From time to time at Calcbench we sound a somewhat skeptical note about how much longer many companies can keep the good economic times rolling. Today Campbell Soup ($CPB) filed its latest quarterly report, and it demonstrates a few examples of the pressures we see.
At the top line, revenue growth looks good — up 24.6 percent, to $2.7 billion. Except that growth largely comes from two acquisitions Campbell closed earlier this year. Organic growth fell 3 percent.
We watch Campbell Soup because it relies heavily on aluminum for its soup cans, and we’re mildly obsessed with the Trump Administration’s tariffs on raw materials like aluminum. So we’re always looking for materials-heavy companies to see how their cost of revenue numbers are changing. The theory being that their costs may be rising due to tariffs and other expenses, eating away any revenue growth they see.
Well, Campbell saw big jumps in cost of revenue (up 35.7 percent), and marketing costs (up 13.2 percent), and administrative costs (up 18.1 percent). Throw in some restructuring charges, a slight trim in R&D costs, and you end up with total costs rising 34 percent — well above that 24.6 percent increase in revenue we just mentioned. See Figure 1, below.
In other words, those acquisitions earlier this year have Campbell working harder just to stay in place. Yes, that’s allowed to happen right after a large acquisition, since integrations are not easy. Still, financial analysts might want to tuck that fact away for a few quarters, to see whether the synergies Campbell promised at time of the deal closing actually come to pass.
Then we get to taxes. Yes, Campbell enjoyed a nice boost this year thanks to the corporate tax cuts Congress enacted last year. But in that case do the math—
So if we had never passed a corporate tax cut, and Campbell had to pay the same 28 percent rate on this year’s $257 million in earnings — that would be $72 million in taxes, and cut its net income from the $194 million it actually did report to $185 million.
In other words, the tax cut is propping up Campbell’s net income because organic growth isn’t there. You could also argue that the M&A deals earlier this year propped up revenue growth.
And once those tax cuts and M&A deals aren’t there — what happens then?
In theory, what happens is Campbell continues to remake itself away from a seller of soup to a seller of soup, snacks, and other food products. (The acquisitions earlier this year were in the snack business.) That is somewhat happening: soup sales actually fell in Q3 2018 compared to one year ago, while snack and other meal categories boomed (thanks to the acquisitions).
Will Campbell’s continue to pull off that re-engineering? Let’s hope so. 2018 was tough on Campbell: its share price steadily declined from $50 one year ago to $38 today.
One might even say Campbell got crunched like, well, an empty can.
We noticed an interesting item the other day about Amazon.com, and a squabble the company seems to be having with the Securities and Exchange Commission over how Amazon ($AMZN) is — or is not — reporting revenue from Amazon Prime membership.
The debate is unfolding via comment letters: written notices that SEC staffers sometimes send to a company, when those staffers have questions about something reported in the company’s financial statements.
For example, the SEC sent a comment letter to Amazon on Aug. 13, stating:
We note from statements in your Current Report on Form 8-K filed on April 18, 2018 that you have exceeded 100 million paid Prime members globally and that you shipped more than five billion items in 2017 with Prime worldwide. In future periodic reports, please disclose the percentage of net sales attributable to sales to Prime members versus sales to non-Prime members.
OK, that sounds more like a command than a comment or request to us, but such is life when you get correspondence from the SEC. Still, companies can politely tell the SEC that they’re sticking to their guns — which is what Amazon did in a reply on Aug. 30.
We respectfully do not believe that net sales attributable to Prime members versus sales to non-Prime members is meaningful or useful information… As with Alexa, our Kindle e-readers, and other offerings and services, Prime is only one element that supports our focus on selling a wide range of products and services. As a result, whether sales are associated with Prime membership does not reflect on or provide useful information about the nature of our net sales and does not reflect how management views the business.
We won’t speculate on who’s right or wrong in this dispute about Prime member revenues. We simply want to remind Calcbench subscribers that you can tap into all these comment letters as they become public.
How? Simple. Visit the Interactive Disclosures page, and select the company you want to research. Then open the “Choose Footnote/Disclosure Type” menu on the left side of your screen, and select “SEC Comment Letters & Responses.” Our magical databases will do the rest for you. (See Figure 1, below.)
Subscribers can also vist a special page we created to post recent comment letters. The URL for that page is plain old https://www.calcbench.com/recentcommentletters.
All SEC comment letters are eventually made public, but they are not immediately made public. By law the SEC must wait at least 20 days before publishing a comment letter, and under some circumstances (say, a pre-IPO company that has submitted its S-1 Registration Statement), the wait can be longer.
Suffice to say that like all other securities filings, once those comment letters are indexed and uploaded to the SEC database, Calcbench is on the case — you’ll be able to see that correspondence in our own databases, properly tagged and searchable, within minutes of it hitting the SEC. And yes, you can use our email alerting function to get a notification when we have a new comment letter, too.
Finally, we noticed that this story about Amazon hit the financial reporting press about seven days after those comment letters became public. So there really is an advantage to setting your preferences for email alerts any time one of your favorite companies gets a comment letter — you might be able to get ahead of the pack, because you saw the data first.
Here at Calcbench, high-quality data is what makes us feel hale and healthy. For everyone else, however, today we’re going to take a quick look at sales of blockbuster drugs in the pharmaceutical industry.
We first identified all listed pharmaceutical and life sciences firms in our database. Then we visited our Segments, Rollforwards, and Breakouts page, to find firms that listed specific product sales that exceeded $1 billion in 2017. (That was our threshold for “blockbuster” drugs.) We wanted to know: to what extent do any large pharmaceutical firms depend heavily on blockbuster drugs for their revenue stream?
First place went to Alexion Pharmaceuticals ($ALXN), with 89 percent of its total $3.55 billion in 2017 revenue attributed to one blockbuster drug: Soliris, an intravenous treatment for autoimmune disorders. Alexion reported $3.14 billion in Soliris revenue last year.
Altogether, however, we found 20 pharmaceutical firms dependent on blockbuster drugs. Table 1, below, shows the top 10 as ranked by dependency.
Dependency on blockbuster drugs is useful to know because that hints at broader corporate strategy. A firm can be relatively small, like Alexion, and still depend heavily on a few blockbuster drugs. A firm can also be huge, like Pfizer or Merck, and depend on many blockbuster drugs.
In either case, the same questions arise: what happens when the patents on those blockbusters expire? What is the company doing now to keep the pipeline of future blockbuster drugs full?
Conversely, a firm like Mylan or Abbott might have large total revenues, but no blockbusters. In that case, the firm probably sells generics. There’s nothing wrong with that per se, but it’s a fundamentally different business model with much lower profit margins. So even though Abbott and Gilead Sciences are nearly the same size in total revenue, they are radically different companies because of blockbuster drugs. Abbott has none, Gilead has lots.
A person wouldn’t necessarily know that unless he or she looked at the revenue details for each company. That’s what Calcbench lets you do.
Users would need to export the Segment data into Excel, and then apply a few rules to get the total blockbuster sales by company. But the exercise itself is not hard (took us less than an hour), and then a financial analyst can have that data-drive, specific insight you might want to put in a client note or put to the CFO on that next earnings call.
Calcbench: helping you take the red pill of data analytics since 2011.
A senior research analyst we know, AJ, was interviewing for a spot at a large asset management company. As part of the process, AJ was asked to “review” a bank and prepare a financial analysis, to present at an interview in two weeks’ time.
At the pension fund where he previously worked, AJ had access to a range of financial data resources including CapIQ, FactSet, and Bloomberg. Now, on his own, AJ needed a way to access significant amounts of data quickly.
AJ, like many others, was accustomed to looking at 10-year history. After all, banks are cyclical, so you want to catch two cycles of information to understand how metrics behave over time. Manually collecting the data would have taken a week (and fingers crossed there were no restatements), which left little time for analysis.
What to do?
Fortunately, AJ had friends at Calcbench. Within two days AJ was able to collect the data he needed for the bank and export it into his model, an exercise that he said would have taken a full week to do on his own. In addition, AJ was able to move confidently into his analysis phase since the data was cleaned and vetted.
AJ — who eventually landed the job — was thrilled. “Using other products like CapIQ, Bloomberg and FactSet, you have to find the data,” AJ said. “At Calcbench, it’s the first thing that you pull up. You can see the financial statement in its basic form, just the way we’re used to seeing it. And it’s in line with the way the company wants you to see it.”
AJ was happy that the financial statements were not “genericized” like some providers offer. He didn’t have to interpret data or determine how to track it. Above all, however, he just saved lots of time.
So what’s this analyst’s plan moving forward? First, get settled in the job. Second, get the word out that Calcbench is a great tool for financial analysis.What can Calcbench do for you?
We noticed an article on Bloomberg this week about the healthcare industry, and the frustration some medical practices are experiencing with high-deductible healthcare plans — that patients with those plans aren’t paying their bills on time, forcing medical practices to spend more time collecting overdue debts.
Interesting, we thought, because Calcbench grumbles about health insurance costs as much as anyone else these days. So how might a financial analyst following healthcare companies use our data to get a clearer sense of that problem in the companies you follow?
We did a quick experiment here using lab testing kingpin Quest Diagnostics as the target.
First, we visited our Multi-Company Page and entered Quest as our company to study. Immediately results started appearing on our screen, of both Quest and its peers: Laboratory Corp. of America, First Choice Healthcare Solutions, Genomic Health, and a bunch more.
A good start, but the standard results you see are revenue, operating income, operating cash flow, and assets. We wanted to explore unpaid debts and how that line item may be changing over time.
Well, unpaid debts are reported as account receivables. So we went to the Search Standardized Metrics field above our list of results and started typing in “receivables.” Right away, one option that came up was “increase or decrease in receivables.” We selected that one, and a new column of data appeared listing that change for each company we were staring at.
Better, but we specifically want to see the changes reported at Quest over the last several years. How do to that?
Move your cursor back to the listing for Quest Diagnostics on the left side, and a few options will magically appear — including one that says “history.” (We’ve enhanced the image below and noted it in red.
Click on the history feature, and you’ll see a period-by-period summary for each line item for that specific company you selected. See Figure 2, below.
Now we can see the historical data we wanted to find. Then it’s a matter of exporting that data to Excel (shout here for our Excel Add-In feature), so you can run whatever analysis you want. We decided to compare period-by-period trends in revenue and change in account receivables. You can clearly see the trend line for revenue is going up, while the trend in receivables is going down.
So yes, Quest might be having more difficulty collecting payment from patients with high-deductible plans, but the data doesn’t suggest any calamity that might be material to the company. You could also then visit our Interactive Disclosures page to dive into the data more deeply, perhaps searching for “deductible” or “debts” in the narrative disclosures for more detail.
Most important for Calcbench users is simply the ease of finding all this data. We ran these searches within a few minutes. Professional analysts who know exactly what they want to search can do the same, and get results with, well, surgical precision.
A solid majority of the S&P 500 have now filed their third-quarter 2018 numbers, so you know what that means: another look at whether cost of revenue and SG&A costs are accelerating faster than revenue.
Calcbench began studying that question earlier this year amid trade wars and tight labor markets, to see if those pressures were outpacing revenue growth. From time to time they were outpacing revenue, which consequently must lead to a decline in operating income. That pressure could also explain some of the stock market decline we’ve seen across 2018.
Overall, the third quarter looked much better for large companies. We examined the filings of more than 360 of the S&P 500. The bottom line: revenues up briskly, expenses up modestly, and therefore operating income rose a pleasant 12.2 percent compared to the year-ago period. See our nifty chart, below.
That said, the devil remains in the details. In our sample of 361 companies, 148 of them had the cost of revenue growing faster than revenue overall, and 158 had SG&A costs rising faster than revenue overall. So while the collective picture might look good, financial analysts will still find plenty of specific companies where the direction of revenue and costs does not look good.
And for those who need a reminder — why are we doing this at all?
Because if costs rise faster than revenue, operating income falls. In theory, companies facing that predicament could still please the Wall Street gods with good net income thanks to certain outside factors, such as last year’s huge corporate tax cut. That’s exactly what we saw at the start of this year when companies reported 2017 numbers.
The problem: for many companies, that tax cut accounted for most of their growth in net income. The feel-good high from that one-time injection to the income statement is long gone. Congress won’t be cutting corporate taxes again this year.
So now companies need to boost net income the old-fashioned way, by generating revenue and controlling costs. They need to do that just as several new outside factors — tariffs and a tight labor market — make controlling costs more difficult. So increasing revenue becomes more important.
Right now it seems like plenty of companies are navigating that path well enough. Then again, plenty of other companies aren’t.
Calcbench has been hot on the new accounting standard for operating leases lately, since the standard goes into effect on Dec. 15 and could have significant implications for companies that carry large operating lease obligations on their balance sheet.
Now, if you want an example of just how significant those implications can be, look no further than rival shipping giants FedEx and UPS.
We picked them because the two firms are roughly similar in revenue, net income, assets, and liabilities. FedEx, however, pursues a business model where it leases much more space than UPS does. The upshot: FedEx’s obligations for future lease payments are 11 times larger than those for UPS.
Now, recall that the new lease accounting standard requires companies to report those future lease payment obligations as liabilities on the balance sheet; and to add a corresponding “right of use” asset on the asset side of the balance sheet too.
Well, return on assets equals net income divided by total assets. So when you add items to the asset side of the balance sheet, you are expanding the denominator of that formula and your ROA must decline. It’s math.
Take a look at this comparison of FedEx and UPS, all pulled from Calcbench data.
We examined the companies’ current leasing obligations, added them to the liabilities side, and then added an equal amount to the asset side for the offsetting right-of-use asset. Then we recalculated an adjusted ROA according to the new leasing standard.
This is the result: Two companies of similar size, but one (FedEx) experiencing a considerable change in ROA simply because of an accounting change, rather than some fundamental change in business operations.
Financial analysts, therefore, might want to ask FedEx on its next earnings call: do you have any debt covenants that might be triggered when ROA falls below 7.5 or 7 percent? Do any executive compensation agreements tie to ROA? Anything else we should know about involving changes to ROA?
You get the picture. (Like, literally; we supplied the picture three paragraphs above.) Calcbench can dig up the data you need. Whether you feed it into your own Excel models or just fiddle around on the fly, we have it. You can find it.
Great news for financial analysts paranoid about getting the latest data as soon as it’s filed! Calcbench has overhauled our email alert function so you can be even more specific in what alerts you want to receive for the companies you follow.
Our expanded alert system lets you designate email alerts for standard 10-K and 10-Q filings as always — plus earnings releases, SEC comment letters, IPO prospectuses (prospectii?), and a bevy of other events that trigger Form 8-K filings. You can now get alerts on 8-K events such as merger announcements, material agreements, delistings, auditor changes, executive officer departures, and more.
Even better, we have redesigned the user interface to set those alerts. Now just visit your email alert preferences at https://www.calcbench.com/account/emailalertpreferences, and you’ll see all the peer groups and companies you follow in neat rows with check-boxes for the types of alerts you want. Take a look at Figure 1, below.
These are the actual peer groups of a certain Calcbench staffer who obsesses over the retail sector and competitors to Dunkin Donuts, among other firms. Along the top are the types of alerts available for each group. Then you can check the box for whatever alert you want, for each peer group or company you follow.
That’s really all there is to it. Any time a firm then files a triggering event with the Securities & Exchange Commission, Calcbench will index that filing within a few minutes; and the email alert will be in your inbox soon after that.
Any time you want to change your alert preferences, just return to the preferences page and click away. You can also clear prior settings, or simply check the “all filings” option and get everything we have.
Financial reporting is a wide world where you see lots of unusual things — and we saw another odd one recently, from software company PTC Corp.
PTC filed its latest earnings release on Oct. 24. This was the first time PTC reported revenues according to ASC 606, the new accounting standard for revenue recognition that all firms had to start using this year.
Important point: PTC sells software, and specifically sells subscription-based software. And as we’ve noted in prior posts, software firms in that line of work are particularly prone to changes in the nature and timing of their revenue streams thanks to that new standard.
Essentially, ASC 606 forces software companies to recognize revenue from long-term subscription contracts all at once. So a firm implementing ASC 606 for the first time might see a spike in revenue for that specific quarter, as it recognizes all that subscription revenue; and then lower, more volatile revenue streams in future quarters.
Sure enough, PTC fits that description. So first the company gave investors this head’s up in its disclosures:
In connection with its adoption of ASC 606, PTC expects to record an adjustment to retained earnings of $350 million to $380 million related to deferred revenue and unbilled deferred revenue amounts… This adjustment will be reflected on PTC’s consolidated balance sheets for the first quarter of fiscal 2019 ending December 29, 2018. We estimate this adjustment will reduce future annual subscription revenue as follows: for FY’19: $200 million - $220 million; FY’20: $100 million - $105 million; FY’21: $35 million - $40 million; FY’22: $15 million.
We expect that this will have a material adverse effect on reported revenue in FY’19 that will be only partially offset by the upfront revenue recognition of the license portion of new subscription contracts and renewals. In FY20 and beyond, we expect the adverse impact related to the retained earnings adjustment will be more than offset by upfront revenue recognition of the license portion of subscription contracts.
In other words, turbulence lies ahead for PTC in fiscal 2019. Fair enough; we’ve seen other software firms make similar disclosures.
Then PTC went above and beyond with its estimates for 2019. The company presented its business outlook twice — once according to ASC 606 as required by accounting rules; and again under the old accounting standard, ASC 605.
Take a look. Figure 1 on top presents PTC’s outlook according to the old ASC 605 standard. Figure 2 at the bottom is the outlook according to the new ASC 606 standard.
The subscription revenue line-item (flagged in red) is the key point here. ASC 606 cuts that revenue from somewhere around $141 million (the old standard) to $93 million (under the new standard).
Can a firm do that with its financial reporting? Um, sure; there’s no law against it. PTC does obey all SEC rules about presenting both versions in identical format and clearly stating why PTC believes the older standard is worth noting. That’s what a company has to do to include a non-GAAP metric, which the outdated revenue standard now is.
We just didn’t expect a firm to go to such extremes. Then again, that’s what makes financial analysis so interesting.
Reduce the amount of time analysts spend reading 10-K/Qs by highlighting the sections which change the most between periods.
The cosine distance between Term Frequency - Inverse Document Frequencey (TF-IDF) vectors of 10-K sections is a useful proxy for semantic change in 10-K sections across time.
Calcbench offers a wealth of data and analytical tools to our subscribers. Today we’re going to focus on one of our lesser known but quite nifty features: purchase price allocation.
All mergers and acquisitions have a total price that you read about in the headlines. The details are usually reported much later, where the company discloses how it allocated that total price across various components: how much for inventory, how much for accounts receivable, how much for goodwill, how much for other intangible assets, and so forth.
That’s purchase price allocation — commonly abbreviated as “PPA” and yes, we track that stuff. Here’s how you can find it.
Start at our Segments, Rollforwards, and Breakouts page. You’ll see a blank page when you first arrive, so you’ll need to select a company or group of companies to research. For our purposes here, we’ll work with one of our defaults, the Dow Jones Industrial Average.
Once you select your group, a menu option will appear on the left side of the page. Open it and a list of about 25 choices will appear. Toward the bottom are three choices related to business combinations. In the middle you’ll find “Business Combinations — Purchase Price Allocation.” (See Figure 1, below; PPA is highlighted in blue.)
Once you select that choice, you get a list of records on your screen — and be warned, this can be a long list. We return one record for every PPA item disclosed by every company, in every period you select. So you might see something that looks like Figure 2, below.
In the above image, we focused on a few PPA items disclosed by Caterpillar and DowPuPont (because that’s all we could fit on one sample screen), for calendar year 2017. We couldn’t even include all PPA items for either company in Figure 2.
So if someone wants to search all PPA disclosures in the whole S&P 500 for several years, you can see that suddenly we’re talking about lots of data. Calcbench has it all; just understand what you’re getting into.
Once you get those records, you can then use the handy Calcbench Trace Feature to investigate whatever number catches your eye. That will whisk you back to the exact disclosure the company made, where usually you can see all the details of how the company allocated the purchase across all line items.
Let’s use the very first record in Figure 2 as an example. Caterpillar reported $26 million in receivables for a freight rail acquisition it did in 2017. Move your cursor to that $26 million and the Trace option appears. Click on that, and you get a disclosure as seen in Figure 3, below. (We’ve magnified that image a few times for clarity.)
As you can see, that $26 million relates to Caterpillar acquiring the Downer Freight Rail business for $99 million, in a deal that closed on Jan. 2 of 2018. That acquisition included $92 million of tangible assets — including $26 million of accounts receivables.
If you wanted, you could scroll to the top of that sidebar and find the “Open in Disclosure Viewer” option. Click on that, and Calcbench whisks you to our Interactive Disclosure Viewer where you’d find the exact same disclosure, presented as Caterpillar presents in the footnotes. It would still be presented in writing, and rather dense to read at that.
Not every PPA disclosure will be dense narrative like that. Lots of them will be presented in tabular format.
For example, we scrolled further down and the first entry for Intel was $10.3 billion of goodwill acquired during an acquisition. We traced that number and the disclosure is shown in Figure 4, below. That $10.3 billion relates to Intel’s acquisition of Mobileye in August 2017 for $14.5 billion.You can see the exact $10.3 billion number in a blue square, and several paragraphs above is a line-by-line accounting of the whole price: $4.4 billion in intangible assets, a few other items for $500 million or less — but the vast majority of the purchase price was allocated to goodwill. Was it worth it? That’s not for Calcbench to say. That’s for analysts to ask about. We just show you how to find the exact numbers as reported, so you can ask quickly and precisely.
Netflix filed its latest quarterly report last week, and we first were poking around its Commitments and Contingencies disclosures to see what leasing obligations the company might have.
Almost immediately, however, we stumbled upon a different commitment Netflix reports: streaming content obligations. That makes sense, given that Netflix has huge licensing and royalty expenses to stream all that content to its customers.
We just weren’t prepared for the staggering size of Netflix’ streaming content obligations — more than $18.6 billion dollars, as of Sept. 30.
How fast have those obligations been growing, we wondered? And were Netflix revenue and income keeping pace?
Answering those questions is actually quite easy in Calcbench. Here’s how we did it.
First, we saw that $18.6 billion amount in Netflix’ disclosures. Of course that figure is a number, so as always, we could use the Calcbench Trace feature to find where that number comes from. We simply moved our cursor over the $18.6 billion, and several boxes magically appeared. See Figure 1, below.
In the lower box, you get an option called “Show Tag History” (circled in red). Click on that option, and a display will appear that lists the values for that specific financial item as far back as Calcbench has the data. In our case here, we could see the history for “PurchaseObligation” that Netflix had reported, as far back as second quarter 2012.
We wanted more, however. So we went to the other box that magically appeared above the $18.6 billion (circled in blue) giving us the “Export History” option. We pressed that, and blammo! Calcbench downloaded all that data into an Excel spreadsheet for us.
Then we just worked in Excel to create the chart below for you to see. It shows that obligations rose by 293 percent — from $6.38 billion to $18.6 billion — over the last six years. Wow. (See Chart 1, below.)
That’s a lot of obligation, so we then wanted to see whether Netflix’s revenue and operating income were growing at comparable rates. Yes, we could use the Trace feature and Export History option two more times, but we were too lazy to do all that again twice.
Instead, we went to the Data Query Tool. There, we could set our search range for Q2-2012 through Q3-2018, and then select revenue and operating income from the choices on the Income Statement list. (See Figure 2, below.) Scroll to the bottom of the page, press the Export to Excel button, and blammo again! Now we had all the quarterly data for both items.
Then it was just a matter of putting that data on charts again. We found that revenue rose 373 percent, from $1.07 billion to $4 billion last quarter (see Chart 2, below); and operating income rose more than 800 percent — from $57.1 million to $480.7 million (see Chart 3, below).
Now, revenue and operating income do fluctuate more than streaming obligations, but that’s no surprise. Spending obligations are often dictated by contracts with orderly payment schedules, while revenue and operating income are subject to the whims of customers and changes in operations costs.
Any way you cut it, however, you have to give Netflix its due. The company might be racking up expenses at a brisk pace, but sales and income are moving even faster.
And you can confirm all that multiple ways through Calcbench.
US Bancorp filed its third-quarter earnings release on Wednesday, and we noticed something in the nitty-gritty: its net interest income rose much faster from second quarter (1.7 percent) than non-interest income (0.2 percent).
That’s not surprising, of course. The Federal Reserve has been raising interest rates slowly but surely since 2016, and one would therefore expect banks to follow suit with their rates, and see more interest income. We just hadn’t noticed that change until today. (So much financial data to read, after all.)
So we started to wonder — is that hypothesis true? Are financial firms seeing more growth in interest income than non-interest income? Are total revenues tilting that way?
Indeed they are.
We visited our handy Data Query Tool and pulled up the data for all depository institutions — a list of 853 firms ranging from publicly traded community banks all the way up to Citigroup, Bank of America, and the other big boys. Then we looked for interest income and non-interest income from first-quarter 2015 to second-quarter 2015.
Across all quarters, interest income has always been larger than non-interest income. So we also divided interest income into non-interest income, and expressed that number as a ratio. The ratio went from 1.24 at the start of 2015 to 1.42 by summer 2018.
OK, that sounds like a lot, but too many numbers make our head hurt. So we graphed them onto a chart, and got this, below.
The trend-line in red tells the tale. Interest income is pulling away from non-interest income as the primary revenue source for banks. The slope on that line is 14.5 percent. Try that on a treadmill and your hamstrings will never speak to you again.
And while we don’t show it in this chart, when you examine the changes within each year and from one year to the next (we did), that growth in interest income is accelerating. So we’ll be back in a few weeks once third-quarter numbers are completely filed with an update.
Analysts following financial firms, meanwhile, may want to contemplate what that acceleration toward interest income means.
Ah, Sears, we hardly knew ye.
No, for real — we hardly ever shop there. Then again, that seems to be the company’s fundamental problem. Nobody does.
News broke in the Wall Street Journal this week that Sears’ long-time financial lifeline Eddie Lampert — the company’s chief executive, largest shareholder, and largest creditor all rolled into one — has finally reached the end of his patience. Lampert is not planning to lend Sears any more of his hedge fund cash.
That’s grim news for Sears, since the company has a $134 million debt payment due on Oct. 15, which it can’t make without another Lampert bailout. So bankruptcy and liquidation proceedings now seem imminent.
Calcbench has decided to note the occasion with three charts.
First, in Figure 1 below, we have Sears’ cash on hand for the last 12 quarters. While the individual amounts fluctuate, the trend line in red says it all. That slope is steeper than a double-black diamond trail at a Vail ski resort.
Figure 2 shows Sears’ current assets over the same period. Assets fell 46.4 percent, from $7.22 billion to $3.87 billion. This trend line might be more like a blue square trail in Vermont, but still: if people are using ski slope metaphors to describe you financial performance, you’re losing.
And Figure 3 shows Sears’ current liabilities. Yes, liabilities have declined too, but much less (29.8 percent) than assets or cash have dropped. And heed the vertical axis: liabilities at the end of Q2 2018 were about $400 million greater than assets.
That pretty much says it all for Sears. Calcbench users can do their own financial analysis of Sears’ dismal performance by using the Company-in-Detail or Data Query pages. Just select Sears as your company to study, and you can barrel down any hill of financial data you like.
Meanwhile, like so many consumers, we’re off to look at Target and Amazon.
At Calcbench we don’t give investment advice; that’s your
job. But we like to help people make informed decisions from available data. That’s
why the Oct. 1 WSJ article about money-losing IPOs caught our eye.
“Money-losing companies are going public at a record rate as investors hunger for new issues.” Funny, they make it sound like it’s a bad thing…
But seriously, just because a company is making a loss at IPO, does that necessarily predict much? Heck, Amazon.com was making a loss at IPO.
You need to dig deepr to figure out what kind of loss the filer is making, and what it means for the future.
To discuss this, we will revisit a post we wrote when Care.com went public in 2014. And it turned out to be prescient, since the company’s stock languished well below the $17 IPO price for several years.
At the time we called it “Buying revenue at any cost… the new strategy for IPOs?’
The first time I noticed a pattern was when I was looking at Groupon’s prospectus. Then came Splunk, Yelp, and several others in the past couple of years. And just today I saw a new one… Care.com
What pattern am I talking about? Companies that spend their pre-IPO year(s) with blowout revenue growth and equally dramatic growth in their costs and losses.
This is expected from early-stage startups. But early-stage startups don’t IPO; late-stage startups do.
Increasingly it seems there is a playbook that investment bankers are selling to hot startups, that reads something like this: If you buy revenue growth at any cost, we can take you public.
Anyone who has worked in corporate finance can tell you there is revenue and there is revenue. Some is good and some is bad. Revenue that loses the company money is bad…unless you need it to make your company look like it is growing.
Here is the game in a nutshell. If your company loses money, it’s impossible to value based on profit, right? So, investors turn to revenue growth instead. But far too few investors seem to realize that revenue growth can kinda sorta be whatever the company wants. Want more revenue? Steal the market by charging
less than all of the competitors. Buy more advertising. Sell deals that cost more than they bring in. Whatever it takes. Who cares what it costs. Because investors aren’t looking at the costs.
But what should you look for to know you are not getting a raw deal?
Simple. Ignore the revenue growth. Everyone’s got that. Focus on the incremental margin:
Good companies are characterized by increasing operating leverage, also known as incremental margin. Over time, for each dollar in revenue growth, a larger portion of that dollar should fall straight to the bottom line. If this doesn’t happen, then there could be something wrong with the business model.
Let’s look at Care.com: Each $1 of revenue cost $1.47 dollars in 2011. In 2012? $1.43. How about the first 9 months of 2013? $1.42. COME ON! After revenue rose 125 percent, you couldn’t increase the incremental margin at all?
In other words, if this company keeps on the same track, it will never turn a profit. Business model changes will have to happen… and why is a company filing for an IPO if it doesn’t have its business model figured out?
Now for contrast, let’s take a look at Amazon.
Each $1 of revenue cost $1.59 dollars in 1995. In 1996? $1.38. And in the final quarter on 1996? $1.28. Clearly, if Amazon kept going in a straight line, it would turn a profit. And, eventually, it did.
Campbell Soup just filed its annual report for its fiscal year ending July 31. If you want a glimpse into all the business issues currently vexing large businesses, pull up a computer screen and take a gander.
First are the financials, which were less than spectacular. Yes, revenue did rise 10 percent to $8.69 billion, but cost of goods sold rose 18.2 percent, marketing costs rose 5.5 percent, and administrative costs rose 18.9 percent. Throw in some restructuring charges and other expenses, and Campbell ended up with total costs rising almost $2 billion last year. Earnings before tax and interest landed at $469 million, two-thirds lower than 2017 numbers. Ugh.
Snoops that we are around here, we were especially interested in that spike in the costs of goods sold. Soup comes in cans, which are made of steel and aluminum. The Trump Administration is currently taxing steel and aluminum as part of its trade war. So we wondered — are those import taxes part of Campbell’s woes?
We visited our Interactive Disclosure viewer to see what Campbell had to say. We discovered a litany of disclosures in the Management Discussion & Analysis that hits pretty much every headache a large business might suffer today.
First Campbell talked about customer concentration generally, and how that consolidation is putting the squeeze on manufacturers of things like soups:
In 2018, U.S. soup sales declined primarily due to a key customer’s different promotional approach for soup. We expect consolidations among retailers will continue to create large and sophisticated customers that may further this trend… In addition, although e-commerce represents only a small percentage of total food sales, we anticipate it will continue to grow rapidly.
Bummer, but what about all those local retailers still fighting the good fight?
At the same time, new and existing retailers continue to grow and promote store brands that compete with branded products.
Sorry to hear that. But we came here to ask about steel and aluminum tariffs, Campbell. What can you tell us about that?
The cost of distribution has increased due to a significant rise in transportation and logistics costs, driven by excess demand, reduced availability and higher fuel costs. In addition, certain ingredients and packaging required for the manufacture of our products, including steel, have been or may be impacted by new or recently proposed tariffs. We expect these cost pressures to continue in 2019.
That’s tough, because those tariffs and higher energy prices aren’t likely to go away any time soon. What about trying to streamline operations? Would that help?
In connection with our transition to our new U.S. warehouse optimization model, we are also experiencing significantly higher than expected cost increases and shipment delays associated with the startup of our Findlay, Ohio distribution facility. The Findlay facility, operated by a third-party logistics service provider, serves as the Midwest hub for distribution of Campbell’s soups, Swanson broth, V8 beverages and Pace, Prego and Plum products.
Geez. Next you’re probably going to tell us Hurricane Florence dropped the whammy on you, too.
In September, our Maxton, North Carolina manufacturing and distribution capabilities were negatively impacted by flooding associated with Hurricane Florence. We expect the collective impact of these cost increases, shipment delays and weather-related issues to have a negative impact on our results of operations for the first quarter ending October 28, 2018.
Oh for pete’s sake, Campbell. We give up. Best of luck to you and we look forward to reading your earnings release in early November.
Every year around this time Calcbench examines the effect of exchange rates on corporate cash.
Why? Because the value of the dollar has important effects on cash. For example, a weaker U.S. dollar means purchasing foreign supplies becomes more expensive, potentially driving up your cost of goods sold. At the same time, selling overseas goods also becomes less expensive, because overseas customers have more purchasing power. During periods of a stronger dollar, that situation is reversed.
Companies must track the effect of exchange rates on cash in a line-item on the Statement of Cash Flows, unglamorously called “Effect of Exchange Rate on Cash.”
So Calcbench examined the amount of cash and equivalents that the S&P 500 reported at the end of 2017, and looked to see how much the exchange rate pushed that sum upward or downward.
First, how did the U.S. dollar do in 2017, anyway?
According to the Federal Reserve of St. Louis, not too good. The dollar began 2017 worth roughly 94.6 cents against a basket of major currencies, reached a low point of 86 cents in September 2017, and closed out the year at 87.4 cents. Take a look.
That said, the dollar is still up markedly from earlier in the decade. It bounced around 75 to 80 cents in the early 2010s, before inexorably rising as the Fed began raising interest rates in the mid-2010s.
Long story short: as the Fed raised rates in the mid-2010s, the dollar got stronger, so the exchange rate started to chew into cash and equivalents. Here are the numbers for 2012 through 2017.
What happened in 2016? The dollar stopped rising. It started the year at 95 cents, drifted downward to 90 cents, and ended 2016 right around 95 cents again. Hence the exchange rate effect decelerated to nibble at cash rather than chew.
And as the dollar continued to slide against other currencies in 2017 — mostly due to other economies finally reviving, and their currencies strengthening relative to ours — the exchange rate effect actually turned positive. It boosted the value of cash among the S&P 500 by 1.5 percent.
We know what you’re thinking: cool story bro, but what about 2018?
So far, the St. Louis Fed says, the dollar has trended largely downward: from 96.4 cents in January to 89.5 cents as of this week. That may be because of the mushrooming U.S. debt (which puts a lotta dollars out there), or stronger economies elsewhere, or a mix of both.
Regardless, if past is prologue, that means cash levels will get a little extra oomph again early next spring thanks to exchange rates.
We haven’t talked about last year’s tax reform for a while, so let’s revisit one significant item for corporate reporting: unremitted foreign earnings.
They’re still unremitted. More than that, they are unreported.
You may have seen that phenomenon explored in a recent Wall Street Journal article. Reporters examined the filings of 108 companies that account for roughly $2.7 trillion in unremitted foreign earnings, and found that those companies have brought home only about $143 billion so far — and more than $90 billion of that came from only two companies, Cisco Systems and Gilead Sciences. Everyone else in Corporate America is still keeping all those foreign earnings in foreign banks.
That wasn’t supposed to happen. Tax reform imposed a one-time “deemed repatriated earnings” tax on foreign profits, and eliminated most taxes on all future foreign earnings. Republicans said that would entice U.S. companies to bring all those foreign earnings home (roughly $4 trillion) and invest the dollars here.
Apparently Corporate America has decided differently. So what are companies doing with their cash? And how can Calcbench help you figure that out?
You can track companies’ unremitted foreign earnings either individually on our Company-in-Detail page; or compare them in bulk on our Multi-Company page. Just select the group of companies you want to study, and enter “Unremitted Foreign Earnings” in the Standardized Metrics search field. Presto, up come the results.
For starters, Calcbench examined all the unremitted foreign earnings among the S&P 500, from 2014 through 2017. “UFE” was briskly rising in the first three years of that period, from an average $6.7 billion in 2014 to $7.9 billion in 2016.
Then UFE fell, to an average of $5.22 billion. Among all the S&P 500 together, total unremitted earnings plunged more than 50 percent, from $2.49 trillion to $1.12 trillion.
That’s good, right? Must mean that tax reform is working and companies are bringing home that overseas cash, yes?
Not so fast.
When we examined each company’s financial data individually, we found lots of companies that simply stopped reporting UFE. The fields they had populated with data in previous years were blank. See Figure 1, below.
Why might a company do that? You can research a company’s rationale for changing its disclosure by using our Interactive Disclosure viewer, to see what the company had to say about whatever issue is on your mind.
So we did that for UFE — and then found nothing. Companies just dropped all reference to UFE in their disclosures. Period.
Take Microsoft as an example, in Figure 2, below. The column on the far right is the 10-K tax footnote from fiscal year 2017; the column on the far left is same footnote in the fiscal 2018 10-K. That middle column, and specifically the paragraph circled in red, is the language Microsoft dropped from its 2017 disclosure compared to 2018.
Microsoft is only one example. We found scores of them throughout the S&P 500, including names such as General Electric, Nucor, Walmart, Abbott Labs, Coty, Cigna, and others. All of them disclosed unremitted foreign earnings in 2016 annual reports, but not in 2017.
We don’t yet know why. We’re not sure we will ever know why. We do know, however, that you can use Calcbench to determine whether the companies you follow fall into that category — and then you can ask that question yourself on the next earnings call or at the next investor day.
And now for some shameless self-promotion: the CFA Institute has published a new article examining how structured data can help with financial analysis, featuring none other than Calcbench as an example of how to put structured data to work productively.
The paper, Data and Technology: How Information is Consumed in the New Age, reviews the uses of structured data: that is, pieces of data “tagged” with descriptors so computer software know what that data is and what the software can do with it.
For example, when you use our Multi-Company Page to pull up the revenue numbers for the S&P 500, our software is actually searching for all data with a
In the paper, Mohini Singh, director of financial reporting policy at CFA Institute, uses Calcbench to show how someone might compare a company’s accounting policies over time, to see whether and how those policies might change. Later Singh cites us again and our research into operating leases. (Oooh, double-shameless plug of our research on operating leases, too!)
Singh then goes on to discuss how some preparers of financial statements don’t like the chore of filing statements with XBRL (the structured data language used in financial statements), but consumers of those statements — investors and analysts — wolf down structured data like Pringles.
The paper is freely available, so give it a read and let us know what you think. We’re at firstname.lastname@example.org.
Stop everything! We interrupt our regular posts on leasing costs, tax reform, revenue recognition, and the like to bring you the really important stuff — like, which films are hitting the biggest of the big screens in 2019!
There we were, skimming the latest quarterly report from IMAX, when we saw it in the Management Discussion & Analysis, right there on Page 54: a complete list of all films IMAX currently plans to release in 2019, with planned release dates.
After all, IMAX makes its money from distributing films, so why wouldn’t its looming lineup be something worth discussion in the MD&A? IMAX has firm plans to release 45 films in 2018, and is working to release as many as 60 when all is said and done. (That would be comparable to the 60 films it distributed in 2017.)
So far the company has announced 17 films for 2019. Among the notables:
So on a more serious note, it’s interesting to see the deep ties IMAX has to Disney. Eight of the 17 titles IMAX has confirmed so far for 2019 are Disney titles. More important is that another three titles are from 20th Century Fox — so when Disney does take full control of those assets from the Fox-Disney merger (which investors approved earlier this summer), that will be 11 of 18 films. Disney will be an enormously important partner for IMAX.
Food for thought, along with the popcorn you grab on your way to see Venom or First Man. IMAX is releasing both of those next month.
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