How to Read a 10-Q: A Plain-English Walkthrough

A 10-Q is the report a US public company files with the Securities and Exchange Commission (SEC) after each of its first three fiscal quarters. It is long, but you do not need to read it front to back. Most of the useful content sits in four places.

Part I, Item 1: the financial statements

This is the raw numbers. There are three statements:

• Income statement (also called the statement of operations): revenue at the top, then costs, then profit at the bottom. It shows the quarter and usually the year-to-date total, each next to the same period a year earlier.
• Balance sheet: what the company owns (assets) and owes (liabilities) on the last day of the quarter.
• Cash flow statement: how much cash actually came in and went out, split into operating activities, investing (such as buying equipment or other companies), and financing (such as borrowing, repaying debt, or buying back shares).

The notes that follow explain how the numbers were built. The segment note is often the most useful one: it breaks revenue and profit down by business line or region.

Part I, Item 2: management's discussion (MD&A)

This is where management explains, in words, why the numbers moved. Look for sentences that name a cause, such as "revenue increased primarily due to higher volume in..." That is the closest thing to a direct explanation from the company. Also look for how the company describes the outlook and any known trends or uncertainties.

Part II, Item 1A: risk factors

Only changes from the last annual report are required here, so this section is short. New or reworded risks are worth a look, because companies tend to add a risk once it becomes real.

Part II, Item 1: legal proceedings

Read this when a lawsuit or investigation is already a known issue for the company.

A sensible reading order

1. Income statement: did revenue and profit rise or fall versus a year ago?
2. MD&A: what does management say caused it?
3. Cash flow statement: did the profit turn into actual cash?
4. Segment note: which part of the business drove the change?
5. Risk factors and legal proceedings: anything new?

What a 10-Q does not give you

The 10-Q's financial statements are reviewed by the company's auditor but not audited. There is no 10-Q for the fourth quarter; that quarter is folded into the annual report, the 10-K. See 10-K vs 10-Q for the differences, and where to find SEC filings if you want to open one yourself.