to develop a mandatory climate-risk disclosure proposal by the end of 2021.
The Bottom Line
A 10-K is intended to provide uniform, important information needed to make decisions about investing in a company. It’s highly detailed and provides more information than the typical annual report. The 10-K can give you valuable insights about investing in a company’s stock or bonds, as well as identify red flags. However, the 10-K does not give you information about how the company performed relative to its competitors—an important consideration when considering a stock.
