Reading a 10-K, 10-Q and Earnings Call

The five places to read, in order

Start with the cash flow statement, because it is the section least amenable to adjustment and it answers the question that decides everything else: is this business generating cash? Read cash from operations against net income, look at capital expenditure, and check whether the distributions are covered. Three minutes, and you already know whether the rest of the document is describing a business that funds itself. Then the significant accounting policies note, which is where the numbers were actually decided. Revenue recognition: when is a sale booked. Capitalisation: what is treated as an asset rather than a cost. Useful lives: how fast the assets are written down. Inventory: which cost flow assumption is used. Leases: how they are classified. These are not technicalities; they are the dials. Two companies with identical economics and different policies report different profits, and this note is where you find out which dials have been turned. Then the segment and concentration disclosures. Segments tell you which part of the business is growing and which part is quietly shrinking, which the consolidated totals hide. Concentration disclosures name customers, suppliers and geographies above a threshold, and they are the single most useful note in the filing for judging fragility — the 31% customer is not in the income statement anywhere, and it decides the future of the company. Then the debt note: the maturity schedule, the interest rates, the covenants and the collateral. A refinancing wall eighteen months out is the thing that turns a bad year into a permanent loss, and it is disclosed precisely. And finally the risk factors, read as a diff rather than a list: the ones added since last year, and the ones naming a specific exposure rather than a category of risk, are what management is thinking about. A filing in five passes — Cash flow statement: Three minutes: does the business fund itself? · Accounting policies: The dials — revenue, capitalisation, lives, inventory, leases · Segments and concentration: Which part is growing, and who the company depends on · Debt note: Maturities, covenants, collateral, refinancing risk ← · Risk factors: Read as a diff: what is new names what management is watching The 10-Q repeats the same structure quarterly with less detail and no annual audit. The 8-K is where material events land between filings: an acquisition, a change of auditor, a departure of the CFO. Checking the 8-K list is often faster than reading the call.

The call, and what it adds that the document cannot

The earnings release is numbers; the call is a group of people answering for them. Three parts are worth listening to. Management’s prepared remarks contain guidance, which is a forward-looking statement with a legal safe harbour and therefore worth treating as an intention rather than a forecast. The analyst questions are the more informative section, because repetition is what exposes a problem: when four analysts ask the same question about a margin line in different ways and none of the answers contains a number, you have learned what happened. Watch for three specific behaviours. A change in the disclosure format — a metric that was reported and no longer is, or a new "adjusted" line introduced the same quarter a charge appears — is a decision about what investors should see. Guidance that is cut for reasons attributed entirely to currency, or to a single customer, deserves the arithmetic check: an FX headwind that large rarely accounts for a miss that large. And a company that stops hosting a question session, or shortens it, has told you something that no press release contains. The transcript matters more than the audio because it can be searched, and the search that pays is across time rather than within one call. Put four quarters of prepared remarks side by side and read only the sentences about the outlook: the language drifts before the numbers do. A company that begins describing a market as "challenging" in the second quarter and "stabilising" in the fourth has given you a timeline, and management chose those words carefully. A filed document is a disclosure obligation, not a marketing document, which is why it contains facts that hurt. The investor presentation is the opposite: written to persuade. Read the filing before the deck, and if the deck contains a number the filing does not, ask where it came from.

The filings the 10-K does not contain

The annual report is the largest document a company publishes, and it is not the whole record. Three other filings answer questions the 10-K is not designed to answer, and they take a fraction of the time to read. **The proxy statement (DEF 14A)** is the governance document, and it is where you find what the 10-K leaves out about people. It shows how executives are paid and against what — a bonus tied to revenue growth rather than returns on capital predicts a certain kind of acquisition. It lists insider ownership, which tells you whether the people making the forecast have their own money on it. And it discloses related-party transactions, which are the places where a controlling shareholder can move value without a headline. **The 8-K** is the real-time file: material events, from a CEO departure to a debt covenant amendment to a completed acquisition, each published within four business days. Between annual reports it is where the actual news lives, and the exhibits attached to it often contain the contracts themselves. **Form 4** covers insider buying and selling — the raw record, not the interpretation. And **13F** filings show what the largest funds held at the end of a quarter, useful as a lagged description of institutional ownership rather than as a signal to follow. Which document answers which question — What could go wrong with the business?: the 10-K risk factors · How are the managers paid?: the proxy statement ← · Does management own a meaningful stake?: the proxy and Form 4 · What happened last month?: the 8-K · Who owns the float?: 13F filings, lagged by a quarter ← The practical order when something moves: pull the most recent 8-K first, then check Form 4 for insider activity, then read the proxy once a quarter. That sequence covers most of what changes a thesis between annual reports.

The three places a filing argues with itself

A filing is written by the company, audited in part, and read by people who will sue if it misleads. The result is a document that is rarely false and frequently flattering, and the flattering is concentrated in three places where two parts of the same filing do not quite say the same thing. Learning to compare them is most of the value of reading filings at all. The first is the **non-GAAP bridge**. Companies report an adjusted earnings figure alongside the audited one, and the reconciliation between them is required and usually at the back of the release rather than next to the headline. The line to look for is recurring-but-excluded items: restructuring charges that appear in each of the last five years, acquisition costs in a serial acquirer, or stock-based compensation excluded on the theory that it is not real. Each exclusion is arguable; the pattern of the same exclusion every year is the finding, because a cost that recurs annually is an operating cost wearing a one-off label. Comparing the GAAP and adjusted trends over three years is a five-minute exercise that changes the multiple you should be using. The second is the **segment note against the press release**. The narrative tends to describe the business as a whole, and the segment table shows which part moved. A quarter presented as a strong year is often one division growing and another shrinking, and the mix matters because the two divisions usually have different margins and different capital intensity. When the release says “record revenue” and the note shows the growth is entirely from a low-margin segment, the margin line in the same release tells you the rest. The third is **MD&A against the cash flow statement**. Management’s discussion is where the company explains its performance in its own words, and the cash flow statement is where the arithmetic either agrees or does not. Profit rising while operating cash flow falls is the classic divergence, and MD&A will usually offer a reason — a working capital build, a receivable extension, a legal settlement. Some of those reasons are ordinary and some are the beginning of an earnings-quality problem; the point is that the comparison is the check, and the sentence explaining it is the claim. Read the two together or not at all. • Read the non-GAAP bridge and look for the exclusions that recur every year. • Compare the press-release narrative with the segment table; the mix is usually the story. • Put MD&A beside the cash flow statement — one is a claim, the other is arithmetic. • A filing is rarely false and often flattering, and the flattery lives where two sections disagree.

The notes written in a different tone

The two places a filing disagrees with itself are about numbers that have already been reported. The three that follow are about numbers that have not, and they are written in a different voice: hedged, conditional and full of admissions that the front of the document would never make. The first is the **critical accounting estimates** section, sometimes folded into the accounting policies note. It names the judgements management had to make — how much revenue to recognise given expected returns, what discount rate and growth assumption sit behind an impairment test, how large a litigation accrual is, whether a tax asset is recoverable — and it is management telling you where the earnings are soft. The reason to read it is not that the judgements are wrong; it is that the same judgements, tightened or loosened a little, move the reported profit, so a company whose earnings are mostly estimate is a company whose earnings are partly a policy choice. The second is the **fair-value hierarchy**. Level 1 assets are marked to a quoted price, Level 2 to observable inputs, and Level 3 to models the company itself built. A note that reports a large and growing Level 3 balance is describing a portfolio whose marks are opinions: the loss has not appeared anywhere because nobody has transacted. The same logic attaches to **contingencies and legal proceedings**, where the disclosure gives a range of possible loss and management states whether the loss is probable and estimable. Two patterns are worth naming: a loss range whose low end is zero is a disclosure written by lawyers rather than accountants, and a contingency that appears for the first time this year is news regardless of the number attached to it. The third is the cluster of items that have no place in the statements at all. **Subsequent events** cover the period between the balance-sheet date and the filing date — up to two months of news that the financials cannot show, including a major acquisition, a refinancing or a customer loss. **Going concern** language is the auditor and the board stating that there is substantial doubt about the company funding itself for the next twelve months. And the two strongest single warnings a filing can carry are not in the operating section at all: an **adverse opinion on internal control over financial reporting**, which says the company cannot reliably produce its own numbers, and a **change of auditor** or a late filing notice, which frequently precedes a restatement. The risk factors then supply the tone test — compare this year’s list with last year’s and read the additions, because the new paragraph is management telling you what changed, in the one section where they have a legal incentive to be thorough. • Critical accounting estimates: where the reported profit is a judgement rather than a measurement. • Level 3 fair-value assets: marks built on models, not on transactions. • Contingencies and legal proceedings: the range of loss, and the new item this year. • Subsequent events: up to two months of news the balance sheet cannot contain. • Going concern, an adverse internal-control opinion, an auditor change or a late filing: the strongest warnings in the document. These five items rarely move the share price on the day they are published, which is exactly what makes them useful. They are the parts of a filing that a screen cannot read and a summary will not carry, and they are where the difference between reading a filing and reading an earnings headline is measured.

Sources

• The structure and item numbers of the annual report on Form 10-KSEC Form 10-K, General Instructions; Regulation S-K
• Significant accounting policies and the notes that decide the numbersFASB ASC 235; SEC Regulation S-X, Rule 4-08
• Segment reporting and customer concentration disclosureFASB ASC 280, Segment Reporting
• Forward-looking statements and the safe harbour around guidanceSEC Rule 175; the Private Securities Litigation Reform Act of 1995