RECENT POSTS
Thursday, March 21, 2019
Tech Data’s Goodwill Adjustment

Tuesday, March 19, 2019
There’s Taxes, and There’s Taxes

Saturday, March 16, 2019
Adventures in Tax Cuts and Net Income

Monday, March 11, 2019
Big Moves in Goodwill, Intangible Value

Friday, March 8, 2019
CVS, Goodwill, and Enterprise Value

Thursday, February 28, 2019
Summary of Our Goodwill Research/ How-To

Wednesday, February 27, 2019
What Does ‘Other’ Mean? An Example

Thursday, February 21, 2019
Another Tale, Buried in the Footnotes

Wednesday, February 13, 2019
Low Latency Calcbench

Monday, February 11, 2019
Now Streaming on Hulu: Red Ink

Thursday, February 7, 2019
Early Look at 2018 Tax Decline

Wednesday, February 6, 2019
You Revised WHAT, Netflix?

Thursday, January 31, 2019
Talking About Huawei Exposure

Wednesday, January 30, 2019
Another Discrepancy in Reported Numbers

Wednesday, January 30, 2019
Finding Revised Facts: Hertz Edition

Wednesday, January 23, 2019
GE Commercial Aviation Services: Bringing Numbers to Light

Monday, January 21, 2019
Differences in Earnings Releases and 10-Ks

Wednesday, January 16, 2019
The Importance of Textual Analysis

Tuesday, January 8, 2019
A Look at Climate Change Disclosures

Wednesday, January 2, 2019
Quants: Point-in-Time Data for Backtesting

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Tech Data’s Goodwill Adjustment
Thursday, March 21, 2019

We often like to talk about goodwill on the corporate balance sheet, and whether the goodwill reported in a corporate merger lives up to expectations. Today we have an small example of how quickly those thoughts can change.

The example comes from Tech Data Corp. ($TECD), a data services firm based in Florida. In February 2017 Tech Data acquired the assets of “TS,” the technology solutions subsidiary of Avnet, for $2.8 billion. The deal was meant to expand Tech Data’s reach globally, including into Asia-Pacific. Remember that detail.

The purchase price included $727 million recorded in goodwill (roughly 26 percent of total deal price), as shown in the purchase-price allocation Tech Data elaborated, below.



OK, sounds reasonable enough so far. But Tech Data took 18 months to integrate TS into its operations fully. When Tech Data finally filed its 2018 Form 10-K on March 20, we skimmed the goodwill disclosures and noticed this gem below. Emphasis added in blue.



In other words, by the time Tech Data’s TS integration was fully complete, its Asia-Pacific operations were deemed not all they were once cracked up to be. So Tech Data had to trim the goodwill from this deal by 6.5 percent of the original $727 million.

As we said, it’s a small example, but a telling one. (We also have much more goodwill research you can peruse on our Research page.) Calcbench subscribers can always try to anticipate goodwill impairments by poring over segment disclosures, following management discussion and statements closely — and of course, setting up email alerts on the companies you do follow, so you can start digging into the data as soon as fresh data arrives.


There’s Taxes, and There’s Taxes
Tuesday, March 19, 2019

Companies report tax payments, and companies make tax payments. Many times, those two things are not the same.

As part of our ongoing look at how the corporate tax cut of 2017 has been affecting net income, we recently tried to quantify just how much those two things are not the same. Studying that gap across several years helps to understand how much corporate tax numbers were distorted in 2017 itself (more on that presently), and whether corporate tax payments today are dramatically different from what companies paid before 2017.

What We Did

We compared the difference in provision for income taxes (what a company plans to pay in taxes for a year) and income taxes paid (what the company actually did pay) for 400 firms in the S&P 500, 2014 through 2018. Then we expressed that difference as a ratio of actual taxes paid to the provision for income taxes.

For four of the five years we studied, the median firm in our population actually paid anywhere from 75 to 85 percent of what it had made provisions to pay. See Figure 1, below.

The exceptional year is 2017, where the ratio spiked to 98.4 percent. That is, almost all the taxes our median company prepared to pay, it actually did pay.

Why? Because when Congress enacted the corporate tax cut in 2017, companies suddenly had to pay large one-time “deemed repatriation taxes” on unremitted foreign earnings; or had to revalue deferred tax assets and liabilities; or do both. And those one-time tax moves had huge effect on companies’ tax payments and tax rates.

Calcbench wrote about this several times in the first half of 2018, as companies were reporting some sky-high effective tax rates in their 2017 annual reports. Our chart above is one aggregate glimpse of that effect.

Table 1, below, shows the tax payments-vs.-provisions for our 400 firms collectively. You’ll notice the percentage ratio here is different from what we have in our chart above. That’s because of outliers at both the top (they paid much more than their provisions) and the bottom (they paid much less), tugging at the average numbers.

That brings us to our final point for today: that individual companies have seen some large differences between tax provisions and taxes paid; and seen large changes in those numbers from one year to the next.

For example, in 2017 Gilead Sciences ($GILD) had provision for income taxes at $8.88 billion, but paid only $3.34 billion — a ratio of 37.6 percent. In 2018, however, Gilead had a tax provision of $2.34 billion but paid $3.2 billion — a ratio of 136.7 percent (because Gilead paid more than it had in its provisions).

Why Are We Doing This?

We do this to amplify a point we made in our previous post about IBM ($IBM) — that drawing conclusions about how the corporate tax cut affects a firm is a complicated, company-specific exercise. You really need to delve into a company’s specific tax disclosures to get a sense of what is going on.

Yes, some companies are experiencing a “tax cut sugar high,” where all their growth in net income for 2018 can be attributed to paying less in taxes, rather than from better operating income. But some also paid so much in one-time taxes in 2017, that they were destined to pay less in 2018, and their tax payments now might be only marginally lower than what they paid in 2016 or prior.

So is that a sugar high now, or was it sour lemons last year? You can use Calcbench to find the answer for whatever companies you follow, but it’s a question that needs thoughtful research to find the right answer.


Adventures in Tax Cuts and Net Income
Saturday, March 16, 2019

Avid readers of the Calcbench blog know that we’ve been watching corporate financial data closely here to understand a complicated, subtle question: How much has the sweeping corporate tax cut enacted at the end of 2017 been responsible for growth in net income?

Economists have pondered that question too, wondering whether the tax cut was a sugar high that goosed corporate earnings in 2018 — with the implication that after the sugar high wears off (say, in 2019), growth in net income might stall.

As companies file their annual reports for 2018, we can now start to answer that question. Somewhat to our chagrin, the answer is more complicated than we expected.

In theory, you would see the sugar high in a company where pretax earnings from operations remained flat or fell, but because the company paid so much less in taxes, net income would rise anyway. That is, the company’s net income didn’t increase because sales were growing or costs were kept in check; net income only grew because Uncle Sam decided to take less in taxes.

So if Washington had not enacted that tax cut in 2017, and the company paid 2018 taxes at the same effective rate as it did in 2017 — then net income might have held steady or fallen, but it wouldn’t have grown. That would be the sugar high.

Do we see that phenomenon at play when comparing 2018 to 2017 numbers? Yes, but with an asterisk. And that asterisk says a lot about how financial analysts need to look at a company’s numbers carefully if you want to get a correct read on its situation.

Example: IBM

A good example of this situation is IBM ($IBM). We hopped over to our Data Query page and pulled up Big Blue’s earnings before taxes, income tax provision, and net income for both 2017 and 2018. The results were as follows in Figure 1, below.

As we can see, IBM’s pretax earnings actually drifted downward last year, but its income tax provision plummeted by more than $3 billion — an amount larger than $2.98 billion increase in net income.

Therefore, all of IBM’s growth in net income can be ascribed to the company paying less in taxes. And sure enough, when you look at IBM’s numbers on the Company-in-Detail page, they’re pretty mopey. Revenue, gross profit, and expenses for 2018 are all within 1 percent of 2017 numbers. That’s what stagnant growth looks like.

The tricky part, however, is in IBM’s effective tax rate. Yes, technically speaking, if IBM paid a 49.5 percent tax rate again in 2018 — that would have meant an income tax provision of $5.6 billion, and net income essentially unchanged at $5.73 billion.

Except, why was IBM’s effective tax rate that high in the first place? Because its effective tax rate in 2016 was only 4 percent (thank you again, Data Query page), and its effective tax rate in 2018 is 23.1 percent. Clearly IBM’s effective tax rate fluctuates quite a bit.

So you can’t assume that without the corporate tax cuts arrived in 2018, IBM would have faced the same higher effective tax rate as 2017, and therefore stalled on net income growth. The 2017 effective tax rate may have been an artificially high number itself.

How would you unravel that mystery? By studying IBM’s numbers on our Company-in-Detail page, and then tracing the tax provision line-item back to our Interactive Disclosure page, which lets you see the narrative explanation for that 49.49 percent.

Sure enough, when we trace the line-item back to the source, we find that IBM recorded a one-time charge of $5.5 billion in fourth-quarter 2017 — the famed “deemed repatriated earnings” tax that so many firms paid that quarter, as part of corporate tax reform. That $5.5 billion charge accounted for 48 points in that 49.49 percent.

More or Less Sugar?

IBM shows us the importance of tax management to a company’s bottom line — not really one-time sugar high this year, as much as an ongoing effort to minimize tax payments every year, which can leave net income growth divorced from operational reality.

We’ll keep looking at the sugar high phenomenon here, and try to draw broader conclusions about how real it may be.

Calcbench subscribers, meanwhile, can zigzag from our Data Query page, to the Company-in-Detail page, to the Interactive Disclosure page — all to connect the numbers companies report to the narrative they offer.

Then you can see how much those things do, or do not, align over time.


Last week we had a post noting the sharp increase in goodwill and intangible assets listed on the balance sheet of CVS Health ($CVS). Those assets ballooned last year as result of CVS’s merger with Aetna, so that they now account for 58.6 percent of all assets the company lists.

That single example got us wondering: what other companies have reported a sharp increase in the value of goodwill and intangibles? So we visited our Multi-Company database page to investigate.

Our study was straightforward. We identified 263 firms in the S&P 500 that have reported goodwill and intangible assets for both 2018 and 2017. First we calculated how much those two line items were as a percentage of total assets, in both 2017 and 2018. Then we sorted our sample population based on largest gain in percentage from 2017 to 2018.

You can see our results in Table 1, below.



Some context: Among our 263 firms collectively, goodwill and intangibles accounted for 21.8 percent of all assets in 2018, unchanged from 2017. The median firm was a bit different: 30.8 percent in 2018, up from 28.5 percent. That’s a jump of 230 basis points in one year.

The nine above, however, are all well beyond the median. So financial analysts following any of these firms would have two questions. First, why the firm you’re following see such a sharp increase? Second, do you believe that increase is warranted, given all the other information you have at hand?

For example, sometimes the increase could be due to a large merger. Well, is the acquiring firm placing a lot of goodwill on the value of the target; or did the target bring a lot of goodwill with it because the target had acquired other firms in the past? That answer could leave a financial analyst with more questions to ponder about management quality and strategy, and whether that goodwill will meet expectations.

Or perhaps the increase comes more from other intangible assets rather than goodwill. Those could be patents, trademarks, contractual obligations — that is, things that are more reliable producers of cash. You might still have questions about whether those things are producing enough cash, or might be vulnerable to other forces that could devalue the asset. But questions about the value of intangible assets are different (sometimes very different) than questions about goodwill.

To demonstrate our point about follow-up questions, Table 2, below has our same list of companies with their changes expressed in dollar terms, rather than percentages. Look at Pentair ($PNR), ranked No. 1.



The value of Pentair’s goodwill and other intangibles actually fell from 2017 to 2018 in dollar terms. But total assets fell even more, so goodwill and intangibles ended up accounting for a larger percentage of the total anyway. Why? That’s an excellent question to ask Pentair executives.

Do It Yourself

All of this is easy to find in Calcbench. Just select the peer group you want to study, and use our Multi-Company page to pull up goodwill, intangibles, assets, and any other line-item you want. (For example, you might also want to compare goodwill and intangibles to shareholder equity.)

That gives you the data itself. Then you can use our Trace feature to bore down to the narrative disclosure that accompanies goodwill and intangible assets data, to find the context you want — or, if not enough context is there, to help you frame the questions you might ask on the next earnings call.


CVS, Goodwill, and Enterprise Value
Friday, March 8, 2019

CVS Health filed its 2018 financial statements on Feb. 28, and one fact almost screamed at us from the balance sheet — CVS has a huge amount of value tied up in its goodwill and intangible assets.

As you can see from Figure 1, below, the firm specifically has $115.2 billion reported for goodwill and intangible assets. That’s (checking calculator…) 58.6 percent of total assets, tied up in items that don’t actually exist here on the material plane.



To be sure, some of those items do create value for CVS. Intangibles, for example, must include copyrights, patents, and other agreements that generate revenue for the firm. Still, some of that value is also tied up in, say, the brand value of the CVS trademark. Let’s recall that Kraft-Heinz also placed a lot of worth on the intangible value of its Kraft and Oscar Mayer brands, right until the company took a $8.3 billion impairment charge against them last month.(Plus another $7.1 billion impairment against goodwill.)

Then there is CVS’ $78.7 billion in goodwill, which alone amounts to 40 percent of the company’s total assets. That’s more than double the goodwill CVS reported in 2017, because CVS merged with Aetna last year. So lots of the goodwill number is the result of a gigantic merger, and we all know how those deals tend to fall short of expectations.

Perhaps most alarming, however, is the number at the bottom of the balance sheet: total shareholder equity is $58.5 billion, roughly half the value of the company’s goodwill and intangibles. So if CVS-Aetna fails to live up to its promise and the company announces a gigantic write-down some day (see Kraft-Heinz, above), that impairment could leave shareholders wiped out.

Bigger Picture

The CVS example got us curious: what is a normal level of intangibles and goodwill tied up on the balance sheet, anyway? So we looked at what the S&P 500 collectively reported for goodwill and intangible assets, compared to total assets, for 2013 to 2017. (We don’t have quite enough 2018 reports yet to include last year.)

Then we expressed that ratio as a percentage, and got this chart, below.



So those items are rising as a portion of total firm value, from 9.37 percent in 2013 to 12.66 percent in 2017 — but CVS is still way, way above the norm.

Just food for thought while you’re waiting to fill your next prescription.


Summary of Our Goodwill Research/ How-To
Thursday, February 28, 2019

The examples below are only observations and are NOT to be construed as investment advice. Nor are these examples of good or bad transactions. They are simply observations and a collection of data for an analyst to use in drawing their own conclusions. This piece was originally written prior to the asset impairment reported by Kraft Heinz on February 21, 2019. We stand by the data and the story.

In order to enable a greater degree of transparency, visit our goodwill page to go through a few examples of acquisitions by large firms and how these acquisitions may be monitored through corporate filings in a systematic way.



A lot of bad feelings can arise from how companies handle goodwill.

That is unfortunate, because goodwill has become an increasingly large and important part of the corporate balance sheet. In our analysis of the S&P 500, we found that more than $3 trillion in goodwill now sits on the balance sheets of those firms (Table 1). Average amount of goodwill per filer has risen 35.4 percent in the last four years, from $5.1 billion in 2014 to $6.9 billion in 2017. In fact, the ratio of goodwill to assets across the universe now sits at 8.77% compared to just over 7% in 2014.

This means that questions about impairment of goodwill, and whether the goodwill paid in an acquisition has lived up to expectations, may have become more urgent. According to one famous study from 2011, at least 70 percent of M&A deals fail to achieve desired returns.1 The implicit criticism there is that acquirers either did not adjust goodwill in those deals downward with appropriate speed, or they simply paid too much for the target in the first place — and didn’t confront that fact until a painful impairment announced to investors.

It should be no surprise, therefore, that the International Accounting Standards Board (IASB) is considering allowing firms to write off a fixed amount of goodwill every year.2 A better analysis of goodwill is crucial to evaluating corporate performance, and to anticipating possible impairment of goodwill before it happens.

TABLE 1 : Goodwill and Impairment Over Time

2014 2015 2016 2017
Goodwill ($B) $ 2220 $ 2489 $ 2791 $ 3069
Firms with Goodwill 436 441 442 445
Avg. Firm Goodwill ($B) 5.093 5.643 6.314 6.898
Avg. Goodwill to Assets Ratio(%) 7.10% 7.84% 8.34% 8.77%
Firms with Impairment 57 69 69 72
Impairments ($B) $ 20.04 80.45* $ 24.61 $ 27.16
Avg. Impairment ($B) $ 0.352 1.166* $ 0.366 $ 0.377
*Energy complex write-downs in 2015 exceeded $55 Billion USD. Removing those brings the average impairment to $243 million per S&P 500 firm.

Initial Conclusion

Impairment numbers are going up, so are goodwill balances and the number of firms reporting both items. Given the trend, we can likely expect that losses from Impairment will grow into the future.

But we are far from finished. Is there anything that we can do to consider what may be coming down the pike?

As we stated in our disclaimer, while we are not in the advisory business, we are in possession of data that can better inform an analyst of potential outcomes.

The Devil in the Details

The topic is making its way into the press as well. The Economist quotes Hans Hoogervorst, the IASB’s chairman, “…many of the computers behind factor funds, a popular type of statistically driven investing, don’t adjust properly for goodwill.”3

At Calcbench, we would posit that an intelligent process be able to anticipate what is coming down the road. To show how this might happen, we combine data from the Business Combinations footnote with the information provided in Table 1. We would also systematically combine that data with segment disclosure information to help in determining the efficacy of the merger.4

Transparency is Good… a Procedure with Transparency is better

At Calcbench we believe that data transparency gives our clients (investor, analysts, academics and auditors) better methods and tools to help answer questions based on complex accounting pronouncements and their impact on financial statements.

1https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook
2https://www.ifrs.org/news-and-events/2018/12/speech-are-we-ready-for-the-next-crisis/
3https://www.economist.com/business/2018/08/30/disputes-over-goodwill-can-seem-arcane
4If an M&A transaction is material, the acquiring company must put the transaction through a purchase price allocation (PPA) process. At Calcbench, we collect and disseminate the data from the PPA in line-item detail. One of those line-items is goodwill per transaction.


What Does ‘Other’ Mean? An Example
Wednesday, February 27, 2019

We’re always fascinated by unusual lines of business here at Calcbench, but one line of business intrigues us more than most — “Other.”

How do companies decide what qualifies as Other? How large can Other be, before the company gives it a more specific name? Does the person running Other have “vice president of Other” on his or her business card?

These questions were on our mind lately thanks to our recent post about American Water Works ($AWK), which has an Other division that seems to do nothing but lose money. We’re not even sure AWK’s Other division is a division, as much as it’s a hodge-podge of homeless operating costs that need to go into a segment somewhere.

As a simple experiment, we researched all firms that have filed 2018 financial statements so far an included an item tagged “Other Sundry Current Liabilities” and found 48. Then we compared that amount to the firm’s total current liabilities, expressed as a percentage. The table below shows our Top 10.



One logical question would be what these other current liabilities are or where they come from. Here’s the thing: lots of companies don’t say.

That is, you can find the disclosure itself. Just use our Multi-Company page and search by the XBRL tag for that line item, “OtherSundryLiabilitiesCurrent.” You’ll get a list of all companies that filed some line-item using that tag.

In theory, you could then use our Trace feature to follow that number back to some more detailed disclosure the company made about that line-item — except, for most companies, they have nothing to say about Other. Why would they? If it were material to the business, you’d call it something else.

Still, if you are Tyson Foods ($TSN) with $805 million in Other current liabilities, or Sprouts Farmers Market ($SFM) with nearly 20 percent of your current liabilities going to Other, that’s not exactly chump change.

So we continue to wonder about Other and what it means. At least our data analytics can help you get started on answering such questions, too.


Another Tale, Buried in the Footnotes
Thursday, February 21, 2019

Footnotes matter, people. Here is today’s example of how true that is.

American WaterWorks Co. ($AWK), one of the largest publicly traded water utilities in the United States, filed both its annual report and its earnings release for its 2017 operations on Feb. 20, 2018. The company reported a revenue increase of 1.36 percent from the prior year, which seems like good news at first glance.

In the earnings release, AWK reported consolidated GAAP earnings per share of $2.38 and consolidated non-GAAP earnings of $3.03 per share. It also reported GAAP and non-GAAP net income for its regulated business of $559 million and $552 million, respectively.

Read that again carefully. Non-GAAP earnings per share were considerably higher than GAAP earnings per share, but non-GAAP net income for the regulated business was lower than GAAP net income.

That’s weird. AWK is a water utility; they are supposed to be boring, stable businesses, with boring, stable earnings numbers. Why such a big gap between GAAP and non-GAAP earnings per share? Why would non-GAAP net income be lower than GAAP income? What’s with that “regulated business” qualification, anyway? Did the company have other business segments that weren’t mentioned on the earnings report?

There’s more. We had also noticed that AWK’s earnings release included a disclosure about its non-regulated “Market-Based Business.” (The earnings release didn’t say much beyond that to clarify AWK’s business structure.) For that non-regulated unit, AWK reported GAAP net income of $38 million and non-GAAP net income of $43 million — so, opposite of the regulated side of the business, where the non-GAAP number had been lower than the GAAP number. Huh?

Clearly, we had questions. So we turned to our Segments Disclosures page for answers.

That is where we discovered that AWK reports numbers separate numbers for its regulated and non-regulated business segments. The non-regulated segment is then further split into “Market-Based Business” and the ever-popular “Other.”

The Other segment had a loss of $171 million — equal to roughly 40 percent of AWK’s consolidated GAAP net income of $426 million. (The $559 million from from the regulated business, plus $38 million from the non-regulated business, minus this $171 million from Other.) See Figure 1, below.



Exactly what does this Other business segment do? AWK describes it as follows:

“Other” includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, fair value adjustments and associated income and deductions related to the acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Other as they are excluded from segment performance measures evaluated by management.

That suggests to us that Other is a AWK’s financial reporting equivalent of your favorite kitchen drawer, where you stow all the junk that you don’t know where else to put it.

Equally interesting: Other has been operating at a loss for years. Remember, you can always move your cursor over any number displayed in Calcbench to see how the filer tags that value — including a “Tag History” option that will display the value for previous periods. (See Figure 2, below.) Other had a net loss of $43 million in 2016 and $39 million in 2015. In fact, AWK reported its 2018 numbers earlier this week, and Other had a $67 million loss last year, too.



So once more, with feeling: reading the footnotes is important. Those numbers can tell a very different story from what companies choose to report in the earnings release, where executives have far more discretion to call out the good stuff.

The footnotes, however, is where all the stuff is reported. That matters.


Low Latency Calcbench
Wednesday, February 13, 2019

Calcbench has added push notifications. Now algorithms can ingest the numbers and text from 10-K/Q/Press Releases seconds after Calcbench publishes. Previously, Calcbench API clients polled us periodically to download data from new filings.

To listen for notifications, use the new handle_filings method on our Python API client. See an example of how to get the most recent face financial data from each new filing @ https://github.com/calcbench/notebooks/blob/master/filing_listener.ipynb. You will need to contact us for a queue subscription before starting your listener.

If you need fundamental accounting data or text from SEC filings for a time sensitive process contact andrew@calcbench.com.


Now Streaming on Hulu: Red Ink
Monday, February 11, 2019

Comcast Corp. ($CMCSA) filed its 2018 annual report at the end of January, which gives us fresh opportunity to catch up on one of our pet interests: the value of Hulu.

We write about Hulu from time to time because it’s a huge player in streaming media, but isn’t publicly traded — so its financial data is somewhat hard to find. Then again, Hulu is owned by four entertainment giants: Comcast, Disney, and Fox, which own 30 percent each; plus Time-Warner with a 10 percent stake.

So if you know where to look in the filings of those companies, you can assemble a better, although still incomplete, picture of Hulu’s performance over the years.

The best place to look these days is the Comcast filing. There in the Investments section of its disclosures, Comcast reports that it owns a 30 percent stake in Hulu and recorded a $454 million loss in 2018 for its share of Hulu operations.

Well, do the math. If 30 percent ownership gives you a $454 million loss, that implies that Hulu’s total loss for 2018 was (gulp) $1.5 billion.

Yikes, we wondered, could that be right? So we pulled up Fox’s most recent annual report, which it filed last August. (Fox has a June 30 fiscal year-end.) There in the Investments section of Fox’s disclosures, it reported a loss of $445 million for its 30 percent ownership stake.

So, yes. Hulu loses a ton of money. We knew that already, based on previous posts we’ve written about Hulu. Still, for historical perspective, using those same calculations from prior years’ disclosures, Hulu’s losses have been…

  • 2014: $20 million;
  • 2016: $523 million;
  • 2017: $716 million.

Wow. And why, exactly, are those losses ballooning so much? Consider this disclosure from Disney’s most recent annual report, filed last November:

The higher loss at Hulu was due to higher programming, marketing and labor costs, partially offset by growth in subscription and advertising revenue

In fairness, Disney and Hulu’s other owners have been disclosing that sentence for three years running now.

One other detail one can pull from the disclosures: a rough estimate of what Hulu might be worth as a business. Hulu was originally founded by Disney, Fox, and Comcast alone, each owning 33 percent of the venture. Time Warner then bought 10 percent of Hulu in August 2016 for $590 million. That implies a value of $5.9 billion at the time.

So what is Hulu worth today? That’s hard to say. First, Fox is selling its 30 percent stake to Disney as part of larger asset purchase deal. That means Disney will become Hulu’s majority owner with a 60 percent stake in the business. We’re still waiting on that deal to close sometime later this spring, and maybe we’ll get a better sense of the purchase price for this particular asset then.

Meanwhile, one of Hulu’s top executives said just this week that the business had double-digit subscriber growth in 2018 (growing fastest in the United States), and now has 25 million paying subscribers. The Hulu exec was upbeat about Disney owning a majority stake.

Then again, what else would you say when you’re a senior exec trying to keep your job?


Early Look at 2018 Tax Decline
Thursday, February 7, 2019

2018 was the first full year of life with dramatically lower corporate tax rates, and now we’re getting early data on exactly how much less companies expect to pay.

Surprising nobody — they are paying a lot less.

We examined 214 firms in the S&P 500 that have already filed their annual reports for 2018. First we pulled their reported earnings before taxes and provision for income taxes; and then compared those numbers to the same line items the firms reported in the prior three years.

Taken altogether, those firms saw their effective tax rates fall nearly in half, from 27.3 percent in 2017 to 14.2 percent in 2018. Their revenues rose briskly in 2018, while provisions for income taxes tumbled. See Figure 1, below.



We also have a year-by-year breakdown, for those who want to delve into the data. See Table 1, below.



For all you alternative history buffs: these firms had an average effective tax rate of 26.8 percent in 2015-2017, before Congress enacted its corporate tax cut at the end of 2017. If Congress had never enacted that tax cut, and we applied that same 26.8 percent rate to 2018’s pretax earnings of $832.9 billion — that would be an additional $104.4 billion in corporate tax payments.

Then again, if Corporate America were paying higher taxes, its collective net income would be lower, and stock prices would likely be lower too.

That’s how the data looks so far. More to come later this spring.


You Revised WHAT, Netflix?
Wednesday, February 6, 2019

Another day, another example of why attention to detail matters in financial analysis: Netflix ($NFLX) and its most recent annual report, which revised a lot of operating expense numbers from prior years. What was that about?

We noticed this adjustment while studying Netflix on our Company-in-Detail page. Netflix filed its 2018 annual report on Jan. 29, and several of the 2017 and 2016 line-items were highlighted as revised. See Figure 1, below. Those cells outlined in the famed ‘Calcbench mustard’ color are adjusted.



So we peeked at those revised facts by clicking on the Highlight Revised Facts tab above the line-items. When you do this, a small plus sign appears next to the revised number. Click on that plus sign and you can see the actual revisions made: what the number originally was, and when the firm revised to the current number seen on your screen.

Intrigued, we dug into that $8 billion number for Cost of Revenue in its 2017 fiscal year — and saw that several weeks ago Netflix adjusted that number upward by $374 million. See Figure 2, below.



For a moment we felt chest pains; $374 million is a significant amount of money. Then we noticed — revenue and operating income hadn’t changed. So Netflix was only rearranging costs among its line items for Cost of Revenue, Marketing, Tech & Development, and General Administrative.

Still, why?

To learn more, we clicked on that $8 billion number and traced it back to the source in Netflix’s 10-K filing. That took us to the Interactive Disclosure tool, where we could read the full details of why Netflix was changing these numbers.

Turns out that in fourth-quarter 2018, Netflix decided to reclassify those line items, so the spending for each one more closely reflected how the company tracks personnel costs. Or, as Netflix formally phrased it:

The Company is making this change in classification in order to reflect how the nature of the work performed by certain personnel has changed to be more directly related to the development, marketing and delivery of our service as a result of the continued evolution of the Company’s strategy to self-produce and create more of its own content rather than license or procure it from third parties. This change in classification will also align external presentation of personnel related expenses with the way that the Company’s chief operating decision maker expects to assess profitability and make resource allocation decisions going forward.

Netflix also provided a table to show all reclassifications by line-item and year, which was mighty nice of them. See Figure 3, below.



Our heart rate returned to normal after reading that explanation and we put away the nitro. Still, it’s another reminder that firms can revise financial filings all the time — and diligent financial analysts should want to know why.

With a few keystrokes to jump around the Calcbench data archives, we did find out why. So can you.


Talking About Huawei Exposure
Thursday, January 31, 2019

We try to keep up with current events here at Calcbench, so we saw the news earlier this week that U.S. prosecutors have indicted Chinese telecom giant Huawei Technologies on charges of stealing intellectual property and violating trade sanctions against Iran and North Korea.

Corporate disclosure geeks that we are, immediately we then asked: What are U.S. companies disclosing about their dealings with Huawei? Could any of those companies somehow be sucked into the legal and geopolitical vortex swirling around Huawei?

Turns out, more than a few companies do have something to disclose about Huawei. Here’s what we found.

Micron Technology ($MU) received a comment letter from the SEC earlier this year, where SEC staffers were asking about Micron’s exposure to Huawei. Since Micron sells its chip components to Huawei, and Huawei stands accused of selling its products to Iran, Syria, and North Korea — how does Micron work to ensure its products don’t end up in those places?

Micron’s response on 3 July 2018—

With respect to Huawei, the Company sells products that are incorporated into some of Huawei’s mobile phone products for the consumer market, server products for the enterprise market, and other products. Micron requires that Huawei sign and abide by the Company’s “End User Certification and Agreement to End Use Restrictions”… Micron has no visibility into the sale of the millions of Huawei products that are sold worldwide. However, Huawei is required to comply with the Terms and Conditions of Sale as well as the provisions in the End-user Certification and Agreement to End Use Restrictions.

So that is one potential issue for U.S. companies: Are their export control compliance programs addressing Huawei exposure effectively? If not, that could lead to future issues with the Justice Department.

Meanwhile, Cisco Systems ($CSCO) disclosed on 6 Sept. 2018 that it agreed to pay $127 million in legal and indemnification costs to T-Mobile, which was in patent litigation with Huawei. The disclosure:

On January 15, 2016, Huawei Technologies Co. Ltd. (“Huawei”) filed four patent infringement actions against T-Mobile US, Inc. and T-Mobile USA, Inc. (collectively, “T-Mobile”) in federal court in the Eastern District of Texas. Huawei alleged that T-Mobile’s use of 3GPP standards to implement its 3G and 4G cellular networks infringed 12 patents. Huawei’s infringement allegations for some of the patents were based on T-Mobile’s use of products provided by us in combination with those of other manufacturers. T-Mobile requested indemnity by Cisco with respect to portions of the network that use our equipment. On December 22, 2017, the Eastern District of Texas court dismissed Huawei’s four lawsuits after the parties reached settlement, and T-Mobile’s indemnity request was subsequently resolved.

During fiscal 2018, we recorded legal and indemnification settlement charges of $127 million to product cost of sales in relation to these matters. At this time, we do not anticipate that our obligations regarding the final outcome of the above matters would be material.

Qualcomm ($QCOM) lists Huawei as one of its customers (along with ZTE Corp., another Chinese telecom giant already sanctioned by the feds in 2017):

Further, the majority of the leading handset and other wireless device companies (including Huawei, LG, Microsoft, Oppo, Samsung, Sony, vivo, Xiaomi and ZTE) have royalty-bearing licenses under our patent portfolio…

Skyworks Solutions ($SWKS) also lists Huawei as a customer, and in Skyworks’ segment reporting discloses that Huawei accounted for 10 percent of the company’s revenue in 2017 — that is, roughly $365 million of Skyworks’ total $3.65 billion in revenue that year.

We’re more curious about whether corporate disclosures related to Huawei (or ZTE, for that matter) will change in the future. For example, Micron isn’t the only company that sells goods to either of those companies. If the SEC starts asking more questions about export controls, U.S. filers will need to respond with more information. If companies rely heavily on Huawei for revenue, how might they respond if U.S.-China relations strain those business ventures?

You can keep an eye on such disclosures using our Interactive Disclosure Viewer, of course. We suspect we’ll see more of them in the future.


Another Discrepancy in Reported Numbers
Wednesday, January 30, 2019

The other week we noted an occasional quirk in financial reporting, where numbers a company announces in its earnings release don’t match what the company actually files in its 10-K or 10-Q several weeks later.

Today we have another example of that phenomenon — except this time that difference comprises almost all the company’s net income reported for the year, and clearly that detail sailed right off the radar screen of most investors.

The company in question: Virtu Financial ($VIRT), a financial services firm in New York with $1 billion in annual revenue. Here’s what happened.

On 8 Feb. 2018, Virtu filed its earnings release for 2017 full-year results. There on Page 10 of the release, Virtu reported that net income attributable to stockholders of $17.33 million. (Total net income was $33.29 million, but Virtu had to deduct the non-controlling interest portion of $15.96 million.) See Figure 1, below. The net income number is highlighted in yellow.



On 13 March 2018, however, Virtu filed its Form 10-K. There, we can see that net income attributable to shareholders was only $2.94 million. That’s $14.39 million of net income vaporized, a decline of 83 percent. See Figure 2, below, with the net income number highlighted in grey.



What happened?

Much of the answer lies in the line-item just above net income: provision for income taxes.

In the earnings release, Virtu reported its provision for income taxes at $78.13 million. By the time Virtu filed its 10-K five weeks later, its provision for income taxes stood at $94.26 million — a difference of $16.13 million.

Virtu also fiddled with a few other numbers here and there on the income statement. For example, interest and dividends income dropped by $3 million, while commissions on technology services rose by $5 million. The ever popular “other, net” also rose by $1.7 million.

Add up all those fluctuations, and Virtu’s net income pretty much evaporates for the year.

We aren’t entirely sure why Virtu’s tax bill changed so much. That was the first year companies were starting to report after the sweeping corporate tax cut from December 2017, so lots of revaluations were happening. You can investigate further on our Interactive Disclosure Viewer if you’re curious.

Equally interesting is what happened with Virtu’s stock price. We looked it up.

On Feb. 3, the day of the earnings release and reported net income of $17.33 million, Virtu’s stock jumped 22 percent, from $21.65 tyo $26.50.

And on March 13, when Virtu dropped the whole 10-K and net income dwindled down to $2.94? The stock opened at $32.80 and closed at $32.95. In other words, nobody cared. But small discrepancies like that add up over time, and people start to care sooner or later.

Here at Calcbench, we advocate for sooner.


Finding Revised Facts: Hertz Edition
Wednesday, January 30, 2019

You may not have noticed, but on New Year’s Eve the Securities and Exchange Commission hit car rental giant Hertz ($HTZ) with a $16 million fine for sloppy accounting practices in the early 2010s, which ultimately led to a financial restatement in 2015 that shaved $235 million off Hertz’ pretax income. Ouch.

The restatement spanned financial results from 2011 into 2014, and for a company with roughly $440 million in annual pretax income before the restatement, a $235 million hit to the bottom line hurts.

Hertz had cooked the books in two ways. First, it extending the estimated lifespan of its vehicle fleet from 20 months to 24 or 30 months. That meant depreciation of the vehicles was allocated over more periods; those lower depreciation numbers cut operating costs, which in turn raised net income for any given period.

Second, Hertz also kept its allowance for doubtful accounts artificially low after a crucial operations change in 2012. That summer, Hertz decided to turn over many more aging accounts to private attorneys for collections — but assumed, without any evidence, that the allowance for doubtful accounts could stay at around 15 percent of the total. In reality, those private attorneys couldn’t collect on 98 percent of the total.

We recount all these details to show you that Hertz’s poor accounting practices spilled across numerous line items, for numerous years.

And yes, if you’re a curious financial analyst who follows Hertz — Calcbench can show you all those details.

As we’ve written before, our Company-in-Detail page displays all a company’s financial details in line-item detail. But you can also use our Highlight Revised Facts feature to see which line items have been changed at some point in the past. See Figure 1, below.



So when you examine Hertz’s results for the period in question (2011 through 2015), you can see that the company had — gulp — seventy-three revised facts. When you view those revisions, suddenly Hertz’s results light up like a Christmas tree. (Figure 2, below.)



Many companies will revise some facts from time to time. Rarely do we see so many facts revised at once — which is a good thing, since financial restatements are decidedly bad things.

Regardless, if you want to see which numbers a company has changed, to better understand how reliable the firm’s financial reporting may or may not be, Calcbench has you covered.


General Electric ($GE) may be trying to sell its capital aviation services business (GECAS). On Jan. 21, the Wall Street Journal reported that Air Lease Corp. wasn’t interested in buying GECAS. The next day, Barron’s wrote about value of GECAS.

GE has several operating segments: Power, Renewable Energy, Oil & Gas, Aviation, Healthcare, Transportation, Lighting, and Capital. Their performance is reported in the segment footnotes in GE’s 10-Ks and 10-Qs. GECAS, however, is part of GE’s Capital segments — so it performance was not separately reported in those disclosures.

Nevertheless, GE does report information about GECAS. You just need to know where to look.

The information can be found in different places. GE has been reporting GECAS’s performance in “sub-segment” information included in 8-K earning releases, or in the Management Discussion & Analysis (MD&A) section of its filings. More information about GECAS can be found in Supplemental Information About “The Credit Quality of Financing Receivables and Allowance For Losses, as GE reports GECAS’s receivables”.

So, how to make sense out of it? Calcbench can help.

In 2014 and 2015, GECAS was reported in a format that gave the information to you — and Calcbench maintains the ability to get it. You can download information directly, or do a search within our tools. Here is what you will get:


But in 2016, that reporting scheme changed. GE disclosed GECAS in a new format (which Calcbench also has).


And in 2017, GE reporting in a third way:

As you see, the firm now reports the revenues from GECAS as a sub-segment of GE Capital revenues. All you now need to do is to get a time series of GE Capital revenues to start the valuation process. That can be done in Calcbench by accessing the segment disclosure and asking for a time series. (See picture below.)

Now it’s possible to assemble enough information to piece together a valuation framework for GECAS based on historical revenues and some profit levels. *Note that in third-quarter 2017, GECAS stopped explicitly disclosing net income.

It just goes to show that while companies might change up their reporting, often times you can find the insights you want, by pulling together pieces of data sprinkled across multiple disclosures. Calcbench lets you do that.

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So there we were, poring over earnings releases and annual reports, because that’s what we do around here in our spare time, when we came upon Alaska Air Group ($ALK).

That’s when we noticed: the company’s earnings release for full-year 2017 results, filed on Jan. 25, 2018, proudly said net income was $1.028 billion, up 26.3 percent from the prior year.

But wait! On the full 10-K that Alaska Air filed on Feb. 15, it listed net income as $1.034 billion — $6 million more than the number it reported just 21 days earlier.

What happened? Take a look at how Alaska Air reconciled its non-GAAP net income on the earnings statement (at right), compared to its full income statement filed in the 10-K (at left). Look closely.

Do you see it? The “special tax (benefit)/expense” in the earnings release was reported as a $274 million benefit, but that number changed to $280 million by the time the 10-K was filed. That explains the $6 million increase in net income.

According to a footnote in the earnings release, the benefit arose from remeasuring deferred tax liabilities after Congress passed the corporate tax cut in 2017. Apparently that remeasurement was adjusted by the time the Form 10-K was filed. That is legal; numbers in earnings releases don’t have any liability attached to them and aren’t audited, and the amount isn’t material anyway.

Still, our Alaska Air discovery did make us wonder: What other discrepancies do companies have between the 8-K earnings release and the 10-K annual report?

Another good example comes from AmerisourceBergen ($ABC) and its results for fiscal 2017. When Amerisource filed its earnings release on Nov. 2, 2017, it clearly reported net income as $414.5 million. But in its Form 10-K, filed on Nov. 21, net income had dropped to $364.5 million — a decrease of $50 million, or 12 percent. Which is not an immaterial amount of money.

Upon closer inspection, we can see that Amerisource increased its expense for employee severance and litigation by $50 million; that’s the cause of the net income discrepancy. If you compare footnote disclosures in the earnings release and the 10-K (folks, always read the footnotes), we can see the $50 million is specifically an increase in litigation settlements, from $864.4 million to $914.4 million.

Then you can use our Interactive Disclosure page to pull up AmerisourceBergen’s discussion of legal matters and contingencies. It’s a long list, including subsidiaries tampering with syringes to dilute oncology medicines and pending opioid legislation.

We didn’t do a sentence-by-sentence comparison to pinpoint exactly which legal troubles pushed up the settlement budget by $50 million, but any analyst following AmerisourceBergen could. That’s what Calcbench lets you do.

And, as we can see from these two examples, analysts probably should, too. A lot can change between the earnings release and the 10-K.


The Importance of Textual Analysis
Wednesday, January 16, 2019

Here’s news you definitely want to read: academic research showing that changes in the text of a company’s Form 10-K correlate to future changes in the share price, often months in advance.

Before you say, “Well, duh,” let’s be perfectly clear. The mere fact that the text of the 10-K has changed is what correlates to future changes in share price — not what the specific changes actually are.

That is, if a company starts using more negative language in the Risk Factors or MD&A sections, it’s highly likely that the stock price will decline several months later. Likewise, a company using more positive language will also likely see its share price rise. The specifics of why the language is changing — looming trade wars, recession risk, labor shortages, materials costs — don’t matter.

So says a recent article in the New York Times, which itself is based upon academic research from Harvard Business School and DePaul University. One key point from the Times article:

The stock market rarely responded to the subtle hints in the reports immediately. In fact, it typically took several months for whatever good or bad news was embedded in the reports to be widely understood — and to move the stock market.

This delay means that there is a profit opportunity for those able to exploit it, the researchers said.

As it so happens, Calcbench subscribers can exploit those changes if you like. Our Interactive Disclosure tool lets you find specific disclosures quickly, and also lets you compare prior years’ disclosures — with color coding to help you identify what’s been added or removed. Users of our API may also be interested in knowing that this can be done programmatically as we have shown in previous blog posts.

Take a look at this example, below. We pulled up Google’s risk factors disclosure. Its 2017 10-K disclosure is on the left, its 2016 10-K disclosure on the right.

We can quickly see that Google deleted some language describing its competition from 2016 to 2017 (in red), while adding a quick line (shown in green) about investing heavily in “hiring talent” to its 2017 report that didn’t exist in its 2016 language.

To find those changes, all you need to do is press the “Show All History” or “Add Previous Period” options immediately above the disclosure panel. The most recent disclosure will always appear in plain text. Changes will appear in the prior period: additions in green, deletions in red.

Do It Quickly

There’s also that point in the NYT article that many investors apparently don’t notice or understand changes in the text for quite some time. To find a competitive advantage, then, Calcbench users can define peer groups of companies they follow, and set email alerts for when those companies have new filings.

Once you get the alert that some new statement has been filed, you can hop onto Calcbench and compare that disclosure to prior statements using our process defined above.


A Look at Climate Change Disclosures
Tuesday, January 8, 2019

Last month we had a post about Pacific Gas & Electric’s disclosures related to California wildfires and to climate change generally. Those disclosures (across multiple filing periods) were fairly extensive: they cited wildfires specifically, and connected the dots from climate change to extreme weather events to wildfires squeezing PG&E ($PGE) operations financially.

So as the 2019 proxy season starts warming up (no pun intended), we wondered what other firms have been saying about climate change lately. By the way, if you want to be able to do some of these look-ups yourself, here is a handy tutorial

Some firms say a lot about current or probable regulation, without saying much about how those regulations affect the firm itself. For example, paper and packaging manufacturer WestRock ($WRK) included more than 1,000 words about climate change in its most recent annual report. The disclosure ranged from requirements under the Paris Accords, to possible changes to Clean Air Act regulations, to greenhouse gas trading schemes in Quebec.

Useful to know, but how do all those rules specifically affect WestRock? The company said only this:

The regulation of climate change continues to develop in the areas of the world where we conduct business. We have systems in place for tracking the GHG emissions from our energy-intensive facilities, and we carefully monitor developments in climate change laws, regulations and policies to assess the potential impact of such developments on our results of operations, financial condition, cash flows and disclosure obligations.

Still, that’s more disclosure than what Tyson Foods ($TSN) had to say. The company cited the existence of environmental regulation and the possibility that more regulation could cost Tyson more money, but that’s about it:

Increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change may result in increased compliance costs, capital expenditures and other financial obligations for us. We use natural gas, diesel fuel and electricity in the manufacturing and distribution of our products. Legislation or regulation affecting these inputs could materially affect our profitability. In addition, climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience and may require us to make additional unplanned capital expenditures.

We were hoping for a statistic about cows and their, um, methane production. No such luck.

Starbucks ($SBUX) mentioned climate change only once, in passing: “The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, such as weather (including the potential effects of climate change)…” Other firms, such as Apple, made similar disclosures that simply noted climate change could cause big weather problems, which could disrupt operations. That’s not wrong, although not particularly detailed, either.

Meanwhile, Air Products & Chemicals ($APD) gives a more precise discussion of how its products and operations create carbon dioxide, and which regulations therefore might affect its business:

We are the world’s leading supplier of hydrogen, the primary use of which is the production of ultra-low sulfur transportation fuels that have significantly reduced transportation emissions and helped improve human health. To make the high volumes of hydrogen needed by our customers, we use steam methane reforming, which releases carbon dioxide. Some of our operations are within jurisdictions that have or are developing regulatory regimes governing emissions of greenhouse gases (“GHG”), including carbon dioxide…

The company goes on for a few more paragraphs. Again, no discussion of possible financial impact from climate change issues, but it’s still more than what other companies say.

Disclosure Requirements

We should note here that SEC rules don’t require companies to disclose specific financial implications of climate change anyway. Guidance published in 2010 only directs companies to discuss the potential implications of environmental regulations in response to climate change, or how climate change might increase or decrease demand for the company’s products.

Little surprise, then, that the disclosures above do veer to discussing regulatory regimes; that’s tangible, and fodder for disclosure. So is the generic boilerplate akin to what Starbucks said, that climate change might ruin the coffee beans.

On the other hand, shareholder activists do push for more climate change disclosure, and proxy season (which will start in another six weeks or so) is when they push. So if anyone is curious to see what companies already disclose, to help you understand how a proxy fight might shake out, our Interactive Disclosures database can be a great place to start. Search “climate change” in the text field on the right-hand side, and see what you find.


Quants: Point-in-Time Data for Backtesting
Wednesday, January 2, 2019

Here at Calcbench we love all analysts, so today we want to give a reminder to all the quantitative analysts out there — we have plenty of time-stamped financial data that can help you backtest your algorithms, and are happy to share.

Our standard dataset consists of this, from the S&P 500. It’s what you see when you open our Multi-Company Page.

We have all that data above, plus other key data and financial metrics, all time-stamped. Those time-stamped data fields include data reported, period start and end, fiscal year and fiscal period, and a few other items.

If you need that data as the raw material to field-test your algorithms, just drop us a line at us@calcbench.com. We’re happy to discuss what you need and how we can get the right data to you.

For the non-quants wondering what all this is, let us explain. Quants create algorithms based on financial data. They test those algorithms using historical data, and need to know the time each piece of data became available to avoid “look-ahead bias.”

That bias happens when your model is running through a year’s worth of data, but you accidentally include some event that happened the 22nd of the month, while your model is still working as if today is the 18th of the month. The algorithm is simulating events, but mistakenly using data it would not have known at some given point in time.

Quants can download this example of our time-stamped data, looking at Microsoft’s data. We have much more, for many more companies, and are happy to work with you to deliver the data you need. Just ask us at us@calcbench.com or visit our website, www.Calcbench.com, and tap on the “Chat with us!” box in the lower-right corner of your browser.


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