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Finding the news in a 10-K in 5 easy(ish) steps

By Karen Blumenthal
Reynolds Visiting Business Journalism Professor at Texas Christian University

Karen Blumenthal

Karen Blumenthal

Tackling a 10-K financial document can be daunting. To meet disclosure requirements, company annual financial reports seem to have expanded to the size of an Ikea catalog, though they’re far less fun to peruse.

If you want to really know what a company does, what risks it faces and the specifics of the business, you need to page through most of the document, which is chock-a-block full of details.

But what if you just want the news?

Then, I suggest, you should go to CLASS. That’s my acronym for the key places to look amid all the fine print if you want to find untold stories from a company’s disclosures.

Here are the details:

Commitments and contingencies.This is one of the last footnotes in the audited financial statements, which

Heinz Annual Report 2011

Heinz took the opportunity to talk about its environmental advances in its 2011 annual report.

sometimes are listed as an attachment to the 10-K. In this footnote, a company should list the percolating problems and commitments that potentially could affect it in the future. I’ve found all kinds of unusual disclosures in this footnote, including major lawsuits, Internal Revenue Service inquiries, environmental investigations and other issues.

Apple, for instance, details how much it paid out in warranty claims–$1.15 billion in the last fiscal year, up 61 percent from the previous year. Retailers also list their lease commitments here, the one place where you can see how much money they have contractually committed to their store spaces.

This isn’t a foolproof section, of course. It’s fairly common for shareholders to learn about a lawsuit only after a company faces a big judgment. But if the company has set aside a reserve for a lawsuit or the IRS has been asking questions, you may find it revealed here first or explained in greater detail.

Liquidity and capital resources. This is typically a few paragraphs in the section called “Management Discussion or Analysis.” The MD&A section is usually a bone-dry write-up of the company’s financial results. But profits, sales and margins tell only part of the story; how the company will pay its bills in the future is a crucial piece of information.

So look at these paragraphs. If the company is short of cash or in danger of running out of dough in the next year or so unless it gets new financing, it should say so in this section.
With big companies, analysts and investors may already know about the problem before the 10-K is published, but this could be big news for smaller, less-covered companies.

Auditor’s letter. The 10-K includes audited financial statements and a letter from the accounting firm that conducted the audit. Usually, this has standard, boilerplate language. But if the auditor found problems, had disagreements with the company or is worried about the company’s ability to keep operating in the future, it should say so in this letter.
Again, auditor concerns are usually reported for giant companies, but may not be known for mid-sized or smaller ones.

Subsequent events. If something big happens after the end of the reporting period, like a merger, acquisition or plant closing, it will be here as the last footnote in both the annual 10-K report and the quarterly 10-Qs. On many occasions, I’ve seen specifics in this section that aren’t reported in the press release, such as the price of an acquisition or the reserve set aside to close a subsidiary.

Significant accounting principles. This is usually the very first footnote after the financial statements, and it’s not the friendliest to readers. But a lot of interesting disclosures can be packed into how a company or nonprofit accounts for its revenue or spending.

For instance, many companies disclose how much they spend on advertising only in this section, where they also spell out whether the advertising is expensed as it occurs.

Recently, some students were looking at the financial statements of a private university, and found in this section how much the school spent on financial aid and advertising and how much was set aside for bad debts—a number that had changed dramatically from the previous year.

These stops are a good starting point. If you have a bit more time, I would recommend reading through all the footnotes to see how money is invested, when debts come due, how much is actually paid in taxes and other details.

In this same university report, a footnote about contributions owed by donors revealed an unusual detail: About 77 percent of the money committed to renovate the football stadium came from just five donors. That’s not a story by itself. But it’s an awfully good lead that makes slogging through a financial document worth the trouble.

Karen Blumenthal is a Reynolds Visiting Business Journalism Professor at Texas Christian University. Blumenthal, the author of several business books, writes The Wall Street Journal’s Getting Goin column and is its former Dallas bureau chief.

In Investing | Banking, Visiting Professors Program.

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