How to read a 10-Q without reading all of it

What a 10-Q is

A 10-Q is the quarterly report a US public company files with the Securities and Exchange Commission (SEC) for each of the first three quarters of its fiscal year. The fourth quarter is covered by the annual report, the 10-K. The financial statements in a 10-Q are usually unaudited: an independent accountant reviews them, but does not audit them in full.

How it is laid out

The form has two parts, and the item numbers are fixed. Part I is the financial information. Item 1 is the financial statements. Item 2 is management's discussion and analysis, usually called MD&A. Item 3 covers market risk, and Item 4 covers controls and procedures.

Part II is other information: legal proceedings, risk factors, sales and repurchases of the company's own shares, defaults, and exhibits. Once you know the map, you can go straight to the layer you need.

Most 10-Qs also open with a cover page and a note on forward-looking statements, the standard warning that anything the company says about the future may not come true. You can skip both.

Start with management's discussion

Item 2 is where the company explains the quarter in its own words: why sales moved, why margins changed, where cash went, and what it expects next. Read the overview and the results of operations first. Mark every sentence built on increased, decreased, or compared with. Those sentences are the changes, and the changes are the news.

Then check three statements

Item 1 holds the income statement, the balance sheet, and the cash flow statement. You do not need every line.

On the income statement, compare revenue and operating income with the same quarter a year earlier, not the quarter just before, because many businesses are seasonal. On the balance sheet, compare cash and total debt with the last year-end. On the cash flow statement, look at cash from operations. A company can report a profit and still use more cash than its business brings in.

Hypothetical numbers, worked through

A hypothetical company reports quarterly revenue of $200 million, against $180 million in the same quarter a year earlier. Operating income is $20 million, against $22 million.

Revenue grew 11.1%. Operating income fell 9.1%. Operating margin, operating income divided by revenue, fell from 12.2% to 10.0%. The plain summary is one line: sales rose, and the profit on each dollar of sales fell. Your next question is why, and MD&A is where the company answers it.

Read the risk factors for what is new

Item 1A in Part II often points back to the risk factors in the annual report and lists only what has changed since. A new risk factor deserves a line in your notes. A statement that nothing material has changed is information too.

What a summary cannot do

A summary tells you what the filing says. What the stock does next is outside it, and it can miss what a footnote qualifies. When a number matters to your decision, read the full passage it came from.

IQ Dragon's earnings breakdowns turn 10-Q and 10-K filings into plain-language summaries. A free account includes basic summaries for S&P 500 companies; Premium adds full breakdowns with historical comparison.