Thursday, September 21, 2023

Today we continue our look at issues in the banking sector, based on the podcast we recorded with John Helfst, a banking industry analyst with 1919 Investment Counsel. In our previous post, we reviewed some of the disclosures that he typically wants to study when researching bank stocks. 

In this post we wanted to look at some of the lines of business that banks report — especially mortgage banking, which had been going like gangbusters while interest rates were low, and then fell off a cliff when the Federal Reserve began a punishing series of rate increases last year. 

We asked Helfst: how should analysts think about pressures like that? 

Much Ado About Mortgages

Helfst agreed that mortgage banking has felt a terrific squeeze in the last 12 to 18 months — and you can see that in the disclosures, as banks report various revenue streams. Small and regional banks were hurt the most, but even some large banks with sizable mortgage origination and securitization saw sharp declines in their business too. 

One elementary question is whether banks’ net interest income could make up for the collapse in non-interest income. “No,” Helfst was quick to say. So the better question to ask is whether banks’ mortgage origination, capital markets, and investment advisory lines of business can revive any time soon.

Helfst isn’t entirely sanguine about that question either. Take mortgage refinancing as an example. Even if that line of business starts to level off compared to the plunges we saw in 2022, those year-earlier plunges were so swift and so steep that today’s leveling off — assuming it actually holds, which is still an open question — isn’t much to celebrate. “Management is trying to rationalize to a lower origination volume environment,” Helfst said. 

One could make similar statements about investment banking. Private equity deals and acquisitions due to SPACs were all the rage in 2021 and early 2022. Well, now the SPAC bubble has burst, IPOs and M&A deals aren’t much better, and private equity isn’t going to pick up enough slack to overcome that drag. 

OK, enough prognostication. Where can analysts find disclosures about all these issues in Calcbench? 

We Have the Data

For starters, most large banks will break out lines of revenue that you can find on the Company-in-Detail page. For example, we looked up JPMorgan’s ($JPM) Q2 numbers for 2023 and 2022 — and sure enough, found declines in investment banking, mortgage fees, and credit cards. See Figure 1, below.

Most large banks will break out lines of business right there on the income statement, so the Company-in-Detail page is an easy place to start. 

One can also reach banks on the Interactive Disclosures page. Start by looking up the footnote disclosure on operating segments, which can provide granular detail about a bank’s lines of business, even if some banks stack their year-earlier comparables on top of each other rather than side-by-side. Figure 2, below, is an example from Wells Fargo ($WFC) in Q2 2023. 

Remember, whenever you see a disclosure that appears as a web link, that means you can use our Show Tag History feature to pull up that disclosure’s value for prior periods. You can then quickly dump those values into a spreadsheet and convert them into a chart, or if you’re using our Excel Add-in you can pull those values directly into whatever model you’re using on your desktop. 

And as always, you can read the bank’s Management Discussion & Analysis, which has even more information about various lines of business and their performance. 

In other words, Calcbench has all the segment-level data you might want to explore, to see whether the banks you follow are clawing their way back to normalcy after the Fed’s punishing series of rate hikes. 

Thursday, September 14, 2023

The banking sector is one of the biggest, most important industries to financial analysts, but it’s also one of the most challenging industries to analyze skillfully. For example, the financial disclosures that banks make can often look quite different from those of other sectors, as can the key metrics that analysts should follow.

To help us understand those challenges, and what an analyst might consider when studying banks’ financial disclosures, we decided to go to an expert: John Helfst, an analyst at 1919 Investment Counsel who follows the banking sector closely, and who also happens to be a member of the Financial Accounting Standards Board’s investor advisory committee. We called him up, asked him some questions about issues in the banking sector these days, and turned the whole conversation into a podcast.

You can hear our entire podcast conversation by using this link. Meanwhile, for those who prefer the written word, we also jotted down some of Helfst’s observations for a series of blog posts. Our first post is below.

Deposit Disclosures

We began by asking Helfst what disclosures he follows for the banking sector. He drew a distinction between disclosures that have always been important, and disclosures that have become more important since the collapse of Silicon Valley Bank back in March of this year. 

Traditionally, Helfst said, you want to look at disclosures that help you understand the mix of a bank’s deposits, since that will help you understand the probable future costs of servicing those deposits. 

For example, Helfst said, you want to study the percentage of non-interest bearing deposits, retail deposits, corporate deposits, and municipal deposits. You also want to understand the mix of “timed deposits” (that is, certificates of deposits) versus demand deposits, which are deposits sitting in a regular savings account. Finally, you want to understand the spread between deposit interest rates and the Federal Reserve funds rate, since a wide spread suggests that the bank’s deposit rates (which will affect interest expense) will soon change. 

OK, let’s pause right there. If that’s the sort of data an analyst wants, where can Calcbench users find it? 

One place to start would be the deposits footnote that just about all banks include in their quarterly filings. For example, we wrote a quick review of Citigroup’s ($C) deposit footnote in March. Figure 1, below, shows a quick sample.

As you can see, it includes a breakdown of interest bearing and non-interest bearing deposits. Further down in the footnote, Citigroup also discloses timed deposits, the maturity dates of those deposits, and the portion of timed deposits that exceed the federal insurance limit of $250,000.

The deposits footnote does not include data about the interest rates paid on savings accounts, although analysts can often find that information elsewhere in the 10-K or from sources other than SEC filings. 

Loan Disclosures

OK, back to Helfst. In addition to disclosures about deposits, he also pays close attention to disclosures about loans. Specifically, he wants to know which loans have floating interest rates, versus those that carry a fixed rate. He also looks for what’s known as the “gap table” that banks typically report somewhere in their 10-K. 

A gap table is any presentation of information about a bank’s interest rate exposure. It’s not a fixed-format thing, where you can search “gap table” and always find such information. Sometimes you will find a bank disclosing this information and calling it a gap table; other times you’ll need to scan through the Management Discussion & Analysis to find the information, and it might go under any number of names. 

Valley National Bank ($VLY) is a great example because it offers two gap tables in quick success in its MD&A. The first presents maturity dates for its various types of loans; the second provides a breakdown of fixed-rate versus floating-rate loans, again by loan type. See Figure 2, below.

From there, an analyst could get a much better sense of which loans might roll over into much higher (or lower, for that theoretical day when the Fed cuts rates again) interest rates, and how that change might affect the bank’s interest income, interest expense, and net interest income.

After the SVB Collapse

All those disclosures are still valuable for the banking industry today, but the collapse of Silicon Valley Bank did force analysts to pay attention to many more issues. “We were looking at stats that analysts had never considered before,” Helfst said. 

So what disclosures would be useful in that new world? Helfst had a few ideas.

Foremost, he said, analysts should look at the percentage of total deposits that exceed the federal deposit insurance limit of $250,000 per account. They might also study disclosures about the bank’s securities holding, such as the mix of held-to-market (HTM) versus available-for-sale (AFS) securities and what the yield is for each of those categories. For example, in his research Helfst found that over the last three years, large banks had shifted their mix from 70 percent AFS to 70 percent HTM, mostly to protect the Tier 1 capital that the banks had to keep on the balance sheet. Smaller banks, which aren’t subject to the same capital reserve requirements, didn’t do that. 

As it happens, Calcbench can help you find that sort of data, too. Just the other week we had a post looking at PacWest Bancorp ($PACW) that traced the flow of its AFS and HTM securities, which PacWest neatly organized into commercial mortgage-backed securities, residential securities, and other asset classes. It also reported the maturity dates for those HTM holdings, and even the credit quality. 

We’ve also had numerous posts this year looking at bank deposit disclosures, and yes, many banks do disclose both insured and uninsured deposit levels. 

In other words, the information you need for solid analysis of the banking sector is generally in the 10-K or 10-Q somewhere. You just need to know what you want to find, and a tool to help you find it. Calcbench is happy to be the latter. 

We’ll have more of Helfst’s banking observations in coming days. 

Monday, September 11, 2023

This might be a bit of inside baseball for some readers, but we’d be remiss if we didn’t note that the Securities and Exchange Commission published a reminder last week for companies to pay attention to the details of the XBRL “tags” they use in securities filings.

The SEC published a sample comment letter about XBRL filings, demonstrating the types of issues that might prompt SEC staff to send a comment letter to a company asking questions about its filings. The agency also included a few paragraphs of guidance about why XBRL is so important to financial reporting and analysis.

XBRL is the data-tagging language companies must use when filing registration statements and quarterly reports to the SEC. Every piece of financial data is tagged in XBRL, which allows other software applications — like, say, Calcbench — to parse that data quickly and precisely. When you sit there wondering, “How does Calcbench do it, making financial analysis so easy?” it’s all thanks to XBRL.

This means, of course, that companies must be diligent in the XBRL tagging they undertake. That’s been the case for years, but Congress underlined the importance of accurate filings when it enacted the Financial Data Transparency Act of 2022. Among other things, the law directed the SEC to improve the quality of corporate financial data.

Clean, accurate XBRL filings are a big part of that push; hence the XBRL guidance last week. 

For financial analysts wondering, “What does this have to do with me?” — honestly, not much. Most companies are quite good with the quality of their XBRL tagging, and Calcbench has a set of quality checks we run ourselves to assure that flawed tags are found and corrected before one ever appears on your search results. 

For corporate filers, the letter is another reminder that you need to practice good financial data hygiene. Most filers already use a dedicated vendor to help them prepare and submit their SEC filings with all XBRL tags in order — but Calcbench does have an XBRL Filer Portal page, where subscribers can check the quality of a company’s XBRL filings. Heck, a company can even check the quality of its own filings, and we extend that service even to companies that aren't Calcbench subscribers. (Just contact us at and we'll set you up to review your own filings.)

Using the XBRL Filer Portal

Here’s how it works. First, go to the XBRL Filer Portal, which might well be the most sparsely designed page on the internet. Enter the ticker of whatever company you want to research. See Figure 1, below. 

Calcbench will then return a page that looks something like Figure 2, below. You first see a list of all SEC filings we have on file for the ticker you entered, and seven tabs so you can see what XBRL glitches our database had flagged over the years. Some common glitches include:

  • Tagging the wrong sign (a positive number instead of a negative one, or vice-versa)
  • Scale errors, such as where you tag revenue to the precise dollar in one place, but rounded to the nearest million in another
  • Possible typos
  • Revised facts, where a company changes previously reported numbers in its current filing (we have an easy way to track revised facts, by the way)
  • Extensions, where a company devises its own unique XBRL tag rather than using one from the SEC-approved XBRL taxonomy.

We randomly selected the New York Times Co. ($NYT) as a test case for our XBRL Filer Portal. Figure 2 then shows two instances where the Times switched the positive/negative signs for the Debt Securities Available for Sale line item. In both cases, Calcbench shows you the value originally submitted, the date submitted, and the date the company filed an updated, corrected tag. 

To be clear, this does not mean XBRL submissions are filled with errors. On the contrary, error rates are usually quite low. XBRL was designed with validation techniques embedded into the system, and filing vendors have their own quality checks, and financial data warehouses such as Calcbench have their own quality checks on top of that. 

We’re just pleased that the SEC (which is a Calcbench subscriber, we’re proud to say) understands the value of XBRL to strong financial analysis.

Thursday, September 7, 2023

So there we were, reading the Wall Street Journal this week, and came across an article warning of a “doom loop” for small and mid-sized banks: that in an era of rising interest rates, existing commercial loans and securities based upon those loans might decline in value, which will clog banks’ balance sheets like cholesterol in your arteries.

Turns out, Calcbench does have data about those securities in our vast troves of financial disclosures. So let’s take a look at where to find such information and what examples of it already exist.

First let’s review the big picture. Historically, small and mid-sized banks have done a brisk business extending loans to commercial real estate developers. The banks then roll those loans into commercial mortgage-backed securities (CMBS), which they sell to investors. As real estate developers make their loan payments, those payments become the income stream that investors in CMBS enjoy.

Our new era of rising interest rates, however, gums up that whole process. Developers can’t refinance their existing loans at the same low rates they had before. Sometimes they just default on the loans; other times they rework the loan terms. Regardless, as loan failures rise, the CMBS based on those loans decline in value — which leads to unrealized losses piling up on the balance sheets of the banks holding those CMBS.

So how and where does that get reported in practice? Let’s look at an example.

PacWest Bancorp

Our example is PacWest Bancorp ($PACW) only because that’s one bank mentioned by the Wall Street Journal. We looked up its most recent 10-K report, filed on Feb. 27. The 10-K included a footnote disclosure labeled “Investment Securities.” That’s where PacWest listed a wide range of investment securities the bank was holding, including private-label CMBS.

As is typical for banks, PacWest grouped its investment securities in two broad categories: available-for-sale (AFS) and held-to-maturity (HTM). For example, Figure 1, below, shows the various AFS securities that PacWest was carrying as of Dec. 31, 2022. CMBS are high-lighted in blue.

So PacWest had an amortized cost of $28.9 million on those available-for-sale CMBS, and then incurred $2.07 million in unrealized losses, for a fair value at the end of the period of $26.8 million. That is a sharp decrease in PacWest’s available-for-sale CMBS holdings from the prior year, when the fair value amount stood at $450.2 million.

We also have held-to-market CMBS. PacWest reports those values further down, as seen in Figure 2, below, again with private-label CMBS shaded in blue.

So held-to-maturity securities have $26.03 million in unrealized losses, leading to a fair value of $319.8 million for the CMBS portfolio. 

But wait! Figure 2 doesn’t include any comparable disclosures for the year-earlier period. That’s because until this year’s 10-K filing, PacWest didn’t report HTM securities. 

One obvious question would be whether the bank took a large portion of the $450.2 million in available-for-sale CMBS reported at the end of 2021 and reclassified them as HTM securities this year. You’d need to do more digging (or questioning of PacWest executives on an earnings call) to find out.

Even More CMBS Data

Let’s go back to the available-for-sale CMBS that PacWest listed. PacWest also discloses a few characteristics about those securities. For example, it includes two tables listing the maturity dates of the AFS securities. Various types of securities have various maturity dates, but the available-for-sale CMBS all have maturity dates more than 10 years in the future. 

So PacWest paid $28.9 million for those available-for-sale CMBS, and their fair value is currently $26.8 million, and their maturity date won’t hit until at least 2033. The question then arises: Who feels confident enough that those CMBS will be worth more in the coming decade, that they’ll buy them from PacWest?

Calcbench doesn’t know. But we do have the data to bring that question to the fore.

Meanwhile, we have those held-to-maturity CMBS, worth $319.8 million at the end of 2022. PacWest also discloses the credit quality of those securities, as seen in Figure 3, below.

As we can see, PacWest reported AAA credit ratings for all its held-to-market CMBS. And just like the available-for-sale securities, PacWest also reports the maturity dates for all its HTM securities, too. See Figure 4, below.

We can ask the same questions we raised earlier about the AFS securities. What is the likelihood that the value of these instruments will improve in coming years, that those unrealized losses will go away? Or will conditions in the commercial lending and mortgage markets continue to flounder, and the unrealized losses keep piling up? Because if it’s the latter, those losses will eventually need to be realized by somebody. 

We will leave you with one final chart. As fascinating as the above analysis is — and you can conduct similar research on your own, with whatever mid-sized banks you follow — we’re aware that the data is, well, dated. So using our world-famous Show Tag History feature, we pulled the quarterly numbers for unrealized losses on PacWest’s held-to-market CMBS since last summer. 

That’s a swift increase in unrealized losses. The more the CMBS market goes down, the more such losses pile up.

Wednesday, August 30, 2023

You may have seen news on the political or healthcare pages earlier this week about the Biden Administration announcing the first 10 drugs that will be subject to price negotiation with the U.S. Medicare program.

Here at Calcbench, we wanted to look at that issue through a financial reporting lens: If the U.S. government does negotiate lower prices for those 10 drugs, what might that mean for the pharmaceutical companies that manufacture them? 

After all, as we’ve explored before on this blog, pharmaceutical companies typically report their sales of blockbuster drugs as separate operating segments. So we can see just how much revenue specific drugs bring to a pharma company, and just how important those blockbuster sales are to the company’s overall revenue picture.

And wouldn’t you know it, all 10 drugs subject to Medicare price negotiation are disclosed by their manufacturers. Hooray!

Table 1, below, shows the 10 drugs flagged by Medicare and their 2022 sales. 

As we can see, the company facing the most pricing pressure is Bristol Myers Squibb ($BMY), since its anti-coagulant drug Eliquis (used to prevent strokes in people with heart conditions) accounted for more than 25 percent of Bristol’s total revenue in 2022. 

We don’t know how much Medicare’s negotiated price might reduce that revenue stream; the lower prices wouldn’t even start until 2026, and presumably Big Pharma will fight this negotiation power in court. Still, Bristol now has a target painted on its back. Financial analysts can use that information to ask management about new drugs coming down the pipeline, the potential for voluntary price cuts to avoid negotiations, and so forth.

We must also note the delicate position of Johnson & Johnson ($JNJ), which manufacturers three of the 10 drugs targeted by Medicare. Altogether those three drugs account for 16.8 percent of the $94.9 billion in revenue J&J reported last year. 

Again, the question to ask management is what strategies they are pursuing to avoid a revenue crunch roughly three years from now. Developing a new blockbuster drug can take upwards of a decade and $1 billion in research costs. If a manufacturer on this list wants to widen its pipeline, the time to do that isn’t even now; it’s yesterday.

By Olga Usvyatsky

(Editor’s note: Today we have a guest column from Olga Usvyatsky, a long-time accounting researcher and occasional contributor to the Calcbench blog. Usvyatsky is raising interesting questions about non-GAAP disclosures and how financial analysts might anticipate potential changes in disclosures based on what the SEC says in comments to registrants.)

Non-GAAP disclosures are one of the most common issues in financial reporting. Almost all large publicly traded companies make them, and such disclosures typically paint a more positive picture of corporate performance than comparable GAAP disclosures. 

At the same time, however, the Securities and Exchange Commission reviews non-GAAP disclosures with a skeptical eye. Earlier this year an article in the Wall Street Journal raised the possibility that thanks to increased SEC scrutiny, companies might change how they calculate non-GAAP metrics. Altering those calculations could be "embarrassing or even costly" for companies, the article said, because they would need to explain to investors why the previously used metrics were no longer permissible.

SEC rules require companies to reconcile non-GAAP disclosures back to their closest matching GAAP disclosure. Those non-GAAP adjustments can be significant, and changing how non-GAAP metrics are calculated could materially reduce adjusted income. In December 2022 the SEC Division of Corporation Finance updated its guidance on non-GAAP disclosures, expanding the list of non-GAAP metrics that violate SEC rules. This renewed scrutiny made us wonder: what types of non-GAAP adjustments would raise red flags with the SEC?

One way to answer that question is to examine SEC comment letters (letters the SEC sends to registrants, asking them about various issues in their financial statements). We used Calcbench’s Interactive Disclosure tool to identify roughly 1,900 SEC comment letters issued since 2021 that raised at least one non-GAAP comment. Then we looked to see which specific citations from that updated non-GAAP guidance were mentioned in the comment letters.  

The issue raised by the SEC most often was Question 102.10, which primarily concerns how companies disclose their metrics. SEC rules prohibit giving undue emphasis to adjusted numbers, such as discussing non-GAAP numbers before GAAP or presenting full non-GAAP income statements. As far as we can tell, presentation-only issues are relatively easy to rectify by updating the disclosure in future filings.

Notably, the updated SEC non-GAAP interpretation states that metrics can be misleading even if properly disclosed. For example, consider removing recurring expenses (Question 100.01) and tailoring non-GAAP metrics to company-specific needs (Question 100.04). Compliance with these provisions following SEC inquiries could be costlier for companies, since it would often require revising the metrics, explaining the changes to investors, and finding alternative ways to communicate results. 

One example of this comes from Lyft (Ticker: LYFT). On Aug. 12, 2022, the SEC asked Lyft to clarify how removing insurance reserve liabilities complies with Questions 100.01 and 100.04 of Regulation G. The company responded, stating that the adjustment is useful and not misleading: 

Regarding the considerations of Questions 100.01 and 100.04, the company does not believe this adjustment to be potentially misleading nor does it consider it to be a measure that uses an individually tailored recognition and measurement method in violation of Rule 100(b) of Regulation G. The company believes that this adjustment, which is disclosed as a separate line item and explained in the company’s non-GAAP discussions, provides investors with additional useful information related to the company’s operating performance during the current period, rather than including the impacts associated with insurance claims which occurred in prior periods.

After two rounds of back-and-forth comments, however, Lyft agreed to discontinue adjusting for the insurance reserves. The conversation between Lyft and the SEC spanned more than 153 days, much longer than an average 35- to 40-day review.

To understand the impact of the SEC review, let’s look at the materiality of insurance reserves to Lyft’s financial results. In 2021 the adjustment for insurance reserves improved Lyft’s non-GAAP contribution metric by $250.3 million. Removing the adjustment reduced the fiscal 2021 contribution margin from 58.6 percent to 50.8 percent. 

When explaining the revision to investors, Lyft noted that the accounting change was made to comply with the new SEC interpretation: In December, the SEC updated its guidance related to non-GAAP financial measures, which applies to all public companies. Subsequent to this change and following consultation with the SEC, we have updated our disclosures for the fourth quarter of 2022 and we have presented past periods on a comparable basis. 

Companies are not required to disclose SEC comment letters, and generally managers have little incentive to highlight SEC involvement voluntarily. Still, voluntary disclosure is notable, because managers are likely to aim at providing more transparency to avoid confusion about why the accounting change was necessary.  

Another SEC comment letter that led to non-GAAP revisions comes from Microstrategy (Ticker: MSTR). On October 7, 2021, the SEC asked Microstrategy to clarify why removing the impairment of bitcoin in reconciling its non-GAAP income and EPS metrics is useful to investors: 

Please tell us and expand your discussion to explain why you believe that adjusting for bitcoin impairment charges provides useful information to investors in light of your strategy and business purpose for purchasing and holding bitcoin. Refer to Item 10(e)(1)(i)(C) of Regulation S-K.

Although the question is fairly neutral and does not imply that the metric is misleading or inappropriate, the SEC noted that the discussion of the usefulness should be tailored to the company’s business strategy. In contrast to companies that hold bitcoins as investments, Microstrategy acquired bitcoins as part of an ordinary business strategy. Under GAAP rules, digital assets are reported on the balance sheet at the lowest price since the acquisition date. Based on the company’s response to the SEC, the adjustment is useful because:

 Reflecting cumulative impairment charges …without regard to current market value gains would result in an incomplete assessment” of bitcoin holdings.

In a follow-up letter, the SEC disagreed with the company’s position (emphasis added):

We note your response to prior comment 5 and we object to your adjustment for bitcoin impairment charges in your non-GAAP measures. Please revise to remove this adjustment in future filings. Refer to Rule 100 of Regulation G.

While SEC’s objection to bitcoin impairment adjustments leaves little room for maneuvering (we rarely see strong language such as “we object” in comment letters), the lack of specific guidance in SEC’s response allows for interpretation. For instance, did the SEC object to the adjustment because buying bitcoins is part of the company’s daily operations, so impairment charges are part of recurring expenses? Or is it because impairments create a tailored GAAP modification? (The improvement of GAAP accounting for digital assets is currently on the FASB agenda.) We don’t know the answer, but it’s worth noting the nuance in SEC comment letters. 

To summarize, companies often revise their non-GAAP metrics to comply with SEC inquiries. Comment letters provide essential context, helping understand the nature of SEC’s concerns. Analysts can use simple observable metrics, such as duration of the review, tone, and reliance on specific regulatory citations, to help identify more informative comments.

Thursday, August 17, 2023

Calcbench has been running a side project for the last few months tracking deposits at publicly traded banks. All such banks report their total consumer deposits every quarter, so we built a spreadsheet tracking deposit disclosures to see how the microburst of bank failures earlier this year might affect consumer deposit patterns. 

In total, the spreadsheet tracks more than 360 banks, from tiny Catalyst Bancorp ($CLST) with $263 million in assets, to JPMorgan Chase ($JPM), the biggest of them all with $3.6 trillion in assets. 

So what did deposit activity look like in Q2 2023? 

First, total deposits for the group went from $13.28 trillion to $13.31 trillion, an increase of 0.22 percent. That number alone, however, doesn’t tell us much since so many banks are in our analysis group. So we split the group into six groups: 

  • The four largest banks, which each have more than $1 trillion in assets: Wells Fargo, Citigroup, Bank of America, and JPMorgan; 
  • Five other quintile groups of about 68 banks each, sorted from smallest in assets to largest.

The results are in Figure 1, below. 

As one can see, the banks with the biggest decline in deposits were those big boys of Wall Street! Of the four in that group, only JPMorgan saw an increase in deposits, of 0.91 percent. Citi, BofA, and Wells Fargo all had declines that ranged from 0.8 to 1.74 percent.

Perhaps that’s not surprising. The big banks have made a conscious choice to keep interest rates on savings accounts low. If consumers don’t like that they can go elsewhere for higher rates, and presumably some consumers are doing just that — but why would the big banks care? A huge number of customers would need to abandon them for greener pastures before those banks felt any serious crimp in their business; huge enough that the banks themselves would be able to see that problem looming and respond with more competitive rates. 

So for now, the big boys can afford to keep interest rates low and alienate a few depositors. That’s not going to jeopardize their operations.

More interesting is that four of our five quintiles also saw increases in deposits. Five months ago, the expectation had been that we’d see a flight to stability, as depositors pulled their money from small and mid-sized banks and put it into the larger, more stable big boys. 

That doesn’t seem to have happened. What will Q3 numbers tell us? Check back in another three months or so and we’ll all find out.

Tuesday, August 15, 2023

If there’s one thing companies like to do during times of economic uncertainty, it’s restructuring. Well, the economy has plenty of economic uncertainty today, so we wondered: what are companies reporting for restructuring costs lately?

Figure 1, below, shows the answer. These are the quarterly reported restructuring costs for S&P 500 companies since the start of 2018.

Why such a long look-back period? Because we wanted to get a sense of “normal” restructuring costs back before the covid-19 pandemic. Indeed, one can see an unsurprising pattern: restructuring costs spiked in 2020 during the worst of the pandemic, and then plummeted in 2021 as we all realized that perhaps economic calamity wasn’t going to strike after all.

Then came 2022 — and specifically, second-quarter 2022. By then inflation had taken root. As we can see, restructuring costs promptly popped back up, to levels slightly higher than pre-pandemic costs but still well below the worst of costs reported in 2020.

Some may also wonder: are more companies reporting restructuring costs? Honestly, no. In any given quarter over the last 5.5 years, the number of companies reporting such costs ranged from 107 to 129. The average number of firms with restructuring costs in any given quarter was 117, and the median was 118. 

The only exception so far has been Q2 2023, with 98 companies disclosing restructuring costs — but we still have a few non-standard firms that haven’t yet reported, so a somewhat lower number isn’t surprising.

Why Restructuring Matters at All

Restructuring costs are worth watching because they’re a common adjustment to non-GAAP net income. For example, in our Non-GAAP Reconciliation Report published earlier this year, where we studied the non-GAAP net income of 200 companies in the S&P 500, 97 of those companies reported non-GAAP net income that excluded restructuring costs. The average adjustment was a $118 million increase in GAAP net income.

Astute financial analysts might also notice that some companies announce one restructuring program after another. That opens the door to make repeated adjustments to net income — but at what point does an endless series of restructuring programs become just another way to mask poor operations? 

Along similar lines, we’ve sometimes seen restructuring programs announced where the company expects to spend, say, $100 million over the next four periods. By the end of that program, however, the company might report very different totals of what it actually spent, either higher or lower. So the ability to track a company’s reported restructuring costs over time is another handy tool in the analyst’s toolkit.

Wednesday, August 9, 2023

Financial data is often where people go to glean hints about current and future economic conditions. Today we have a great example of that from Capital One ($COF). 

The consumer banking and credit card giant filed its latest quarterly report at the end of July. The top line numbers look reasonable enough: interest income up 43 percent, net interest income up 9 percent. 

Then we get to provisions for credit losses — which more than doubled, from $1.08 billion in the year-earlier period to $2.5 billion today. That drove a decline of 14.9 percent in net interest income after credit losses (kinda sorta the banking equivalent of operating income), and down at the bottom line we see a decline of 29.5 percent in net income. 

OK, clearly something not good is going on, and it’s somewhere in Capital One’s disclosures about credit losses. Let’s start digging into the data. 

Our first stop is Capital One’s footnote disclosure about allowances for credit losses. There, the bank reports charge-offs (that is, debt deemed unrecoverable) across various divisions. See Figure 1, below.

Look at the charge-offs for Capital One’s credit card division: $1.87 billion. That’s up roughly 80 percent from $1.01 billion in the year-earlier period. 

We can also look at net charge-offs, which are even worse. Net charge-offs for the credit card division one year ago were $678 million; today, as we can see in Figure 1, they’re at $1.53 billion. Net charge-offs across the entire bank went from $845 million to $2.18 billion.

So Capital One customers are falling behind on their credit card payments. Next question: how significant is that phenomenon to Capital One’s overall business? 

To find that answer, we need to crack open Capital One’s segment disclosure

Once there, we find that the credit card division had $4.73 billion in net interest income this quarter, up 21.2 percent from $3.9 billion one year ago. Capital One also had $7.11 billion in net interest income this quarter, which means the credit card business accounts for a lot (66.5 percent) of Capital One’s overall net interest income. 

But that spike in provisions for credit losses ruins everything! One year ago, Capital One’s credit card business had $3.9 billion in net interest income, offset by only $589 million in credit loss provisions. Pretax income from continuing operations was $1.96 billion.

Now Capital One is seeing more net interest income, thanks to consumers racking up credit card debt (we all saw that story the other day about credit card debit surpassing $1 trillion for the first time ever, right?) and Capital One charging higher interest rates — but provisions for credit losses grew even faster. So pretax income from continuing operations plunged this quarter to $1.12 billion. See the table below for a comparison.

Simply put, consumers are now neck-deep in credit card debt. A greater portion of them are falling behind on payments, which is not good for a large credit card company such as Capital One. Its charge-offs are rising faster than the debt payments consumers are making. When your credit card business is such a significant part of overall operations, that’s a big deal.

How big a deal? Calcbench isn’t necessarily sure — but we do have all the data you need to answer that question yourself.

Thursday, August 3, 2023

Corporate America is filing a flood of earnings releases at the moment; you could view our Recent Filings page any given day this week and get a bird’s-eye view of corporate earnings and the state of the economy right now.

Today we want to look at a few examples that, alas, are not a pretty picture.

One interesting example is FMC Corp. ($FMC), maker of pesticides, fungicides, and assorted other cides. FMC filed a Q2 earnings release this week that makes you wince: revenue down 30 percent from the year-ago period, operating income down 62 percent, net income down 77.3 percent. Even non-GAAP earnings were down 74 percent. Ouch. 

So what happened? Let’s start with the income statement, shown below in Figure 1. 

As you can see, revenue plummeted and, um… that’s pretty much the whole story.

Specifically, notice that operating expenses (selling, general & administrative, R&D, and restructuring costs) actually fell from $355.5 million one year ago to $300.6 million this quarter, a decline of 15.4 percent. But revenue plunged by roughly twice that, and hammered gross margins. 

So one can’t say FMC was overspending while revenue dried up; it wasn’t. Rather, demand for its various pesticide products fell off a cliff. 

OK, but why did revenue fall off said cliff? FMC offered an explanation near the top of its Management Discussion & Analysis:

As a result of increased inventory carrying costs and improved security of supply, growers and the distribution channel abruptly and significantly reduced purchases across all four regions during the second quarter of 2023. Volumes were down significantly driving a decline in results compared to the prior year period. However, grower consumption and demand for our innovative portfolio remains steady.

Next question, then, is whether that reduced demand from customers will continue. FMC addressed that too:

The channel's active inventory management is expected to continue. However, new launches are expected to partially offset volume headwinds. We expect adjusted EBITDA of $1.30 billion to $1.40 billion, down approximately 4 percent at the midpoint versus 2022 results. We are expecting cost tailwinds and improved mix from new products and launches to continue during the second half of 2023, which should mostly offset anticipated volume headwinds. 

An adjusted EBITDA decline of only 4 percent in latter 2023 is certainly better than the 48 percent plunge in adjusted EBITDA that FMC reported for the second quarter. But those projections do depend on several factors going FMC’s way: lower inflation (we assume that’s what “cost tailwinds” means) and new product launches that win favor with customers. 

Maybe those things will happen, but financial analysts will want to keep a sharp memory about these predictions so you can follow up with FMC executives when third quarter rolls around. So yet again, read the footnotes, people! They are brimming with detail you’ll want to know.

Meanwhile, in Microchips

Qualcomm ($QCOM) also reported a rather vertiginous plunge in revenue: $8.45 billion in the second quarter of this year, down 22.7 percent from $10.93 billion one year ago. Operating income plummeted 59.2 percent to $1.82 billion, net income down 51.6 percent to $1.8 billion.

Why so down? The gist of it, as described in Qualcomm’s MD&A, is overall “weakness in the macroeconomic environment.” Consumers and companies are buying fewer pieces of technology (smart phones especially), and those items they do buy, they’re drawing down from retailers’ existing inventory — all of which means depressed demand for new chips from Qualcomm. 

Even worse, Qualcomm reported sales declines in every significant operating segment it has. See Figure 2, below.

Will the situation for Qualcomm improve in coming quarters, as FMC expects for its business? Perhaps not. In another footnote discussing Qualcomm’s “Other” line of cost and revenue, the company discussed how it had spent $285 million on restructuring costs over the prior nine months. (Qualcomm’s fiscal year ends on Sept. 30.)

The good news: that $285 million seems to be the bulk of what Qualcomm had expected to spend on its current restructuring plan, announced earlier in fiscal 2023. 

The bad news: Qualcomm is now preparing another restructuring plan, “to consist largely of workforce reductions, and in connection with any such actions we would expect to incur significant additional restructuring charges, a substantial portion of which we expect to incur in the fourth quarter of fiscal 2023. We currently anticipate these additional actions to be substantially completed in the first half of fiscal 2024.”

So the drumbeat goes on. It’s just not a pleasant dance. 

Tuesday, August 1, 2023

Second-quarter earnings reports continue to arrive, and now we’re starting to see some of the large consumer products manufacturers file their statements. That gives us the opportunity to ask an important question.

Total revenue for these companies is generally up, which is nice — but what about the volume of sales? 

Volume refers to the actual number of items a consumer manufacturer ships, rather than the price of those items. It can be an important indicator of the company’s overall health.  

For example, if a consumer goods company reports that revenue is up 2 percent because the company raised prices, volume declined by 3 percent at the same time because consumers are buying fewer of those more expensive items, that’s worrisome. It could mean that consumers have less income to spend at the store, and higher prices will only carry that company so far. At some point it must start moving more units of whatever it makes. 

The above scenario is no hypothetical, by the way; it’s exactly what Procter & Gamble ($PG) reported in its earnings statement filed on July 28

Specifically, P&G reported net sales of $82 billion for the fiscal year that ended June 30, an increase of 2 percent from the prior year. Organic sales grew 7 percent, which also sounds like good news. Except, that increase in organic sales revenue came from higher prices and a “favorable mix” of goods sold, partially offset by a 3 percent decrease in shipment volumes.

Translation: Procter & Gamble had higher sales because it raised prices on Pampers, Tide, Head & Shoulders, and all the other stuff the company makes, and consumers responded by buying fewer of those more expensive things. 

Figure 1, below, tells the tale, neatly sorted by P&G’s major product categories. That 2 percent increase in net sales is on the far right, while the 3 percent decline in volume is on the far left. 

Next question for financial analysts: How do those volume figures track over time? Calcbench can help you there, too, with our Show Tag History feature. We used it to track P&G’s sales volume disclosures for the last several quarters. 

Yikes, that trend is not good. Clearly it follows the rise in inflation in 2022, apparently lagging about one quarter behind the worst inflation numbers (which were in mid-2022). P&G has seen smaller volume declines since then; the question now is whether sales volume will actually turn positive in latter 2023 as inflation appears to be fading. 

For the record, P&G executives know all this and see the urgency here. One recent Wall Street Journal article spotlighted P&G, Colgate-Palmolive ($CL), Kimberly-Clark ($KMB), and a few other consumer products manufacturers. Executives at those companies have stressed on earnings calls that higher sales volumes are a top priority for the rest of the year. 

Sale volume is a widespread disclosure these days, typically reported in the earnings release and the Management Discussion & Analysis section of the 10-Q. Look for it there, and use our Show Tag History feature to track volume disclosures over time.

Friday, July 28, 2023

So remember that banking crisis that happened in the first quarter of this year? 

No? Well, that’s fine; apparently nobody else does either. The supposed flood of customer deposits from mid-sized banks to large banks looks like it could be over. 

At least, that seems to be the early message from the largest banks themselves, who reported a slight decline in cash deposits from first to second quarter of this year. We pulled the numbers for Bank of America ($BAC), Citigroup ($C), JPMorgan Chase ($JMP), and Wells Fargo ($WFC). Collectively, the amount of cash deposits they held at the end of Q2 2023 fell a barely perceptible 0.57 percent — but fall it did, from $6.98 trillion to $6.94 trillion.

Table 1, below, tells the tale. Indeed, we were somewhat surprised to see that total deposits for the big four have actually fallen for four consecutive quarters. They went from $7.05 trillion last fall to $6.94 trillion today, a drop of 1.57 percent. 

We’re not sure why this is. Perhaps inflation’s sting made people withdraw money from their savings accounts; perhaps higher interest rates made sophisticated investors shift their cash from savings accounts to better-paying money market accounts or treasury bonds. 

We don’t yet have sufficient Q2 reports from mid-sized banks to see whether their deposits are increasing, which would indicate that customers have quit panicking about the stability of their banks. Stay tuned for that analysis in coming weeks as those quarterly reports arrive. 

It’s also important to stress that the Q2 2023 numbers above come from the banks’ earnings releases. Those documents are certainly informative, but they don’t have nearly as much data as a full 10-Q quarterly report. The 10-Q will also have details about held-to-market securities, under-performing loans, and various other clues to the banking system’s overall health. 

In other words, there is lots more financial analysis to be done on the banking sector in weeks to come. Calcbench will have everything you need along the way.

Wednesday, July 26, 2023

Microsoft and Google both filed their latest quarterly reports on Tuesday, and both reported generally good numbers powering along as usual. Calcbench decided to take a look at one specific line of revenue important to both businesses: cloud computing.

Figure 1, below, compares quarterly cloud computing for the three giants in this sector: Microsoft, Google, and The winner seems to be Microsoft ($MSFT).  

We cannot be entirely sure of this because Amazon ($AMZN) has not yet filed its Q2 earnings report. But Microsoft is several billion dollars ahead of Amazon, and light years beyond Google ($GOOG). 

Microsoft has seen its cloud revenue nearly double in recent years, from $12.3 billion in Q1 2020 to $24 billion in Q2 2023. Quarter-over-quarter revenue is a bit more zig-zaggy than Google and Amazon, but overall revenue for Microsoft rose 96 percent. 

Amazon’s AWS revenue went from $10.22 billion to $21.35 billion in Q1 2023, an increase of 109 percent; but Amazon started from a lower base than Microsoft and hasn’t caught up yet. Maybe that will change if Amazon reports a huge AWS revenue number this quarter. We’ll have to wait and see. 

Meanwhile, Google’s cloud revenue went from $2.77 billion to $8.03 billion, an increase of 189 percent. That’s a growth rate far more brisk than Microsoft or Amazon, but in absolute dollars Google still trails well behind either of its peers. 

Monday, July 24, 2023

Tesla filed its latest quarterly report on Monday morning — and since we couldn’t schedule something more fun to do like a root canal, let’s take a look at what the world’s most exasperating electric vehicle company had to say.

We call Tesla ($TSLA) exasperating because it is one of the very few publicly traded companies that makes its reports difficult to analyze. For example, the company files its earnings releases as image files rather than as searchable text. That is perfectly legal, but it means financial analysts must squint at every line of that image and jot down important data by hand. Really, Elon? 

The good news is that all GAAP disclosures in the full quarterly report are filed as tagged and searchable text (as required by law), so Calcbench can pull those numbers. We decided to begin with total revenue, which clocked in this quarter at $24.9 billion, up an impressive 47.2 percent from $16.9 billion in the year-ago period.

Beyond that headline, however, we looked at Tesla revenue by geographic segment. Tesla reports sales in the United States, China, and rest of the world; using our Show Tag History feature, we tracked quarterly revenue growth in each region from the start of 2020. See Figure 1, below. 

That’s some mighty sharp and steady growth in the U.S. region (blue line) with rest of the world (yellow line) following a similar trajectory except for one dip in mid-2022. China (red line) is poking along at a somewhat lower pace. 

We then reframed those numbers as a column chart, complete with trend lines for each region. See Figure 2, below. 

This is a much better understanding of the full picture. The trend line for the U.S. region had clearly been much higher than either China or the rest of the world, but look at those last two quarters of U.S. sales. They’re down from the end of 2022 and stuck in neutral. 

One could speculate that this is partly due to pricing competition, since Tesla has been cutting prices to remain competitive with other automakers now racing into the EV market. In theory, Tesla could preserve its dominance in the market through lower prices and greater unit sales, which preserves market share. 

Unfortunately this brings us back to Tesla’s frustrating disclosure habits. The numbers that would answer that question — unit sales, unit sales by region, average profit per unit, and so forth — aren’t GAAP-required disclosures, so they aren’t easy to find in Tesla’s reports. You need to look for them manually. 

Adventures in Manual Research

For example, Tesla does disclose in the Q2 report that it has produced 920,508 consumer vehicles through the first half of this year (Page 24 of the report, second paragraph of Management Discussion & Analysis). Tesla also said in its first-quarter report that it produced 440,808 consumer vehicles. Do the math and that means Tesla produced 479,700 consumer vehicles in Q2. Figure 3, below, is the comparison of the MD&A disclosures. 

On the other hand, Tesla delivered 889,015 vehicles through the first half of the year, which (using the same manual math process) breaks down to 422,875 and 466,140 vehicles in the first and second quarters, respectively. 

Could we therefore say that if $20.42 billion in auto sales in Q2 (which it did), spread across 466,140 vehicle deliveries, that means the average vehicle sold for $43,804? Because that would be a decline in average vehicle revenue compared to Q1 2023, when Tesla reported $18.88 billion in auto sales and 422,875 vehicle deliveries. 

Mathematically those calculations are correct; we’re just not sure they’re an entirely fair representation of Tesla’s economic activity because Tesla is so cagey with what it discloses. 

For example, are vehicle deliveries the right metric to use, or should it be vehicles produced? Plus, historically Tesla has required customers to make a small deposit ($250 when one of our folks here bought one 18 months ago) upon sale agreement, and then you pay the rest upon delivery. Where does that $250 deposit land in the quarterly reports? It’s only about $105 million or so ($250 multiplied by 422,000 deliveries), but you have to report it somewhere. 

You get the picture. Financial analysts trying to identify the most important metrics from Tesla can make a try at the task, but it won’t be easy. It involves lots of flipping back and forth between quarterly reports, earnings releases, whatever notes you scribble on paper, and any math you do in Excel. 

Regardless, it can be done, and Calcbench does have the tools to help you do it.

Delta Air Lines ($DAL) filed a second-quarter earnings release last week positively brimming with enthusiasm. Delta is typically the first of the major U.S. airlines to file every quarter, so we thought we’d catch up on the airline sector today before the other majors follow with their Q2 reports later this month.

The most important non-GAAP metric the airlines report is TRASM, short-hand for total revenue per available seat mile. It measures efficiency of an airline, and you calculate it by dividing operating income into available seat miles. TRASM is typically reported in cents; the higher the number, the more revenue the airline is wringing from each seat on its airplanes flying through the sky.

Obviously the covid-19 pandemic sent TRASM plummeting in 2020, and airlines have been marching back to pre-pandemic levels ever since. We used our Interactive Disclosure tool to dig up the details. Figure 1, below, shows how TRASM has fluctuated for five major airlines over the last four years.

All five airlines saw predictable declines in 2020, followed by a steadily accelerating return to normal until 2022. That’s when inflation started causing airfare prices to spike, so we see that pop at the beginning of 2022; followed by a clearly visible decline in latter 2022, perhaps due to consumers and business customers putting some flight plans on hold because prices had risen so high and so swiftly.

On the other hand, regardless of the narrative about the whole industry, Delta (the blue line in Figure 1) is clearly outpacing its peers in TRASM, even through Q1 2023.

TRASM, however, only brings your analysis so far. Airlines also report CASM, cost per available seat mile. Figure 2, below, charts TRASM and CASM for Delta from the start of 2019 through the Q2 2023 numbers reported last week.

Look at that divergence in the most recent quarter! Revenue clearly pulling away from cost (good), with revenue rising and cost falling. No wonder CEO Ed Bastian sounded downright giddy in his most recent earnings call. Delta raised its earnings guidance for the rest of the year and reaffirmed billions in free cash flow that it can use for further investments, hiring employees, share buybacks, or whatever else might come to mind.

What will other airlines report for Q2? We eagerly await the arrival of their filings.

Sunday, July 9, 2023

The U.S. economy has long been rumored to be at the brink of recession — except that it hasn’t actually entered recession yet, and nobody knows whether it will, so everyone is turning over every piece of data they can find to dig up one more morsel of insight about what might happen next.

To that end, we submit a quick analysis of inventory values.

After all, if consumers aren’t buying anything— or if they’re spending more money to buy the same amount of goods, thanks to inflation — then inventory should start to pile up on the balance sheet, right? Or maybe it’s the other way around: if consumer sentiment is strong, then businesses stock up on inventory to meet heightened demand rather than get caught flat-footed. That is precisely what happened to lots of retailers in 2021, when consumers showed up with cash in hand and retailers hadn’t obtained enough inventory during 2020.

We offer two charts to shed light on the situation.

Figure 1, below, shows total quarterly inventory values for all firms with $250 million or more in annual revenue since the start of 2019.

Notice how total inventory values trended down in early 2020 as the pandemic struck, and then edged upward only slightly through most of 2021. That’s when many companies realized they should have ordered more goods several quarters ago, and when supply chains finally started unknotting — so inventory levels rose from Q4 2021 through 2022. Even Q1 2023 is appreciably higher than most quarters that don’t have a “4” in them, which coincides with the holiday season.

Except, inventory alone doesn’t convey too much information. So Figure 2 shows the average inventory as a percentage of average sales of that same 2019-2023 time period. Actual numbers are the jagged blue line; the overall trend is the red line.

Our thinking is that if inventory suddenly started piling up on the balance sheet, it would become a larger percentage of all assets. The red trend line shows that inventory as a percentage of total assets is rising, but “suddenly” doesn’t seem like an appropriate adverb to describe things. That upward slope is so gentle we had to squint to see it.

Also notable: the only sudden jump in this ratio happened in Q3 2022. That was when inflation was raging away at nearly 10 percent. The Federal Reserve hasn’t tamed inflation yet, but the latest numbers now suggest annual inflation is closer to 4 percent than 8 or 10 percent. So perhaps that spike in Q3 2022 was a collective pause by consumers as inflation squeezed them.

Will matters ease now? Financial analysts should know more soon, as Q2 2023 financial results start arriving — the first this week, and many more by the end of August, including large retailers who report on a July 31 quarter end. Stay tuned.

Thursday, July 6, 2023

Not long ago the Securities and Exchange Commission gave a rap on the knuckles to View Inc. ($VIEW) for poor accounting of its product warranties; View had reported warranty liabilities in the range of $22 million to $25 million, when its actual warranty liabilities were closer to $50 million.

Hey! Product warranty disclosures — we’ve got that!

Warranty disclosures are one of those niche accounting items that can bite a company (or financial analyst) in the rear if you’re not paying attention to them. The amount for such warranties is typically reported as a footnote unto itself, although in some instances the disclosure might be tucked away in another footnote about financial operations or Management Discussion & Analysis or some such thing.

Or you can use the Calcbench database super powers, where we track warranty disclosures for you!

First let’s discuss what happened at View, to give you a sense of why warranties can be important. As described in its settlement order with the SEC, View makes those “smart windows” that get progressively darker tint as sunlight strikes them. In 2019, View discovered a manufacturing defect in its windows and knew it had to replace existing windows it had already sold to customers.

View had promised customers a 10-year warranty on its windows, so this was going to cost the company some serious coin. That wasn’t a big deal unto itself, however, because — like any good company offering product warranties — View had systematically accrued money over the years to cover those potential liabilities. By early 2021, View had accrued and disclosed an estimated warranty liability of $22 million to $25 million.

Except, those accrued liabilities only covered the costs of manufacturing replacement windows. When the window scandal broke (no pun intended), View management decided it would also cover the cost of shipping and installing replacement windows — and View hadn’t accrued liabilities for that extra cost.

So in reality, View’s product warranty liabilities were $48 million to $53 million. Because the company hadn’t accounted for those extra costs, it had to restate financials for 2021, which is about as pleasant as passing a kidney stone. (View also came clean to the SEC about its poor accounting controls and agreed to improve things, so it won a cease-and-desist order from the SEC but didn’t have to pay any additional fine.)

Now back to Calcbench and our tracking of warranty disclosures.

We Guarantee It

One place to find warranty disclosures is our Multi-Company Search page. Just choose whatever sample group you want to research, and then select “Warranty Accrual” from the standard disclosure metrics field on the left side of your screen. For example, we searched warranty accruals for the S&P 500 in 2022; the results are in Figure 1, below.

From there, you could then hold your mouse over any specific disclosure to use our Nobel Prize-winning Trace feature, to trace that warranty disclosure amount back to the original disclosure in the actual footnote.

You can also search individual companies on our Interactive Disclosures page by typing the word “warranties” into the text search field at the top of the page. That will whisk you away to whatever footnote contains warranty disclosures. For example, Figure 2, below, shows the warranty disclosure for View itself in 2021.

Remember, however, that numbers alone aren’t necessarily enough for a financial analyst to reach proper conclusions. View had already been making warranty accruals for years when its defect came to light, and then management made a policy choice (to cover shipping and installation costs too) that left the warranty accruals insufficient.

Astute financial analysts would have asked about that: “View, you just suffered a major warranty issue. Are you sure that the accruals you previously set aside will cover all expected costs?”

Most of the time, the answer will be yes. In fact, most of the time, the products will be working just fine and warranty accruals will never be a point of concern. But for those rare occasions when warranty accruals do matter, you need to be prepared with the right questions and the right data.

The questions are your responsibility. The data, we have for you.

Tuesday, June 27, 2023

As we all prepare for Q2 2023 filings, which will start to arrive in mid-July, let’s pause to remember there’s more to financial analysis than tracking revenue, net income, assets, and other standard-fare financial disclosures.

There are a host of other, industry-specific performance metrics, too; and Calcbench can help you track them as well. Let’s start with an example from the retail sector.

You might recall that last year we had a post on the inventory-to-sales ratio, a number that gives analysts a sense of the pressure a retailer might face to cut prices. Essentially, as that ratio rises, retailers have more goods they need to sell. That pressures them to cut prices, so they can move the inventory off store shelves and make room for new goods.

So we wondered: What is a “normal” inventory-to-sales ratio for various retailers? And how has that ratio changed for various retailers over the last 18 months or so.

We were able to compile that information easily enough using our Multi-Company Search page. Just define the list of retailers you want to track, and then track sales and inventory for those firms using our standardized search field. The result will look something like Figure 1, below.

From there, you can export the data into a spreadsheet and perform some basic math to calculate the inventory-to-sales ratio. For example, in our sample of eight firms above, Walmart ($WMT) has the best ratio by far — 37.4 percent for Q1 2023, while all others were anywhere from 50 to 78 percent.

Suppose, however, that you also want to see how those ratios trend over time. That’s a straightforward exercise in Calcbench too.

Go back to Figure 1, above. See that small yellow square in the corner of the Revenue and Inventory columns? Click on that, and you get a pull-down menu that includes a “See previous period” option. You can use that to pull up several periods of the disclosure in question. We did so, pulling up revenue and inventory numbers for all eight firms, for the last five quarters. Then we charted the inventory-to-sales ratios over time.

Figure 2, below, shows some of our results. As you can see, those ratios generally spiked last summer (when inflation was high and people were closing their wallets), before plunging in Q4 (when retailers were desperate to make annual sales quotas, so they slashed prices to get those wallets back open.

Then again, not all retailers follow this pattern. Figure 3, below, shows inventory-to-sale ratio over time specifically for Walmart, Dollar General ($DG), and Dollar Tree ($DLTR).

As one can see, Walmart consistently has a rock-bottom ratio relative to the other retailers in our sample. We were also intrigued to see that while Dollar Tree and Dollar General do have the highest ratios in our group, their ratios do track each other fairly closely. Presumably that’s because they are direct competitors, selling the same low-cost stuff all year long.

Our point with this exercise isn’t to draw any conclusions about these specific retailers; they’re a motley bunch with different operations and different audiences. We simply want to point out that one can derive a wide range of insights by pulling some basic disclosures and doing a bit of math on those numbers.

Of course, Calcbench also tracks a bundle of other performance metrics relevant to the retail sector, including:

  • Percent change in comparable store sales
  • Number of stores
  • Sales by channel (in-store versus online)
  • Comparable sales by channel
  • Average “ticket” (that is, average amount paid at checkout)
  • Sales per retail square foot
  • Number of customer visits

Not all retailers report all those metrics, but most retailers report at least some of the above or other metrics. Your best bet is to scan the earnings release closely, see which metrics the company discloses, and then track that over time by holding your cursor over the number and using the “See tag history” feature that pops up.

We’ll take a look at other industry-specific disclosures over the next few weeks, ahead of Q2 earnings reports. Stay tuned!

Tuesday, June 20, 2023

Today we conclude our series on non-GAAP adjustments to net income with our third and final report on the subject, and one sure to be popular with financial analysts who love gossip.

Our list of the biggest adjusters we found!

As previously discussed on this blog, Calcbench teamed up with an elite squad of accounting students at Suffolk University to analyze the non-GAAP adjustments to net income made by 200 randomly selected companies in the S&P 500. Altogether, we found 1,188 individual reconciling items with a total value of almost $219 billion. Companies averaged 5.9 reconciling items in 2022, and average adjusted non-GAAP net income was $3.97 billion, 38 percent higher than average GAAP net income of $2.87 billion.

But who cares about averages, right? Let’s get to specific names of which companies adjusted by how much.

Table 1, below, shows the 10 firms in our sample with the largest total adjustments to net income, alongside what that GAAP-approved net income actually was.

As one can see, these are very large companies that made very large adjustments, for a variety of reasons. For example, AT&T’s ($T) $26.299 billion in adjustments comes almost entirely from one massive goodwill impairment charge of $24.8 billion, mostly taken against its Latin America operations. On the other hand, Pfizer’s ($PFE) adjustments of $6.346 billion were scattered across categories such as amortization of intangible assets, acquisition costs, restructuring, tax provisions, and the ever-popular “other” category.

Table 1 is only a small portion of our complete list of big adjusters. You can download the full Top 50 list from our Research Page and then conduct a close analysis of whatever companies are on your watch list.

Also remember that we published yet another non-GAAP report last week to examine non-GAAP adjustments by industry. You might even want to cobble that industry report and this Top 50 report together to derive extra insight.

For example, if one of the companies you follow is on our Top 50 list, you might then use our Interactive Disclosure database to find the exact breakdown of its non-GAAP adjustments, and then compare that list against what seems to be the norm for its industry. If your big adjuster’s disclosures seem wildly out of whack for its industry norms, that might be something to ask about on the next conference call.

In other words, if you have non-GAAP on your mind, Calcbench has all the data you need to conduct whatever analysis you want. We’re also happy to help with more detailed questions or even yet more non-GAAP industry analyses, if you have a good idea. Drop us a line at any time and let us know what’s on your mind.

Thursday, June 15, 2023

Today we continue unpacking the findings from the 2022 Non-GAAP Reconciliations Report that Calcbench released last week, which examines the non-GAAP adjustments to net income that 200 companies in the S&P 500 had made to their annual financial reports.

The primary findings from that report were that non-GAAP adjustments to net income are growing larger (an average of $184 million, up 53 percent from the prior year); and that in the vast majority of cases those adjustments push non-GAAP net income higher than “traditional,” GAAP-approved net income.

Well, what about those few instances when non-GAAP net income is lower than GAAP net income? How often does that happen, and why?

As a technical matter, it happens because SEC rules say so. A company can report a wide range of non-GAAP adjustments, but it must report those adjustments consistently from one period to the next.

That is, a company can’t use a non-GAAP adjustment for one filing period that pushes non-GAAP net income higher, and then discard that same adjustment in subsequent periods because new totals now make that same non-GAAP line-item lower. Your earnings release needs to stick to its non-GAAP guns period after period, even if you sometimes end up shooting yourself in the foot.

So what does that look like in the real world? Our non-GAAP report offers some insights.

The Downward Dog Seldom Barks

First, downward adjustments are not common. Our 2022 report examined the non-GAAP disclosures of 200 companies in the S&P 500. Figure 1, below, is a scatterplot that shows which non-GAAP net income disclosures were higher or lower than GAAP net income, and to what extent. As you can see, most non-GAAP net income disclosures were zero to 50 percent higher than net income, although a few outliers had adjusted non-GAAP net income that was 400 percent or higher larger than GAAP net income.

More precisely, 83 percent of all companies adjusted non-GAAP net income upward, versus only 17 percent that adjusted non-GAAP net income downward. Among those 17 percent who did adjust downward, almost all of them were with 50 percent of GAAP net income. We had far fewer negative outliers than positive ones.

That said, one can easily find those downward dogs using Calcbench archives. For example, we visited our Multi-Company Search Page; searched the S&P 500 for companies that reported both net income and non-GAAP net income; and measured the difference between the two. Below is a table of the 10 firms with the biggest non-GAAP downward revisions for 2022. (Please note, the companies on this table are not necessarily also in our 2022 Non-GAAP Reconciliation Report.)

Next question: What, specifically, might force a company to report such large downward revisions? Let’s look at an example from our table above.

Marathon Petroleum

Marathon Petroleum ($MPC) is one interesting example because it has reported downward non-GAAP net income for two years in a row. You can find the details (for Marathon or any other company) by going to Calcbench’s Interactive Disclosures page and pulling up a company’s earnings release. If that company reports non-GAAP anything, it must reconcile that non-GAAP metric back to its closest GAAP counterpart.

Table 2, below, shows how Marathon went from larger GAAP net income to lower non-GAAP net income.

Short answer: Marathon has been selling lots of assets, including its Speedway gas station chain, which netted the company $11.7 billion in 2021 and another $60 million in 2022. A huge, one-time gain from an asset sale is exactly the sort of item that deserves special attention and non-GAAP treatment, but it also pushes net income down.

Las Vegas Sands

Another example of downward non-GAAP net income comes from Las Vegas Sands ($LVS). Sands reported net income of $1.83 billion for 2022 — and then through a series of non-GAAP adjustments ended up with a non-GAAP loss of $918 million. How’d that happen? See Table 3, below.

In this case the answer is clear: a $2.9 billion loss from discontinued operations, plus assorted other small adjustments around the edges. Perhaps that shouldn’t come as a surprise; as noted in last week’s post about non-GAAP adjustments, gains and losses from operations were the single most common category of adjustment we found.

Don’t forget that we also now have a second report on non-GAAP adjustments, comparing the adjustments made across various industry sectors. We’ll have a third one soon examining large adjustments at individual companies, and more analysis to come after that.

If you have specific non-GAAP issues you’d like us to explore, drop us an email at any time!

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