Taking the Fear Out of Reviewing a 10-K


Posted on May 9th, by in Sales Training. No Comments

Ipsa Scientia potestas est. This phrase came from Sir Francis Bacon in Bacon’s Mediationes Sacrae in 1597.

For a B2B sales executive, these words especially apply to reviewing a prospect’s 10-K. Below I will demystify the effort it takes to review and interpret a prospect’s financial statements. You should know there are many financial statements filed throughout the year. Once a year public companies are required to file a 10-K and may also publish an Annual Report. These two documents are slightly different. The Annual Report is created for investors and customers (easier to read with a bit more “rah rah!”). The 10-K is a bit more rigid and follows SEC guidelines. Once a quarter companies will file a 10-Q. This document is essentially a progress report to let investors know how they are doing against stated goals or prior results. In between these annual and the quarterly SEC filings they file all sorts of other forms you likely won’t need to worry about.

You can find a prospect’s financials in several places. An obvious choice is to Google them, or look them up in the Investor relations section of their website. Another choice to visit www.sec.gov and enter the company stock symbol or name. All filings for a public company will appear here.

When available, I like to start with the Annual Report and more specifically the Letter to the Shareholders. This communication from the CEO usually begins with how they did in the previous year and ends with a look to the future. It usually contains the years’ successes and failures. In a few pages, you can really gain insight into the company’s intended direction both strategically and tactically. The CEO usually discusses revenue and revenue goals, expenses and how they are controlling spending, and what their priorities are going forward. There is a great deal of actionable intelligence to be gained from The Letter to the Shareholders.

Next, I would like to turn your attention to the 10-K. First of all, you must remember every company is different. An entertainment company like Comcast is very different from a process controls company like Johnson Controls. With that in mind, you have to look at each 10-K a bit differently. The layout, however, is basically the same from company to company.

Part I of the 10-K lays out the basic business and operation, and risk factors they face in the market. Often times these are simply boilerplates that are used in every filing. However, I would advise you to not to ignore these sections. Take a moment and skim them, sometimes they discuss a risk that has recently impacted their or their industry’s business, that you could impact(e.g., The Home Depot and their cyber security breach).

Item 3 is typically legal proceedings. I like to scan this section to see if there is litigation that my solution could impact. Perhaps an automotive manufacturer is in a class action lawsuit for a particular defect, and my product would have helped them with managing repair history or past claims. This is, of course, actionable intelligence I can use in the sales process.

Part II contains Item 7, the Management Discussion and Analysis (MD&A). The MD&A usually begins with a recap of the previous year’s results. It discusses the financial highlights, including revenue, expense, and spending. (A quick summary of the P&L, Balance Sheet, and Cash Flow Statement proceeds it in Item 6). The MD&A will often include a discussion on their business strategy and some forward-looking thoughts. A great deal of actionable intelligence will come out of the MD&A. One suggestion you may consider is using the ctrl. F function (for PC users) to search on keywords. For example, if you sell security software, a keyword like “breach” could render a lot of insight. Using the search feature will save you a lot of unnecessary reading. Sometimes these documents are 300 plus pages long.

Also in Part II is Item 8. Item 8 contains copies of the full corporate financial statements and what they call supplementary data. The financial statements are great for tracking trends and making a determination as to whether a company is growing, shrinking, spending too much on SG&A, or not investing in their own growth. By reviewing their financials you can determine how much debt they owe, how much cash they have, working capital, and free cash flow. You can also determine of course the company’s net worth. There is a great deal of actionable intelligence in the P&L, Balance Sheet, and Cash flow statement.

Following the financials is the notes section. This section will help explain the numbers. I like to skim through the notes and look for anomalies in the data. When I don’t understand what was reported or something just doesn’t seem right, I will always look in the notes for an explanation. The notes are basically where the CFO explains what they did and why they did it. It also explains some of the calculations used for things like depreciation. Keep in mind a small change in the way you depreciate an asset can change the profitability of a company.

Finally, every quarter, and annually the executives of the company hold an earnings call where they present the financials. It is also an opportunity for analysts to ask questions. My final suggestion to you is sit in on a call, or download the transcript. You will be surprised at how much you can learn from these presentations.

After all, Ipsa Scientia potestas est! (Knowledge itself is power.)

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