Tuesday, May 30, 2023

Now that most companies have filed their 2022 annual reports and we’ve already written many posts about those disclosures, today let’s look at the next wave of 2022 reports now arriving fast and furious into the Calcbench databases.

Proxy statements.

Proxy statements can be invaluable sources of information for financial analysts, especially those at institutional investors with long-term holdings. The proxy contains information about executive compensation, expertise (or the lack thereof) among the board of directors, audit fees the company is paying, who holds large amounts of company stock, and much more.

And as always, Calcbench indexes as much of that data as possible, to allow for quick and easy analysis.

For example, Masimo Corp. ($MASI) filed its 2022 proxy statement on May 27. We randomly decided to peek at the company’s audit fees for 2022, which are disclosed on Page 69 of the document. Much to our surprise, we saw that audit fees doubled last year. See Figure 1, below.

Why the sudden spike in audit fees? From the proxy statement alone, one doesn’t know. The report of the board’s audit committee, which accompanies Figure 1 above, doesn’t discuss any significant accounting investigation that Masimo might be undertaking, or any recent merger that might have expanded the business and thus the work that Masimo’s audit firm (Grant Thornton, if you’re curious) is doing.

We did, however, use our nifty “show tag history” feature to see that this year’s jump in audit fees is indeed an eye-popping spike. See Figure 2, below.

Yikes. Suddenly Masimo’s annual audit is almost as expensive as a Taylor Swift ticket. What’s going on?

Using our Footnote Disclosure Tool, we hopped over to Masimo’s disclosures of controls and procedures; that’s where a company typically discloses weaknesses in financial reporting, which can explain a jump in audit fees. Except, Masimo reports that its financial controls and procedures are fine. Then we looked up the independent audit report from Grant Thornton.

Ah, there’s the answer: Masimo acquired a company called Sound United in April 2022 for $1.06 billion. More than $600 million of that purchase price went to assorted intangible assets, and Grant Thorton flagged the valuation of those assets as a critical audit matter.

That does not automatically mean that Masimo’s valuation of those assets was wrong. It only means that valuation of intangible assets is an important item that needs close scrutiny from the board and the audit firm; it’s also something that can keep an audit firm mighty business, which leads to higher fees.

One can also compare annual disclosures from 2021 and 2022, to get a sense of how much the merger expanded Masimo’s operations. Almost every line item on the income statement is up sharply. See Figure 3, below.

Sure, some of those increases might be due to Masimo’s natural growth or external factors such as inflation; but the Sound United merger is a big factor too.

Yet another way to look at audit fees is to chart them as audit fees per $1,000 of revenue.

In that case, Masimo in 2021 had $2.24 million of audit fees for $1.24 billion of revenue. Do the math, and that means for every $1,000 of revenue, $1.80 went to audit fees. 2022 saw $4.4 million of audit fees against $2.035 billion of revenue; that works out to $2.10 per $1,000 of revenue.

The dollars are small, but in relative terms the jump is appreciable. So the question for next year is whether audit fees per $1,000 in revenue stabilize, or go up even more. If they keep climbing, that means the auditors are keeping themselves busy. Financial analysts might want to ask why.

Monday, May 22, 2023

Today we pivot back to interest rates, since we now have enough filings for Q1 2023 to perform another large-scale analysis of just how much companies are paying these days to cover the cost of their debt.

More. They are paying much more.

Specifically, Calcbench studied the Q1 interest expense for more than 1,000 filers for the last five years. For most of that period, interest expense was remarkably flat — until Q1 2023, when the number jumped a painful 22 percent. See Figure 1, below.

What’s going on in Figure 1 is this: pre-pandemic, when interest rates were low and life was grand, the corporations in our analysis sample poked along with Q1 interest expense somewhere around $60 billion, give or take a billion. Then the pandemic struck in 2020, and corporations loaded up on debt — to the extent that even with rates essentially near zero, interest expense in Q1 2021 nudged upward to $64.3 billion, before dropping back to $60.1 billion in Q1 2022.

Then came the inflation costs, and the Federal Reserve’s punishing wave of interest rate hikes throughout 2022. So corporations’ interest expense for Q1 2023 popped by that painful 22 percent, to $73.3 billion.

Even more unsettling, average interest rate costs also rose 22 percent this year. So we can’t really blame a few outliers whose big debt loads and bad timing led to major refinancings and gigantic interest expense costs that skewed things for the whole group. Interest expense is rising at a painfully high pace for companies across the board. See Figure 2, below.

All that said, individual debt levels do matter here. That is, a company might have had a very low level of debt in 2019, and then doubled or tripled that debt over the last five years — but that doesn’t necessarily mean financial suffocation now; it only means that interest expense rose sharply in relative, percentage terms. In absolute dollars, even the higher interest expense of today might not be a big hit to the balance sheet, if the company is generating lots of cash from operations.

For example, Table 1, below, shows the five companies with the largest increase in interest expense from 2019 to 2023 in absolute dollar terms.

How painful those higher interest expenses are depends on the company. Amazon.com ($AMZN) was racking up debt and interest expense because it grew like crazy during the pandemic, when the world had nothing to do but order stuff online with government stimulus payments. Cruise company Carnival Corp. ($CCL), on the other hand, was racking up debt while most of its cruise business was in drydock for at least a year.

Table 2, below, shows the five firms with the biggest jump in interest expense in percentage terms. As you can see, it’s a very different lineup.

One interesting factoid: only one company was on our Top 10 lists for biggest interest expense jumps in both absolute and percentage terms. That was Carnival Corp. Make your own quips about sailing into headwinds.

For those who want to explore debt and interest expense further, remember that Calcbench ran a five-part series on corporate debt at the start of this year. In particular we had a post that reviewed how to find all these disclosures on Calcbench, and detailed, firm-by-firm analysis is crucial if you want to reach the correct insights in these tricky times.

Wednesday, May 17, 2023

Now that we have a significant supply of Q1 2023 filings in hand, we wanted to revisit inflation again, to see whether retailers have enough pricing power to pass along higher prices to consumers.

The theory here is simple. Yes, the cost of raw materials and labor jumped by painful amounts in 2022 — but if companies could then pass along those higher costs to customers, the companies could preserve operating margins. Right?

To test that thesis, we compiled a list of 61 retailers that have already filed their Q1 2023 financial statements; everyone from Albertsons and Amazon.com, to Dillards and Home Depot, to Sonic Automotive and Wayfair.com. Then we examined their quarterly revenue, gross profit, operating income, and net income for the last three years (that is, from the start of the pandemic until now).

The data tells an interesting tale. Altogether, gross margins (revenue minus cost of goods sold) have held remarkably steady even as companies swung from lockdowns to pandemic-recovery splurging to inflation. Operating margins (profit before interest and taxes) tumbled notably in 2022. And net profit margins (you should know what that is already) bulged upward in 2021, fell sharply in 2022, and have barely begun climbing back upward today.

Let’s start with gross profit. Figure 1, below, shows the collective gross profit margin for our retailer group.

Talk about steady! We’ve hung picture frames less level than the line above. Across all 13 quarters we examined, gross margin only fluctuated from a low of 26.3 percent (Q1 2020) to a high of 27.9 (Q2 2021). Gross margins in the last six months have been hovering near that 27.9 percent high.

OK, that’s one data point to support the thesis. What about operating margins? See Figure 2, below.

Clearly operating margins are much lower than gross margins. More than that, however, operating margins did feel more of inflation’s pinch, especially in the latter half of 2022. (The blue line is operating margin quarter to quarter; the red line is the overall trend.) For example, operating margins went from a heady 6.9 percent in mid-2021 to a low of 1.9 percent in Q3 2022. That was when the effects of inflation, which had started to accelerate several months earlier, had seeped into the economy as a whole.

So that’s one data point against our thesis. Could net income be the tie-breaker? See Figure 3, below.

Yuck. Net margins were even more volatile for our peer group. They fell to a low of only 1 percent in Q3 2022, and while margins are accelerating back upward now, the red trend line is still on a steeper downward slope than the operating margins in Figure 2.

At least for our sample of 61 retailers, then, perhaps the “pass along thesis” about costs isn’t so strong. The above charts all look at the margins collectively, for all 61 firms together; but we ran a similar analysis for average gross, operating, and net margins, and came to the same results.

Maybe a larger pool of retailers, or other industrial sectors, would tell a different story. We’ll keep looking into things, but the data above tell the tale that they do.

Where to Go From Here

Financial analysts could go in several directions from here, as you try to discern what the future might hold.

For example, one big determinant for net income is interest expense — and last time we checked, interest rates were still going upward. So for whatever firms you follow, you’d be well-served to examine their debt levels and whether those firms will be refinancing old debt any time soon. If they’re likely to refinance at higher interest rates, that’s going to squeeze net income. (If you want to geek out on debt disclosures, be sure to review our in-depth series on corporate debt levels from earlier this year.)

Second, another big driver of margin pressure is personnel costs. Those costs are typically reported in the Sales, General & Administrative line, after gross profit. So ask: is this retailer a tech-centric firm, such as Amazon or Wayfair, where they might have over-hired in 2021 or still struggle to hire good coding and engineering talent? Or are they more brick-and-mortar focused, where labor might still be scarce, but the company is paying hourly wages rather than sky-high salaries?

Calcbench has all that data to perform further analysis, of course. Let us know what we should research next!

Thursday, May 11, 2023

Disney Co. ($DIS) filed its latest quarterly report on Wednesday, giving financial analysts yet another opportunity to see how well pandemic-sensitive industries have recovered to their pre-Covid glory days. Specifically: how are the company’s theme park operations doing?

Yes, we know, Disney is also reporting big losses in its streaming TV services. We leave that issue for another day. On this day, when the pandemic emergency formally ends, how is Disney’s segment that deals with people in close proximity to each other? 

We can glean that information from Disney’s segments disclosure, where the company reports both revenue and operating income for a segment it calls “Parks, Experiences, and Products.” This segment includes Disney theme parks, cruises, resorts, and vacation packages; as well as the sale of Disney merchandise and licensing of Disney intellectual property for consumer goods. We don’t know the exact mix of parks and experiences versus merchandise sales, but it’s the best approximation of Disney’s pandemic-sensitive operations an analyst is going to get.

Using the tag history feature we’ve discussed before, we mapped out those disclosures for the last 14 quarters. The result is Figure 1, below.

As we can see, the revenue line has completely recovered from the pandemic, although things took a tumble in the most recent quarter (which ended April 1, 2023). Operating income is almost there, but not quite; operating income was $2.52 billion in the first quarter of 2020, and while recent quarters are coming mighty close, none have topped that figure yet.

Or, if you want to track the segment’s operating margins, see Figure 2, below.

Honestly we did that just to see the vertiginous plunge in 3Q-2020, which aligns with Disney’s summer busy season and the height of pandemic lockdowns that year. More recently, margins are seesawing right around 33 percent, which was the margin at the start of 2020.

Anyway, it’s clear that the theme parks are now moving in a normal direction, just as the country’s pandemic emergency formally ends this week. Perhaps other economic forces will push revenue or operating income back down, but at long last, it seems like we can’t blame the virus any longer.

Sunday, May 7, 2023

For the week ending May 5, 2023 we processed thousands of filings. On Wednesday alone, we received over 500 earnings releases and nearly 300 10-Qs. Below are a few highlights from last week’s earnings reports.

Both DraftKings and Apple filed an 8-K in the evening (post-close) on May 4th and then filed the 10-Q in the morning (pre-open) on May 5th. Calcbench processed both the earnings report and the quarterly report within minutes of the information being made public. 

With Apple, the press is screaming about iPhone sales, but their services business did $20.9 billion in sales with costs of $6.07 billion. So the gross margin was 71% slightly down from 72.6% a year ago. But if the services business was a stand alone company, it would rank in the top 150 of the S&P 500 in terms of sales. 

DraftKings’ reported an adjusted loss per share of $(0.51) while GAAP EPS was $(0.87). Why the difference? Mostly due to Stock-based compensation expense and Amortization of intangible assets. Note: a year ago the Stock-based compensation expense was higher.

Marriott International reported earnings and overall the numbers look good. Year-over-year Q1 revenue, operating income and net income have increased substantially. But digging into disclosures we found some signs of slower growth in certain hotel brands. See the Ritz Carlton RevPAR (revenue per available room) which was growing fast right after quarantine, but has been limping along more recently.

Garmin also reported this week - both an 8-K and a 10-K in the morning. Overall, sales and profits were down year-over-year. We delved into their operating segments. A look under the covers at the outdoor segment sheds light into where the bulk of losses are coming from.

Kraft Heinz was another where the segments helped tell an interesting story. Organic sales up 9.4%. Remember last week when we shared how to obtain  organic sales growth from Coca-Cola and Pepsico?  

Last but not least from our findings, time series data. Examples included Broadridge which reported current and recurring revenues. Using Calcbench we got a time series of both.  The Income statement, directly below, is a time series of metrics while the bar chart below it is of the recurring revenue from Broadridge.  Please note that the bar chart x-axis reflects most recent information all the way on the right hand side, whereas the income statement reflects most recent information on the left hand side.

Want to learn why investment bankers are cautious?  PJT Partners, a boutique banking advisory firm from the Morgan Stanley family breaks out advisory revenues and note the trend.  It may be a harbinger.

While the bulk of the S&P 500 firms have reported we’ll continue our daily updates on earnings throughout this coming week.

Thursday, May 4, 2023

As the slow-motion stability crisis for mid-sized banks continues (First Republic already gone; now everyone giving PacWest the side-eye) Calcbench wanted to put our financial data prowess to work.

To wit, then, we offer a public spreadsheet tracking the changes in deposit levels at more than 350 publicly traded banks across the United States.

You can view the data simply by clicking on the link above. It shows the banks, total assets, total deposits, and change in deposit levels from year-end 2021, year-end 2022, and Q1 2023. Figure 1, below, gives you a sense of it.

The big picture is that for all 373 banks we are tracking, total deposits fell by 2.26 percent last year, from $17.62 trillion at the end of 2021 to $17.23 trillion at the end of 2022. Deposits accounted for 66 percent of total assets at the end of 2022 as well.

We don’t yet have enough data on Q1 2023 deposits to draw any conclusions about banks overall. (All the “N/A” and “VALUE!” entries you see on the spreadsheet are banks that haven’t yet filed Q1 numbers.) At the individual level, however, we do have some Q1 numbers that speak to the larger conversation about bank stability.

For example, JPMorgan Chase ($JPM) saw deposits fall by nearly 5 percent last year compared to 2021 numbers — but deposits then jumped by 1.58 percent in the first quarter of this year. Presumably that’s a flight to safety, as skittish depositors transfer their savings from mid-sized banks to larger, safer players like JPMorgan.

On the other hand, we have mid-sized institutions such as M&T Bank ($MTB). Its total deposits rose 24.3 percent last year to $163.5 billion — and then dropped 2.7 percent in first-quarter 2023. Citizens Financial Group ($CFG), U.S. Bancorp ($USB), and other middle-tier banks saw similar trends.

How can you use this spreadsheet? As we said, anyone can view it, although nobody (other than Calcbench) can alter the data itself. You can download the whole file into an Excel spreadsheet on your own desktop, and then modify the data and formulas as you’d like.

We’ll also keep updating this spreadsheet with fresh data until all banks file their Q1 numbers, which will take a few more weeks at least.

Now back to business as usual, wondering which banks might be next on the stability crisis.

Wednesday, May 3, 2023

Calcbench has added a function to retrieve standardized data in bulk with our Excel Add-in.  Excel 365 on Windows is required.

The function allows users to easily get all standardized data for a set of companies, or all companies that report a set of metrics.  You can also retrieve all data published on a specific day.  See the example sheet link below.

Install the latest version of the Add-in from calcbench.com/excel.  Contact us@calcbench.com for further questions.

Example Sheet

Hotel giant Marriott International ($MAR) filed its first-quarter 2023 earnings report this week, which allows us to address two of our favorite issues on this blog in one post: the recovery of pandemic-sensitive industries, and non-GAAP disclosures. Let’s take a look at what Marriott had to say!

First let’s review the traditional GAAP stuff. Marriott’s Q1 report is quite rosy: revenues up 33.7 percent from the year-earlier period to $5.61 billion, operating income up 70.4 percent to $904 million, and net income essentially doubling to $757 million. See Figure 1, below; it looks nice and healthy.

The devil, however, is in the details — and the details tend to be non-GAAP. So we also looked at Marriott’s earnings release, which included adjusted revenue, operating income, and net income. Using our “Show Tag History” feature that we’ve mentioned previously, we downloaded the history for those three non-GAAP measures for the last 12 quarters. See Figure 2, below.

You can see the long, slowly accelerating slog for Marriott since the depths of the pandemic in early 2022. As to what those specific adjustments are, you can always investigate that via our Footnotes Query tool. In the earnings release you’ll always find a reconciliation from the adjusted, non-GAAP metric back to its closest comparable GAAP metric.

But wait, there’s more!

Since we’re talking about the hotel sector, another critical disclosure is “RevPAR.” That’s revenue per available room (even if the room is unoccupied), and it’s calculated by total room revenue into total rooms available.

Marriott also discloses RevPAR, occupancy rate, and average daily rate for each of its many hotel brands. See Figure 3, below.

Again, using our Show Tag History feature, we could download RevPAR for each hotel brand. We did that for the Ritz-Carlton, going all the way back to the start of 2019. See Figure 4, below.

As you can see, RevPAR is now $336, above pre-pandemic levels. RevPAR in Q2-2020, by the way, was only $30.81 — which sounds like someone just taking a drink from the mini-bar without even renting a room at all.

Anyway, all this information (and much more) is buried in the earnings reports. All you need to know is how to find it, compare it to others, and drop it into a chart. Marriott’s report hit our database at 12:40 p.m. on Tuesday, and our marketing team had all these charts done within 20 minutes. Imagine what an actual financial analyst is able to do!

Sunday, April 30, 2023

At Calcbench, for the week ending Apr 28, 2023, we gave our users a sample of some of the things that we were seeing on a firm level.  The reports were voluminous, and we took a small sample of things that crossed our desk and shared them.  We will recap those things below.  

But before we start with the re-cap, so far, we have found reports for 259 S&P 500 firms that also reported data as of a year ago for Q1.  We quickly summed up both the revenue reported for those 259 and the GAAP Net Income and found that revenue has grown by 3.6% on average for those firms, while Net Income fell by 1.9% year over year.  

Some of our individual firm level insights included observations from the earnings reports of ...

Pepsi versus Coca-Cola





Next week promises to bring as much excitement!  

Thursday, April 27, 2023

Today our look at the wide world of disclosures in Q1 2023 filings continues with a quick visit to Hertz Global Holdings ($HTZ), the car rental giant. Hertz filed its first-quarter report on Thursday, and right away we found an answer to a question we’ve often wondered while waiting in line to pick up our rental at the airport.

Just how much money does Hertz make from renting all those cars every day?

Hertz does disclose this detail, in a non-GAAP metric known as total revenue per transaction day — abbreviated as “total RPD.” That number is calculated as total rental revenue divided by the total number of transaction days for the period. Essentially, it measures how much money Hertz made per car per day that car was in use.

So for example, in Q1 2023, Hertz reported $2.047 billion in revenue. It also reported 33.79 million “transaction days” — the total number of cars multiplied by the total number of days each car was driven. Divide 33.79 million into $2.047 billion, and you get total RPD of $60.48 for the quarter.

That disclosure is nicely reported on Page 2 of Hertz’s earnings release, and is shown in Figure 1, below (high-lighted in blue).

That’s interesting unto itself, but we also wanted to know how total RPD has changed over time. Easy enough to do! We simply held our mouse over the $60.48 figure to pull up the previous tag history. That displayed what Hertz had reported for total RPD for the last nine quarters. See Figure 2, below.

From there, we copied those values and dumped them into a spreadsheet, did some re-arranging to line up the quarters, and cooked up this nifty chart (Figure 3, below) complete with trendline.

As you can see, total RPD has fluctuated over the last two years, although it’s broadly moving in the right direction (for Hertz, anyway; not for those of us renting one of its cars).

We should note, this entire analysis exercise — from the moment we saw Hertz listed on our Recent Filings page to finishing the chart above — took all of, like, two minutes. And it was all done by our marketing intern, no less, whose research skills are still under development. If even the intern can get a presentation-ready chart completed (on a non-GAAP metric!) in mere minutes, just imagine what you can do.

This week is a huge one for first-quarter earnings reports, and Calcbench will be with you every step of the way to parse the filings and find interesting morsels of disclosure to discuss.

First up: Coca-Cola ($KO) and Pepsico ($PEP). Both companies have filed their Q1 earnings reports, and we wanted to do a quick soda-to-soda comparison between the two.

For example, using our Multi-Company Page, you can benchmark the two companies on standard GAAP disclosures such as revenue and operating income, and also on non-GAAP disclosures such as adjusted net income and adjusted EPS. See Figure 1, below.

Calcbench tracks a host of non-GAAP disclosures, and on the Multi-Company page you can compare those disclosures across a host of companies. Not every company will use every non-GAAP metric we track, but we do follow EBITDA, free cash flow, and many more. Simply start typing “non-GAAP” in the standardized metrics field, find the metric of your choice, and see which companies are reporting what.

You can also track historical trends in non-GAAP disclosures that a company makes. For example, we cracked open the earnings release for Coca-Cola, and noticed right at the top that organic revenues (a non-GAAP disclosure) grew 12 percent compared to first-quarter 2022.

By mousing over that specific 12 percent number, we could then “see tag history” — which is a fancy way of saying we could see how Coca-Cola reported that same item in prior filings. Organic growth was 18 percent in Q1 2022 and 6 percent in Q1 2021. Dump those numbers into an Excel spreadsheet, and with a few keystrokes you can cook up a chart like Figure 2, below.

We then did the same for Pepsico’s earnings release. Organic growth at Pepsi rose 14.3 percent in Q1 23 versus 13.7 percent in Q1 2022, with less fizzy performance in the years before that. Again, we built a simple table in Excel and ended up with the chart below, Figure 3.

You could keep playing with the numbers from there, honing your analysis to ever more precise conclusions. For example, you could compare operating or geographic segments; or expand your analysis to include other peer companies, such as Snapple Dr. Pepper.

Some pointers to remember:

  • Choose your peer group carefully. That was true when your mom warned you about your peers in middle school, and it’s true in financial analysis too. Calcbench has several ways to let you find the peer group that’s right for you.
  • Any number you see that’s hyper-linked, you can hold your mouse cursor over it to get the tag history. That gives you the historical data you want, and most times you can export that tag history as an Excel spreadsheet
  • Excel can be your friend! Just use our Excel Add-In to help export the company data you want into whatever model you’ve whipped up on your PC.

That’s all for today. We’ll have more posts about the wide world of Q1 disclosures throughout the week.

Thursday, April 20, 2023

Eager to geek out on the details of all those Q1 2023 earnings reports now starting to arrive? Calcbench has you covered. Today we offer two quick examples of how to find niche data from the filings, and how to analyze trends in that niche over time.

We start with AT&T ($T), which filed its first-quarter 2023 earnings release on Thursday. The company stated that revenues were up 1.4 percent overall to $30.1 billion, and services revenue in particular were up more than five percent. As you can see in Figure 1, below, that jump in services revenue was driven by “postpaid average revenue per user” (ARPU).

Calcbench has a database function that extracts metrics such as ARPU and allows you to compare prior disclosures of that metric over time. We fired up that database superpower to get first-quarter ARPU for the last three years; the entire exercise took about three seconds. See Figure 2, below.

The point here is that you can look top down, or bottom up. We have the tools to help.

Example 2: Time Series Data

SL Green Realty ($SLG) released its earnings report after the market-close on Wednesday. Within that report was a sentence saying that the company signed 41 office leases in its Manhattan office portfolio totaling 504,682 square feet.

Q: What did those numbers look like in the year-ago quarter?

A: You can hold your mouse over the relevant numbers in our Interactive Disclosure Viewer and can see for yourself. (The data also downloads to a spreadsheet rather easily).

We did that, holding our mouse over the 41 leases announced this quarter. Figure 3, below, shows the “tag history” and tells us that in Q1-2022, SL Green had only 37 leases. 

We then dug up last year’s release, to find that those 37 leases last year covered 820,989 square feet, which means SL Green has been trimming its sails a bit — but that isn't the point of this post; the point is that Calcbench has all the information you need at your fingertips.

If you'd like to learn more, just ask at us@calcbench.com.

Tuesday, April 18, 2023

Johnson & Johnson filed its first-quarter earnings report this week — and thanks to a mammoth litigation settlement that cost the company billions, J&J reported the biggest adjustment to earnings we’ve seen in a long while.

First, the backstory. Johnson & Johnson ($JNJ) had been mired in litigation for years over allegations that its baby powder and other talc products contained chemicals that cause cancer. Earlier this month the company announced that it had reached a settlement in the dispute, where J&J will pay $8.9 billion over the next 25 years to end thousands of lawsuits that had been filed against the company.

Then came J&J’s first-quarter earnings report, released on Tuesday. It provides an eye-popping glimpse into how that $8.9 billion will be reflected in the company’s disclosures.

Johnson & Johnson enjoyed respectable gains in revenue (up 4.9 percent from one year ago to $24.7 billion) and gross profit (up 3.3 percent to $16.3 billion). But that $8.9 billion litigation cost sank the bottom half of the income statement, so J&J ended up reporting a loss of $68 million for the quarter ($0.03 EPS loss) versus $5.15 billion in net income ($1.93 EPS) in first-quarter 2022.

So that’s yucky, but that’s GAAP.

In the world of non-GAAP adjustments, however, J&J reported a very different tale. It excluded $6.9 billion of litigation expenses, as well as another $2.3 billion in assorted other exclusions; and then added back a $2.06 billion tax benefit. When you total up all the adjustments, J&J ends up with adjusted net earnings of $7.07 billion, just a hair below $7.13 billion in adjusted earnings reported in the year-earlier period.

Figure 1, below, shows the math.

This is all perfectly legal, and one sees the sense in adjusting for the litigation expense; it’s a single, discrete item that won’t appear in future periods. That’s what non-GAAP adjustments are for.

The sheer size of it, however, is mammoth. For example, last year Calcbench cooked up a research project to tally up non-GAAP adjustments that 123 S&P 500 firms made in 2021. Litigation adjustments for all those companies added up to $230 million. J&J’s adjustment is more than 38 times larger than that.

Subscribers can track non-GAAP adjustments in various ways in Calcbench, such as using the standardized metrics field on our Multi-Company search page. And clearly tracking such disclosures is worth doing, because as Johnson & Johnson shows, sometimes those adjustments really add up.

Wednesday, April 12, 2023

As everyone waits for banks to start filing their Q1 2023 earnings so we can hyperventilate about deposits, we thought we’d stall for time with a throwback to banks’ non-interest income — which, thanks to rising interest rates, has plummeted.

How much of a plummet? Figure 1, below, shows the total non-interest income for more than 315 banks that reported non-interest income every year for the last six years. Our sample includes everyone from JPMorgan Chase ($JPM) with its $62 billion reported in 2022, down to First Seacoast Bancorp ($FSEA) in lovely Dover, N.H., which reported $888,000 last year.

For those who prefer narrative disclosure, the story is this: non-interest income went from $245.2 billion in 2017 to $301.6 billion in 2021, a jump of 23 percent. That increase was driven by rock-bottom interest rates during the pandemic, which sparked a wave of home purchases and refinancings, which led to lots of non-interest income.

Then came 2022. Interest rates spiked, refinancings went the way of the dodo bird, and non-interest income plunged to $268.5 billion — an amount last seen circa 2019.

In other words, the pandemic-induced bubble of non-interest income for banks is now truly gone. No wonder the Biden Administration formally ended the Covid-19 national emergency earlier this week.

Thursday, April 6, 2023

The other week we had a post exploring the disclosures that banks make about their deposit amounts — disclosures that will be important for financial analysts in weeks to come as banks start to submit their Q1 2023 filings.

Today let’s take a deeper dive into exactly what banks are saying, courtesy of some filings that arrived within the last few days.

Example No. 1 is Western Alliance Bancorp. ($WAL), which filed a preliminary earnings release on Thursday to, as the bank itself said, “clarify deposit levels” as of March 31. Western Alliance had $53.6 billion in deposits as of Dec. 31, 2022. Then, quoting directly from the preliminary release…

  • The bank experienced elevated net deposit outflows surrounding the announcements of the Silicon Valley Bank and Signature Bank closures in mid-March, concentrated primarily in our Technology and Innovation and Settlement Services groups, with net outflows falling sharply and returning to normalized levels by March 17.
  • Since March 20, deposit balances stabilized and grew approximately $900 million to quarter end.
  • Since March 31, quarter-to-date deposit growth has continued this trajectory and increased an additional $1.2 billion as of April 4.

In other words, Western Alliance felt the tug of the black hole created by the implosion of Silicon Valley Bank and Signature Bank in mid-March; but managed to evade disaster.

Still, Western Alliance ended March 31 with $47.6 billion in deposits, a decline of 11.2 percent from the previous quarter.

But What About Insured Deposits?

That’s a good question, because let’s remember that it was SVB’s uninsured deposits that caused so much panic. The greater a bank’s uninsured deposits (that is, deposits above the $250,000 threshold set by federal banking regulators), the more panicky those depositors might become.

Western Alliance included one more bullet point in its preliminary release, saying that insured deposits at the end of Q1 were 68 percent of total deposits. Well, 68 percent of $47.6 billion is $32.37 billion. That would be the amount of insured deposits at Western Alliance.

Now go back to Western Alliance’s 10-K, filed on Feb. 23. On Page 51, in the Management Discussion & Analysis, the bank says that it had $29.5 billion in uninsured deposits on Dec. 31, 2022. See Figure 1, below; important part highlighted in blue.

Now do the math. If Western Alliance had $53.6 billion in total deposits at the end of 2022, and $29.5 billion of that sum were uninsured deposits, then the other $24.1 billion had to be the amount of insured deposits.

And if Western Alliance now has $32.37 billion in insured deposits (as indicated in this week’s release), then Western Alliance gained $8.27 billion in insured deposits during Q1 2023, even while total deposits declined.

This could have happened as large Western Alliance depositors saw what happened at SVB and said, “Oh crap, I gotta get my deposits under the $250,000 insurance limit. Lemme transfer some of my cash to other accounts.” That would have the practical effect of lowering Western Alliance’s total deposits, while more of the remaining cash qualified as insured deposits.

The lesson here is that analysts should be looking at the footnotes as Q1 filings arrive, to trace the flows of total deposits, insured deposits, and uninsured deposits.

If a bank has a high percentage of uninsured deposits, then investors should be looking to see whether the bank has similar exposure to unrealized losses on held-to-maturity securities (the assets that poisoned SVB’s balance sheet) — and if so, what steps the bank is taking to hedge such risks.

We should also note that Western Alliance is not the only one sending up smoke signals about Q1. For example, Axios Financial ($AX) also published a preliminary earnings release this week, promptly disclosing that total deposits increased by 25 percent in the quarter and 90 percent of deposits are insured.

The message from Axios is clear: “We don’t have an SVB problem!” Something tells us Axios won’t be the only bank trying to convey that point in coming weeks.

As most financial analysts know by now, the banking crisis sparked by Silicon Valley Bank is fundamentally about asset valuation. SVB held a large quantity of financial assets based on low-interest loans, which plunged in value in today’s high interest rate world, which led to an accumulation of unrealized losses that eventually imploded the balance sheet.

Some people might wonder whether similar dysfunction could affect non-financial companies, and how you might analyze corporate disclosures to get a better sense of that risk. Today let’s explore how one might perform that analysis.

This idea came to us as we were studying Urban Outfitters ($URBN), which filed its most recent quarterly report earlier this week. Among its many disclosures was a footnote about the fair value of financial assets the company has. For any company you might choose, your analysis can start there.

Like many companies, Urban Outfitters invests some of its cash in other financial assets. The companies must then report the estimated fair value of those assets every quarter. Figure 1, below, shows what Urban Outfitters disclosed this quarter.

This is a standard table for disclosure of marketable securities. Under U.S. Generally Accepted Accounting Principles, companies must classify the securities they hold into one of three categories:

  • Level 1, where the price comes from readily observable inputs such as quoted prices in active markets for identical assets or liabilities.
  • Level 2, where prices are less readily apparent, so values are determined by other means — say, quoted prices for assets that are similar but not identical.
  • Level 3, reserved for assets that don’t have readily available markets, so the company estimates a value based on its own best assumptions and calculations.

So if we go back to Urban Outfitters and Figure 1, we can see that the company has $11.98 million of Level 1 assets, which are mutual funds held in a rabbi trust (a type of tax-deferred account so named because a rabbi first came up with the idea). The company also has $272.2 million in various Level 2 assets, mostly corporate bonds; and no Level 3 assets.

As disclosures of financial assets go, Urban Outfitters’ report is rather run of the mill. Many companies, financial and non-financial alike, will have similar disclosures.

What About Level 3 Assets?

The trickier question are Level 3 assets, since they rely so much more on models and assumptions to determine their value rather than market data.

What might that look like in practice? One example comes from Loews Corp. ($L), which disclosed $1.64 billion in Level 3 assets in its 2022 annual report, filed in February. See Figure 2, below.

To be clear, Loews does not have much value tied up in these Level 3 assets; that $1.64 billion is only 4.3 percent of the total $37.7 billion in financial assets Loews reported for last year and only 2.1 percent of $75.5 billion in total assets. Even if those Level 3 assets suddenly dropped to zero (unlikely), that would barely be material to the overall balance sheet.

Our point, however, is that Level 3 assets theoretically could see sudden, wild swings in value that catch investors by surprise, because Level 3 assets don’t trade on easily accessible markets.

To help you understand the changes in those values over time, companies do need to reconcile the values from fiscal year-start to fiscal year-end, and report those numbers. Figure 3, below, shows how Loews reconciled its Level 3 assets. (Be warned, you may need to squint.)

There’s a lot going on in Figure 3, but basically it shows that Loews started 2022 with $1.55 billion in Level 3 assets, lost value in some of them, gained value while purchasing others, and ended 2022 with that $1.64 billion we mentioned above.

You can run similar exercises on other companies reporting Level 3 assets. Speaking of which…

How You Find the Data

That’s easy. As we mentioned, you can find the disclosures for specific companies using our Footnote Disclosure tool, looking for the Fair Value footnote that most companies (and just about all banks and financial firms) report.

Or, to find those disclosures in bulk, you can use our Multi-Company search page. In the standardized metrics field, just start typing “Level.” Before you even finish, you’ll see a platoon of choices to research Level 1, 2, or 3 assets; and any transfers of value from one level to another.

Then it’s off to the races. Here’s hoping your asset values always stay strong.

Thursday, March 30, 2023

First-quarter 2023 ends this week. That means first-quarter earnings reports will start arriving a few weeks after that, and in recent years the large banks have been the first companies to file their quarterly reports.

So, since everyone is kinda sorta unnerved that maybe there’s a banking crisis afoot, Calcbench offers this quick refresher on where in the footnotes a financial analyst might look for useful disclosures about bank health.

Specifically, some banks include footnotes entirely dedicated to their deposits. What do those footnotes tell us?

Let’s start with Citigroup ($C). The bank included a deposit footnote in the 10-K it filed on Feb. 27 that offered three tables explaining the amount of deposits, the change in deposit amounts from one year to the next, total deposits inside and outside the United States, and more.

For example, Figure 1, below, shows that total deposits rose from $1.317 trillion at the end of 2021 to $1.365 trillion at the end of 2022, an increase of 3.7 percent. A majority of that increase came from branches inside the United States ($28.3 billion) rather than branches outside the United States ($20.4 billion). And to little surprise, the large majority of deposits are in interest-bearing accounts rather than non-interest accounts.

Even more interesting, Citigroup includes a breakdown of “time deposits” (read: certificates of deposits) whose denominations exceed the $250,000 limit on deposit insurance. See Figure 2, below.

What can analysts do with disclosures like this? For starters, you might use this data to help you understand a bank’s interest expense — the money it pays to depositors who hold interest-bearing accounts. The higher interest rates go, the more money people deposit into savings accounts, and the higher a bank’s interest expense climbs. (Banks do report interest expense as its own line-item on the income statement, of course.)

As for deposits that exceed insurance limits, that disclosure might give you a better sense of the risks that a bank poses to the larger financial system. After all, the heart-attack moment for Silicon Valley Bank’s collapse was the realization that almost all its deposits exceeded federal deposit insurance limits, so most depositors were potentially looking at financial ruin.

Clearly such a scenario is much less likely for a giant such as Citi, which has larger capital reserves and “failure risk” that is negligible. But mid-sized banks might paint a very different story.

Other Examples

Not all banks are as chatty about their deposits as Citi. Bank of America ($BAC), for example, offered only one table about the maturity of CDs in the 10-K report the company filed on Feb. 22. (See Figure 3, below.)

On the other hand, U.S. Bancorp ($USB) provided a table that listed deposits by savings account, checking account, money market accounts, CDs, and non-interest accounts. (See Figure 4, below.) Do the math, and you’ll find that the biggest increases came in CDs (up 45 percent) and money market accounts (up 26 percent) — which happen to be the accounts that offer the best interest rates. Who woulda guessed?

Finding these disclosures in Calcbench is easy. Simply open our Disclosures & Footnotes database, select the bank (or banks) you want to research, and then look for a “Deposits” footnote among the many disclosures listed on the left-hand side of your screen.

As we said, the exact disclosures will vary from one bank to the next, and some banks (mostly smaller ones, from our cursory research) might offer no such disclosures at all. But among those banks that do, you’re likely to find some fascinating nuggets of data that you can use (along with other disclosures the banks make, such as interest expense and net interest income) to drive your analysis of which banks are doing well these days.

First-quarter reports will be arriving by late April. Start planning your models now!

Thursday, March 23, 2023

We’re history buffs here at Calcbench. So when the U.S.-China trade war turned five years old today, we decided to celebrate — with a bit of financial research!

It was March 2018 when then-president Donald Trump announced that he would impose tariffs on steel and aluminum imports, primarily as an action against China. Trump signed an executive order to that effect on March 8, and the tariffs formally went into effect March 23. So did the trade war.

The United States and China then lobbed a series of tariffs on each other and engaged in negotiations to end the war. The history of who promised to make what concessions is long and convoluted, and the war kinda sorta paused in 2020 as the covid pandemic started.

Many of the Trump-era tariffs remain in place today, and U.S. companies have even more restrictions, especially around semiconductors and other technology. (The Trade Talk podcast is an excellent resource if you want to nerd out on trade policy. Its most recent episode walks through the trade war’s history.)

Anyway, back to our celebration of financial data. We decided to use our Segments, Rollforwards, and Breakouts page to see which S&P 500 firms report significant revenues from the China market. We picked 15 companies with the largest reported revenue, and compared 2018 to 2022.  The result is Figure 1, below.

Companies that saw a decline in the portion of total revenue coming from China are shaded in red. Don’t bother squinting: it’s nine of the 15 firms, and six of those nine are in the semiconductor sector.

Total revenue for our group grew 29 percent from 2018 to 2022. Total revenue specifically from China, however, grew only 24.4 percent — slower, but not that much slower considering there’s a war on.

We should also stress that the 15 companies in our sample are only a small glimpse into overall U.S.-China trade. Several U.S. companies with significant sales to China (Boeing and Starbucks, for example), have odd fiscal year-ends and haven’t yet reported 2022 sales.

Many other companies also report China as part of a larger geographic segment — “Asia Pacific,” for example, or “China and Japan,” or some other segment. We didn’t include those firms since there’s no easy way to pinpoint China revenues. The 15 above all have segments that simply say “China.”

You can, of course, conduct your own analysis of companies’ overseas revenue, either by using the Segments page or by sifting through the segment disclosures companies make in the footnotes via our Interactive Disclosure tool.

Tuesday, March 21, 2023

As bank failures unfold, investors, regulators, businesses, and everyday people are looking at which financial intuition is going to be the next Bear Stearns, Washington Mutual (WaMu), or Silicon Valley Bank. Ultimately the public will have in-depth reports (and probably even books) on how these failures happened. Fundamentally, these firms held large amounts of concentrated risk without a coherent, fully developed strategy for  asset and liability management (ALM).

For Bear Stearns, its downfall was exposure to mortgage-backed securities — and then doubling down on those investments when the proverbial [expletive] hit the fan. WaMu had a focus on risky mortgage lending and an untenable expansion approach. For Silicon Valley Bank, its concentration in tech-backed start-ups and the bank’s high proportion of held-to-maturity (HTM) securities ultimately led to its demise.

To explore bank concentration risk in more detail, fintech entrepreneur, former financial analyst, and friend of Calcbench Marvin Chang did some sleuthing on banks and home lending asset trends. Chang evaluated more than 20 banks, ranging from the big national banks, to super-regionals, regionals with under $80 billion in assets, down to local community banks with under $10 billion in assets.

Figure 1, below, is a sample of what Chang found. It shows the different growth rates in home lending for the various sizes of banks. 

Overall, asset growth has been muted at national banks over the past four years. Home lending (mortgage and home equity) at these institutions has been declining from 2018 through 2022. With the one exception of Wells Fargo ($WFC), home lending is a single digit percentage of total lending at each of the big banks.

At super regional banks, regional banks, and local community banks, the story is different. From 2018 through 2022, asset growth was more accelerated, and mortgage lending rose. Often, the smaller the bank (in asset size) the more aggressive they’ve been in real estate which is interesting given that home lending has increasingly become a scaling/technology game.  

For super-regionals, the focus has been on home lending which hovers around 23 percent of total lending in 2022; at regionals with less than $80 billion in assets, home lending is 26 percent of total lending that same year.

As Calcbench first reported last summer, with interest rates on the rise, real estate lending has fallen off a cliff. For super-regional and regional banks specifically, Chang recommends taking a deeper look at their portfolios to understand what shoe might drop next.

Using Calcbench to do this research was easy, or as Chang says, “it’s like riding an electric bicycle.”

To download Chang’s detailed spreadsheet and see the tags he used with his Calcbench’s Excel Add-in, click here.

About the Author

Marvin Chang is currently chief commercial officer at digital lending platform Revvin. He has led digital transformation programs at Caliber Home Loans, which enabled this top mortgage lender to achieve a 10x increase in loan production via digital channels. There, he cultivated relationships with many of the leading residential housing value chain disruptors. At First Data, Chang led efforts to build innovative consumer loans propositions, focusing on point-of-sale and buy-now-pay-later lending. While overseeing international business development, Chang set up the company's venturing arm in India to tap into the market’s payment innovation. At Citigroup, his leadership in managing the legacy mortgage portfolio helped turn the mortgage holdings unit into a steady generator of returns. At Morgan Stanley, Chang held innovation leadership roles within the institutional research unit.

Monday, March 20, 2023

Remember our in-depth series on corporate debt loads back in January, when we analyzed 22 companies in the S&P 500 that seemed to have alarmingly high debt in our world of rising interest rates?

Well, the crack Calcbench research team was at it again recently. Now they’ve analyzed the debt loads of 75 companies in the S&P 500 — and the picture is as alarming as before.

First, a recap. Corporations loaded up on debt in the 2010s, an era of rock-bottom interest rates. Now much of that debt is coming due, except the 2020s have been an era of rising interest rates. So those companies seeking to roll over that older debt might be in for a rude awakening, as their interest expense costs jump sharply.

Consider Figure 1, below. It shows how total debt among S&P 500 non-financial firms surged from 2016 through 2022. (Keep in mind that we don’t have all filings for 2022 yet, including some large firms with significant debt.)

Likewise, interest expense among S&P 500 non-financial firms also surged from $133 billion to $156.8 billion — an increase of 18 percent, and we’re still not done yet with 2022 filings. See Figure 2, below.

Now back to the 75 firms we mentioned previously.

Those 75 companies were carrying a total of $1.206 trillion in debt against  $4.741 trillion of assets. Nearly $382 billion, or 28 percent of that total debt, will mature in the next five years. The weighted average interest rate for debt maturing in the next five years ranged from 2.53 to 4.96 percent. See Figure 3,  below.

The big question: What will happen to those companies when their debt comes due? Will they refinance at higher rates, and see their interest expense jump? Will they retire the debt, at the risk of shrinking their cash reserves? Will they raise new capital through an equity offering of some kind and dilute current shareholders? Something else?

To make matters even more complex, until this week it was pretty much a foregone conclusion that the Federal Reserve would keep raising interest rates. Now, thanks to the collapse of Silicon Valley Bank and Signature Bank, and yellow alerts about the health of other regional banks, the Fed may well decide to hold rates steady or even cut them later this year. So maybe those firms with debt coming due will find an escape hatch after all.

Specific examples

Companies do disclose their schedule of debt instruments and interest rates in the footnotes. The table below shows examples from the 75 companies we studied, and the effect of rolling over the debt is significant.

For example, Thermo Fisher ($TMO) has two senior notes coming due in 2023 for a total of $3.17 billion, paying an average interest rate of 1.44 percent. Let’s assume that Thermo rolls over that debt at 4.58 percent, the Federal Funds Rate this week. In that case, Thermo’s annual interest expense on that debt rises from $45.6 million to $145.1 million.

Calcbench has an updated research note going into more detail about these findings, including a watch list of other companies whose interest expense already equals a substantial portion of net income. You can download the note from our Research page, or revisit our original series on corporate debt to see how you can conduct your own analysis with Calcbench resources.

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