How to Read a 10-Q in 15 Minutes

A 10-Q is the quarterly report US public companies file with the SEC for each of their first three fiscal quarters. You do not need to read all of it: in about 15 minutes you can cover the sections that carry most of the information, namely MD&A, the cash flow statement, changes in risk factors and subsequent events. This guide gives you a repeatable order of reading.

What a 10-Q contains

A 10-Q has two parts. Part I holds the financial information: condensed financial statements (income statement, balance sheet, cash flow statement, equity), notes, Management's Discussion and Analysis (MD&A), market risk disclosures and controls. Part II holds "other information": legal proceedings, risk factors, share repurchases, defaults and exhibits.

Two features distinguish it from the annual report. The financial statements are unaudited (they are reviewed by the auditor, which is a lighter procedure), and the disclosures are often shorter, focusing on what changed since the last 10-K. For a full comparison, see 10-K vs 10-Q.

Before you start: know what the market expected

Most companies release earnings in a press release, furnished under Item 2.02 of a Form 8-K, before or alongside the 10-Q. The headline numbers are therefore already known when the 10-Q arrives. Your job with the 10-Q is different: you are looking for the details that the press release left out, softened or did not explain. Note the headline revenue, margin and earnings per share, plus any guidance, so you can test them against the filing.

Minutes 0-5: MD&A

MD&A is where management explains the numbers in its own words. It is the most useful section for a fast read. Focus on:

• Drivers of revenue change. Look for the split between volume, price, mix, currency and acquisitions. "Revenue grew 8%, of which 6 points came from an acquisition" is a very different quarter from 8% organic growth.
• Segment results. A strong consolidated number can hide one segment in decline.
• Margin commentary. Input costs, wages, pricing and one-time items.
• Liquidity and capital resources. Cash, available credit lines, debt maturities, covenant compliance and planned capital spending.
• Known trends and uncertainties. Management is required to discuss known trends reasonably likely to affect results. Read this language carefully; new wording here is often a signal.

A useful trick: open the prior quarter's 10-Q next to the current one and compare the same paragraphs. Changes in wording are frequently more informative than the wording itself.

Minutes 5-9: the cash flow statement

Earnings can be shaped by accounting choices; cash is harder to massage. Note that the 10-Q cash flow statement is usually presented on a year-to-date basis, so the third-quarter 10-Q shows nine months. To isolate a single quarter, subtract the prior 10-Q's year-to-date figures.

1. Operating cash flow vs. net income. If net income rises while operating cash flow falls, find out why. Common reasons are growing receivables (customers paying slower) or inventory build-up.
2. Working capital lines. Large swings in receivables, inventory, payables and deferred revenue explain most gaps between earnings and cash.
3. Capital expenditures. Operating cash flow minus capex gives a rough free cash flow figure.
4. Financing activities. Buybacks, dividends, new borrowing and debt repayments show how the company is funding itself.

Stock-based compensation is added back in operating cash flow. For companies where it is large, free cash flow before and after share-based pay can tell two different stories.

Minutes 9-12: guidance and the notes that matter

Guidance is generally not required in the 10-Q itself; it usually lives in the earnings release or call. Check whether the MD&A language is consistent with the guidance management gave publicly. Then skim a few notes to the financial statements:

• Revenue and deferred revenue (remaining performance obligations for subscription businesses).
• Debt: maturities, rates and covenants.
• Commitments and contingencies: litigation, guarantees, purchase obligations.
• Segment information: to confirm what MD&A described.

Minutes 12-14: changes in risk factors

Part II, Item 1A asks companies to disclose material changes to the risk factors presented in the last 10-K. Many companies write "there have been no material changes." When a company does add or rewrite a risk factor mid-year, it deserves attention: a new paragraph on customer concentration, a regulatory investigation, a supply problem or going-concern doubts is the company telling you what worries its lawyers.

Also scan Part II, Item 1 (legal proceedings) and Item 2 (unregistered sales of equity and repurchases), which shows how many shares the company bought back and at what average price.

Minutes 14-15: subsequent events

The subsequent events note covers material events that happened after the quarter closed but before the 10-Q was issued: a financing, an acquisition, a debt refinancing, a restructuring, a lawsuit settlement. These events are not in the quarter's numbers but can change the picture for the next one. They may also have been reported separately in an 8-K, so cross-check.

Example: ACME's third-quarter 10-Q

ACME reports 9% revenue growth and higher earnings per share. In MD&A you see that 5 points of growth came from an acquisition and 2 from currency, so organic growth was roughly 2%. The nine-month cash flow statement shows receivables up sharply and operating cash flow down year over year. Item 1A adds a new risk factor about dependence on one distributor. The subsequent events note discloses a new revolving credit facility. None of this contradicts the press release, but together it gives a more cautious picture than the headline.

A 15-minute checklist

• Headline numbers and guidance noted from the earnings release
• MD&A: organic vs. acquired growth, segments, margins, liquidity, new trend language
• Cash flow: operating cash flow vs. net income, working capital, capex, financing
• Key notes: revenue, debt, contingencies
• Part II: changes in risk factors, legal proceedings, buybacks
• Subsequent events

This guide is for information only and is not investment advice. Investing involves a risk of capital loss.