Financial analysts looking for more PPT decks to read, Calcbench has your back! We just posted a new research paper looking at trends in capital expenditures for most of the last decade.
The full paper (11 pages) is available for free on the Research Page of our website. We crunched the data on more than 9,900 firms that have reported “capex” spend since 2010, with a deeper analysis into spending trends since 2013.
We encourage you to read the full report, and meanwhile, we also have some spoilers about the primary findings here.
First, as a whole, capex spending is on its way down. Spending among all 9,908 firms peaked in 2015 at $1.236 trillion, then drifted downward to $1.102 trillion by 2018.
Second, the biggest capex spenders are BIG spenders. The U.S. firms spending the most on capital equipment this decade are, in order:
The spending of those 10 firms in 2013-18 ($926.34 billion) accounted for 13.7 percent of all capex spending, among our entire sample of 9,908 firms ($6.764 trillion). In every year of that six-year period, at least eight of those 10 firms were among the year’s 10 biggest spenders.
Third, concentrated spending has held remarkably steady since 2013. Capex among the S&P 500 accounted for 50 to 55 percent of all capex every year, 2013-18. Throughout that same period, the 100 biggest spenders (regardless of which firms they were) accounted for progressively more of all capex spend.
(As an aside, be sure to read the Wall Street Journal article today about declines in capex spending among large firms, with data provided by yours truly.)
Fourth, average spending among the S&P 500 was actually drifting downward until a jump in 2018; and average spending among non-S&P 500 filers accelerated even faster. Among the big firms, average spending rose 10.6 percent from 2013-18, but largely due to a notable increase in 2018. Among smaller firms, the rise was 54.5 percent.
Fifth, the number of firms reporting capex spending dropped sharply last year — from 5,844 to 4,295. That could explain why average spending is rising among various groups, even though total spending is falling: the decline in firms reporting any capex spending at all is falling faster than the decline in overall spending, so averages get larger even while absolute numbers get smaller.
We’ll keep doing more analysis here, and we can share cuts of company-specific data upon request. Meanwhile, down the report, read our findings, and ponder what it all might mean for 2019 economic performance.
Canadian weed company Tilray ($TLRY) filed its most recent quarterly earnings report this week, and for all the industry enthusiasts’ talk about the potential for revenue and income, another thought struck us while blazing through Tilray’s balance sheet.
Has anyone noticed the inventory these businesses have?
Seriously. Tilray’s inventory went from $16.2 million at the end of 2018 to more than $48.7 million by March 31. The company’s value for “finished goods,” because apparently that’s what we’re calling it these days, rose by 510 percent. Take a look at the disclosure below.
That’s at least enough weed to do a live re-enactment of Pineapple Express. Maybe even a sequel, which is long overdue, by the way.
Legalized weed is still relatively new in Canada (or anywhere else that isn’t Amsterdam), and Tilray is a relatively young company. Since it started filing quarterly statements in mid-2018, however, its inventory has increased dramatically.
Clearly Tilray is also planting a stake in the ground, since its PPE has nearly doubled in nine months too — from $65.7 million last summer, to $129 million today. Most of that investment came in buildings and leashold improvements (up from $51 million to $75 million), or in lab equipment (up from $6.1 million to $20.1 million). Grow operations don’t come cheap, after all.
Those disclosures from Tilray got us wondering — who else has lots of weed? How much do they have? So we kept searching our Company-in-Detail database for more nuggets of information.
There’s Cronos Group ($CRON, naturally); they disclosed $8.5 million in inventory at the end of 2018, most of it as “works in progress,” which certainly puts a new spin on the phrase “growing like weeds.”
Really interesting: Cronos discloses not only the value of its grass, but also the physical amount it has. That means you can reverse engineer the value per ounce. Not that we have any experience with weed purchases. We swear.
Anyway, see Figure 2, below. (Note that the amounts below are Canadian dollars, which we calculate at 1.34 CAD equals 1 USD.)
Assuming 2.2 pounds per kilogram, and at 16 ounces per pound, that’s 6,582 ounces of inventory, valued at $109.70 per ounce — which is, we’re told by smokers who know, “an amazing price.” Then again, we assume there is a markup before anything reaches the retail counter.
Meanwhile, CannTrust ($CTST) reported $25.9 million in inventory, about 45 percent weed and 55 percent extracts. That’s triple the inventory from 12 months ago, when it stood at $8.7 million.
You can find other cannabis businesses (more than you’d expect) either by looking for related firms listed in the upper-right corner of the company you’re studying; or by going to the Interactive Disclosures page and searching “cannabis” in the text-search field.
After that, it’s reefer madness.
The Securities and Exchange Commission is proposing rules that would modify the registration, communications, and offering processes for business development companies (BDCs) and other closed-end investment companies under the Securities Act of 1933. As part of that proposal, the SEC has called for public comment on its amendments.
Calcbench recently posted its response, the text of which is below. Have you? The comment period ends on June 10. We encourage you to provide your feedback to the Commission. Here’s the link.
Dear Acting Secretary Countryman, U.S. Securities & Exchange Commission,
We, the founders of Calcbench, write this letter to express our support for S7-03-19, specifically the structured data reporting provisions that require Business Development Companies (BDCs) to tag their financial statements using Inline eXtensible Business Reporting Language (XBRL). Currently XBRL is mandated for corporate filings by the Commission. Yet BDCs traditionally have been exempt. The proposed changes to Securities Act 4 would close this loophole and move BDCs toward more modern, transparent, and accessible reporting.
Since 2009, when the Commission adopted rules requiring operating companies to submit information from the financial statements accompanying their registration statements and periodic and current reports in a structured, machine-readable format using XBRL format, use of XBRL by investors has grown exponentially. Much of this has to do with InLine XBRL, which has improved the quality and usability of XBRL data. Today, some of the largest asset managers, most influential researchers, and top public companies are using XBRL to gain critical insights. How do we know? Many of them are our clients.
Calcbench, our company, is powered by XBRL. With just a click of a button or a data feed, we provide investors, researchers, and corporations with an interactive database to access face financials and hard-to-find information hidden in the dark corners of the footnotes. Our customers use this XBRL data to get accurate, timely information to accelerate and refine their analysis.
While it behooves us to give our clients access to BDC-tagged information, and we believe in rule parity for public companies, the primary reason we believe BDCs (and frankly all investment companies) should have mandatory Inline XBRL tagging is that XBRL works. In a nutshell, investment firms can get what they want from the filings directly, from the source that filed it. They also get it FAST. There is no delay in obtaining the information once it is in the public domain. This makes capital markets more efficient.
While less publicized, one of the critical aspects to the XBRL mandate is investor protection. We believe the transparency that XBRL enables investors to do their own research quickly and conveniently to ensure that they are understanding the risk that they are taking purchasing BDCs.By our estimate, total stock market dollar volume in BDCs is roughly $165 million per day. These are neither small firms nor inadequate dollar volumes that are exchanged.
In conclusion, we believe that reporting in a structured data format makes financial information easier for investors to access and analyze. Given that XBRL is the standard by which all other public operating companies file, we believe there should be consistency in BDC reporting to ensure accuracy and timely results.
Pranav R. Ghai and Alexander M. Rapp
Co-Founders, Calcbench Inc.
We noticed the other day that General Motors ($GM) has been talking up the idea of selling its factory in Lordstown, Ohio, to Workhorse ($WKHS), an electric-vehicle business that supposedly wants to use the factory to make electric trucks.
You might already know some of the history here. Last November, GM announced that it would eliminate 14,000 jobs across the whole company and “unallocate” several factories — including the Lordstown plant, which employed more than 1,200 people until it closed its doors on March 8.
Since then, General Motors, the autoworkers’ union, and politicians have been scrambling to figure out the factory’s ultimate fate. Technically GM cannot close the plant without first negotiating with the union; hence invention of the word “unallocating” instead. GM has also been trying to sell the plant so it can get that liability off its balance sheet.
Including, apparently, an electric vehicle firm called Workhorse.
How feasible is that sale, really? We fired up the Calcbench databases to take a look.
First, our Company-in-Detail page shows some pretty sparse financials at Workhorse. The company had only $2.85 million in cash and equivalents at the end of first-quarter 2019, and only $7.8 million in current assets. More than half of that amount was tied up in inventory and prepaid expenses.
Meanwhile, Workhorse also has more than $9 million in warranty liabilities, plus $8.4 million in long-term debt. Stockholders’ equity stands at negative $18 million.
Then there’s the income statement, which is no better. Workhorse at $364,000 in sales in the first quarter. Aside from a stretch in mid-2016 to mid-2017 where sales were in the low several millions per quarter, revenue has been pitiful. Like, $11,000 in the third quarter of 2018 pitiful.
Then we went to the Interactive Disclosures database to see what Workhorse said about its controls and procedures. Workhorse wins points for candor:
We identified the following material weaknesses in our internal control over financial reporting as of December 31, 2018:
Because of the material weaknesses noted above, management has concluded that it did not maintain effective internal control over financial reporting.
- The Company has not established adequate financial reporting monitoring activities to mitigate the risk of accounting errors.
- The lack of a fully implemented enterprise resource planning (“ERP”) system caused over reliance on manual entries.
Workhorse did say it has hired an accounting firm for a top-to-bottom review of its accounting systems, and vowed to finish an ERP implementation to get a grip on its inventory and purchase order issues.
Our disclosures database also has the auditor’s opinion from Workhorse. The company’s firm is Grant Thornton, and it also gives a thumbs down to Workhorse’s internal controls, for the same reasons management cites.
Most interesting, however, might be the $35 million that Workhorse has borrowed from Marathon Asset Management, a hedge fund that apparently sees a horse worth betting on here.
In theory, Workhorse could ask Marathon for enough capital to buy the Lordstown plant, especially if GM is under political and business pressure to sell the plant pronto.
That said, Workhorse has a lot of disclosure about its financing from Marathon. For example, Workhorse has a debt payment of $10 million due to Marathon at the end of 2021. You can read all the details about the Workhorse-Marathon relationship in the Long-Term Debt disclosures and several other parts of Workhorse’s report. As always just type “Marathon” into the text search box on the right side of the page, and Calcbench will pull up whatever it can find.
So overall — this sale to Workhorse seems like a long-shot bet. A lot of numbers would need to line up just right.
Calcbench subscribers who use our email alerting function know it’s that time of the quarter again — the time for a flood of earnings releases, quickly followed by quarterly reports. So today let’s have a refresher course in all the ways Calcbench can help you digest the data in earnings releases.
First, as we just mentioned, you can configure your account to receive email alerts any time a company that you follow files an earnings release. Just visit your account preferences at https://www.calcbench.com/account/emailalertpreferences, where you’ll see a list of all our standard peer groups, any peer groups you’ve created, or individual companies you follow. Along the top are the types of alerts available for each group — including earnings releases.
Check that box for whatever companies you want, and within minutes of those companies filing an earnings release, you’ll see an email from Calcbench giving you the head’s up.
Second, you can use our Interactive Disclosure Viewer to read those earnings releases once they’re filed. In the pull-down menu on the left side of that page, you’ll see Earnings Releases as an option under “Choose Footnote/Disclosure Type.”
So on that page, first select the companies and the period (or periods) you want to search. Then select “earnings releases” on the left, and those earnings releases will appear on your screen. Notice you can also choose other options such as “Guidance Update” or “Guidance/Outlook” if you want to narrow your search to companies changing previous guidance. See Figure 2, below.
As always with this page, you can also enter text in the box on the right side, too; in case you wanted to search, say, all earnings releases in the S&P 500 for first-quarter 2019 that use the word “tariffs.” We can give you those results in a jiffy.
Third, our Company-in-Detail page can show you any non-GAAP metrics or other guidance a company might have included in an earnings release, along with the corresponding data filed in the quarterly report.
Simply select the “Show Guidance & Non-GAAP Metrics” button when viewing a company’s financial details. Figure 3, below, shows an example from Telsa’s ($TSLA) 2018 annual report.
Fourth, download and read our Earnings Release Analysis Guide if you want an in-depth look at earnings releases and how Calcbench processes that data. It’s 20 pages of all the background you might need on when earnings releases are filed, how companies typically present information in that document, and the tags Calcbench uses to bring that data to you clearly, quickly, and easily.
Earlier this month we had a post reviewing Corporate America’s restructuring costs, including a list of the largest restructuring costs that various companies have reported over the last three years.
This week we’re going to walk through the details of one specific restructuring project. With Calcbench’s Interactive Disclosure Tool you can do that, to see whether a restructuring effort is growing larger or smaller over the years.
Our example is Kimberly Clark Corp. ($KMB). Why? Partly because Kimberly reported more restructuring costs in 2018 than any other firm in the S&P 500, when it disclosed $4.18 billion in costs. A significant chunk of that amount was due to a global restructuring program Kimberly announced in January 2018.
Well, Kimberly Clark just filed its first-quarter 2019 report this week. That gives us the chance to look back at four quarters’ worth of restructuring costs since the plan was announced.
The actual comparing of one period’s disclosure to another is easy. First, find the disclosure you want in the Interactive Disclosure Tool. In this case, we’re studying Kimberley’s “Exit or Disposal Cost Obligations,” although other firms might sometimes call this “Restructuring” or some similar name. Then you’ll see several tabs immediately above that disclosure: Add Previous Period, Show All History, and Compare to Previous Period.
Select the tab you want. Calcbench will then pull up the same disclosure for those prior periods. That’s all there is to it.
We first chose Compare to Previous Period. At the top of that second column you see a color-coded key: text shaded in red was in the previous filing, but deleted from the current document; text shaded in green was not in the previous filing, and added to the current filing. Take a look at Figure 1, below.
Some caveats: when you select Compare to Previous Period, you are reviewing changes to the text, rather than seeing the previous period’s actual filing. That’s why the text in the comparison column looks different, and the numerical values in that column aren’t tagged so you can trace them. You aren’t looking at Kimberly Clark’s actual Q1-2018 filing; you’re looking at a color-coded analysis of how that text differs from the Q1-2019 filing.
If you want to compare actual filings — that is, line them up in a more readable format for all — then you’re better served selecting the Add Previous Period or or Show All History tabs. They won’t give you the color-coded passages to see what’s changed, but they do let you line up the disclosures so you can bounce back and forth more easily.
See Figure 2, below. It shows the quarterly costs of Kimberly’s 2018 restructuring program for the most recent three quarters — but that’s only because we don’t have the space to show more. In the Interactive Disclosure Tool, you can scroll backward through time, to the start of the 2018 restructuring program and even earlier quarters before that, when Kimberly was disclosing costs related to a 2014 restructuring program.
Start with Kimberly Clark’s original disclosure 12 months ago, when it first reported the 2018 restructuring plan and expected costs: “Workforce reductions are expected to be in the range of 5,000 to 5,500… Restructuring charges in 2018 are expected to be $1.2 billion to $1.35 billion pre-tax.”
Then came a breakdown of Q1-2018 restructuring costs in table format, which said net charges that quarter were $428 million — roughly $577 million in real charges, offset by $149 million in lower taxes and other offsets.
That was first quarter of 2018. Then you can scroll back and forth across other filings from 2018, to see how the totals keep changing. Kimberly does a good job with the disclosure, providing a breakdown of restructuring costs in more than a dozen line items, for both the period in question and year-to-date cumulative costs. See Figure 3, below.
Total costs related to this restructuring project were $1.036 billion, below the $1.2 billion estimate the company gave at the start of that year. In the Q1-2019 filing submitted this week, Kimberly estimates that 2019 costs will be $600 million to $750 million pre-tax.
How will Kimberly-Clark manage its restructuring oversight in 2019? Will it hit that goal or, like 2018, even finish below that number? We can revisit the issue 12 months from now — and with the Interactive Disclosure tool, also keep tabs on data along the way.
Commentary abounds these day about how much corporations are, or are not, cutting back on capital expenditures.
Earlier this month, for example, the Financial Times had an article exploring how Corporate America supposedly isn’t spending more money on capital expenditures — and baldly said, “Capex has flatlined.” Other media pick apart the sweeping corporate tax cut Washington enacted 18 months ago, ostensibly to stimulate exactly the sort of business investment capex represents.
So what’s really going on? Calcbench decided to look at the data and see what it really says. A few points stand out right away.
First, capex spending for all filers overall is falling. We reviewed the capex numbers reported by more than 10,000 firms for the last five years. Capex spending peaked in 2015, with total spending at $1.46 trillion. The numbers then sloped downward for two years — and then that decline accelerated a lot in 2018. See Figure 1, below.
Average capex spending per filer, however, ticked upward last year — from $233 million in 2017 to $268.6 million in 2018. That’s also the highest average capex spending we’ve seen in the last five years.
What’s that about? How can aggregate capex be falling while average capex per filer is rising? One possible reason is that spending among a small number of large companies is rising swiftly, while everyone else is throttling back. So we next looked at capex spending among 423 firms in the S&P 500.
Among that group, capex spending shot up in 2018. Total spending jumped 15.5 percent, to $623.3 billion. Average spending rose 16.3 percent, to $1.47 billion. Median spending rose 9.6 percent to $469 million.
The pattern is irrefutable. Capex spending among the biggest firms in Corporate America rose sharply in 2018, period. See figures 2 and 3, below. Pay particular heed to the trendlines for each, in red.
The single biggest spender in 2018 was Google. It jacked up capex from $13.08 billion in 2017 to $25.04 billion in 2018 — an increase of (gulp) $12.95 billion last year alone. That was the biggest one-year increase of any firm, by far. Table 1, below, shows the top 10.
Even if you exclude those big spenders, however, average and total capex spending in the S&P 500 still rose. In our sample of 423 firms, 289 of them reported more capex spending, versus 123 that trimmed it. Two held capex spending level.
That’s enough data for today. We’ll have more posts on this subject soon, since it’s clearly worth more examination. For now, we can unmistakably say that the data show Corporate America is spending more on capital expenditures, even if the rest of the corporate world is a more murky picture.
We were trolling through Amazon.com’s latest annual report the other day, and can confirm yet again: Amazon is a highly profitable web-hosting company, with a side business as the world’s largest retailer.
What piqued our interest was Jeff Bezos’ most recent letter to shareholders. There, in the 13th paragraph, Bezos had this line about the company’s web-hosting business, Amazon Web Services: “AWS is now a $30 billion annual run rate business and growing fast.”
We knew AWS was a lucrative operating segment for Amazon ($AMZN) — but $30 billion? That lucrative?
So we visited Amazon’s segment disclosures. And, yes, AWS really is tearing it up right now.
You can see the tale from Figure 1, below. Amazon does generate an enormous portion of total revenue from online retail sales, particularly North America. Eighty-nine percent of the company’s $232.9 billion in revenue last year came from retail. North America sales alone, $141.37 billion, accounted for 60.7 percent.
AWS revenue was only $25.6 billion in 2018 — but growth momentum is clearly with AWS, not retail. AWS revenue more than doubled from 2016 to 2018. In the same period, retail sales grew only 67.4 percent.
AWS’ fourth-quarter 2018 revenue was $7.43 billion. Annualize that out, and it’s $29.7 billion for a full year. Therefore, Bezos is correct. AWS has a $30 billion run rate. Its operating profit has more than doubled in three years. Heck, its operating income is now larger than operating income from retail.
So AWS has a compound annual growth rate of 28.07 percent, compared to a CAGR of only 18.76 percent for Amazon retail. If you carry those rates forward, then AWS will become Amazon’s primary revenue stream in 2046. AWS would have revenue of $26.2 trillion that year, compared to $25.5 trillion for retail. See Figure 2, below.
Sound far-fetched? Before you roll your eyes, consider this. The United Nations estimates that the world population will be 9.8 billion by 2050. Let’s cut that to 9.5 billion by 2046, just to be conservative. That would be $2,688 spent by every man, woman, and child on Amazon retail in 2046.
We don’t know about you, but we’re doing our part to spend that much on Amazon right now.
Now that 2018 annual reports are filed for most firms in the S&P 500, we are picking over the data for interesting nuggets. Today’s data point — restructuring costs.
We last looked at restructuring costs three years ago, and found that Corporate America spent $84 billion on that line item from 2012 through 2015. Since then, the pace of restructuring costs has actually accelerated, to $78.6 billion in the three years of 2016 through 2018. (Which implies $104.8 billion over four years, if you average and extrapolate the numbers.)
That acceleration might be a bit misleading, however.
See Figure 1, below. The high-water mark for restructuring costs came in 2016, at $29.3 billion. Since then total costs are below $25 billion, although they’re still well above annual averages in the first part of the 2010s.
It’s also worth looking at average restructuring costs per filer. Those costs are up 14.7 percent, from $131.5 million in 2017 to $150.9 million in 2018 — and they are well above the average of $118.8 million we saw 2012-2014.
Critical point: the number of firms reporting restructuring costs also fell, from 190 in 2017 to 161 last year — and we’re still waiting on roughly 50 more 2018 reports from the S&P 500. So it’s possible that by the time those last firms file, their numbers might shift the average substantially. We don’t know.
Meanwhile, severance costs seem to be moving in three-year cycles, with spikes in 2012, 2015, and (apparently) 2018. Total costs for the S&P 500 are gently rolling downward, but average costs per filer are moving upward. See Table 1, below.
We pulled this data together quickly from our Data Query Tool, which is just the thing when you want to find trends in data among large groups of companies. In these cases here, we asked the search tool to return aggregate and average numbers — but you can also get results for individual companies within your sample.
When we did that, we quickly found the 10 largest restructuring charges of the last three years. Topping the list was Kimberly-Clark Corp., with a $4.18 billion charge it announced for 2018. The top 10 are below, in Table 2.
And what were those charges about, exactly? Then you can shift to our Interactive Disclosures database and research whatever firm catches your eye. Typically, that footnote disclosure will include details such as which operations may be scheduled for restructuring, how many employees might lose their jobs, and more.
It’s also worth watching how those disclosures change over time. As we noted in our original restructuring post three years ago, firms have a habit of announcing one set of targets with a restructuring goal — and then somehow expanding those numbers and costs over time.
How do our subscribers use Calcbench to solve real problems in the real world? Here’s one tale from a customer running the accounting and external reporting function at a large public company, in his own words.
We decided to implement ASU 2016-18, Restricted Cash, but we didn’t know how to present and tag our Statement of Cash Flows properly. Given the young age of the standard, we were unsure how widely it had been adopted, fearful we wouldn’t know how others presented their Cash Flow statement. We also had a tight deadline and needed a solution our controller would approve and our auditors would agree to — fast.
What We Usually Would Have Done
We would have tasked a few analysts to search for any company that had restricted cash, and then see whether that company had adopted the new accounting standard. The analysts would have grabbed the list of roughly 15 other peer companies, maybe a few prime companies as well, then headed to the SEC website and hunted in the haystack — crossing their fingers that they found this specific scenario.
What We Accomplished With Calcbench
Using Calcbench, we went to the Multi-Companies page, selected “Choose companies” from the Screen/Filter tab, and typed in “restric” (that is, the first few letters of “restricted cash”).
Immediately, I could see that less than 10 percent of filers employed the tag RestrictedCashAndCashEquivalents. From there, I set my results to be “not equal to zero” and hit “go.” Lastly, I entered the same tag to add a column, selected Q1 2017 to get the most recent filings and sorted by dollar value. That was it! (See Figs. 1 and 2, below, searching for Q4 2018 filings.)
In less than five minutes, we had our list of companies with restricted cash balances. To complete the task, we:
So within minutes, we found other filers that had recently adopted the new standard and had restricted cash balances. We also had data on how they presented their Statement of Cash Flows. We took that information, marched into our controller’s office, and won approval for our suggestion — which, in turn, was also approved by our auditors.
Without Calcbench, our process would have suffered severe delays as we hunted through the haystack. Instead, we found the needle in minutes, and had our whole problem sovled in less than a day.
OK, readers, this is the Calcbench crew again. That’s one tale of Calcbench in practice. If you have others, drop us a line at firstname.lastname@example.org and let us know!
Retailer TJX Cos. ($TJX) filed its latest Form 10-K report this week, for its 2018 fiscal year that actually ended on Feb. 2, 2019. Heed that date, because it’s an important reminder about the nuances of lease accounting and corporate balance sheets.
As we’ve written many times now, a new accounting standard for leasing costs went into effect on Dec. 15, 2018. Under the new rule (formally known as ASC 842), companies must start reporting the costs of operating leases as liabilities on the balance sheet, rather than bury those costs away in the footnotes.
For retailers like TJX, those operating leases can be expensive. TJX currently had $9.8 billion in leasing commitments on the books as of Feb. 2, according to the Commitments section of disclosures in the 10-K footnotes.
But wait, you say! Didn’t we just note two paragraphs earlier that the new accounting rule requires firms to report those costs on the balance sheet? What’s this footnotes business we’re mentioning now?
That’s why the Feb. 2, 2019 date is so important. Firms must adopt ASC 842 for the fiscal year beginning on or after Dec. 15, 2018 — and for TJX, its next fiscal year began on Feb. 3, 2019.
Little surprise, then, that TJX had this to say in its accounting policies disclosures about adopting ASC 842:
We will adopt this standard on February 3, 2019 using the optional transition method… On adoption of this standard we will recognize an operating lease liability of approximately $9 billion on our statement of financial condition as of February 3, 2019 with corresponding right-of-use assets based on the present value of the remaining minimum rental payments associated with our more than 4,300 leased locations.
Translation: TJX implemented a significant change to its balance sheet exactly one day after filing its 2018 annual report, where disclosure of that change was tucked away in the footnotes.
To be clear, this is entirely legal — and to a certain extent, even logical. After all, you have to pick some day to adopt a new standard; the start of a new fiscal year is a reasonable choice.
We only call out TJX today because noticing such details is important for astute financial analysis. The $9.8 billion in lease liabilities that piled onto TJX’s balance sheet on Feb. 3 is larger than all the company’s other liabilities, $9.2 billion, that existed there 24 hours earlier.
Shifts like that could have consequences for a firm’s debt covenants, if current liabilities suddenly cross some critical threshold as a portion of total liabilities. These shifts will also affect how a firm’s return on assets is calculated, since ASC 842 requires companies to add a “right of use” asset on the asset side of the balance sheet, to offset the liabilities.
TJX isn’t the only company with large leasing liabilities piling onto the balance sheet one day after filing the 10-K. In our recent master class video with Jason Voss, we called out Chipotle as another example. You can visit our Research page or search our blog archives for all the other material we’ve written about leasing costs. We even have a dedicated report on leasing expenses from last July, with a 2019 version coming this summer.
Suffice to say, there are plenty of examples to choose from.
Now that 2018 annual reports are mostly filed, the 2018 proxy statements are starting to arrive. That means we can move on to our next piece of financial data to analyze: the CEO Pay Ratio.
That number compares the CEO’s total annual compensation to annual compensation of the firm’s median employee. The SEC began requiring pay ratio disclosure in 2017 proxy statements — which means this year’s proxy statements offer our first instance to see how that ratio is changing over time.
Calcbench users can search for CEO Pay Ratio disclosure. Just go to our Multi-Company or Interactive Disclosures pages, and enter “CEO Pay Ratio” in the standardized search metrics field on the upper left. That will return the pay ratio disclosed by whatever companies you are researching.What can we say about CEO pay ratios so far? A few things…
First, it’s early in the proxy season, so financial analysts don’t have many 2018 pay ratio disclosures so far. We searched the S&P 500 and found only 21 firms that have reported pay ratios for both 2017 and 2018. But more such disclosures will be coming as proxy season unfolds, so if CEO pay is something you study, you’ll want to check back with us regularly.
Second, those pay ratios we do already have are mostly trending upward — but perhaps not as widely as cynics might expect. Of the 21 firms we examined, 12 have higher pay ratios in 2018, but eight more had lower ratios. (One firm’s ratio held steady.)
Then again, it’s still early. Maybe as more firms file 2018 pay ratios, the balance will skew higher and the cynics will be vindicated. We don’t know yet. Table 1, below, shows the five firms with the largest 2018 pay ratios so far.
An important point to consider here is why pay ratios might be fluctuating. For example, if a CEO receives most of his or her compensation in the form of stock awards, the company’s shares might have done quite well in 2018.
That would certainly enlarge the CEO’s total compensation, and therefore boost his or her pay ratio. But that’s not the same as a Scroogey McScrooge CEO reporting a higher pay ratio because he cut the median employee’s salary while raising his own base pay.
Critics of the CEO Pay Ratio Rule — and don’t die of shock here, but many CEOs do dislike this rule — say the number can be confusing, or even misleading. They’re not wrong; it can be misleading, if financial analysts don’t understand where the numbers in the ratio come from and how those numbers fluctuate from year to year.
Calcbench subscribers can do this by using our Trace feature to see how a CEO pay ratio was calculated. The trace will whisk you back to the proxy statement and the underlying data.
For example, American Electric Power ($AEP) reported a 2018 pay ratio of 111. That comes from CEO Nick Akins’ total compensation of $12.2 million last year, compared to the median employee compensation of $110,125.
You could also then compare that against AEP’s disclosure from 2017, when the pay ratio was 102 — stemming from $11.5 million in CEO compensation, against $113,085 for the median employee.
Now, you might ask: where did those changes in Akins’ compensation come from? Jump to AEP’s summary compensation tables, and you can find the answer. Akins did get a raise in base salary of $40,00o to $1.415 million, and he also got a much larger incentive bonus: $2.9 million, compared to $1.7 million last year. His stock awards, pension contributions, and other compensation, however, actually fell.
Searching standardized metrics, tracing back to the source disclosure, comparing to previous periods; that’s how you can do better financial analysis. Calcbench lets you do it with just a few keystrokes.
Earlier this month, a corporate client asked us if we knew where firms were spending their projected benefits from last years TCJA. He told us what their firm did. So, we set out to help our client answer the question. Here’s the story.
We examined the 2017 and 2018 spending among more than 2,600 publicly traded firms that all reported more than $1 billion in assets. That is, many more firms than those in the S&P 500, but substantial firms with real operations and assets nonetheless.
First we have Figure 1, below. 2017 spending is in blue, 2018 spending in orange. We totaled up corporate spending in four categories, R&D, capital expenditures, pension plan contributions and share buybacks.
As you can see — spending is lower across the board, except for share buybacks. Spending there rose from $660.4 billion in 2017 to $803.3 billion last year.
One important caveat: we have not seen all companies submit their 2018 filings yet. In our study here, we have 2,400 filers in our 2017 pool, but only about 1,900 in our 2018 pool.
So as more 2018 filings arrive, might our exact totals and percentages change? Yes. But we already have all the largest filers included for both years, so our basic conclusion should remain the same: lots more spent on share buyback programs, less spent on everything else.
You can also see the spending shift in our two pie charts, below. 2017 spending is on top, 2018 spending below. These charts are looking at what the average firm spent on each of these four categories in each of the last two years. In the R&D case, only 567 firm observations exist in 2018, so the average spent per firm is relatively high as a percent of total spending.
Yellow and orange are the most important slices. The yellow (share buybacks) expanded from 30.8 percent of all spending in 2017, to 35.2 percent in 2018. That may not sound like much, but do the math: that’s an increase of 440 basis points, or a 14.3 percent increase from 2017 totals.
Meanwhile, capex spending (the orange slice) shrank by 402 basis points, while R&D (blue) and pension contributions (green) stayed essentially flat.
We will revisit and update these numbers later this spring, and of course, the conclusions we draw here today are about collective corporate spending — spending among individual companies may differ quite sharply from the broad tale told here.
By the way, if you have any financial data questions you want answered, we’re always happy to help. Email us at email@example.com and tell us what’s on your mind. We’ll get cracking on an answer.
From time to time we revisit how large, for-profit health insurers are faring financially. Now that 2018 numbers are filed for seven of the largest such firms, we can declare that they are still alive — although perhaps not as hale and hearty as they were 12 months ago.
We pulled up data for the following firms:
We reviewed their revenue, operating expenses, operating income, operating cash flow, and net income; comparing 2018 to 2017, and 2017 to 2016.
Table 1, below, shows the most recent numbers for all seven firms collectively. At first glance they look OK. Revenue, operating income, net income all going up; that’s good. Can’t say we love the decline in operating cash or the increase in operating expenses, but nobody needs to administer CPR for a data table like this.
Now let’s look at Table 2, comparing 2016 to 2017. We see a much more rosy complexion here: revenue not growing quite as quickly, but operating expenses growing more slowly, and operating cash flow popping along with a 31.2 percent increase. Net income popped even higher.
What happened? For starters, six of our seven companies saw declines in operating cash flow; only UnitedHealth ($UNH) kept cash growing. Humana ($HUM) also saw operating income drop by 27 percent, which pulled down net income by 31 percent.
You can research the numbers yourself on our Multi-Company page, for health insurance or any other sector you follow. And as the guest on our most recent master class video, Jason Voss, stressed — look at the financial data over longer periods of time. As our example above shows, what looks good across two years may look a lot less healthy across three or more.
Rejoice, lovers of all things Calcbench! We have posted another master class video, to explore important lessons in financial analysis and how you might use Calcbench tools to put those points into practice.
As usual, this video is divided into two parts. First we have an interview with Jason Voss, a financial analyst, investment manager, prolific author and writer, and (for real) student ninja. We spent 20 minutes chatting with Voss about three practices every analysis should embrace:
Those are solid best practices, and Voss gives examples of each one with real filers.
In the second half of the master class, our own CEO Pranav Ghai picks up story. He shows how Calcbench database tools can be used to research Voss’s three points, and we offer three more examples, all pulled from current filings made by large firms.
Don’t forget our first master class video, featuring former FASB member Marc Siegel. That one talks about the evolution of financial analysis in the last 15 years and how technology has moved to the center of things.
We’ll also be posting more videos in the future. If you have ideas about what subject we should explore, drop us a line at firstname.lastname@example.org.
We often like to talk about goodwill on the corporate balance sheet, and whether the goodwill reported in a corporate merger lives up to expectations. Today we have an small example of how quickly those thoughts can change.
The example comes from Tech Data Corp. ($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.
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.
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 $3.2 billion — a ratio of 136.7 percent (because Gilead paid more than it had in its provisions).
We do this to amplify a point we made in our previous post about IBM ($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.
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.
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 $5.5 billion charge accounted for 48 points in that 49.49 percent.
IBM shows us the importance of tax management to a company’s bottom line — not really one-time sugar high this year, as much as an ongoing effort to minimize tax payments every year, which can leave net income growth divorced from operational reality.
We’ll keep looking at the sugar high phenomenon here, and try to draw broader conclusions about how real it may be.
Calcbench subscribers, meanwhile, can zigzag from our Data Query page, to the Company-in-Detail page, to the Interactive Disclosure page — all to connect the numbers companies report to the narrative they offer.
Then you can see how much those things do, or do not, align over time.
Last week we had a post noting the sharp increase in goodwill and intangible assets listed on the balance sheet of CVS Health ($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.
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 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.
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.
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