We’ve explored this idea before, looking at:

• Disclosure of risks related to artificial intelligence; 

• Discussion of cash from operating activities;

• Presentation of restricted cash.

Today let’s look at another common headache for issues: disclosure of cybersecurity incidents.

This is a fairly new requirement, driven by SEC rules adopted last year requiring issuers to disclose “material cybersecurity incidents” as 8-K filings within four days of deciding that the incident you just suffered is indeed material. 

Specifically, companies file the 8-K as Item 1.05 — and you can indeed find those disclosures via Calcbench. You can either track individual companies and be alerted when they submit new filings, if you know specific companies you want to follow; or you could visit our Filings page, which lets you see all recent filings and filter them by specific filing type. Just filter for ‘1.05’ and you’ll see a list of recent disclosures for cybersecurity incidents.

For example, we hopped onto the Filings page and searched for cybersecurity disclosures from July 1 through Sept. 10. We found 10 (including several companies that had filed original and then amended 8-Ks). Let’s take a look.

Sonic Automotive

Sonic Automotive ($SAH) first disclosed a cyber incident on July 5, when the company reported that it was one of many auto sales businesses disrupted by a ransomware attack that struck CDK Global ($CDK), a software company that helps car makers and dealerships manage their sales. CDK was knocked on its heels in late June, causing weeks of grief to all manner of other companies.

What caught our eye is that Sonic then filed an updated 8-K disclosure about the attack on Aug. 5, as the full scope of damage to Sonic became more clear:

As of the date of this filing, access to the Company’s information systems affected by the Incident has been restored, including its dealer management system (“DMS”) and customer relationship management system (“CRM”). However, the Company experienced operational disruptions throughout July related to the functionality of certain CDK customer lead applications, inventory management applications and related third-party application integrations with CDK.

The Company has concluded that the Incident had a material impact on the Company’s business during and results of operations for the second fiscal quarter ended June 30, 2024 (“Q2”). The Company’s GAAP earnings per diluted share for Q2 were $1.18, and the Company estimates that the Incident adversely affected its GAAP earnings per diluted share for Q2 by approximately $0.64 without taking into account any potential recoveries related to the Incident and after factoring in estimated lost income and expenses attributable to the Incident.

Sonic also said it does not believe the attack will have any material effects in Q3 or beyond.

Key Tronic Corp. 

Key Tronic Corp. ($KTCC) is a manufacturer of printed assembly boards and other electronic components. The company first reported in May that it had suffered an unauthorized intrusion to its manufacturing systems. What happened then? The company filled in more details in a follow-up 8-K filing on Aug. 6… 

As a precautionary measure, the Company halted domestic and Mexico operations for approximately two weeks during remediation efforts. After production was restarted, these locations returned to near capacity approximately another two weeks later. Other international operations continued production without material disruption from the cybersecurity incident. During the disruption of business, the Company continued to pay wages in accordance with statutory requirements. The Company also deployed new IT-related infrastructure and engaged cyber security experts to remediate the incident. The Company’s operations and corporate functions were restored in mid-June, and we believe that the unauthorized third party no longer has access to the Company’s IT systems… 

The Company has determined that, due to the cybersecurity incident, it incurred approximately $2.3 million of additional expenses, and was unable to fulfill approximately $15 million of revenue during the fourth quarter. Most of these orders are expected to be fulfilled in fiscal year 2025.

Key booked $559 million in annual sales for its fiscal 2024, which ended June 30, so that $15 million loss in its final quarter probably stings. 

Halliburton 

Oil services giant Halliburton ($HAL) suffered an unauthorized intrusion on Aug. 21, and first filed an 8-K disclosure about the attack two days later — a rather bland, six-sentence item that the company was looking into the matter. (“The Company activated its cybersecurity response plan and launched an investigation internally with the support of external advisors.”) 

Ten days later, Halliburton filed a more expansive 8-K drilling a bit more deeply into the situation:

The incident has caused disruptions and limitation of access to portions of the Company’s business applications supporting aspects of the Company’s operations and corporate functions. The Company believes the unauthorized third party accessed and exfiltrated information from the Company’s systems. The Company is evaluating the nature and scope of the information, and what notifications are required.

The Company has incurred, and may continue to incur, certain expenses related to its response to this incident. As of the date of this Current Report on Form 8-K, the Company believes that the incident has not had, and is not reasonably likely to have, a material impact on the Company’s financial condition or results of operations.

Three different companies, three different approaches to providing more detail to investors about cybersecurity incidents. 

External reporting teams grappling with what to say about their own incident will always still need to make their own judgments, based on the facts of your own specific attack and advice of legal counsel; but studying the path that others have trodden can always make your own journey a bit more bearable. Calcbench data is always there to help.

The big picture is that public companies altogether did see higher revenue for Q2 2024 compared to the year-ago period, although smaller firms saw a smaller revenue gain than their larger brethren.

Net income, however, tells a different story. Large firms saw net income rise by 5.7 percent, but smaller firms and those that are domiciled internationally— that is, everyone outside the S&P 500 — saw net income plunge by a painful 24.4 percent.

We submit Figure 1, below. It breaks out year-over-year change in net income for all firms together, all non-financial firms, S&P 500 firms, non-financial S&P 500 firms, and all firms outside the S&P 500.

As you can see, every category enjoyed some amount of net income growth except for those non S&P500 firms. They collectively saw net income fall from $139.1 billion one year ago to $105.2 billion this quarter.  Once you remove international firms from that mix, the smaller US domiciled firms saw Net Income flat as it grew year over year by some 30 basis points.

The data suggests that net income growth is concentrating at the top, rather than across Corporate America overall.

Now consider what happened in the markets for the last six weeks. Large companies filed first, and they were reporting revenue and net income growth in the high single digits; and stock market averages rose. Then the smaller companies started to file, with net income declining, and the market declined. 

Well, share price is a function of expected growth in net income. If net income isn’t growing, share price declines. So what we’ve seen on Wall Street lately shouldn’t be a surprise.

The larger question, so to speak, is whether large companies will also see net income declines when they start filing Q3 earnings reports next month. So stay tuned as earnings releases start to arrive in about four weeks’ time, and the Calcbench Earnings Tracker cranks back up again.

How did you start using Calcbench? 

My friends and I went to the CFA Institute’s website to learn about the benefits of being a CFA Institute member. We were also looking to see what data was available through the CFA Institute’s website, and happened upon Calcbench. 

As a hobby, I’m learning to code in Python. I’m currently a beginner-to-intermediate coder, but hope that as I progress in my coding skills I will eventually be able to integrate Python into my work.

I recently started using Calcbench’s API. 

How easy is it to use the Calcbench API? 

I am currently downloading information into a Jupyter notebook. This is my first attempt at trying to get financial information in a systematic way and it took a little time for the initial setup. Lots of trial and error, and I had to go to Github for help — but once I understood the flow, I was able to extract a lot more data. 

SG&A stands for “sales, general, and administrative” costs, and encompasses pretty much any cost not directly related to making a product or delivering a service. Marketing, shipping, utilities, rent, coffee in the breakroom, ficus trees in the lobby — all of that, and more, rolls into SG&A costs.

We were curious about two questions. First, how much have SG&A costs risen for the S&P 500 in the last several years? Second and more important, how much have those costs risen as a percentage of revenue? 

The first is easy. Using our Bulk Data Query tool, we pulled quarterly SG&A costs for the S&P 500 from the start of 2020 through second-quarter 2024. In total those costs rose 21.6 percent, from $482.9 billion to $587.3 billion. Average SG&A costs per company rose 25.5 percent over the same period, from $1.08 billion to $1.35 billion.

Over those same 14 quarters, however, revenue rose even more: up 38.1 percent for the whole S&P 500 altogether, and up 42.1 percent for the average firm.

Figure 1, below, compares revenue and SG&A costs on an annual basis, since fussbuckets out there will say quarterly revenue fluctuates too much to be a good yardstick.

It’s a bit hard to see the change in those SG&A costs compared to revenue, but clearly revenue (blue) has been rising more than the costs (red).

Meanwhile, Figure 2, below, shows SG&A costs as a percentage of revenue for the last 14 quarters. The fluctuations there do roughly correspond to inflationary periods, such as early 2020 when the pandemic threw everything into turmoil, and mid-2022 into mid-2023, when costs were rising faster than many companies could address through pricing changes. 

By late 2023, however, inflation had decelerated and companies had adjusted their pricing as necessary, so SG&A costs as a percentage of revenue started to trend downward.

Macro-theorists could ask whether the falling lines in 2024 are reflective more of higher prices driving higher revenues, or lower demand leading to job cuts, fewer shipping costs, less utility needs, and the like. That’s not our question to answer. We just provide the data to raise it.

Inspiration for this post came from payments processor Bill.com ($BILL), which filed its latest annual report last week. We were snooping around the company’s business acquisition footnote, and found a discussion of Bill.com’s acquisition of Invoice2Go back in 2021. The deal was valued at $674.3 million, and that purchase price was allocated as follows in Figure 1, below.

As you can see, intangible assets were valued at $91.22 million, or 13.5 percent of the total $674.3 million price. (Goodwill was a whopping 86.8 percent of the total price, but we’ve written about goodwill in acquisitions plenty of times before.) 

So exactly what went into that $91.22 million of intangible assets? We skimmed further down the footnote, and found a nifty table describing the three main elements. See Figure 2, below.

All of those elements are quite typical of a software acquisition. The acquiring company gains new customer relationships, technology developed by the target company, and residual value of the target company’s name until the acquirer washes that name away after some period of time.

At this juncture we should pause to appreciate the accounting rules here. For reasons that only a CPA could love, internally developed software assets are not included on the balance sheet as intangible assets; internally developed software isn’t listed anywhere, actually, other than as an operating expense. So it’s often more advantageous for a high-growth software venture to acquire other software companies, since those other companies’ technology is listed on the balance sheet as an intangible asset.

Like most intangible assets, however, those customer relationships, developed technology, and trade name do depreciate over time. Which means the weighted average useful life disclosure (as seen in Figure 2) can become quite important. 

For example, analysts could ask: Has the company made a reasonable estimate of the useful life? Could external factors (say, a rapid advance in competitors’ technology) shorten or otherwise change that estimated lifespan in the future? Could a poor estimate of the useful life risk an impairment of the intangible asset sometime in the future? 

Bill.com’s discussion of the Invoice2Go acquisition is simply an example of the disclosures one can find with Calcbench. So we wondered — what do other software companies say about the intangible assets involved in their acquisitions?

Searching for Detail

That information is not difficult to find in Calcbench. For example, we went to the Footnote and Disclosures database, then searched for any reference to “developed technology” by the S&P 500 in their 2023 annual reports (and then narrowed the search to companies using that term in their business combinations footnote). We found dozens of results. 

For example, Trane Technologies ($TT, maker of HVAC systems) disclosed multiple acquisitions in 2023 worth a total of $843.4 million. Intangible assets were valued at $330 million, or 39 percent of total acquisition costs. Those intangibles were valued as follows:

Analog Devices ($ADI, maker of various micro-electronic components) discussed its $27.95 billion acquisition of Maxim Integrated Products from 2022. Intangible assets were $12.43 billion (or 44.8 percent) of that deal, and were accounted for as follows:

And for good measure, we should also examine the disclosures of cybersecurity firm CrowdStrike ($CRWD) because it discusses two quite different acquisitions.

First is the company’s acquisition of Bionic Stork, a privately held company that provides an application security posture management platform, whatever that is. CrowdStrike paid $239 million for Bionic last year, including $34.9 million worth of intangible assets. In that $34.9 million, $29.9 million of that sum was assigned to “developed technology” with a lifespan of 72 months.

OK, cool beans; but CrowdStrike also acquired a smaller firm last year called Reposify Ltd. for $18.5 million. That amound included $3.8 million of developed technology, which seems to be the only intangible asset reported from the deal — and CrowdStrike estimated the lifespan of Reposify’s developed technology also at 72 months. (The deal was so small that CrowdStrike didn’t report it in table format so we have nothing to show you.) 

We’re not cybersecurity software developers, so we don’t know whether 72 months is an appropriate lifespan estimate or not — but we did notice that CrowdStrike is using the same estimated lifespan for both acquisitions. Well, why? Does the company use 72 months as a standard benchmark for all acquisitions? Is that appropriate for the cybersecurity industry? 

Those are questions for investors and analysts to ponder. Calcbench simply has the data so that those questions can be brought to the surface, and you can find the answers.

Well, OK… but exactly what are those companies disclosing about AI risks?

After all, it’s easy to see why more companies are talking about AI as a risk: because ChatGPT exploded onto the scene in late 2022. It’s cool and disturbing and everywhere and has potentially huge disruptive effects, so companies can’t really not say at least something about AI’s significance to their operations.

Still, that’s not the same as saying how AI might be a risk to your company. Some firms might see their business models eviscerated; others might see their businesses soar if they’re nimble enough to take advantage of AI in a timely manner. 

To explore this question, we fired up Calcbench’s Disclosures and Footnotes database and searched for S&P 500 companies that mentioned “artificial intelligence” in their risk factors for Q2 filings. 

Most companies kept that discussion of AI simple — say, adding AI as yet another technology that might complicate the firm’s cybersecurity risks, or mentioning AI as a technology the company needs to harness. 

For example, Nike ($NKE) had one sentence that mentioned AI, as part of a larger discussion about the company’s reliance on technology:

To  the extent we integrate artificial intelligence ("AI") into our operations, this may increase the cybersecurity and privacy risks, including the risk of unauthorized or misuse of AI tools we are exposed to, and threat actors may leverage AI to engage in automated, targeted and coordinated attacks of our systems.

Darden Restaurants ($DRI) did much the same, although it managed to stretch its discussion to two sentences:

However, because technology is increasingly complex and cyber-attacks are increasingly sophisticated and more frequent, there can be no assurance that such incidents will not have a material adverse effect on us in the future. For example, the rapid evolution and increased adoption of artificial intelligence technologies may intensify our and our service providers’ and key suppliers’ cybersecurity risks.

A more expansive discussion came from Clorox ($CLX). It mentioned AI multiple times in its risk factor discussions, including the important point that the company’s long-term prospects might suffer if it can’t reap the benefits of new technology quickly:

If the Company is unable to increase market share in existing product lines, develop product innovations, undertake sales, marketing and advertising initiatives that grow its product categories, effectively adopt and leverage existing and emerging technologies, such as artificial intelligence or machine learning, and/or develop, acquire or successfully launch new products or brands, it may not achieve its sales growth objectives.

More specifically, Clorox warned that it might struggle to wield AI in a manner that respects compliance obligations, ethical concerns, and legal risks:

In addition, the legal, regulatory and ethical landscape around the use of artificial intelligence and machine learning is rapidly evolving. The Company’s ability to adopt this emerging technology in an effective and ethical manner may impact its reputation and ability to compete, and this technology could be, among other things, false, biased, or inconsistent with the Company’s values and strategies. Further, the use of generative artificial intelligence tools may compromise confidential or sensitive information, put the Company’s intellectual property at risk, or subject the Company to claims of intellectual property infringement, all of which could damage the Company's reputation.

That’s a good point to raise. Right now the regulatory climate for AI is still a mess (read Radical Compliance if you’re a compliance nerd who wants the deets on AI compliance issues), and nobody quite knows what businesses will need to do to stay on the right side of AI law in, say, 2030.

Fedex Corp. ($FDX) made similar risk disclosures about seizing AI’s potential heightened cybersecurity threats. It also raised an interesting point about AI and social media generating so much digital noise that the company might struggle to keep up with reputation risks:

With the increase in the use of artificial intelligence and social media outlets such as Facebook, YouTube, Instagram, X (formerly Twitter), TikTok, and other platforms, adverse publicity, whether warranted or not, can be disseminated quickly and broadly without context, making it increasingly difficult for us to effectively respond. Certain forms of technology such as artificial intelligence also allow users to alter images, videos, and other information relating to FedEx and present the information in a false or misleading manner.

Somewhat to our surprise, Microsoft ($MSFT) mentioned artificial intelligence only once, despite being a huge player in AI development:

We are investing in artificial intelligence (“AI”) across the entire company and infusing generative AI capabilities into our consumer and commercial offerings. We expect AI technology and services to be a highly competitive and rapidly evolving market, and new competitors continue to enter the market. We will bear significant development and operational costs to build and support the AI models, services, platforms, and infrastructure necessary to meet the needs of our customers. To compete effectively we must also be responsive to technological change, new and potential regulatory developments, and public scrutiny.

In other words, Microsoft is betting the company on the success of AI. That’s not an unwarranted bet, but it’s going to be a big, enterprise-wide, long-term endeavor. 

We could keep going with more examples; we found 39 in Q2 filings alone, and several hundred in annual 10-K filings for 2023 — and that’s all for the S&P 500 alone, never mind all the other businesses out there. 

Filers looking for inspiration on how to describe AI in your risk factors can always start here, comparing yourselves to peers. At the least, those other disclosures would help you have more informed discussions with the legal team, the CTO, or anyone else in your enterprise involved in artificial intelligence, so you’ll know what questions to ask them as you form your narrative disclosures. Whatever data you need, Calcbench has it!

That’s right: Warner Bros. disclosed its impairment charge on Aug. 7, and then rival entertainment behemoth Paramount Global ($PARA) followed suit with a $6 billion impairment charge declared on Aug. 8. 

Both companies offer some fascinating — and eerily similar —  details about why they decided to take a goodwill impairment charge. Financial analysts following the sector should pay close attention, since understanding the how and why of these charges might help you anticipate goodwill impairment charges that other entertainment companies might report in the future.

First, a quick recap of the Warner Bros. impairment. As we discussed in our prior post about the company, Warner was carrying $22.1 billion in goodwill assets from its merger with Discovery Inc. back in 2022. The impairment arose from persistent poor performance in the company’s TV networks segment, which rested on two critical assumptions:

• A long-term growth rate for the Networks division of negative 3 percent.

• A discount rate of 10.5 percent, “reflective of the risks inherent in the future cash flows of the reporting unit and market conditions.” 

Lo and behold, Paramount made almost the exact same assumptions about its own TV networks business. Taken right from its footnote disclosure about the impairment charge:

• A long-term growth rate of negative 3 percent;

• A discount rate of 11 percent. 

So much like Warner Bros., Paramount management pretty much knew that its TV networks business was only going in a downward direction. Impairment was bound to happen sooner or later. 

Figure 1, below, shows quarterly revenue for Paramount’s TV Media segment for the last two years, just like we tracked with Warner Bros. Again, note the alarming trend line (in red).

An ironic twist: even as revenue from the TV unit has been falling in absolute terms, it has been accounting for more and more of Paramount’s total revenue — up from 62.7 percent of total revenue in mid-2022, to 67.6 percent in mid-2024. Heck, it even peaked at more than 70 percent of total revenue for a few quarters in 2023. 

Think about that. If your dominant operating segment is seeing revenue declines, then almost by definition your company is in profound strategic disarray. In that case, no wonder Paramount has been trying to sell itself for years, and finally sold itself to Skydance Media in July. 

Our point is simply that if financial analysts paid close attention to the details disclosed in the footnotes, and compared those details for Company A to peer companies B, C, and D, you’d be in much better shape to anticipate significant events such as billion-dollar impairment charges and sale of the company.

Calcbench does track all those details. All you need to do is start digging.

We can start with the impairment itself, announced as part of Warner Bros.’ second-quarter earnings release filed on Aug. 7. The company declared an impairment of $9.1 billion for its Networks division, which includes operations such as cable TV and other broadcast television operations, both in the United States and abroad.

OK, it’s not news that traditional television has been taking it in the teeth lately, as consumers cut the cable in favor of streaming services. But what exactly caused Warner Bros. to declare a goodwill impairment now, barely two years after the company came into being with the merger of Discovery Inc. and the Warner Media business of AT&T ($T) back in April 2022? 

This is a question worth considering because that merger involved a lot of goodwill — $22.1 billion in a deal with a total value of $42.4 billion, according to the purchase price allocation disclosed by Warner Bros. See Figure 1, below.

So if Warner Bros. is already impairing such a significant part of the deal, could further impairments lurk somewhere down the road? Exactly how bad has business in its Networks segment been, anyway? Could astute analysts have anticipated this impairment landmine and sidestepped it? 

That’s what we wanted to know.

Start With Fair Value Disclosures

Companies are supposed to review their goodwill assets annually and, when necessary, test those assets for possible impairment. An impairment could be triggered by a sudden, specific event (say, a subsidiary that loses exclusive rights to a key product); or by a long, steady, irreversible decline in value of a certain asset or the company’s share price.

According to its footnote disclosure about goodwill, Warner Bros. experienced both triggers. First, and as you may have seen in the news, the network lost its rights to broadcast NBA games; that is one of those sudden, specific events that dramatically weaken the value of the business. (Warner Bros. is now suing the NBA and its decision to broadcast the games on Amazon.) 

More interesting to financial analysts, however, are the criteria Warner Bros. used to monitor the long-term value of its Networks division — exactly the sort of details that could signal potential future trouble, if analysts know where to look and what those signals mean.

There in the goodwill footnote, Warner Bros. disclosed two critical assumptions:

• A long-term growth rate for the Networks division of negative 3 percent.

• A discount rate of 10.5 percent, “reflective of the risks inherent in the future cash flows of the reporting unit and market conditions.” 

Yikes. Taken together, those two assumptions telegraph to investors that Warner Bros. knows that the future of Networks division is only going down. Then came the dust-up over NBA broadcast rights, making matters all the worse.

In other words, astute readers of Warner Bros. financial statements could have anticipated that a goodwill impairment was possible, if you were reading the footnotes and paying attention to external events (the NBA fight) streaking across the headline. Sometimes, when you have 2 and 2, you can calculate that the answer is 4.

More Tricky: Segment Disclosures

Warner Bros. also reports revenue according to three major operating segments: Studios (making content), DTC (direct-to-consumer streaming services), and that troubled Networks division. See Figure 2, below.

Using our show-tag-history feature, we then traced the Network segment’s revenues for the last two years (back to when Warner Bros. Discovery was born in April 2022). As you can see in Figure 3, below, segment revenue has zig-zagged down pretty much from birth, and the trend line in red is alarmingly steep.

You can find even more detail about the Networks segment (and Warner Bros.’ other two segments) if you read the earnings release directly. There, the company breaks down specific lines of business within each segment, complete with comparables to prior periods.

Unfortunately these details are only displayed in a PDF image, so they can’t be indexed for easy and immediate display. But if you know where they are, you can read them and see that the Networks segment is staggering along with a pretty bad limp. See below.

That’s enough for today, but we’ll have more about this impairment in another post — including a look at what other entertainment companies are reporting these days, and how to compare disclosures to suss out what’s what.

In last week’s update, smaller companies (those outside the S&P 500) were finally reporting more revenue than Q2 2023, but were still suffering through lower net income levels. 

Well, that dynamic has not changed. 

As of noon ET on Aug. 9, our Earnings Tracker had crunched the Q2 earnings data of more than 3,100 smaller firms, and net income stood at $76.76 billion — down 10.3 percent from the $85.63 billion in net income that those companies had reported for Q2 2023. 

S&P 500 firms (449 of them so far) were in much better shape, with net income up 12.1 percent. That figure includes large banks and other financial firms, too. When you exclude them and only look at non-financial S&P 500 firms, net income was up even higher, to 14.5 percent.

Figure 1, below, tells the tale.

As you can see, net income is up for all firms collectively, all firms excluding the financial sector, all S&P 500 firms, and even all financial firms in the S&P 500 (although just barely for that last group). Only small firms are seeing net income decline this quarter compared to one year ago. 

Revenue is a better picture. Altogether, the 3,593 firms we have tracked through Aug. 9 reported revenue up an impressive 33.8 percent. Across each sub-category we track revenue was up anywhere from 3.4 to 7 percent— although smaller firms reported the smallest revenue growth, up only 3.45 percent. See Figure 2, below.

We will continue to update our earnings tracker at the end of every week for another few weeks, until Q2 reports slow down to a trickle. 

If Calcbench subscribers wish to get their hands on the template we use for this analysis, so you can conduct your own experiments at home, use this link to the file. 

Please note that it will only work with an active Calcbench subscription. If you need an active subscription (and who doesn’t, really, when swift access to real-time data is so important?), contact us at info@calcbench.com.

The crackerjack Calcbench research team then wondered: how accurate is that hypothesis? What data do we have that might suggest where things are going? 

To answer those questions, Calcbench examined a group of roughly 120 pharmaceutical firms making at least $250 million in annual revenue, tracking their R&D spending as a percentage of revenue for the last 14 quarters. See Figure 1, below.

The blue line is actual spending per quarter, and as you can see it has fluctuated from 15 to 25 percent since the start of 2021. The red line is the underlying trend, and that has been gliding up nicely, even though R&D spending levels have gyrated more wildly in the last year or so.

But that’s not the whole tale, is it? We also looked at trends in free cash flow for that same group of pharmaceutical firms, since free cash flow tells investors how much more money the company could devote to various projects — like, say, new R&D spending. See Figure 2, below.

Oh dear, that’s not good at all. Free cash flow has clearly been on a downward path. If it continues on that trajectory, pharma companies are bound to feel a spending squeeze. Yes, preserving R&D is likely to be a priority; but pressure is pressure, so perhaps Charles River Labs’ warning about an R&D slowdown should not be a surprise after all. 

Some fussbuckets out there will inevitably say that free cash flow fluctuates too wildly from quarter to quarter, and measuring it annually would be more productive. OK then, see Figure 3.

Ack! Free cash flow dropped 17.2 percent from 2022 to 2023! That puts 2023 spending back on par with 2020, the whack-a-doo year of pandemic disruptions. 

The question now is whether that decline in free cash flow will continue through the rest of 2024. If it does, and if the pharma industry’s R&D spending goes into decline for some unknown period — well, that’s not the end of the world, but it does lead to certain strategic questions analysts might want to ponder. 

For example, big pharma might decide to spend more on acquisitions, scooping up privately held pharma or life science startups that are targeting one specific product that might make a nice addition to the acquirer’s pipeline. That’s a time-honored strategy for this sector; maybe it will come back in vogue.

Calcbench can’t predict that future, of course. But we do have all the data you need to ponder the future in more precise terms, and then tailor your investment or financial planning decisions to follow.

In our July 26 update, we saw that large companies (those in the S&P 500) were reporting revenue and net income for Q2 2024 higher than the year-earlier period, while smaller firms (those outside the S&P 500) reported slightly lower revenue and net income. At the time, however, only 788 firms had reported at all, and most of that number were large firms (because the S&P 500 have earlier filing deadlines). 

This week we’re up to more than 1,700 firms, and most are now smaller firms. So what does the Earnings Tracker tell us now? 

As of Friday, Aug. 2, the revenue gap for smaller firms disappeared: revenue for Q2 2024 is now up 3.45 percent compared to Q2 2023. That’s not as good as the revenue increase for large firms (up 4.74 percent), but at least it’s a positive number. 

Net income, however, is an uglier story; it is now down 10.3 percent for small firms compared to the year-earlier period, while net income for large firms is up 12.1 percent. 

As usual, we also have the data in charts. Figure 1, below, tells the tale for revenue across various groups: large versus small, financial firms versus non-financial, and so forth.

Figure 2, below, does the same for net income. The bar charts give the comparison in absolute dollar numbers (the left-side vertical axis), while the gray line is the percentage change (the right-side vertical axis).

The numbers do help to put recent market events into context. For example, if a great number of small companies out there are suffering through declines in net income, that will ultimately lead to lower share price — which certainly squares with the market sell-off Wall Street saw last week. Yes, lots of that sell-off was probably driven by panic selling, but a broad-based decline in net income growth could presage a sluggish market for quarters to come.

We will continue to update our earnings tracker at the end of every week for the next few weeks, as quarterly reports flood into the database. 

If Calcbench subscribers wish to get their hands on the template we use for this analysis, so you can conduct your own experiments at home, use this link to the file. 

Please note that it will only work with an active Calcbench subscription. If you need an active subscription (and who doesn’t, really, when swift access to real-time data is so important?), contact us at info@calcbench.com.

You don’t see that too often. As we documented in our Non-GAAP Adjustment Analysis published earlier this year, most non-GAAP disclosures are higher than traditional net income, but that’s not always the case. Under SEC reporting rules, a company that reports a certain non-GAAP disclosure must (a) use the same calculations for that metric period after period; and (b) keep reporting that metric period after period, until the company has thoughtful, reasonable rationale for discontinuing it.

So under the right circumstances, a company could report a non-GAAP metric that paints a less flattering picture of financial performance than standard GAAP disclosures, but you’re stuck reporting that non-GAAP number anyway. 

Such was the case with Cushman & Wakefield’s second-quarter earnings report. 

First let’s look at the GAAP numbers. Cushman reported $2.29 billion in revenue for the quarter, down 4.9 percent from the year-earlier period. Net income, however, jumped from $5.1 million to $13.5 million, largely thanks to cost savings on the operations side. See Figure 1, below.

Now we come to Cushman’s non-GAAP disclosures. Specifically, the firm reports adjusted EBITDA, which translates in the common tongue as “net income excluding a whole bunch of things.” 

Figure 2, below, shows what those adjustments are. Some are the usual for EBITDA (interest, taxes, depreciation, and amortization, the “ITDA” in EBITDA) — but others are more exotic, such as cost savings initiatives, CEO transition costs, and loss or gain on disposal of assets. 

As you can see, adjusted EBITDA actually declined from $146.1 million one year ago to $138.9 million this quarter. 

Because Cushman started a cost-cutting program last year, which included the sale of some assets, that led to markedly different — and worse — adjusted EBITDA numbers for second-quarter 2024 compared to those of 2023. Adjusted EBITDA margin and adjusted EPS declined, too. 

Calcbench does let you track non-GAAP metrics, in all their quirky glory, by holding your cursor over the disclosure in question. You’ll see an Excel icon appear that allows you to “export history.” Press that, and the disclosures for that metric will be downloaded onto your desktop for easy further analysis. 

We did exactly that for the adjusted EBITDA, and charted the number over time. See Figure 3, below.

All done in minutes with a few easy keystrokes. That’s the power of Calcbench!

We track these earnings using our Earnings Tracker template, which pulls in financial disclosures as companies file their latest earnings releases with the Securities and Exchange Commission. The Earnings Tracker provides an up-to-the minute snapshot of financial performance compared to the year-earlier period.

In this Week 2 of second-quarter earnings season, we have 788 firms reporting. The headline numbers are below. First is Figure 1, reporting revenue… 

As you can see, several different tales are being told at once here. Large companies (those in the S&P 500) are doing well, with revenue up 2.72 percent if you include financial firms and still up 1.85 percent when you don’t. 

Smaller companies outside the S&P 500, however, saw total revenue decline from the year-earlier period by more than 1 percent. 

Can’t say we love that divergence, but what about net income? That story is even more kooky, as shown in Figure 2 (which we converted into bar graphs just to show off). 

Here, smaller firms outside the S&P 500 saw net income decline by 0.33 percent. Except, when you exclude smaller financial firms, all other small filers saw net income pop by 13.3 percent — an increase pretty much equal to what all non-financial firms saw (up 13.7 percent) and all non-financial large firms (up 13.8 percent). 

Large financial firms, however, saw net income rise 8.4 percent. That’s not the 13.5-ish increase for non-financial firms, but it ain’t chump change either. Which implies that smaller financial firms must still be taking it on the chin. Then again, we’re still relatively early in earnings season, so the picture may change yet again in another few weeks. 

We will continue to update our earnings tracker at the end of every week for the next few weeks, as quarterly reports flood into the database. 

If Calcbench subscribers wish to get their hands on the template we use for this analysis, so you can conduct your own experiments at home, use this link to the file. 

Please note that it will only work with an active Calcbench subscription. If you need an active subscription (and who doesn’t, really, when swift access to real-time data is so important?), contact us at info@calcbench.com.

For example, did you know that average maximum train length is a thing? It is! And according to Union Pacific’s second-quarter earnings release, its maximum average train length increased by 2 percent from the year-ago period, to an all-time high of 9,544 feet. That’s 1.8 miles long, and we’re pretty sure we got stuck waiting for one of those trains at a rail crossing in upstate New York last month.

Anyway, using the nifty Calcbench export-to-Excel capabilities we talk about so much, we even charted out maximum average train length for the last four years. See Figure 1, below.

We’re not rail industry analysts so we don’t quite know what to do with this disclosure, other than to marvel at its inherent coolness. 

Nor is maximum average rain length the only interesting disclosure Union Pacific makes. Its earnings release is full of oddball disclosures, such as:

• Quarterly freight car velocity of 201 daily miles per car was flat.

• Quarterly locomotive productivity was 134 gross ton-miles (GTMs) per horsepower day, a 6% improvement.

• Quarterly workforce productivity improved 5 percent to 1,031 car miles per employee.

• Fuel consumption rate of 1.08, measured in gallons of fuel per thousand GTMs, improved 1 percent.

For all the above disclosures, you can quickly export them to Excel and compare them to prior periods’ disclosures, to generate charts such as ours above. That is, you can use Calcbench to model nuanced metrics of corporate performance quickly and easily, in visual formats easy to drop into a research note or client presentation.

We only chose Union Pacific because it happened to file this week, and because we went through a diehard Thomas the Tank Engine phase in kindergarten. You could just as easily find key performance metrics from other companies in other industries too, such as airlines, banking, retail, and more. 

Indeed, if you know an industry with particularly interesting performance metrics, drop us a line at info@calcbench.com and let us know! We’re always happy to dig into new types of data and come up with other cool industry reports. 

#KPI #earnings #railroads #finance #economics

We track these earnings using our Earnings Tracker template, which pulls in financial disclosures as companies file their latest earnings releases with the Securities and Exchange Commission. The Earnings Tracker provides an up-to-the minute snapshot of financial performance compared to the year-earlier period.

Today is our first look at second-quarter numbers. As of 2:30 pm ET this afternoon, we had data for roughly 110 non-financial companies. The headline numbers are in Figure 1, below.

As you can see, revenue is up 1.56 percent compared to second-quarter 2023, and net income is up a whopping 17 percent. Then again, we have so few companies in our sample size so far, it’s unwise to draw any broad conclusions from this data; come back in a few weeks, when we have hundreds of firms’ reports. 

We also track cost of revenue to get a read on where inflation is going these days, and so far cost of revenue is down 1.8 percent. (We’ll be sure to forward our data to Federal Reserve economists so they can hyperventilate about inflation signals properly.) Capex is up 4.6 percent, inventories down 4.7 percent.

Figure 2, below, shows essentially the same data from above in chart format.

We will continue to update our earnings tracker at the end of every week for the next few weeks, as quarterly reports flood into the database. 

If Calcbench subscribers wish to get their hands on the template we use for this analysis, so you can conduct your own experiments at home, use this link to the file. 

Please note that it will only work with an active Calcbench subscription. If you need an active subscription (and who doesn’t, really, when swift access to real-time data is so important?), contact us at info@calcbench.com.

OK, that’s not really a thing, but given the extent of UnitedHealthcare’s breach earlier this year, it could be. UnitedHealth suffered a devastating ransomware attack in February, when hackers shut down its Change Healthcare subsidiary (acquired in 2022). Since Change Healthcare processes billing and insurance claims for a large swath of the healthcare industry, the attack left pharmacies and hospitals across the United States unable to fill prescriptions, book procedures, and otherwise operate as normal. 

Anyway, back to today’s s earnings release for second-quarter 2024. UnitedHealth reported a total of $98.8 billion in revenue (up 6.4 percent from the year-ago period) and $4.42 billion in net income (down 21.8 percent).

The good stuff, however, was in the non-GAAP disclosures about the cyber attack. UnitedHealth broke the numbers down into “direct response costs” (that is, money the company paid out to help defray costs of the breach) and “business disruption impacts” (reduced revenue from the attack). Take a look at Figure 1, below, from the earnings release.

As you can see, total cyber attack impacts (that is, higher costs and missed revenue) were $1.1 billion for this quarter alone. That’s up from $872 million in the first quarter, which also means total impacts were $1.98 billion for the first half of the year. 

But wait, there’s more! Further down the release, UnitedHealth also estimates the attack’s total hit to EPS, for both this period and the full 2024 calendar year. See Figure 2, below. (Look for the bottom line shaded in blue.)

You may need to squint, but total hit to EPS for this quarter was $0.92 and estimated total hit for the year is $1.90 to $2.05.

Of course, also remember that you don’t need to squint at images and tables, even in our easy-to-use Disclosures & Footnote Query tool. If you simply leave your cursor over the table you’re studying (Figure 2 appears on Page 8 of UnitedHealth’s supplemental financial data), an icon automatically appears that lets you download the entire table as a neatly formatted Excel spreadsheet. You can then conduct your own analysis with the data as you see fit.

We do still have questions about the UnitedHealth breach itself. For example, the company said it extended $8.1 billion in interest-free loans to various parties disrupted by the breach. Well, who were those parties? What will they disclose in their earnings releases over the next few weeks? We’re not sure yet, but we have a reminder to ourselves to check.

UnitedHealth is also likely to face significant regulatory pressures from the Securities and Exchange Commission (our brother-in-arms Radical Compliance has a long post about potential SEC enforcement against UnitedHealth if that’s your bag), the Federal Trade Commission, federal healthcare regulators, and lord knows who else. 

It’s a big mess. The devil is in the details. Calcbench has those details indexed and ready for you.

That’s on our mind today because the SEC recently published a comment letter exchange the agency had with Lyft ($LYFT) about how the ride-sharing business discusses cash used in operating activities. 

The letters themselves don’t say anything too controversial. Basically, SEC staff told Lyft that they wanted to see more detail about material changes in cash from operating activities, and about how the company plans to meet its cash requirements. Lyft then responded with examples of expanded disclosure on those two points, which the company promised to include in future filings. 

Our point is simply that if you, another company, aren’t certain about exactly what you should include in footnote disclosures — which can often be a lengthy mix of obscure data and narrative discussion — SEC comment letters offer a glimpse into the SEC’s thinking. You can see what’s on the agency’s mind, and how other companies tried to answer those expectations; and then craft a more useful disclosure that, ideally, will avoid any exchange of SEC comment letters at all.

For example, the SEC comment letters asked specifically about Lyft’s 10-K filing for the period ending Dec. 31, 2023. Lyft responded by saying that it had updated and expanded its disclosure of cash related to operations for its Q1 2024 filing, and then included a sample with the new material underlined:

“Cash provided by operating activities was $156.2 million for the three months ended March 31, 2024, which consisted of a net loss of $31.5 million primarily offset by changes in working capital of $97.4 million. The year over year decrease in net loss from $187.6 million to $31.5 million was a result of increase in our revenues and the actions we have taken to reduce our operating expenses. Net loss was also offset by non-cash adjustments for stock-based compensation expense of $80.1 million, which decreased year over year due to a reduction in headcount driven by the restructuring activities initiated in prior years, and depreciation and amortization expense of $32.4 million. The changes in working capital were primarily driven by insurance, which saw (i) an increase in our insurance reserves due to a rise in commercial auto insurance rates on a per mile basis compared to the prior year and an increase in ride volume in the first quarter of 2024 compared to previous quarters and (ii) an increase in accounts payable which was primarily due to the timing of insurance claim payments.”

Apparently responses like that worked, because in a follow-up letter dated June 6 the SEC said it had completed its review of Lyft’s filing.

As we’ve noted before on this blog, SEC comment letters can be somewhat difficult to find and analyze. The SEC does release all comment letters eventually, but they are released on a time delay that can range from several weeks to months. Then you need to hunt-and-peck through the letters to figure out the right chain of conversation.

Calcbench simplifies that for our users by indexing all comment letters. We maintain a dedicated page for recent comment letters, and when you find a company that piques your interest, we display the entire comment letter chain by date so you can understand who wrote what to whom, on what date, and what the reply was.

You can also research whether a company has received any comment letters in the past (most have, even if the letter only says the SEC has reviewed its filing and has nothing else to say) by going to the Disclosure & Footnotes Query page and then selecting “SEC Comment Letters” from the pull-down menu of disclosure choices on the left side of your screen.

Why bother with this at all? Because you can find a lot of stuff in comment letters, including some pretty obscure disclosure issues by industry or accounting topic. Chances are that if you’re struggling with a disclosure issue, somebody else has already struggled through that same issue too — and with a little bit of digging in Calcbench, you can find out how they resolved it. 

We fired up our Disclosures & Footnotes tool, and randomly decided to look at KB Home’s debt disclosure. Hoo boy, that perked us right up!

Figure 1, below, shows what we found. KB has four notes payable, each for several hundred million dollars, coming due within the next several years. Moreover, those notes have interest rates anywhere from a rather reasonable 4 percent to 7.25 percent, almost high enough to cause a nosebleed. 

That alone made us wonder about KB Home’s ability to pay off those debts. Then we kept reading through the footnote, and came to this line at the bottom:

As of May 31, 2024, principal payments on our notes payable are due during each year ending November 30 as follows: 2024 – $4.3 million; 2025 – $1.0 million; 2026 – $360.6 million; 2027 – $300.8 million; 2028 – $.8 million and thereafter – $1.04 billion.

Yikes, that’s a lotta debt coming due in two years’ time. Perhaps that will work in KB’s favor; maybe the Fed will be in a rate-cutting cycle by then, and the company can refinance the debt at rates lower than what we see today. On the other hand, if that calculation turns out wrong and rates aren’t substantially lower, KB could be in for either (a) continued high debt loads and interest payments, if it refinances at high rates anyway; or (b) some painful financial reckoning as the company pays down its debt. 

Well, what about paying off that debt — is KB throwing off enough cash to do that? To ponder that question, we flipped over to our Company-in-Detail database to look at KB’s balance sheet and statement of cash flows for the last few years. 

The short answer is that we’re not financial analysts, so we aren’t making any predictions. But we can show you some of KB’s relevant disclosures, to let you draw your own conclusions.

For example, Figure 2, below, shows KB Homes’ balance sheet for the last few years. Cash has zig-zagged up and down over the last four years, most recently landing at $727.1 million for the fiscal year that ended last November. At the same time, notes payable has fluctuated in a much narrower range, landing at $1.69 billion in the last fiscal year. 

Next we have the statement of cash flows. That shows a surge in cash from operating activities in the most recent fiscal year to $1.08 billion, although that surge largely comes from a huge positive swing in inventories plus other assorted accounting moves, such as an increase in deferred taxes. See Figure 3,  below.

On the other hand (and not shown here), KB Homes saw a decline in cash generated from investing and financing activities; although it did end 2023 with an increase in cash of $397.1 million.

All this is to say that good financial analysis requires careful examination of both the primary financial statements and the footnote disclosures; you can’t understand the whole story — including, critically, where the business is likely to go in the future — by looking at only one set of disclosures. You need both.

Which, coincidentally, Calcbench has.