What is MD&A?

Management Discussion and Analysis in the 10-K

Written by CFI Team

Reviewed by Jeff Schmidt

Read Time 4 minutes

What is the MD&A Section of a 10-K?

The Management Discussions and Analysis (MD&A) is a section of the annual report or SEC filing 10-K that provides an overview of how the company performed in the prior period, its current financial condition, and management’s future projections and outlook.

The Management Discussion and Analysis helps potential investors understand the company’s financial fundamentals and management’s thinking, beliefs, and performance. The MD&A is a required disclosure for publicly traded companies in many jurisdictions. For example, the U.S. Securities and Exchange Commission (SEC) requires companies to include the MD&A in certain filings.

Typically, the MD&A, as part of Form 10-K or an annual report, attempts to give a view of the company through the eyes of the company’s management team. This article covers several topics discussed in the management discussion and analysis.

MD&A example

(Source: sec.gov)

Key Highlights

The management discussion and analysis, or MD&A, is a section that can be found in a company’s annual report or 10-K. It provides key information regarding how a company is performing financially, as well as any economic or industry trends that will impact operations.
The MD&A provides information on a company’s performance in its previous fiscal year, its current financial standing, and projections by management for future performances.
The MD&A also discusses critical accounting estimates and liquidity and capital resources.

Parts of the MD&A

The MD&A comprises several components, including:

Business Overview

The management discussion and analysis will typically begin with an overview of company operations. This will generally include a discussion of major product lines and/or business units and geographies the country operates in, as well as a high-level industry outlook, including risks to operations and financial performance.

The purpose of this part of the MD&A is to inform users of financial statements about the business itself and any potential risks or trends that would impact the company’s financial condition.

Critical Accounting Estimates

Next, the company will provide an explanation of its accounting policies in the MD&A. The company will disclose whether the financial statements were prepared using Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). It helps investors understand the effects of the accounting policies, the judgments made when applying the accounting policies, and the likelihood of a material difference in the reported results if the company applies different assumptions.

For example, a company may explain its adherence to FIFO or LIFO inventory accounting. In the past, regulators have acknowledged that the quality of disclosure of critical accounting policies by public companies has been unsatisfactory. Therefore, public companies should make full disclosures of their critical accounting policies in the MD&A to help investors understand the company’s performance.

Liquidity and Capital Resources

In the MD&A, company management must identify any known trends, events, commitments, demands, or uncertainties that are likely to result in material changes in liquidity or capital resources. Management will usually also discuss any off-balance sheet arrangements the company may have entered, as well as any contingent obligations.

This section should also discuss the company’s material commitments for capital expenditures and any anticipated sources of funds necessary to meet such commitments. For example, management should explain the current capital structure and any plans to offer additional bonds or stock if necessary.

Results of Operations

When discussing the results of operations, management will explain how the most recent year’s financial statements compared to the previous year(s). For example, let’s assume the company experienced a significant rise in revenues compared to previous periods. Management will explain the degree to which the increase is attributable to a price increase, introduction of a new product or service, or to some other factor(s).

Management will also usually discuss any unusual events or transactions and any significant economic changes that affected income from continuing operations. Management must explain any known trends or uncertainties that have had, or that they expect to have, a favorable or unfavorable impact on operations.

Typical unusual or infrequent events may include items like restructuring costs, impairments, or any other one-time gains or losses. Investors need this information to better understand the underlying financial statements so they can more accurately project the future operations of the company.

Significant economic changes may include a discussion and analysis of recent events impacting the economy. For example, a company may discuss how events like COVID-19 or Russia’s invasion of Ukraine may have materially affected the business.

Additionally, a company will discuss the impact of rising costs and inflation and provide an assessment of how that will impact business operations.

As part of the Results of Operations, the company will usually provide abbreviated financial statements. These financial statements are less detailed than the financial statements and footnotes that are provided later on in the annual report or 10-K.

Furthermore, a company may report non-GAAP (or non-IFRS) results. Companies often report non-GAAP metrics, as management may use these metrics for analyzing operations. EBITDA and free cash flow are commonly reported non-GAAP results. Typically, if a company reports non-GAAP results, it must provide a reconciliation between the non-GAAP results and the nearest GAAP metrics (for example, Regulation G in the United States requires this reconciliation).

Finally, management may provide guidance about future company results. Guidance is used to help investors looking to predict where the business is going. For example, Amazon provided the following first quarter 2023 guidance when it released its 2022 10-K:

Net sales are expected to be between $121.0 billion and $126.0 billion or to grow between 4% and 8% compared with the first quarter of 2022. This guidance anticipates an unfavorable impact of approximately 210 basis points from foreign exchange rates.
Operating income is expected to be between $0 and $4.0 billion, compared with $3.7 billion in the first quarter of 2022.
This guidance assumes, among other things, that no additional business acquisitions, restructurings, or legal settlements are concluded.

Additional Resources

Thank you for reading CFI’s guide to the MD&A. To learn more and advance your financial knowledge and career, see the following free CFI resources: