Diving into the

10-K

Michelle Leder

editor/founder footnoted

mleder@footnoted.com

@footnoted

Photo by flickr user TauchSport_Steininger

POLL QUESTION #1

How often do you at least skim a 10-K?

•I’ve never read one.

•Once or twice

•Periodically for companies I follow

•It’s my favorite hobby.

So what is a 10-K anyway?

• Think of it as the annual report – on steroids!

• At its heart, it’s the audited financial

statements* – the only time all year that a

company does this.

• Extensive footnotes.

• Often has numerous exhibits

• Details on all sorts of other things critical to

the business – from its competitors to its tax

rate. *But don’t be fooled by the auditor's letter

We don't mean to scare you, but:

• The largest 10-K filed so far this

year was over 2,300 pages!

• Five companies, including

Coach Inc. filed 10-Ks that were

over 1,000 pages!

• Not uncommon for a typical-sized

K to run over 100 pages.

Google’s 10-K, for example, was

106 pages.

• Because many companies

operate on a calendar year, it’s

common to get a lot of Ks around

same time! Photo by flickr user manoftaste.de

If only every

10-K were

more like this!

Facebook’s 2012 10-K

• They filed 134-page annual report on Feb. 1, 2013.

• Unfortunately, it looked like most other annual reports

(no status updates or like buttons or cute baby

pictures).

• It was the first annual report for the company, which

went public in May 2012.

• How many people who own Facebook stock do you

think actually read even a portion of that filing?

Do you really need to read all 100

(or 1,000) pages?

• No, no, and no!

• But you do need a system that helps you

figure out the most important parts to read.

• Keep in mind that 10-Ks are highly

organized.

Let's take a closer look…

Photo by Flickr user Vectorportal

For those who read 10-Ks regularly, what

section do you always read first?

•Risk factors

•Legal issues

•Financial statements

•Management’s Discussion and Analysis

•Other: ______

POLL QUESTION #2

Focus on a few key sections:

Section 1: Business description

Section 1A: Risk factors

Section 2: Properties

Section 3: Legal issues

Section 8: Financial statements

Section 15: Exhibits, especially exhibits that start w/the number 10

Go straight to the table of contents

Exercise #1

The short letter that follows was attached to a

312-page 10K that Marsh & McLennan filed in

February 2013. Brian Duperreault is the retiring

CEO.

Come up with a tweet

based on the letter and

type it in the chat pod.

Some of our favorite finds in 10-Ks

in 2012

• The New York Times Co. disclosed that the $4.5 million in

consulting fees it was paying to former CEO Janet Robinson didn’t

require her to work a specific number of hours.

• Whole Foods breaks its customers into four key groups:

Conscionables, Organics, Foodies and Experientials.

• CenturyLink said that legislative changes under MAP-21 would

save the company $1 billion in pension costs over the next 5 years.

New disclosures are the rare white

truffle!

There are several ways to find new disclosures:

• Subscription services like Alpha-Sense, Factset

Blackline, Morningstar Document Research

(formerly 10KWiz)

• Microsoft Word (involves lots of cutting and

pasting)

• Textdiff site

None is totally foolproof, but they're better than doing it

manually!

Section 1: Business description

This is where companies provide a

narrative about what they do:

• how they make money

• the competition they face

• key customers

• number of employees

Tip: Look for any significant

changes in language from year

to year

Photo by flickr user

Images_of_Money

Section 1A: Risk Factors

• More narrative, but on the

risks the company faces in the

company's own words (or at

least their lawyer's own words)

• Be on the lookout for

economic issues, competition,

and new legal issues in

particular.

My all-time favorite risk factor was

in February 2004, when

Halliburton disclosed that Dick

Cheney was a risk factor!

Section 2: Properties

While it's very rare you'll find a smoking gun in this

section, you may just find some interesting trends.

Section 3: Legal issues or

proceedings

• Some companies have lots to say here;

others are much more circumspect

• Patterns are important.

• So is anything new

• This is where it really pays to use a

comparison tool.

• Some companies handle this section in a

footnote, but they'll guide you to that footnote

in this section.

Section 8: Financial statements

• Footnotes, footnotes and more footnotes

• Unless you're really digging in, it's hard to

get through every footnote

• Footnotes vary depending on the type of

company. A mining company will have very

different footnotes from a bank or retailer

• My single favorite footnote is the tax footnote

because it's a quick gut-check.

Section 15: Exhibits

• Pay close attention to any

exhibit that begins with the

number 10, the number for

"material contracts."

• Also, pay attention to

exhibits that begin with a 99

-- a catch-all category.

• Some companies attach the

whole annual report here,

including footnotes.

Amended 10-Ks

• Companies often file amended

filings. For a 10-K, it has the

designation 10-K/A.

• The amendment can be

relatively minor, or it could be

significant.

• Some companies file an

amended 10-K with proxy-

related info, if they can't make

the proxy-statement deadline.

Your assignment:

• Take a closer look at the 10-K that HPQ filed on Dec. 27, 2012:

http://www.sec.gov/Archives/edgar/data/47217/000104746912

011417/a2211959z10-k.htm

• What’s the first thing that jumps out at you? (Hint: Don’t overthink.)

• Now, read pages 16-26 of the risk-factors section carefully.

• Compare it to the same section for the 10-K filed in 2011.

• Write a short paragraph on what you found.

• Email to: cassandra.nicholson@businessjournalism.org by

noon ET Wednesday, Oct. 9.

• For more info on SEC documents,

see our 10-Q and proxy guides.