10-K Table of Contents example

10-K Table of Contents example


How to read a 10-K? Which information is included in a company’s
“annual report on Form 10-K” filed with the Securities and Exchange Commission? Find out by walking through an example of
the table of contents of a 10-K filing. A big part of the success in analyzing an
annual report is knowing where to look! For this overview, I have taken as an example the 10-K filing of a well-known company called 3M. Their 2017 10-K document is 176 pages in length
(longer than for example Apple and Alphabet, but shorter than GE). A significant part of the volume of a 10-K
is made up by exhibits attached at the end of the document, such as the 3M executive
life insurance plan, and the company’s long term incentive plan. I personally must admit that I have never
spent time reading those sections (I fully trust the company’s compensation committee
and audit committee plus the company’s auditors on that!), so the “net workload” of reviewing
a 10-K document may be less intimidating than it seems. In compliance with SEC rules, the 10-K document
has 4 parts (with Roman numerals), and one level below that items numbered 1 through 16. That doesn’t mean there are only 16 items
in a 10-K, as we will soon see. By taking you through an example of an actual
10-K document rather than just a theoretical discussion, I can also show you the volume
of pages for each section. For me personally, item 1 business, item 6
selected financial data (a one-page summary for the latest 5 years), and the financial
statements in item 8 are the first things to read in a 10-K report, followed by a review
of item 7 the MD&A. Let’s review them in numerical order, and
find out what’s in them. Item 1 – “Business”. This is a good place to start to understand
how the company operates: a description of the company’s business, including its main
products and services, what subsidiaries it owns, and what markets it operates in. Very useful to read, especially as companies and their business environment are constantly changing. How is the company organized? What are the leading businesses? Have there been any significant acquisitions
or divestitures? Item 1A – “Risk Factors”, information
about the most significant risks that apply to the company or to its securities. Interesting to read, to understand the context
of the business. Be aware that this is a listing and discussion
of known and identified risks. By their very nature, unidentified risks,
sometimes referred to as unknown unknowns, have traditionally been outside the scope
of risk management. Item 1B – “Unresolved Staff Comments”. This section will state “None” for most
companies (including 3M in 2017), and will only have information when the SEC has raised
any questions about the company’s statements that have not been resolved. If there are any items in here, study them
carefully! Item 2 – “Properties”. Where are the company’s headquarters located? How many manufacturing sites in how many countries
does it have? Does the company lease or own most of its
physical properties? Item 3 – “Legal Proceedings”. These are either listed here in item 3, or
the reader is referred to item 8 notes to the financial statements. The outcome of legal proceedings and claims brought against a company is subject to significant uncertainty. The accounting for a contingency like a lawsuit
is essentially to recognize only those losses that are probable and for which a loss amount
can be reasonably estimated. Item 4 – “Mine Safety Disclosures”. Very specific to companies that have mining
operations, which for 3M is the case. Item 5 – “Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”, contains
information about the company’s equity securities, such as share price highs and lows, dividends,
and stock repurchases by the company. Item 6 – “Selected Financial Data”. This is a good 1-page overview to “zoom
out” and get a longer time perspective. It contains a 5-year comparison for items
like sales, net income, earnings per share, dividends, assets and debt. The income statement and cash flow statement
in item 8 usually have 3 years’ worth of detailed financial information, and the balance
sheet two years (last year’s ending balance and this year’s ending balance). A 5-year comparison can alert you to longer
term trends. Item 7 – “MD&A”, or Management’s Discussion
and Analysis of Financial Condition and Results of Operations. The MD&A is designed to provide a reader of
the financial statements with a narrative from the perspective of management. Transparency is the key here. Very important to understand business performance,
and operational drivers of this performance. In the case of 3M in 2017, the MD&A is 35
pages. Item 7A – “Quantitative and Qualitative
Disclosures about Market Risk”, items such as interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk. Item 8 – “Financial Statements and Supplementary Data”. In volume of pages, this tends to be the largest
section of a company’s 10-K. It has the auditor report, each of the financial
statements, and a huge amount of notes to those financial statements. My approach tends to be to analyze the financial
statements, make a list of items that I want to review, and then dig through the notes
to find the information related to those items, rather than trying to read item 8 from start
to finish. Item 9 – “Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure” requires a company, if there has been a change
in its accountants, to discuss any disagreements it had with those accountants. Many investors view this disclosure (if applicable)
as a red flag. Item 9A – “Controls and Procedures” includes
information about the company’s disclosure controls and procedures and its internal control
over financial reporting. Item 9B – “Other Information” includes
any information that was required to be reported on a different form during the fourth quarter
of the year covered by the 10-K, but was not yet reported. For most companies in most years this is another
“not applicable” section. Part III (items 10 through 14) covers amongst
others corporate governance, executive compensation and audit fees, and looks a little light in
terms of number of pages. There’s a clear reason for that. Although these disclosures are required by
the 10-K, most companies meet this requirement by providing the information in a separate
document called the proxy statement, which companies provide to their shareholders in
connection with annual meetings. If the information is provided through the
proxy statement, the 10-K would include a statement from the company that it is incorporating
the information from the proxy statement by reference – in effect directing readers
to go to the proxy statement document to find this information. Item 15 is a long reference list of related
schedules and exhibits. Item 16 is either blank, or a redirect to
the table of contents in the front of the 10-K filing. So where to start, when you want to read a
10-K. For me personally, item 1 business, item 6
selected financial data (a one-page summary for the latest 5 years), and the financial
statements in item 8 are the first things to read in a 10-K report, followed by a review
of item 7 the MD&A. Let’s see where the journey takes you! Thank you for watching! If you enjoyed this short discussion of the
table of contents in a 10-K document, then please give it a thumbs up! On this end screen, there are a few suggestions
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