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Calcbench can help you dig deep into text disclosures by allowing you to pinpoint search all disclosures in 8-Ks, 10-Ks, 10-Qs, proxy statements, earnings press releases, and SEC comment letters, or search by disclosure type.
You can search for terms like “tax cuts and jobs act” to see how companies are reporting on issues related to tax reform. Try searching “ESG” to understand how companies are reporting on sustainability. Or, poke around to see who has recently transitioned out of an executive role.
Reviewing the text disclosures allows for easy comparisons, over time and across companies, and brings more usability to the hard-to-find information embedded within financial statements, which many times is text, not a number on a line-item.
To try it out yourself, sign up for a free two-week trial, then visit the Interactive Disclosure Page and select your favorite Footnote/Disclosure Type. Enjoy!
Impairment of assets is something no investor likes to see. Impairments can catch people by surprise and blow up an earnings statement with no warning.
Or what if you could measure that potential risk?
Not the risk of a specific asset being impaired; that takes in-depth analysis over time. We were more curious whether you could measure the potential damage to earnings that an impairment might cause — regardless of the asset getting impaired or the dollar value of the impairment.
Here’s what we did.
Using our Multi-Company search page, we examined the goodwill and right-of-use assets listed by the S&P 500. We also then pulled net income and diluted shares outstanding to calculate earnings per share for third-quarter 2019.
Then we asked: What would happen to EPS if goodwill and ROU assets were impaired by 1 percent?
Mathematically that’s a straightforward exercise. You just subtract 1 percent of goodwill and ROU assets from net income and then recalculate EPS. That’s a measure of how sensitive a firm’s earnings are to impairment.
So we did that, measuring firms’ sensitivity to impairments of 1, 5, and 10 percent.
Below are 10 firms with high impairment sensitivity. That is, even impairments of only 1 percent would lead to relatively large swings in EPS. For example, if Macy’s ($M) declared an impairment of only $65 million, that would have caused a 20-fold drop in its EPS.
To be clear, other firms would suffer larger EPS declines in absolute terms. For example, if Charter Communications ($CHTR) declared a 1 percent impairment on its goodwill and ROU assets, that would be a charge of $306 million and cut net income by $1.38 EPS. But because Charter reported EPS of $2.10 in the third quarter, that actually cuts EPS by only 65 percent.
Nobody would like that, but in relative terms it’s nowhere near the wipeout that any firms in Table 1, above, would experience.
OK, so an impairment sensitivity test exists — what do you do with it?
By modeling a firm’s potential exposure to impairment, that can help financial analysts sharpen the questions they want to ask about management strategy.
For example, if a highly impairment sensitive company is carrying lots of goodwill on the books — say, it’s a highly acquisitive firm that’s collected numerous brands over the years — that can inform questions you might ask management about what it plans to do with those brands, or whether integration plans are moving along well enough to justify whatever the company paid in goodwill. (Don’t forget, you can also look up purchase price allocation on Calcbench to determine how much of an acquisition went to goodwill and other assets.)
Or if you’re following a retailer that has high impairment sensitivity thanks to lots of leased ROU assets, you might ask more pointed questions about customer traffic or potential sub-lease value if the retailer wants to shutter its stores.
Our point is only that the data does exist to model impairment sensitivity. All you need is the data, Calcbench has that in spades.
The new accounting standard for leasing costs is no longer so new, but its secondary effects on financial reporting still are. Today Acuity Brands ($AYI) gave us one glimpse of that, when it declared an impairment on a leased asset.
What happened? Acuity, which sells indoor and outdoor lighting plus assorted other equipment, filed a rather yucky Q1 2020 report. Revenue down by 11 percent, operating profit down 36 percent, net income down 40 percent. The company also announced the arrival of a new CEO to turn things around.
What caught our eye, however, was a $6.9 million item on the income statement labeled “special charge.” See Figure 1, below; with the line-item highlighted blue.
That $6.9 million was far larger than any other special charge Acuity has reported lately, and it’s always wise to look closely at special charges anyway. So we did, using the ever-handy Calcbench Trace feature.
In the footnotes, we then found this disclosure from Acuity:
During fiscal 2020, we recognized pre-tax special charges of $6.9 million. The fiscal 2020 special charge consisted primarily of severance costs and ROU asset lease impairments related to planned facility closures. Additionally, we recognized charges for relocation costs and ROU lease asset impairment charges associated with the previously announced transfer of activities from planned facility closures.
In other words, Acuity is closing a few facilities and that will cost it $6.9 million. Acuity goes on to say that $5.1 million of the charge will be related to severance costs, and the company had been accruing reserves to cover that amount — but the remaining $1.8 million is indeed an impairment of the leased facility Acuity had been using.
This is a big deal because it demonstrates that the new lease accounting standard, which went into effect last year, can indeed affect earnings. Sure, in Acuity’s case this impairment isn’t a material amount of money — but until last year, you wouldn’t see something like this at all. Now you can.
The standard, ASC 842, requires companies to list their leased assets — commercial stores, airport gates, office equipment, data storage facilities, and so forth — on the balance sheet. The costs of the leases are listed as liabilities, the value of the leased items listed as assets. (We discuss all these issues at length in several white papers on our Research Page, if you want to know more.)
Like any other asset, however, that means the value of those leased items could fall, and the company would therefore need to declare an impairment. When that happens, the impairment is reported as a charge against earnings.
This happens with goodwill assets on a regular basis and sometimes with other intangible assets as well, so the idea isn’t new. It’s just expanding to a new type of asset: operating leases.
How common will this be? That’s hard to say right now. We’re not sure any other company has reported a charge like this. In theory, however, an impairment to leased assets might arise if a company signs a long-term lease for something and then economic circumstances around using that item change dramatically.
For example, a large bookseller might have signed a 20-year lease for commercial stores in 2011, and by now Amazon has whittled away the value of those stores — and if the locations are in crumbling shopping malls, who else is going to take that space off the bookseller’s hands before the 20-year lease expires in 2031? That’s how the lease accounting rule could end up forcing companies to serve up an earnings surprise.
Another question is whether these impairments would ever be material. In Acuity’s case, the impairment isn’t; even without it, the overall 10-Q numbers would still be pretty gross.
Still, for devotees of financial reporting, Acuity’s disclosure is a rare bird. We’ll keep looking to see whether any more fly by.
Calcbench has released an Excel Add-in for Office 365. Now Mac users can use the Calcbench Excel Add-in.
Professors whose students mostly use Mac can include the Calcbench Excel Add-in in their curriculum. If you are an accounting professor interested in using Calcbench to enhance the use of data analytics and maybe even fulfill the AACSB data-analytics requirement email firstname.lastname@example.org. Anyone can try Calcbench for two weeks by signing up for a trial @ https://www.calcbench.com/join.
If you have a Calcbench account and Office 365 you can install the Add-in by clicking on the Get Add-ins button in Excel and searching for calcbench. More Documentation
Microchip maker Jabil Inc. filed its latest quarterly report last week, where it gave details of a restructuring plan expected to cost the company $85 million over the course of fiscal 2020.
Analysts who follow Jabil might be thinking, “Wait — wasn’t this company already in the middle of a restructuring plan? Hasn’t it been reporting restructuring costs already?”
Correct on both counts, astute Jabil observers. In fact, the company has been in the midst of one restructuring plan or another since 2013.
We noticed this in Jabil’s filing from Jan. 3, for the quarter ending Nov. 30, 2019. That’s when Jabil began detailing some of its expenses relating to the 2020 Restructuring Plan it had announced last September. See Figure 1, below.
The 2020 costs are shown in the column on the left, for the period ending 30 Nov. 2019. Further down the filing (but not shown here) Jabil says this is these expenses are the first phase of its 2020 Restructuring plan, which should cost $85 million.
Fair enough, but we were more intrigued by the column on the right: that $6.025 million related to Jabil’s previous 2017 restructuring plan.
What was that about? How much did that plan cost? And how much did Jabil expect the plan to cost when the company first announced it three years ago?
Calcbench likes to follow restructuring costs because we’ve seen numerous instances of filers estimating one amount of cost at the beginning of a restructuring plan, and ultimately reporting a different amount at the end of the plan.
Kimberly Clark Corp. ($KMB), for example, announced a restructuring plan in 2018 whose costs in the first year ultimately were less than originally estimated. (How will 2019 costs fare? Ask us again in a few months.) At the other extreme, Hewlett-Packard ($HPQ) went through a restructuring in the first half of the 2010s where total costs and layoffs by 2015 were nearly double what HP originally expected in 2012.
Jabil seems not to have that issue about changing costs. We used the Show All History tab at the top of the disclosure viewer to call up its previous statements about restructuring charges. The company announced its 2017 Restructuring Plan in late 2016 and estimated the total cost would be $195 million.
Sure enough, three years later Jabil announced the end of that plan, and total costs were $195 million. The $6.025 million in Figure 1 was the last of it.
But wait! While we were time-traveling backward through Jabil’s disclosures, we noticed that when the company announced the beginning of its 2017 Restructuring Plan, it was also announcing the conclusion of a 2013 Restructuring Plan.
So we went all the way back to Jabil’s 10-Q from July 2013, when the company disclosed its very first restructuring plan. There, deep amid the text, using our hieroglyphics decoding technology, we found this:
The company currently expects to recognize approximately $188.0 million in pre-tax restructuring and other related costs over the course of the company’s fiscal years 2013, 2014 and 2015 under the 2013 Restructuring Plan.
Four years later, however, in summer 2017, we found this statement:
The company currently expects to recognize approximately $179.0 million in pre-tax restructuring and other related costs over the course of the Company’s fiscal years 2013 through 2018 under the 2013 Restructuring Plan.
So Jabil’s first restructuring plan from 2013 cost less money than expected, but took more time — and overlapped with the 2017 restructuring plan. That 2017 plan then brought us up to the 2020 restructuring plan. Jabil’s disclosures even mention a 2014 Restructuring Plan several times, but we think we’ve demonstrated the point here: that Jabil has been going through one restructuring plan after another for most of the last decade.
Is that a legit strategy? It’s not our place to say. Restructuring charges are supposed to relate to one-time actions a firm normally wouldn’t undertake, to align operations to new (usually diminished) business circumstances. Examples would be a plant closure, or integration of two sales forces with attendant layoffs, or something like that. Restructuring costs are often a reason why firms report adjusted earnings: because the costs are one-time items not reflective of normal business operations.
But how many restructurings can a company report before all those efforts are just, ya know, the normal course of business?
That’s an excellent question for financial analysts to ask a CFO during an earnings call. Calcbench is just your humble servant, giving you the right data so you can ask the right questions.
You may have seen news that Uber filed a lawsuit against the state of California on New Year’s Eve, challenging the state’s new employee classification law — a law that could force Uber to reclassify its drivers as full-time employees, and therefore deliver a gut-punch to Uber’s business model.
That led us to wonder: what has Uber ($UBER) been saying about driver classification issues, anyway?
The company’s most recent quarterly filing was published on Nov. 5. It had lots to say about worker classification laws generally and the California law (known as Assembly Bill 5) specifically, such as this passage from the Risk Disclosures section:
Government authorities may, and private plaintiffs have and other private plaintiffs may, bring litigation asserting that Assembly Bill 5 requires drivers in California to be classified as employees… If we are required to classify drivers as employees, this may impact our current financial statement presentation including revenue, incentives and promotions…
Uber went into more detail in the Management Discussion & Analysis section, where it said drivers have already started filing mis-classification lawsuits against the company and more are likely to come.
Uber also said it’s pushing a ballot referendum question to go before California voters that would neutralize much of AB 5’s impact; and said it continues to “explore legal options,” although the company didn’t specifically mention a lawsuit of its own in that Nov. 5 filing. Now we know.
Moreover, aside from AB 5, Uber is already under legal siege from other drivers suing for mis-classification — and it’s settling with those drivers before things get out of hand.
For example, more than 80,000 Uber drivers have entered arbitration agreements with Uber as of Sept. 30, which the company estimates will cost $142 million to $170 million. That disclosure is also tucked away in the Risk Factors. It’s not material to Uber, which had $3.8 billion in revenue for Q3, but you won’t find those amounts unless you read the fine print.
OK, that’s what Uber is saying and doing about worker classification. What about other companies? We opened up the Interactive Disclosures database and searched for the term “independent contractors” used in Q3 filings.
For example, Lyft ($LYFT) discussed AB 5 in California and potential litigation that others might bring against the company under the new law. It also talked about several lawsuits Lyft itself filed in the state of New York over rules the New York City Taxi & Limousine Commission adopted to impose minimum earnings requirements for ride-sharing drivers.
How much might any of these litigation threats cost Lyft? The company didn’t say. Its own lawsuits against the New York TLC are on appeal, and the California law is still so new nobody is ready to declare what its financial consequences might be. Still, the threats are there in the filings.
And while AB 5 is primarily aimed at Gig Economy businesses like Uber, Lyft, Postmates (which is suing California along with Uber) and others, they’re not the only businesses watching this trend in legislation.
For example, Raymond James Financial ($RJF) lists worker classification legislation as a risk factor, although it doesn’t say much about the matter. Warner Music Group ($WMG) worries that AB 5 could have significant consequence if its go-to songwriters are reclassified as employees, and “there is no guidance from the regulatory authorities charged with its enforcement.”
So the risk is real, for more companies than you see in the news headline. Financial analysts will need to dig into the details to find a company’s real exposure to AB 5, but Calcbench has you covered.
Calcbench last looked at the legalized weed business in May, when we noted the run-up of inventory that many Canadian marijuana businesses were disclosing.
We meant to revisit the inventory issue again in November after another wave of filings — but, um, we spaced on the date. We finally took a fresh look at those inventory numbers this week, and suffice to say the overhang issues continue.
If a single chart can tell the tale, it is this comparison of inventory and revenue from Tilray ($TLRY), one of the larger Canadian cannabis companies today.
As you can see, revenue is growing at a respectable rate — from $7.8 million at the start of 2018 to $51.1 million by Q3 2019. But the revenue increase is dwarfed by Tilray’s inventory, which zoomed from $7.4 million to $110.5 million in the same period.
That’s not good when your product is literally intended to go up in flames. No wonder Tilray stock has gone from a high (no pun intended) of $49.30 on July 1 to around $17 these days.
Other major Canadian cannabis players such as Cronos Group ($CRON) or CannTrust Holdings ($CTST) report similar challenges, although they don’t file quarterly statements like Tilray so we can’t conjure up the same nifty charts.
As a Wall Street Journal article noted in November, “The largely Canada-based cannabis sector has struggled as demand has failed to emerge as expected after the country legalized recreational marijuana last year. Oversupply has weighed on cannabis prices, forcing write-downs.”
You can see that in the filings, typically in a weed company’s disclosures about inventory. Tilray, for example, wrote down the value of its Q3 work-in-process inventory by $201,000, on a total value of $81.3 million.
What does all this mean for Calcbench users who follow weed companies?
Above all and as always, read the disclosures. We have them all, tagged and indexed via our Interactive Disclosures page. That’s where you can find items like adjustments to inventory, as well as management statements about big plans to achieve future growth.
CannTrust, for example, has extensive disclosures about how it values its “biological assets” — because, as the company blandly notes, “there is no actively traded commodity market for plants and dried product.” So CannTrust needs to estimate the fair market value of its weed, and therefore shares all sorts of estimates about harvest yield, value per gram of final product, and the like. Cronos does the same.
You can also find some interesting management rationale for the overhang, and plans to achieve stronger growth. Tilray, for example, is plotting more sales in Europe while the Canadian market splutters along.
Will any of this work? We don’t know. We do know, however, that the data is there to help analysts make better judgments. After all, that Wall Street Journal article about inventory oversupply was published in November, and our first post about inventory was published six months earlier.
All you need to do is dig in.
Astute readers of the Calcbench blog will recall that last July we had a post about Knight-Swift Transportation ($KNX), an Arizona-based trucking firm that warning earnings were entering a mid-year slump.
Now we have an update: they’re still in a slump.
Knight-Swift filed posted an update on Dec. 19 to its earnings guidance, guiding fourth-quarter estimates of adjusted EPS downward from an original range of $0.62-$0.65 to $0.50-$0.52. Ouch.
Why the mark-down? “The industry continues to be oversupplied with truckload capacity,” Knight-Swift said its release, “which led to more muted seasonal improvement in the freight market from third to fourth quarter… As a result, our sequential third to fourth quarter rate increases were less than anticipated, leading to reduced revenues and lower than expected operating income.”
So the trucking industry continues to be in a slump, so trucking firms can’t raise prices as expected, so revenue is lower and that crimps operating income. Got it.
This is interesting because in an earnings release from July, Knight-Swift predicted a bit of slowness in the third quarter and then a rebound in earnings by now — like, to adjusted EPS range of $0.73-$0.77. Now we’re moving in the opposite direction from those halcyon mid-summer estimates.
What are some of Knight-Swift’s peers saying about an industry slowdown? We decided to take a look.
Werner Enterprises ($WERN) filed its third-quarter 2019 results on Oct. 25, and the word “down” appeared all over the opening paragraphs. Werner also said this:
During the third quarter, freight demand in our One-Way Truckload fleet was seasonally below average and well below the unusually strong freight demand of third quarter 2018, which was aided by two December 2017 mandates. Tax reform incentives strengthened third quarter 2018 freight volumes…
We’ve heard this theory before: that the corporate tax cuts enacted at the end of 2017 put the economy on a sugar high in 2018; and as that sugar high faded in 2019 business activity cooled. Hmmm.
Schneider National ($SNDR) reported “challenging market conditions” in its Q3 report from Oct. 31, and cut its 2019 earnings estimates from $1.30-$1.38 EPS down to $1.24-$1.30 — but also said that much of that cut was due to an impairment charge Schneider was swallowing on its trucking fleet.
Old Dominion Freight Line ($ODFL) said much the same in its Q3 earnings release, too. Third-quarter results “reflect the challenging operating environment. The domestic economy remained sluggish during the quarter…”
Analysts can interpret these statements in a few ways. First, it’s true that the economy had a lot of uncertainty hanging over it at the time: the trade war with China, Brexit, a potential government shutdown, the future of U.S. interest rates. That much uncertainty can give any economy pause.
Well, we have a lot less uncertainty about all those issues, at least for now. So maybe businesses and consumers will keep the party going into 2020, and presumably that means revived demand for trucking as we move goods around.
On the other hand, when you read the earnings releases of these trucking firms, you see lots of talk about “right-sizing” or “repositioning resources” or just flat-out taking impairment charges, like Schneider did. At some point, prolonged softness in the industry will prod individual firms to trim down into better competitive shape — or, as always, “consider strategic alternatives.”
We at Calcbench don’t know when any of those forces might translate into a material change in prospects, for Knight-Swift or any other firm. We do, however, provide the tools that can help analysts monitor those forces over time. The rest is up to you.
Large corporations have had to address one new accounting standard after another in recent years, and 2020 will be no exception.
Ladies and gentlemen, welcome to the new standard for Current Expected Credit Losses — otherwise known as CECL.
CECL will be 2020’s big honking new accounting standard that companies struggle to implement. It goes into effect on Jan. 1, and requires firms to implement a new methodology to calculate expected credit losses over the lifetime of financial instruments said firms carry on their books.
Those calculations will be a blend of historical experience plus forecasts based on reasonable evidence and analysis of current conditions. Broadly speaking, CECL is likely to make a company’s estimated credit losses more precise in any single quarter, but also more volatile across many quarters — kinda like what happened with the new standard for revenue recognition introduced in 2017.
Suffice to say that CECL is complicated, so Calcbench will be following disclosures and analyzing data all through the coming year. Meanwhile, we’ve already done some preliminary work and have a few pointers for you now.
First, you can always visit our Interactive Disclosures Page and just search for “CECL.” We did, and found hundreds of results in the S&P 500 for third-quarter 2019 filings alone.
For example, American Express ($AXP) said that based on preliminary testing, CECL could lead to a significant increase in reserves for credit losses:
The results of those preliminary simulations continue to indicate that our total reserves for credit losses related to our Card Member loans and receivables portfolios could have a net increase between 25 percent and 40 percent, with an increase in reserves of between 55 percent and 70 percent related to our Card Member loans portfolio and a decrease in reserves related to our Card Member receivables portfolio, all of which is based on the comparison of preliminary CECL estimates as compared to the incurred loss model applied today.General Motors ($GM), meanwhile, had this to say:
Upon adoption, we expect to record an adjustment that will increase our allowance for credit losses between $700 million and $900 million, with an after-tax reduction to Retained earnings between $500 million and $700 million. The amount of the adjustment is heavily dependent on the volume, credit mix and seasoning of our loan portfolio.
And PNC Financial ($PNC) devoted almost an entire page to discussing CECL. The key part was this:
The adoption of the CECL standard could result in an overall [allowable credit losses] increase of approximately 20 percent, as compared to our current aggregate reserve levels. The overall change is primarily due to the difference between current loss reserve periods versus the estimated remaining contractual lives, as required by the CECL standard. We believe that given current conditions, our consumer loss reserves will increase significantly, while our commercial loan reserves will decrease slightly. Additionally, the CECL ACL could produce higher volatility in the quarterly provision for credit losses than our current reserve process.
CECL will foremost affect companies that carry a lot of financial instruments or extend credit to customers. So expect banks, insurers, and other financial firms to have lots to say about CECL; and also businesses with significant customer financing operations — like General Motors, which is why we included the company above.
Allowances for loan losses are listed on the balance sheet, so you can always research a firm using our Company-in-Detail page to find its estimated loan losses. Or use our Multi-Company page to search for loan-loss allowances and then use our world-famous trace function to see the underlying disclosures for more detail.
You can also search for ASU 2016-13, which is the formal name for CECL. Typically companies will mention new accounting standards in their Significant Accounting Policies disclosures, but not always. When we skimmed the S&P 500, we found CECL discussion in the Management Discussion & Analysis, Basis of Presentation, and even in a few earnings releases.
So you’re best served by using our text search to look for the specific standard, regardless of where any specific company might place its disclosures.
That’s all for now. As we said, CECL will be the big financial reporting issue for 2020, so we’ll have lots more to say on the subject throughout next year.
Calcbench was on the road this week, visiting Washington to attend the AICPA’s annual conference on SEC reporting issues. There, a parade of panelists from the Securities and Exchange Commission talked about all things financial data — including non-GAAP data that firms try to report and the SEC watches closely.
Like, say, contribution margin.
Contribution margin is calculated as sales minus variable costs. Those can be items such as labor, the expense of running machinery, or any other cost that would typically rise or fall in step with the volume of sales. (Compared to rent, for example, which is a fixed cost.)
Contribution margin’s biggest claim to fame is that WeWork tried to use that metric to woo and wow investors — and stretched its calculation of contribution margin so far that the SEC told WeWork to drop the disclosure from its IPO documents. Which presaged things to come, since WeWork eventually dropped the IPO entirely.
At the AICPA conference, several SEC officials talked about the perils of contribution margin and how firms should not push their math too far, lest they get rebuked like WeWork.
So we wondered: how many firms report contribution margin, anyway? In what context?
Well, you can find those answers via our Interactive Disclosures page. Just create some peer group you want to review, and then enter “contribution margin” in the text search box on the right side of the page.
For example Cloudera ($CLDR) includes contribution margin in its segment disclosures. Its definition of the term: “segment revenue less the related cost of sales excluding certain operating expenses that are not allocated to segments because they are separately managed at the consolidated corporate level.”
Then the firm reports positive amounts for contribution margin in two segments it defines as subscriptions ($356.2 million) and services ($12.3 million), for a total contribution margin of $368.53 million.
Er, not quite. Then, per SEC rules, Cloudera reconciled its contribution margin back to the most appropriate GAAP metric, which is operating income — or, in Cloudera’s case, loss from operations. Take a look:
As we can see, despite those rosy numbers in Cloudera’s non-GAAP numbers, the company actually lost money according to good ol’ Generally Accepted Accounting Principles.
All of this is legal, of course. So long as a firm defines a credible, plausible non-GAAP metrics that informs investors, and reconciles that non-GAAP metric with its closes legit GAAP counterpart, the SEC will allow it. WeWork went overboard with its cockamamie non-GAAP metrics, but many more firms manage to stay on the SEC’s good side.
Hundreds of firms report something about contribution margin. Restaurant businesses, for example, report contribution margin to give a sense of how much money their sites are making. Lots of software and IT services firms report it too.
The question for analysts is how to assess contribution margin — including the possibility that company management is hoping to distract you with glitzy talk about contribution margin so you’ll overlook those red-ink numbers in operating or net income.
The details are always in the footnotes, people. Calcbench can help you find them.
We strive to keep pace with current events here at Calcbench, so we spent most of last week pondering the same question that transfixed the rest of the civilized world.
Like, if we ever gave Mrs. Calcbench a Christmas gift to help her lose weight, the first thing she’d drop would be us. As to the rest of the Twitterverse commentary about the ad — Was it sexist? Did consumer antipathy really drive Peloton’s stock price down 9 percent in one day? — we offer no opinion.
The controversy did, however, leave us wondering — what does the data tell us about Peloton Interactive ($PTON)?
The data is somewhat scarce, because Peloton only went public in September and so far has filed one quarter of financial statements. Still, you can find a few interesting nuggets even at this early stage.
First, Peloton isn’t turning a profit yet, but it does have growth. Revenue and gross profit in third quarter 2019 both doubled from the year-ago period, while loss from operations fell 8.45 percent to $50.9 million. OK, those numbers are all spinning in the right direction. (Yep, we made that pun.)
When you look at the balance sheet, Peloton has $1.376 billion in cash thanks to that IPO, and only $327.6 million in current liabilities. So while the company isn’t turning a profit yet, it does have ample funds to cover those losses and to keep expanding.
More interesting are Peloton’s disclosures about its segment operations.
Peloton has two primary revenue sources: “Connected Fitness Products,” which are the bikes and treadmills it sells; and subscription to those online fitness instructors who keep
yelling at encouraging you via video screen while you cycle your keister off.
Connected Fitness Products are the larger source of revenue for Peloton — $157.6 million, or 69.1 percent of the $228 million in total revenue. But subscription revenue is growing faster, with better gross profit margins. See Figure 1, below.
That’s interesting for two reasons. First, Peloton could always boost subscription revenue per user by simply by raising monthly fees. In that sense Peloton is kinda like Amazon ($AMZN), which can conjure up extra revenue just by increasing the price of its Amazon Prime membership.
Second, however, is that subscription revenue can be more volatile. If the economy turned south for upwardly mobile fitness geeks, they might cancel those subscriptions. Plus, not everyone will buy a Peloton — and once the company approaches that market saturation point, subscription fees will become a more important part of ongoing revenue. So what happens then?
One could ponder all sorts of questions along those lines. Will Peloton introduce cheaper, lower-end equipment to keep growth alive in its Connected Fitness Product line? Will it somehow sell access to other content providers who want to access Pelotonian customers?
The key to finding answers will be delving into the data, quarter after quarter. You can do that with Calcbench.
We leave you with the famed Peloton ad itself, while we go take a lap.
Here at Calcbench we’re all for improving the quality of higher education, so we were delighted to discover recently that Calcbench data has been cited dozens of times by accounting professors conducting academic research.
We found this fact on Google Scholar, Google’s online index of academic papers. Type “Calcbench” in the search bar and you’ll get at least 65 results from the last six years.
What are some of the subjects where Calcbench data helped an academic? Well, a random selection of examples includes…
Google Scholar has many more examples online. If you’re an academic looking to see how Calcbench data might be put to use in the research setting, that’s a great place to find inspiration.
We’re also happy to discuss your specific ideas in detail to see how Calcbench might help. Just drop us a line at email@example.com and we’ll follow up with you ASAP. One of our senior executives here even teaches accounting and understands the road you travel.
Disney Corp. filed its 2019 annual report this week, and devout readers of this blog know what that means — more Hulu news!
After all, Disney ($DIS) has been a long-time investor in Hulu, along with Fox Corp., Comcast (now NBC Universal), and Time-Warner. We’ve written about Hulu numerous times over the years, trying to piece together its financial picture from morsels of data those four firms disclose. Since Hulu itself is a private company, assembling a complete picture has been hard to do.
But earlier this year, Disney acquired most of Fox’s assets, including Hulu. That led to big changes in Hulu’s ownership structure and disclosures about its operations — and with Disney’s most recent annual statement, we’ve hit paydirt.
Let’s begin with how much Hulu is worth. Consider the following table from Disney that shows the purchase price allocation for its $69.5 billion acquisition of Fox assets back in March.
First, Disney updated its allocation from the original deal value in March. That’s unusual, but whatever, we’ll get into that another day. Look at the second to last line, where Disney values its original 30 percent stake in Hulu at $4.737 billion as of Sept. 30. That implies a total value of $15.79 billion.
Above that table is the footnote disclosure about Disney’s acquisition of Fox, and there we find much more information.
For example, we already know that with the Fox acquisition on March 20, Disney owned 60 percent of Hulu: its own 30 percent share, plus Fox’s 30 percent share. Then Disney bought out the 10 percent share owned by Time-Warner for $1.4 billion — which makes sense, because that would value Hulu at roughly $14 billion back in April. Which is at least in the ballpark of the $15.78 billion Disney says Hulu is worth today.
Those deals, plus some other negotiating, left Disney owning 67 percent of Hulu, and NBC Universal the other 33 percent. And since the estimated value of Hulu is $15.78 billion, that means NBC Universal’s one-third share is worth $5.26 billion.
Remember that value. We’ll get back to it momentarily.
Well, duh, of course not. But Disney’s 2019 report gives us new insight into just how much money Hulu is losing.
Disney reports that from the date of acquisition (March 20) until the end of the fiscal year on Sept. 30, Hulu had $1.938 billion in revenue and $774 million in losses. If those are the numbers for six months, then we can reasonably guess that Hulu’s full-year performance is roughly double those numbers — $3.876 billion in revenue and $1.548 billion in losses.
That’s consistent with a prior estimate we made back in February, where we calculated that Hulu had lost around $1.5 billion in 2018, based on the share of losses its various owners were disclosing then.
One can hope that starting next year, Disney will report Hulu’s full-year performance annually and we can be done with the guessing games. For now, however, revenue of nearly $3.9 billion and net losses at 40 percent are a pretty good guess.
Now let’s get back to that NBC Universal stake worth $5.26 billion.
After those machinations with Fox and Time-Warner, Disney struck a deal with NBC Universal. Starting in January 2024, either party will have the right to compel Disney to buy out NBC Universal’s remaining stake in Hulu (either Disney can force NBC Universal to sell it, or NBC Universal can force Disney to buy it) for fair market value or $27.5 billion, whichever is greater.
Let’s state that more simply for clarity. That one-third stake in Hulu, which is worth $5.26 billion today even though the business is losing money hand over fist? NBC Universal has the right to sell it to Disney four years from now at a 5X markup.
We have many questions about that proposition. For example, in the Business Description segment of Disney’s disclosures, Disney says that Hulu currently has 29 million paying subscribers. None of Hulu’s past owners had disclosed subscribership in earlier years, but one Hulu executive said in February that the business had 25 million subscribers back then, with double-digit subscriber growth.
So the 29 million subscriber number makes sense. But if you divide those 29 million subscribers into that $3.876 billion in estimated annual revenue, that’s $133 per subscriber, or roughly $11.15 per month. (We’re cheapskates here at Calcbench and get the $5.99 minimum package.)
For Disney to justify that $27.5 billion price coming due in 2024, that implies a huge increase in revenue per subscriber (read: higher subscription fees), or a dramatic cut in costs, or some mixture of both. Like, Hulu is nowhere near turning a profit right now — let alone generating enough free cash flow to justify marking up the value from $5.26 billion to $27.5 billion.
In theory, Disney could cut those Hulu costs; Disney does have a bottomless pit of entertainment content, and the pit just got even more bottomless with the Fox acquisition. But Disney is shipping its best content to its new streaming service, Disney+. (We’re two episodes into “The Mandalorian,” by the way. Seems promising.)
So what’s the strategic plan here? Disney runs rival streaming services, where at least one is losing a fortune and has a balloon payment of $27.5 billion due in four years? We don’t know.
We just know the details are in the data — and you can find all that data on Calcbench to tell your own tale.
Starbucks filed its 2019 annual report last week, and we noticed an interesting detail: the largest coffee shop in the world, with stores all over the place, had not yet adopted the new accounting standard for leases.
That’s because thanks to a quirk of the company’s fiscal year, Starbucks ($SBUX) is one of the last large filers to adopt the new leasing standard, known as ASC 842. Which gives us yet another opportunity to see how ASC 842 can affect a firm’s balance sheet.
Allow us to explain.
First, the standard itself. ASC 842 requires firms to report the value of operating leases on the balance sheet; until now, those numbers had been buried in the footnotes. Every firm must list the value of the leased item as a right-of-use (ROU) asset, and the cost of future lease payments as liabilities.
Second, the adoption date. All firms must begin reporting under ASC 842 with their first fiscal year that began on or after Dec. 15, 2018.
For most large firms, that adoption date was Jan. 1, 2019. But Starbucks’ fiscal year begins every Oct. 1 — so its fiscal 2019 was already underway by Dec. 15, 2018. Starbucks didn’t need to start compliance with ASC 842 until fiscal 2020, which began just a few weeks ago. We won’t see Starbucks’ first filings under ASC 842 until early next year.
Meanwhile, since Starbucks did disclose an estimate of its operating lease assets and liabilities in the footnotes. So we can still build a model that shows us how the application of ASC 842 could affect Starbucks’ balance sheet.
See Table 1, below. Starbucks says that ASC 842 will add “$8 billion to $9 billion” in both ROU assets and operating lease liabilities. We split the difference and added $8.5 billion to the total assets and liabilities Starbucks just reported for 2019.
As you can see, adopting ASC 842 will expand Starbucks’ balance sheet substantially, and that will have follow-on consequences for the company’s debt-to-equity ratio (total liabilities divided by equity) and its return on assets (net income divided by total assets).
All with no real change to Starbucks’ business operations. Indeed, Starbucks says in its accounting policy disclosures that when it does start reporting under ASC 842, the standard will have no material effect on income.
Balance sheet, however — that’s another matter.
So there we were, skimming through average discount rates for operating leases among the S&P 500, because (a) we’re nerds who need a life; and (b) you can do that with Calcbench.
Discount rates are important because they help a company to determine the net present value of future lease payments. Those payments are now listed as liabilities on the balance sheet, thanks to the new accounting standard for leases, ASC 842.
When a company sets its discount rate on the high side, that results in a lower NPV for future lease payments, and therefore a smaller number liability reported on the balance sheet. Conversely, a low discount rate results in a higher NPV for future lease payments, and a larger liability on the balance sheet.
So those discount rates are important — and sharp changes to a firm’s discount rate are also important, since that can lead to big changes in liabilities on the firm’s balance sheet. Which can then lead to all sorts of questions about what’s going on.
Which brings us to Dish Network Corp.
As we skimmed over those discount rates for the S&P 500, we came to Dish Network ($DISH) and noticed that its discount rate had dropped, substantially. In the first and second quarters of 2019, Dish disclosed average weighted discount rates of 9.3 and 9.1 percent, respectively.
Then, in the Q3 statement Dish filed on Nov. 7, the average discount rate was 5.1 percent.
That’s a lot. As you can see in Fig. 1, below, other companies lower their discount rates too, but usually by only a few basis points — 3.5 to 3.38 percent, 4.2 to 4.1 percent, or something like that. Dish cut its discount rate by 400 basis points.
What’s up with that? We used our Trace feature on that 5.1 percent number to pull up the underlying disclosure.
There, we found a footnote disclosure that on Sept. 10, Dish took possession of $495 million in satellites and real estate that Dish had been leasing from Echostar — and remember, Echostar sold a chunk of itself to Dish earlier this spring.
This transfer of satellites and real estate is, apparently, part of that transaction. Dish said in its footnote that those leased assets were transferred over to Property, Plant & Equipment. Sure enough, the PPE line item ballooned from $1.89 billion in Q2 to $2.76 billion in Q3, an increase of 45.5 percent. The operating lease assets transfer was part of that balloon.
How does all that relate to the change in the discount rate to 5.1 percent? We’re not sure. One reasonable guess is that the remaining assets Dish still leases (from Echostar or anyone else) have a different market value or different lease structure, and therefore deserve a lower discount rate.
Regardless, the bigger story is that Dish moved around a substantial number of dollars on the balance sheet, shifting operating lease assets into PPE. That led to a subsequent drop in operating lease assets and operating lease liabilities, but the numbers only shifted around.
That’s why data is good, but data and footnote disclosure together is better. With Calcbench, you can get both.
Calcbench prides itself on tracking hard-to-find corporate data, and today we want to explore one niche of corporate reporting that’s always been one of our favorites: product warranty accounting.
A product warranty is a promise that a firm makes to its customers, that the firm will repair certain types of damage or even replace the whole product for a set number of days after sale. As such, companies need to accrue money to cover the cost of those warranties and list those accruals as liabilities (since they represent an obligation the company will eventually need to pay).
Moreover, the company also needs to record those accruals in the same period that the sales are made, so investors can get a better picture of the company’s true financial performance. Otherwise investors might see sales revenue rolling along quarter after quarter, and then suddenly depressed earnings when those warranty claims are finally processed months after initial sale.
We decided to play around with product warranty accruals among the S&P 500 for the last few years. Not many companies actually report these numbers; we found only 83 that reported accruals every year, 2014 through 2018. You can see the totals in Figure 1, below.
As you can see, total accruals jumped 25.4 percent over the last five years, from $33.85 billion in 2014 to $42.45 billion in 2018.
At a high level, one can argue that upward spike is a good thing. More warranty accruals means firms are selling more goods, to which those warranties are attached. Also, General Motors ($GM) accounts for a big portion of these numbers. For example, GM reported $15.2 billion in accruals in 2018, and $16.7 billion in 2017. Strip GM out of the sample, and total warranty accruals only rose 9.1 percent, from $25 billion five years ago to $27.27 billion last year.
We also did a company-by-company look at which firms had the largest increases in accruals, excluding GM. They were:
Of course, many other factors can drive a firm’s warranty accruals beyond gross sales. The company might change its warranty policy to offer fewer of them, or start selling more products that don’t come with warranties. Management might also decide to change its estimates for how many products might get returned, which would therefore change the accruals.
Calcbench users can get a better sense of those factors by examining warranty items in our Interactive Disclosure viewer. Lennar Corp. ($LEN) is a good example here.
Nominally, Lennar had a huge increase in warranty accruals; see that 175.3 percent increase, above. In the footnotes, however, we see that acquisitions in 2018 drove a lot of that growth, as Lennar assumed responsibility for those warranties issued by the acquired businesses. See Figure 2, below.
You can indeed find details like that, either in the Interactive Disclosure tool or in our Multi-Company page, where you can search a bundle of standard metrics related to product warranties. Those metrics include new warrants issued, additions to warranties due to acquisitions, warranty payments, and more.
You can also read our User Guide for product warranties and guarantees for more information, including visual examples and more detail on exactly how we track this data.
That concludes today’s deep dive into an obscure niche of hard-to-find financial data. We love this stuff, so expect more dives in the future!
Agribusiness giant CHS Inc. ($CHS) filed its Form 10-K for 2019 on Tuesday, and performance of its U.S. agriculture segment might best be described as wilted. It’s a good example of broad economic trends we all see in the headlines also showing up in the data. Let’s take a look.
First, the numbers. Total annual revenue fell by 2.4 percent, from $32.68 billion in 2018 to $31.9 billion this year. Net income did rise by 6.8 percent, but that was mostly due to a mix of good performance in non-agriculture operating units (CHS owns a few oil refineries that did well thanks to favorable pricing of Canadian crude); or special cost savings that might not appear again (the company had some favorable tax treatments that lowered the cost of goods sold, for example).
OK, that’s nice, but CHS is foremost an agriculture business. We started reading through the fine print thanks to our Interactive Disclosures page, and once we got past the oil refineries and tax treatments, we found items like this:
Translation: bad weather at the start of this year’s growing season put CHS on the back foot, and the trade war has kept CHS in that position ever since.
Figure 1, below, tells the tale. North America sales fell by $1.58 billion, a decline of 5.3 percent. That decline in North America sales — and note the sentence under the chart, which explains that “North America” really just means the United States — was responsible for almost all CHS’s decline in total revenue.
How long will CHS’s difficult position last? Nobody knows. Don’t take our word for it. In the company’s Management Discussion & Analysis, CHS said this:
The agricultural industry continues to operate in a challenging environment characterized by lower margins, reduced liquidity and increased leverage that have resulted from reduced commodity prices. In addition, trade relations between the United States and foreign trade partners, particularly those that purchase large quantities of agricultural commodities, are strained, resulting in unpredictable impacts to commodity prices and volumes sold within the agricultural industry. We are unable to predict how long the current environment will last or how severe the effects will ultimately be.
Translation: CHS doesn’t know how long the trade war will last either. The company did say it’s trying to streamline operations and efficiency, with a few tricks like better internal controls and a new ERP system. Maybe those steps will help. Then again, Sales, General & Administrative expenses rose by 8.9 percent for 2019, so maybe not.
Either way, the key to CHS’s long-term future is an end to the trade war. U.S. and Chinese trade negotiators are supposedly edging toward resolution of the dispute, and may announce a preliminary deal in December.
That would be welcome news to CHS, which right now is stuck reaping the whirlwind.
Calcbench is proud to announce our latest master class video, now on our Research Page — another conversation with investment manager Jason Voss about how to prepare your portfolio for possible recession.
We post these master class videos every few months, where we take a deep dive into a specific subject related to financial analysis. The first half is an interview who knows the subject matter better than us; the second half then walks through how Calcbench can help you explore whatever topic we discussed in the first half.
Our previous master class videos considered data analytics in financial analysis, and five common mistakes financial analysts make in their work. This time around, Voss — who has a day job as CEO of Active Investment Management Consulting — offers three suggestions on how to position your portfolio to reduce the pain of recession.
We won’t spoil the whole master class for you, but suffice to say Voss’s suggestions range from better risk analysis, to harvesting deferred tax assets and liabilities, to innovative ways to stock up your portfolio with cash. Then Pranav Ghai, our own CEO and co-founder, walks through how you can use Calcbench tools to do those three things.
The whole show lasts about 37 minutes.
If you have suggestions for future master class videos, email us at firstname.lastname@example.org and tell us what’s on your mind. We’re eager for feedback, and hope you find the master classes useful!
Yes, yes — we talk constantly about the new standard for disclosure of operating lease costs, and we just published an in-depth report about the new standard’s effect on the retail sector.
Well, we have even more. Today we look at how the new standard changes the return on assets for two of those retailers: Burlington Stores ($BURL) and Michaels Cos. ($MIK).
Return on assets (ROA) measures how efficiently a firm manages its assets to create a dollar of profit. It’s calculated as net income divided into total assets, and is expressed as a percentage. The higher the percentage, the more efficiently a firm puts its assets to work to make money.
But wait! The new leasing standard (ASC 842, if you care) requires firms to report the value of leased assets on the balance sheet. Mathematically, that means the standard is increasing the denominator of the ROA equation.
So could a firm see its assets expand so rapidly that ROA actually falls, even if net income goes up? Yes it could. Burlington Stores and Michael’s Cos. are two cases in point.
See Figure 1, below. It compares their net income and assets in Q4 2018, just before the ASC 842 standard went into effect; with the same numbers in Q2 2019, after ASC 842 arrived.
As you can see, ROA for both firms fell sharply, solely because of ASC 842. We calculated what their Q2 2019 numbers would have been without operating lease assets included. In both cases, ROA would have risen.
That change in operating metrics isn’t necessarily disastrous. After all, the business operations themselves didn’t change to any material degree; accounting rules did. The trick for firms in this predicament is to communicate the reasons behind that change clearly and effectively, so investors won’t misunderstand what’s happening.
Now we’re off to pick up a new coat and some crafting supplies. Winter is coming and we want to decorate our laptops for the holidays.
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