Last month we had a post examining the evolving revenue picture at Citigroup ($C), and specifically how the bank’s net interest income vaulted upward this year while its non-interest income wilted like sauteed spinach.
This time around we decided to widen the lens. We performed the same exercise for 10 large consumer banks in the United States, tracking net interest income vs. non-interest income for the last 15 quarters. Figure 1, below, is the result.
As you can see, net income started to soar for these 10 banks at the start of the year. Non-interest income actually started drifting downward at the beginning of 2021, presumably after a flood of home refinancing deals that happened in late 2020 as interest rates were at rock-bottom prices.
How will that spread continue in 2023? Good question. Federal Reserve chairman Jerome Powell said on Wednesday that the Fed might decelerate the pace of its rate hikes, from 0.75 percent per meeting to 0.5 percent — but rate increases will continue, even at that potentially slower pace. Meanwhile, non-interest income is going down the tubes because home sales and mortgage refinancings are at a standstill; that’s not likely to change any time soon.
We’ll just have to wait and see what the next chart will look like.
(PS. The banks in our sample were Bank of America, Capital One, Citigroup, Citizens Financial, Fifth Third Bancorp, JP Morgan, PNC Financial, Truist, US Bancorp, and Wells Fargo.)
We interrupt our usual exploration of weighty financial reporting issues for a subject even more important, which we’re sure is on everyone’s mind these days.
Which companies have something to say about the World Cup?
Just for kicks, so to speak, we pulled up the third-quarter filings of all companies with $500 million or more in annual revenue, and searched “World Cup” in their footnote disclosures. Who would those companies be? Why would they have something to say about the World Cup? Did anyone have some sort of victory default swap against Argentina? Because wow, they really blew it with Saudi Arabia in the opening round.
We found a total of eight companies that mentioned the World Cup in one disclosure or another. A recap is below.
Comcast Corp. ($CMCSA) reported that the adjusted EBITDA for its Sky TV segment fell 27.9 percent compared to the year-earlier quarter, driven by higher operating costs for— you guessed it— broadcasting games related to the World Cup:
The increase in operating expenses primarily reflects higher sports programming costs due to the timing of sporting events, including a shift of certain football matches to the third quarter in advance of the 2022 FIFA World Cup, which will occur in the fourth quarter of 2022…
This raises an interesting point. Normally the World Cup is held over the summer, which means any costs and revenues derived from the event would be reported in the third quarter of that year. This time around, the World Cup is being held in the fourth quarter because Qatar is too hot for summer games. So that could lead to some unusual fourth-quarter reporting once those filings start arriving early next year.
Endeavor Group Holdings ($EDR), a sports marketing company, made much the same point in its own earnings release. The company’s Events, Experiences & Rights segment reported revenue of $440.6 million for the quarter, down 1 percent from the year-earlier period — again, thanks to the odd timing of various sporting events:
The decrease was primarily due to certain media rights deals for events that do not occur annually, including the Ryder Cup, the UEFA Euro Championship and the CONCACAF World Cup qualifying games, as well as the timing of certain events that took place earlier in 2022 than the prior year.
We also have Mercadolibre ($MELI), an e-commerce business in Latin America that sounded so upbeat in its latest earnings release you almost want management to take a Xanax:
After a successful third quarter that delivered strong growth and profitability, our attention is now focused on executing well in the fourth quarter, which brings Black Friday, the FIFA World Cup and Christmas back onto the retail calendar. We remain as optimistic as ever about the fundamentals of our business… On our mission to democratize Latin America's commerce and financial services markets, the best is yet to come.
For the record, quarterly revenue rose 44.8 percent from the year-ago period, and net income was up 35.8 percent. Far be it from us to judge the company’s exuberance with numbers like that.
Visa ($V) reported higher marketing expenses for the quarter, “due to higher spending in various campaigns, including the FIFA World Cup 2022 and the Olympic and Paralympic Winter Games Beijing 2022, and client marketing.” Then the company even included line-item detail on marketing expenses:
$1.336 billion in marketing expenses for Q3, up 17.6 percent from the year-earlier period. How much of that $200 million increase was specifically due to the World Cup? We don’t know, but the event is part of that increase somehow.
You get the gist of it. We don’t have a lot of disclosures in the great wide world of SEC filings, but global entertainment, sports, and consumer finance businesses are all spending big on the World Cup. Here’s hoping for a drama-filled series so there’s lots more to discuss — at the water cooler, and in Q4 filings once those arrive.
Faithful readers of the Calcbench blog might recall that back in May, we wrote a post exploring whether inflation might be about to turn downward. Specifically, we looked at “the bullwhip effect” among large retailers — defined as a rising ratio of inventory to sales, which theoretically would be a harbinger of prices going downward.
Six months later, overall inflation has clearly not gone down, more due to high food, energy, and housing costs than anything else. Still, we wanted to circle back to the 10 large retailers we examined in May, to see whether the bullwhip finally is cracking their backsides.
Figure 1, below, shows the ratio of inventory to sales for all 10 of those retailers combined, from the start of 2019 through Q3 2022. You can clearly see how the ratio dropped sharply in 2020 and stayed low into mid-2021, which coincides with when the supply chain went haywire and we saw goods shortages all over the place.
The red trend line, however, is only a gentle upward slope; and recent inventory-to-sales ratios aren’t terribly higher than they were pre-pandemic. For example, the Q2 2022 ratio was 43.6 percent, slightly lower than the 44.7 percent seen in Q3-2019.
That might lull some people into believing the retail sector is just returning to historical norms, and perhaps on longer time horizons that’s true. But for kicks, we ran the same analysis starting from Q1 2020, excluding those pre-pandemic norms. Figure 2, below, is the result.
Wow. Suddenly the trend line looks much steeper, and the quarterly numbers much more grim. No wonder some large retailers have begun their Black Friday sales before Thanksgiving, promising deep discounts all over the place.
Several questions then arise.
We don’t know the answers to those questions, but we do have the data to help you answer them.
Finally, for those interested in the 10 specific retailers we studied, Figure 3, below, shows the change in inventory levels for each one from Q2 to Q3 of this year.
The higher the change, the more inventory the retailer has clogging up shelves and warehouses. That could presage price cuts, which could presage lower revenues once firms start reporting Q4 early next year. We’ll see.
Dentsply Sirona, the world’s largest supplier of dental equipment, filed its latest quarterly report this week. That gives us an excellent opportunity to review how Calcbench can help you study financial restatements — because Dentsply had plenty of facts it had to restate.
For those who don’t know the history, Dentsply Sirona ($XRAY) disclosed back in May that it had begun an investigation into financial improprieties involving several current and former employees. That to an eye-popping side story about Dentsply’s former CFO, Jorge Gomez, who got fired one day into his new job as CFO of Moderna when Dentsply disclosed its investigation — but we digress. The news here is what Dentsply said in its latest quarterly report, filed on Monday.
First, management gave a summary of its investigation. In the company’s North America operations, the investigation concluded that several former executives, including the former CEO and the former CFO (Gomez, the one fired from Moderna) “did not maintain and promote an appropriate control environment focused on compliance in areas of the company’s business, nor did they sufficiently promote, monitor or enforce adherence to [Dentsply’s] Code of Ethics and Business Conduct.”
The investigation also concluded that executives in Dentsply’s China operations committed intentional wrongdoing by misleading the company’s local accounting teams, and then “lacking truthfulness” in providing information when Dentsply’s board launched its investigation.
That’s the investigation, anyway. Dentsply also restated results for the three- and nine-month periods ending Sept. 30, 2021; and for the entire fiscal year that ended on Dec. 31, 2021.
One could find those restated details by digging through Dentsply Sirona’s footnote disclosures — but who wants to do that? It’s painstaking and causes eyestrain. Calcbench devised a simpler way.
To find restated financial disclosures, start by looking at the income statement (or balance sheet, as the case may be) using our Company-in-Detail page. Restated financial disclosures can be found using the “Highlight Revisions” tab on the right side of your screen.
For example, Figure 1, below, shows Dentsply Sirona’s disclosures after they have been restated, but before using our Highlight Revisions feature to see exactly what those restatements were. (We also circled the Highlight Revisions tab in blue.)
Figure 2, below, shows what happens when you do activate the Highlight Revisions tab. All line items that were revised are highlighted for easy follow-up.
That’s a lot of revised facts, but then, Dentsply had a rather far-reaching restatement. Other companies might revise only a few facts, and if a company doesn’t need to revise anything then the Highlight Revisions tab won’t work at all because there’s nothing to see.
You’ll also notice that every highlighted revision has a plus sign next to it. Click on that sign and a box will appear that explains the timing and the size of the revision. Figure 3, below, shows the result when we clicked on the net sales disclosure for Q3 2021.
As you can see from the box, Denstply originally reported $1.069 billion for the quarter back in November 2021. Now, after the investigation and restatement, that number has been cut to $1.04 billion.
Just another way that Calcbench tries to track all financial disclosures in the known universe, and then present them to you in an easy-to-use, easy-to-digest format. Much less painful than a root canal!
Calcbench is always game to analyze an impairment charge, and this week cloud services provider Rackspace Technology ($RXT) served up a good one. Let’s take a tour of what the company had to say.
First, the company reported underwhelming numbers generally. Revenue for the third quarter was $787.6 million, up a rather meager 3.3 percent from the year-earlier period. Meanwhile, cost of revenue rose 9.4 percent, meaning gross profit fell 10.6 percent to $207.1 million.
For comparison purposes, cloud services rival Amazon.com ($AMZN) saw revenue in Amazon Web Services rise by 27.4 percent in the same period; and Microsoft ($MSFT) saw revenue rise 20.2 percent in its Intelligent Cloud division. So Rackspace has been battling some big, fierce competitors, and not doing so well.
Anyway, back to the impairment charge. In its Company Overview disclosures, Rackspace described how the company “experienced a sustained decline in our stock price” — about 37 percent, from $7.14 in July to $4.46 by late August, and that’s down from $16.50 at the start of the year).
That prolonged decline triggered an impairment review, and Rackspace ended up declaring several individual impairment charges that altogether were $436.2 million:
As we mentioned, the total for those impairments is $463.2 million, which contributed to an overall operating loss of $476.7 million and a total net loss of $511.7 million. We get it, most of that loss is an ephemeral, one-time thing due to the goodwill impairment charge — but that’s still a lot of red ink.
Were those impairment charges warranted? For a sense of that, we looked at Rackspace’s segment reporting. See Figure 1, below.
Both the Multicloud Services and the OpenStack Public Cloud units saw declines in gross profit, OpenStack particularly so. Revenue was at least growing for Multicloud, which is more than we can say for OpenStack.
We were also intrigued by one more item Rackspace disclosed as a Subsequent Event. Emphasis is our own:
In October 2022, we announced our intention to sell our current corporate headquarters facility located in Windcrest, Texas and relocate our corporate headquarters to leased office space in San Antonio, Texas. Due to current real estate market conditions and the unique nature of the facility, the ultimate sale price of the property will likely be below its current net book value resulting in the recognition of an impairment charge or a loss on the sale, the amount of which could be material.
That “current real estate market conditions” raises an interesting point. Lots of businesses try to cut costs by selling real estate they own and then leasing space elsewhere. With interest rates so high, however, real estate values are starting to fall. Rackspace might not be the last one to find that the value of property it owns isn’t what people were expecting — and that could lead to more impairments in the future.
Calcbench has written about inflation numerous times over the course of 2022. Today we want to take more of a big-picture view: how is inflation affecting corporate revenue, expense, and earnings across a large population of companies?
After all, inflation drives up costs — but as companies pass along those higher costs to customers (which they’ve done with increasing frequency in recent months), then inflation should also push up revenue, right? And would that also give companies more ability to protect earnings?
To answer such questions, we did a quick review of the collective performance of roughly 1,700 non-financial firms. Right now the picture is decidedly mixed.
Figure 1, below, is that picture. It shows the year-over-year change in 12 common financial metrics, comparing Q3 2021 to Q3 2022. It shows us that revenues are up 14.8 percent, which is more than the roughly 8 percent annualized inflation we’ve seen lately. Then again, cost of revenue (typically raw materials and components) rose even more, by 16.9 percent.
Ultimately, however, net income fell 5.3 percent — so to whatever extent companies are passing along their higher costs to customers, that effort hasn’t preserved earnings growth yet.
In fact, the situation might even be worse than Figure 1 suggests. We broke out earnings specifically from large oil & gas companies, to see how much their outsized earnings in Q3 propped up the whole 1,700-firm sample. The results are in Figure 2, below.
Oh dear. Aside from oil & gas firms and the gobs of profit they just reported, earnings for Q3 2022 were actually even worse than that -5.3 percent in Figure 1. The stunning performance of the oil & gas sector is keeping Corporate America’s collective net earnings afloat.
We should stress that these numbers are a work in progress. Lots more firms still need to file their Q3 reports, including major retailers such as Walmart ($WMT) and Target ($TGT). Retailers do give a good sense of how much companies can push their higher prices to consumers, but they also work on a later fiscal schedule, which means we won’t see their Q3 data for a few more weeks yet. Calcbench will publish a more complete report once all that data is in hand.
One interesting example of the challenge facing companies right now is Shake Shack ($SHAK), which filed its Q3 financial statements the other week. Year-over-year revenue rose by a brisk 17.5 percent, but expenses rose by 18.4 percent. So the company ended up with an operating loss that nearly doubled, from $2.64 million one year ago to $4.83 million for the period that just ended. See Figure 3, below.
One question analysts might want to ask is the extent to which a company might revisit some of its expense items to keep operating profit high. We are not necessarily talking about fraud, but rather — which expense items could be squeezed for more savings, and how?
For example, Shake Shack reported a $592,000 impairment charge; will that be the case in future periods? Or, Shake Shack’s labor expenses rose 11 percent from the year-earlier period; will management implement a hiring freeze or layoffs? Do those issues come up in the earnings call?
We only cite Shake Shack because it provides a detailed look at its expense items (plus we like their shakes). It demonstrates the point that the disclosures companies provide can help you focus your analysis and sharpen the questions you might want to ask management.
The story about inflationary pressures is there, and it’s a big one; the details are simply — and as always — in the data.
The lord giveth, and the lord taketh away — and lately, with rising interest rates, companies in the mortgage business have been reminded of just how true that statement is.
The latest example is Zillow ($Z, such a great ticker), which reported Q3 earnings on Wednesday. The online real estate kingpin reported predictably dismal results, as rising interest rates continue to pressure home sales, mortgage origination, and refinancings. That pressure was painfully clear in Zillow’s disclosures.
One piece of evidence was in the Management Discussion & Analysis. There, Zillow walked through the decline in mortgage origination volume (that is, the total dollar value of mortgages that Zillow issues to consumers, and then typically resells to banks or other mortgage industry players). See Figure 1, below.
As you can see, total loan volume in Q3 was down 76 perent from the year-earlier period, from $1.11 billion to $271 million. Refinancings plunged 96 percent, to a piddling $31 million. (Although honestly we’re more puzzled at the people who did refinance in Q3, with mortgage rates at their highest levels since the 1990s. Did they not see the memo to refinance last year?)
Anyway, mortgage origination volume matters because as that number falls, so does the revenue Zillow generates from its Mortgages operating segment. That brings us to Figure 2, below, which shows Zillow’s segment revenue for the quarter.
Mortgage orgination revenue dropped 63 percent for the quarter, from $70 million one year ago to $26 million today. That segment also dropped from 13 percent of all revenue one year ago to 5 percent this quarter. (The bulk of Zillow’s revenue still comes from its “IMT” segment, derived from online advertising and other internet-based real estate services.)
For comparison purposes, Zillow had $517 million in loan orgination volume for Q3 2020, including $353.3 million in refinancings — so the company saw a gigantic spike when interest rates were at rock-bottom lows during the pandemic, and now those numbers have fallen off a cliff. Figure 3, below, tells the tale.
Notable: Zillow didn’t even bother reporting loan origination volumes in 2019, before the pandemic pushed interest rates to zero and the home sales market took off like a rocket. Now it’s crashing just as hard.
Amazon.com ($AMZN) filed its third-quarter report last week, and gave markets a jolt with mixed results for Q3 (earnings beat expectations; revenues missed) and a warning that the fourth quarter might be difficult.
Calcbench has taken a more nuanced view of Amazon over the years. Historically the company has generated oodles of profit as a provider of cloud-based services in its Amazon Web Services segment, with so-so performance from its much larger e-commerce segment.
So how’s that been going lately?
Figure 1, below, gives us one sense of the company’s two revenue streams.
Notice how the blue line (e-commerce revenue) follows the general direction of the yellow line (total revenue) — but is slowly parting ways with the yellow line. Why? Because the red line (AWS revenue) is, inexorably, becoming an ever-larger part of Amazon’s total revenue. For example, AWS revenue was only $6.68 billion in Q3 2018; this quarter, it was $20.54 billion.
Figure 2 shows that same dynamic another way: AWS revenue as a percentage of total Amazon revenue over time.
From quarter to quarter, sometimes that percentage fluctuates. The trend line in red, however, is sloping upward nicely. AWS revenue went from 10.66 percent of total revenue at the start of 2018 to more than 16 percent for the last two quarters, the highest it’s ever been.
All that said, the real question is whether AWS’s operating income is large enough, and consistent enough, to offset the hit-or-miss margins that Amazon’s e-commerce segment has been turning in for years. The answer might well be no.
For example, Figure 3 below shows Amazon’s sales, expenses, and operating income for each of its major segments. (Amazon breaks out its e-commerce sales into North America and International; for figures 1 and 2, above, we just added those together into one e-commerce segment.)
Look closely. AWS’ operating margin for Q3 2022 was 26.3 percent, versus 30.3 percent in the year-ago period. Operating margins for the first nine months of 2022 were 30 percent, versus 29.8 percent over the same three quarters in 2021.
As to the e-commerce segment, what more needs to be said about it? That segment has reported negative margins many times over the years, and is much more susceptible to volatility in consumer sentiment, inflation, fuel costs, and supply chain disruptions. None of that is news.
AWS perhaps not acting as a buffer for that volatility — that is news nobody would want to see. Nevertheless, it might be a delivery on investors’ doorstep in quarters to come.
Analysts need to dig into the data to find the right answer. Thankfully, Calcbench has that in spades.
About Perry Beaumont
Perry Beaumont, PhD, is a lecturer at Columbia University’s School of Professional Studies. He also works for Amazon Web Services (AWS) in Cloud Economics. At Columbia, Beaumont teaches finance classes at the post-baccalaureate/master’s degree level. A data scientist by trade, Beaumont has authored several books, including a new textbook, “Business Case Studies in Applied Data Science” in which Calcbench is featured.
The XBRL Challenge
Perry first learned of Calcbench a decade ago at the XBRL Investor Forum at Baruch College. Beaumont was sitting next to Alex Rapp, Calcbench co-founder and CTO, when Calcbench was announced as the winner of the XBRL Challenge.
Bridging academia and industry
As a professor, Beaumont is focused on building bridges between theory and practice. He uses tools such as Calcbench and Tableau to prepare his students for success in the real world.
Beaumont often teaches students through case studies; one such example is from the recent pandemic. Beaumont asks students to perform financial analysis using period-over-period performance. Students evaluate the pandemic’s effect on cash flow, inventory supply chain disruption, and more, all using Calcbench data and visuals from Tableau. Students are encouraged to show recovery time periods and go deeper into the footnotes (using the Interactive Disclosure query tool) to find information that might be hidden in the details.
In addition to the case studies, Beaumont likes to show students how to use several Calcbench features including: peer-to-peer benchmarking (through the multi-company tool) and performance measures such as the many ratios that Calcbench tracks (using our Bulk Data Query page).
Beaumont also encourages students to read Calcbench’s blog posts. He has heard from Columbia University’s School of Professional Studies alums that the knowledge gained from using Calcbench and reading the blog posts has been helpful for interviews and in the workplace.
In the future, Beaumont hopes that Calcbench will add commentary features so students will be able to take notes and write reports using Calcbench.
One thing that Beaumont wants readers to know: the support at Calcbench is amazing. Beaumont notes the platform is intuitive, but if you need guidance, it’s immediate and the team is here to help.
Calcbench and Academia
Calcbench is proud to serve a range of higher education institutions across the United States, including but not limited to: Arizona State University, Baruch College, Colorado College, Duke University, Florida State University, Indiana University, US Air Force Academy, Valdosta State University, Villanova, Wharton School of Business (at the University of Pennsylvania), and Yale University.
Now that third-quarter earnings statements are arriving fast and furious, we should review one important financial disclosure that’s likely to come up more often than usual: foreign currency adjustments.
Foreign currency adjustments are an issue right now thanks to the soaring value of the U.S. dollar. That makes sales in overseas markets more difficult, because U.S. goods are more expensive once they’re priced into local currencies. It also means that once those local sales are translated back into U.S. dollars, most companies will report a “foreign currency translation adjustment” that’s a negative number.
Why? Because the sale might be first booked at the start of the quarter at, say, $100. But by the time the sale closes several weeks later, the dollar’s value has risen so that $95 buys the same amount of local currency — which translates into a “loss” of $5 on the sale. That loss bypasses the income statement and gets reported as part of Other Comprehensive Income in the statement of equity.
We’ve already seen some companies report foreign currency translations in their third-quarter 2022 statements that are striking. For example, Figure 1, below, shows the disclosure for oil services giant Baker Hughes ($BKR). The relevant line item is shaded gray:
First, Baker reported a $321 million downward adjustment. That gets reported as part of its comprehensive loss (which is not the same as net income loss) on the company’s statement of shareholder equity. Baker already reported a net loss of $9 million for the quarter on the income statement. Then came the $321 million foreign currency hit, which was the lion’s share of a comprehensive loss that totaled $348 million.
That, in turn, helped drive shareholder equity down from $16.7 billion at the start of the quarter to only $14.4 billion by Sept. 30. See Figure 2, below.
Aside from the sheer size of the adjustment, a second point to remember is the growth of that adjustment. Go back to Figure 1, above. That $321 million foreign currency adjustment for Q3 is more than double the adjustment for Q2. The adjustment for the first nine months of 2022 ($474 million) is more than nine times larger than the adjustment for the same period in 2021.
We’re going to see similar dynamics over and over again this quarter, and probably in future quarters too until the U.S. dollar retreats from its soaring heights. For example, Netflix ($NFLX), a radically different company from Baker Hughes, saw its foreign currency adjustment balloon from a $29.6 million loss one year ago to a $103.2 million loss this quarter. Figure 3:
Calcbench lets you find and study foreign currency adjustments in several ways.
First, while you’re studying one specific company on the Company-in-Detail page, go to the tab listed as Comprehensive Income. That will pull up all the adjustments made to comprehensive income — adjustments that typically aren’t included in the income statement. Many times a company will report a positive number for “AOCI” (adjusted other comprehensive income), but these days the foreign currency translations can push AOCI into a loss.
You can also search these disclosures in groups of companies. Go to the Multi-Company page, and then search for foreign currency adjustments in the standardized metrics text field. For example, try this metric:
When you search that, you can find a range of companies reporting a foreign currency loss on the Comprehensive Income Statement. We found several dozen for Q3 already, from Danaher Corp. ($DHR), with a $1.04 billion loss; to food maker General Mills ($GIS) which actually reported a $3.8 million gain.
Citigroup ($C) filed its third-quarter 2022 earnings release last week, and the data therein gives financial analysts plenty to think about.
Like most large banks, Citi has two primary revenue streams: revenue generated from interest collected from customers, known as interest revenue; and everything else, lumped together in one “non-interest revenue” line item.
Interest-based revenue is (no pun intended) an interesting disclosure these days because interest rates are rising so quickly. That means banks see more interest revenue, but they also pay more interest expense — and the difference between the two, reported as net interest income, is what matters.
Figure 1, below, shows the spread between Citi’s interest income and interest expense, as well as net interest income, from the start of 2020 (when the Fed cut interest rates to zero as part of its response to the Covid-19 pandemic) through Q3 2022.
Nothing terribly surprising here. As interest rates rose throughout the course of 2022, Citi’s interest expense and interest revenue rose at relatively the same pace. Net interest income hasn’t accelerated quite as much yet for various reasons, although it is clearly drifting upward.
That’s the good news for Citi’s income statement. The bad news is non-interest income, which comes from activities such as M&A deals, asset management, mortgage fees, and the like. Figure 2, below, shows Citi’s quarterly trend for non-interest income compared to net interest income.
Citi’s non-interest income is clearly going downhill faster than its net interest income is going uphill. At an abstract level that’s not a surprise; it’s how most large banks would fare in volatile economic circumstances like we see today.
For example, JPMorgan Chase ($JPM) also filed its Q3 earnings statement last week. Its comparison of net interest income to non-interest revenue looks rather different, but that same divergence appears in 2022. See Figure 3, below.
The difference is that for much of the last several years, JPMorgan’s non-interest revenue was greater than net interest income; at Citi, non-interest revenue never exceeded net interest income. But as interest rates rise — and the Fed seems gung ho to keep raising rates for the foreseeable future — net interest income seems likely to keep going up.
What happens to non-interest revenue? Well, that’s an issue for the management earnings call, the footnotes, and your own modeling and gut instinct.
Loyal readers of this blog know that Calcbench loves to talk about purchase price allocation, which is how a company discloses all the details when it spends piles of money to acquire a business.
It’s not at all unusual to see a huge deal announced in the headlines — say, Salesforce ($CRM) acquiring Slack for $27.7 billion, which happened in 2020 — only to find out many months later that much of that headline price was allocated to goodwill. That’s exactly what happened with the Slack deal, where eight months after the deal was announced, Salesforce disclosed that $21.1 billion of that $27 billion number was allocated to goodwill.
Now Walgreens Boots Alliance ($WBA) has given us another point to ponder about purchase price allocation: that those allocation numbers can change over time.
We noticed this with Walgreens’ latest annual report, filed on Thursday. In its disclosures about business combinations, Walgreens reported the purchase price allocation for its acquisition of VillageMD, a chain of primary care medical practices often set up right next door to a Walgreens. Figure 1, below, shows the purchase price allocation as reported in the 10-K, filed on Oct. 13.
So Walgreens acquired VillageMD for a total of $10.05 billion, and $8.04 billion of that amount was allocated to goodwill.
But Walgreens first announced the VillageMD acquisition almost one full year ago, on Nov. 4, 2021. We wondered: was this really the first time Walgreens had disclosed the purchase price allocation for this deal?
The short answer is no. We reviewed Walgreens’ previous quarterly reports, and found that the company had been disclosing purchase price allocation details since the start of 2022 — but the breakdown of those details did change over time.
Figure 2, below, shows the purchase price allocation as reported in Walgreen’s quarterly report filed on Jan. 6, 2022.
The details were different back then! Yes, the total purchase price was still $10.05 — but in the first quarter of this year goodwill was only $7.67 billion of the total, rather than the $8.04 billion reported last week.
Over the next nine months, Walgrees marked down the identifiable assets by $368 million. Specifically, it cut the value of intangible assets from $1.982 billion (reported in Q1) to $1.621 billion (reported in Q4). Meanwhile, goodwill was marked upward by $341 million.
What happened? We’re not quite sure, although it seems that as 2022 progressed, Walgreens got a better sense of the intangible assets it had acquired in the deal. The company said this about those intangible assets in its Q4 disclosures:
Intangibles acquired include primary care provider network, trade names and developed technology, with a fair value of $1.2 billion, $295 million and $76 million. Estimated useful lives are 15, 13 and 5 years, respectively.
Once Walgreens marked down those assets, it needed to re-assign that value somewhere else to preserve the $10.05 billion total purchase price. So the powers that be reallocated the value to goodwill.
Whether that $368 million mark-down in intangible assets is material depends on your point of view. It’s 3.6 percent of the total deal price. It’s 26.5 percent of operating income for the year, which was $1.387 billion. It’s peanuts compared to total assets ($90.12 billion), but 3.4 percent of all intangible assets.
Our point is simply that purchase price allocation isn’t just worth noticing; it’s worth watching, because those numbers can change over time. That might lead to interesting new questions you might want to pose to management on the next earnings call.
This morning, October 13th, the FT published a front page article about the world’s top semi conductor equipment suppliers halting business with China.
Since we hadn’t done it in a while, we figured we would put together a list of the revenue that firms in SIC group 3674, Semiconductors and Related Devices, sold to China. This group is a superset of the firms mentioned in the FT piece. But it reasonable to believe that if any part of the supply chain is restricted, it will impact other firms in the group as well. Here’s the list. Note that you can do this work for yourself on Calcbench using our segment disclosures section
* Firms with 25% or more of sales to China in RED
Third-quarter earnings releases will start arriving this week, with several of Wall Street’s largest banks leading the way. Citigroup, JPMorgan Chase, Wells Fargo, Morgan Stanley and several others are all expected to announce Q3 results on Friday.
Those reports will be full of useful data. So ahead of the big day, Calcbench wanted to demonstrate the types of analysis you can perform quickly and easily on that data using our research tools.
We decided to look at banks’ Tier 1 capital over time. Tier 1 capital is the capital that banks must hold in reserve so that they can withstand large losses during difficult economic times. It consists of common stock plus other disclosed reserves, such as those for bad losses. Under the Basel III accords, drafted to avoid a repeat of the 2008 financial crisis, a bank’s Tier 1 capital must be at least 6 percent of its total risk-weighted assets.
More simply, Tier 1 capital is an important metric of a bank’s financial strength. So Calcbench tracks it.
We examined the Tier 1 capital ratio (that is, Tier 1 capital compared to total assets) for 100 banks, studying how the average ratio compared to the median ratio over time — and yes, we found a pattern.
Figure 1, below, shows the Tier 1 ratios in 2014, all of them dot-plotted onto a chart. The average ratio is in red, the median ratio in green. As you can see the average and mean ratios are nearly identical. (Indeed, you can barely see the red line, tucked underneath the green.) Average ratio that year was 9.43 percent, versus a median average of 9.46 percent.
Now here’s the same chart using Tier 1 ratios from 2018.
And one more time, using data from 2021.
As you can see, the spread between the average ratio and the mean ratio has widened over time. That happens because several banks have been posting higher Tier 1 ratios in recent years, which has the statistical effect of pulling the average ratio higher, even while the median remains relatively steady.
Banks can post higher Tier 1 ratios for several reasons, but most usually it happens because a banking regulator tells them to reserve more capital. (Say, when a bank fares poorly on its annual stress test, something required annually for large banks under the Dodd-Frank Act.)
You can do your own research on Tier 1 capital using our Multi-Company page. We track numerous disclosures related to Tier 1 capital; just start typing “Tier 1” in the text field for Standardized Metrics on the left side of your screen, and a bundle of choices will appear. (See Figure 4, below.)
Now all we need is that Q3 data to bring our analysis up to date. Stay tuned; once the banks start releasing those earnings statements, we’ll have the data ready for your fingertips a few minutes later!
Calcbench can help financial analysts in all sorts of ways. Today we want to demonstrate one of those ways that’s critically important for career success: how to whip up a chart of financial data quickly and easily, so you can drop it into a research presentation and impress the boss.
Our example company is Bed, Bath & Beyond ($BBBY), the troubled retailer that just filed its second-quarter report last weekend. Its numbers were not good; revenue and gross profit both were both down sharply from the year-ago period, while the company’s operating loss ballooned from $84.1 million one year ago to $346.2 million today. Ouch.
So if you wanted to make a quick chart depicting BBBY’s current state of affairs, how would you do it? We’ll show you.
Begin by pulling up BBBY’s quarterly numbers on the Company-in-Detail page. Be sure to hit the “Previous Period” tab on the far right, so you have lots of quarters you can review. It will look something like Figure 1, below.
In theory, you could use our short-cut (which we’ll introduce momentarily) to conjure up a chart for any of the line-items you see above. Except those quarters in Figure 1 are backwards; we start with the most recent on the left, working outward to earlier quarters on the right. In a chart, most people would expect the data to flow the other way around (earliest data on the left, later periods on the right).
To rectify that, simply hit the Reverse Order tab you’ll see on the right side above the display; we’ve circled it in red, above. That will reflow the quarterly data so it’s ready to export in a readable sequence.
Next, select the line-item you want to turn into a chart. In our case we went with Net Sales, which then became high-lighted in teal. When you do that, you’ll see a small image of a bar chart (three bars) appear next to the line’s subject along with some other choices: notes, tag, and compare. See Figure 2, below.
Press that bar chart image, and Calcbench will automatically whip up a simple line chart for that line-item you’ve selected. It will appear on your screen. See Figure 3, below.
You can download the chart as a PDF directly to your desktop using that small arrow button in the upper-left corner of the chart. From there you can drop it into whatever presentation you like.
In our case, we can see that BBBY had a plunge in net sales in first-quarter 2020 — but then again, who didn’t? The whole world was on Covid lockdown. Subsequently, however, BBBY enjoyed a brief rebound but then more quarters of decline, bringing BBBY to the brink of going down the drain today.
You can do the same chart creation for any company, with any line item where you see that small bar-chart icon. Anything we can do to help you impress the boss, we’re happy to do it!
Earlier this week Calcbench held our annual webinar on the state of goodwill assets and impairment. The session went off wonderfully thanks to our stellar lineup of speakers, and to keep the conversation going we have a recap of their main points below.
First, for anyone who missed the webinar: you can watch an archived version on the Calcbench YouTube channel. The entire episode lasts 60 minutes, and the speakers include:
We explored several questions over the course of the webinar. Among them…
The size of goodwill assets in total, and as a percentage of the balance sheet. Among the S&P 500, total goodwill assets rose 31.7 percent over the last five years, from $2.86trillion in 2017 to $3.77 trillion at the start of 2022.
That’s a lot in sheer dollars, but actually goodwill has stayed rather flat as a percentage of total assets. Total assets grew by 30.7 percent over the same five-year period, so goodwill isn’t swelling up to be a disproportionate center of gravity on the balance sheet. See Figure 1, below.
That said, goodwill and intangible assets can still be a huge portion of specific merger and acquisition deals. For example, when Salesforce.com acquired Slack last year for $27.07 billion, goodwill was $21.16 billion of that purchase price — 78.1 percent of the whole deal. Other intangible assets accounted for another $6.35 billion of purchase price allocation. Together those two components exceed the entire purchase price, although when you net out other items the math all works out eventually.
On the webinar we explore why that is, and how analysts can think about goodwill valuation: what specific things fall under goodwill, and how you might begin to assess whether the goodwill valuation in a deal reflects sound judgment about future business prospects.
Another important point about goodwill assets is that companies must test the value of those assets every year to see whether they should be impaired. That can result in a nasty punch to earnings and stockholder equity.
Impairments did spike in 2020, as the pandemic challenged the business models of so many companies. Then impairments fell in 2021 as economic growth stabilized; see Figure 2, below.
So what will happen with impairments in 2022 and beyond? Our webinar panelists weren’t quite sure, because nobody has seen inflation like today’s numbers for roughly 40 years — while the accounting model for impairments has only been around for roughly 20 years.
So, as panelist Scott Taub said, nobody really knows how the current impairment model will hold up for inflation like we see today. This situation has never happened before. Taub, Patel, and Peters all offered their thoughts on how financial analysts might navigate the quarters to come.
Also up for discussion were:
We hope you find the webinar useful. If you have ideas for other issues we should explore in future webinars, drop us a line any time at firstname.lastname@example.org.
Since cash is king, the data nerds at Calcbench decided the other day to answer a quick question: How much cash is coming into the coffers for S&P 500 companies lately?
The chart below suggests that so far this year, cash is actually leaving those coffers. It shows the average increase in cash for S&P 500 firms since the start of 2017.
The story is fairly clear. Prior to the pandemic, cash see-sawed from one quarter to the next, generally in a downward direction. Then came that gigantic spike in early 2020, when the pandemic struck and companies raced to secure as much cash as possible. The average cash increase in Q1 2020 was $1.56 billion.
Since then the downward trend has resumed, but in a more pronounced direction — and in a much more downward direction since the start of this year.
Obvious question: why?
We can posit part of the answer right away. Once everyone realized in latter 2020 that economic collapse wasn’t imminent, firms felt more comfortable spending down the piles of cash they secured at the start of that year.
The arrival of inflation in 2022, however, poses more questions. Since interest rates are rising, are some firms avoiding cash from finance activities? Since costs are rising, is cash from operating activities falling because companies were paying higher input costs before they could pass along those higher prices to customers?
Our chart above is just meant to raise those questions; it can’t provide answers unto itself. But if questions about cash flows are on your mind as an analyst, Calcbench does have that data in spades. We built the above chart simply by going to our Bulk Data Query page, which has 19 separate cash flow metrics one can pull.
Among those individual metrics are many relating to operating, financing, and investing activities; and you can study them for large groups of firms in aggregate, or large groups of firms each listed individually.
Our particular chart took about two minutes to build. Whatever analytical adventure you want to choose, we have the data for that too!
The Lord works in mysterious ways, and sometimes so does the goodwill line item on the corporate balance sheet. Case in point: Cisco Systems ($CSCO), which filed its annual report last week and included an interesting disclosure about its goodwill assets — if you were ready to dig for it.
The item that caught our eye was Cisco’s disclosure about acquisitions that happened in its fiscal 2022, which ended on July 30. The company reported three acquisitions in the year at a total cost of $364 million. The disclosure was this:
Do you see what’s missing from that picture? Cisco never mentions the names of the companies it acquired.
Yes, we understand that as a practical matter those acquisitions aren’t material to a company as large as Cisco ($51 billion in sales for 2022), so the company has no particular need to disclose those names. But of that $364 million spent on acquisitions, $332 million was allocated as goodwill. That’s more than 90 percent of total purchase price allocation.
Put another way: Cisco ladled $332 million of goodwill assets onto the balance sheet, and from the financial statements, you can’t determine what investors got in exchange. How did those deals help Cisco strategically? What purpose did the deals serve? We don’t know.
At least if the company added $332 million in property or equipment or licensing agreements, someone could inspect those assets to see whether Cisco got a fair price. Goodwill is as ephemeral as an asset can be.
Intrigued, we started tracing through Cisco’s previous quarterly filings for the year (by using our “see previous period” option on our Interactive Disclosures page, of course). It turns out that Cisco never identified any of those three mystery acquisitions by name in the 10-Q reports, either. You can see that Cisco did one deal in the first quarter, another in the second, and the last in the third quarter; but not once did Cisco name the targets it was acquiring — but nothing more.
Figure 2, below, shows the acquisitions disclosures for the first and second quarter. (First quarter on the right side, second quarter on the left. We didn’t have room to include the third quarter as well.)
Now we have a bit more clarity. The first-quarter acquisition was by far the largest: $323 million, with $305 million allocated to goodwill. So that deal alone accounts for most of the mystery we described above. But still, no names for what Cisco actually acquired.
We then proceeded to Cisco’s earnings release for the quarter — and there, finally, we got some answers. The company had this to say:
In the first quarter of fiscal 2022, we closed the acquisition of Epsagon Ltd., a privately held modern observability company with expertise in distributed tracing solutions for modern applications and technologies, including containers and serverless environments.
We’re not tech people, so we have no idea what Epsagon actually does or how important it is to Cisco; but at least we found an answer.
Likewise, we then searched Cisco’s earnings releases for the second and third quarters, and unmasked the mystery acquisitions there, too. In Q2, Cisco acquired a German company named Replex. In Q3, it acquired a company called Opsani. All three companies were privately held.
Analysts could keep digging from there if you wanted. For example, Cisco’s total acquisitions rose from $351 million in the second quarter to $364 million in the third. That’s a difference of $13 million, and according to the earnings releases, that must have been the Opsani deal.
Well, Opsani has only 11 employees on LinkedIn, according to its company page. Perhaps the company has more employees who aren’t on LinkedIn, but clearly this suggests that Cisco paid $13 million for a very small business. But goodwill rose only $5 million in that quarter, so what else did Cisco get for the $13 million?
We here at Calcbench don’t know, and we’ll end our post now. Our point is merely that goodwill can often be a murky part of corporate dealmaking — but with the right data and a bit of determination, you can brighten the picture considerably.
Don’t forget, we have a free webinar about goodwill assets happening on Monday, Sept. 26, at 1 pm ET. If you want to learn more, register today!
Peloton might be famous for its Internet-connected treadmills and exercycles — but if its latest annual report is any indicator, let’s just hope the company doesn’t end up better known on Wall Street as a punching bag.
As you might recall, Peloton ($PTON) announced last month that it needed to delay the filing of its annual report to sort out accounting related to a recently adopted restructuring plan. That annual report finally arrived Wednesday morning. So what bits of financial data are tucked away in that report, that might give analysts a fuller picture of Peloton’s future?
The headline numbers do not look good. Annual revenue fell from $4.02 billion to $3.58 billion, a drop of 10.9 percent. The cost of revenue, however, actually rose $2.56 billion to $2.88 billion. Then came increases in costs for sales, marketing, R&D, and administrative costs; plus a goodwill impairment and a restructuring charge. Add everything up, and Peloton suffered a pretax operating loss of $2.81 billion.
OK, so is there any good news in Peloton’s report? Perhaps.
The company also reported revenue by two operating segments: those fitness products that increasingly end up as modern art in your living room; and ongoing subscription revenue from those few health nerds who do still use their Peloton products as intended. Figure 1, below, shows the breakdown of revenue by those two segments.
There, in the subscription segment — revenue growth, and lots of it! Even better, gross profit margins increased too, from 62.7 percent in fiscal 2021 to 67.7 percent this year.
Those numbers are important because they’re crucial to Peloton’s restructuring plan. That plan, announced in February, essentially gets Peloton out of the equipment manufacturing business, leaving the company to focus on subscriptions and related high-end services. With growth and margins as seen in Figure 1, perhaps there’s mileage in that idea after all.
To pull off that plan, however, Peloton still needs to shed a lot of assets. So how’s that going?
Figure 2, below, gives us a sense of things. The line items for inventory and property, plant & equipment have both been trending downward since earlier this year, just when Peloton first announced its plan.
That said, you can find even more detail about inventories and PP&E in the footnotes. For example, in Figure 2, inventories are listed at $1.104 billion. Figure 3, below, shows precisely how that number breaks down.
Finished products in inventory actually rose over the last year, from $879.5 million to $1.3 billion. So while the overall strategy of shifting to subscription services might seem promising, Peloton still has a lot of fitness equipment it needs to sell — at a time when sales of that segment are falling.
We previously wrote about inventory-to-sales ratios as an omen of price discounts in the retail sector; that phenomenon might strike at Peloton, too.
Meanwhile, like rats on a treadmill, we at Calcbench keep collecting and studying the data!
Today we have a cross-over episode of the Calcbench blog, looking at how two of our favorite subjects — asset valuation and energy prices — factor into the financial picture of Devon Energy.
Devon ($DVN) caught our eye because the company filed its Q2 2022 quarterly report a few weeks ago, and we glanced at changes in the company’s balance sheet over the 18 months or so. There among the assets was a line labeled “Oil and gas property & equipment.” See Figure 1, below; with the line in question shaded in gray.
Do you see what we see? The value of Devon’s oil & gas properties stood at $4.43 billion at the end of 2020, then jumped to $13.82 billion in the first quarter of 2021. What was that about?
The research team’s first thought was “acquisition,” and we soon confirmed that was the case. We jumped over to the Interactive Disclosures page and pulled up Devon Energy’s disclosures for that quarter. Under the heading of Acquisitions, Devon disclosed that it had merged with oil & gas exploration business WPX Corp. that January in an all-stock deal valued at $5.4 billion.
Included in that merger footnote was — wait for it — purchase price allocation! Figure 2, below, shows the assets Devon brought onto its balance sheet after closing the merger with WPX.
Devon acquired $7.02 billion worth of proved oil & gas property and equipment, and $2.37 billion of unproved property & equipment. Add those two numbers to the existing $4.43 billion Devon already had on the books, and you get the $13.82 billion it reported at the end of Q1 2021.
We also noticed that since then, the value of those oil & gas properties has steadily edged downward to $13.59 billion in Q2 2022 — a drop of only 1.7 percent, while oil prices have gyrated wildly.
Remember, since that deal closed in January 2020, the world first suffered through a pandemic that sent oil prices negative during the lockdowns that year; followed by surging demand in 2021; and then Russia’s invasion of Ukraine this year, which sent gasoline prices to record highs. Throughout all of that, Devon’s property and equipment assets barely budged.
Now, the Calcbench research team are not oil & gas specialists. We assume that line item is holding steady because it’s a long-term investment that will hold value regardless of any particular issues that might shift from one quarter to the next. Our point is simply that we have the data for those analysts who do want to follow oil and gas closely, and sometimes that data can quickly assemble some very interesting stories. That, in turn, will allow you to build more sophisticated models or to ask more pointed and specific questions on the next earnings call.
For example, rival company Marathon Oil ($MRO) reports a Property, Plant & Equipment line that fell 8.2 percent over the same 18-month period. Well, why? Marathon reports all PPE as a single line item, while Devon reports oil & gas PPE and “other PPE” separately. Is that part of the discrepancy? Do other business considerations figure into the story?
We don’t know ourselves, but the data is there for analysts to find deeper issues and arrive at better insights.
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