Picking up where we left off last time, we we're looking at Boeings 10K (BA 2019 10K).
In this post I want to go over the breakdown of the 10K. This applies to all 10K's but like with many things in this series, we will use the BA 2019 10K as our guide.
10K Breakdown
There are 4 parts to a 10K filing each broken up into multiple sections (called items). I will name and describe each item using the verbiage written by the SEC. I will then try to explain in a short summary what the SEC means. To see where I am getting the breakdown from check this out: SEC How to read 10K/10Q.
Part 1
Item 1:
“Business” requires a description of the company’s business, including its main products and services, what subsidiaries it owns, and what markets it operates in. This section may also include information about recent events, competition the company faces, regulations that apply to it, labor issues, special operating costs, or seasonal factors. This is a good place to start to understand how the company operates.
If you know the company which you are researching this section may appear dull. I think a good way to read this section is as follows:
- Before reading verbalize to yourself what you would write in this section. What do you think the companies product is? How do you think it operates? What markets do you believe this company operates in?
- Read the section
- Does your understanding of the company and the "companies" understanding match up? If not, do you agree with the way the 10K portrays the companies operations?
To see why this is important I share the following clip from The Founder. In this scene we see Harry J. Sonneborn (Accountant) explain the Founder of McDonalds Ray Kroc, that he doesn't realize what business he is in. While Ray Kroc believed his company was in the burger buisness, Harry J. Sonneborn saw McDonalds for what it was/could be, a Real Estate buisness.
This is, in my opinion, the best scene in the movie and I think giving yourself the chance to see if your understanding of the buisness your researching matches the way the owner/founders/company see's their buisness can be incredibly insightful.
Item 1A
“Risk Factors” includes information about the most significant risks that apply to the company or to its securities. Companies generally list the risk factors in order of their importance. In practice, this section focuses on the risks themselves, not how the company addresses those risks. Some risks may be true for the entire economy, some may apply only to the company’s industry sector or geographic region, and some may be unique to the company.
The SEC does a good job explaining this section. Similar to the section above I suggest trying to think of what risk factors you believe the company faces before reading the ones they mention. What is as important as what they mention is what they don't mention. If you believe there exists some risk factor X which the company doesn't mention, you may feel the company is being naive or their lack of awareness could potentially hurt their bottom line. It is not good if a company does not recognize a major risk fact.
Item 1B
“Unresolved Staff Comments” requires the company to explain certain comments it has received from the SEC staff on previously filed reports that have not been resolved after an extended period of time. Check here to see whether the SEC has raised any questions about the company’s statements that have not been resolved.
This is not one of those section you can really think about before hand and see if your thoughts match the companies. This section may be interesting if you had a question from a previous financial statement and were curious if it was resolved or answered. Typically we wont spend much time in this section. Unless I learn some new insight that changes that feeling as I write more.
----- This concludes Item 1 on the 10K. There are more items in Part 1 and then there are 3 more parts (as mentioned above). Instead of going through all of them in this post I think I will mention the parts as we work through the 10K together. Next post we will start reading part 1 together. Until next time!