Here’s news you definitely want to read: academic research showing that changes in the text of a company’s Form 10-K correlate to future changes in the share price, often months in advance.
Before you say, “Well, duh,” let’s be perfectly clear. The mere fact that the text of the 10-K has changed is what correlates to future changes in share price — not what the specific changes actually are.
That is, if a company starts using more negative language in the Risk Factors or MD&A sections, it’s highly likely that the stock price will decline several months later. Likewise, a company using more positive language will also likely see its share price rise. The specifics of why the language is changing — looming trade wars, recession risk, labor shortages, materials costs — don’t matter.
So says a recent article in the New York Times, which itself is based upon academic research from Harvard Business School and DePaul University. One key point from the Times article:
The stock market rarely responded to the subtle hints in the reports immediately. In fact, it typically took several months for whatever good or bad news was embedded in the reports to be widely understood — and to move the stock market.
This delay means that there is a profit opportunity for those able to exploit it, the researchers said.
As it so happens, Calcbench subscribers can exploit those changes if you like. Our Interactive Disclosure tool lets you find specific disclosures quickly, and also lets you compare prior years’ disclosures — with color coding to help you identify what’s been added or removed. Users of our API may also be interested in knowing that this can be done programmatically as we have shown in previous blog posts.
Take a look at this example, below. We pulled up Google’s risk factors disclosure. Its 2017 10-K disclosure is on the left, its 2016 10-K disclosure on the right.
We can quickly see that Google deleted some language describing its competition from 2016 to 2017 (in red), while adding a quick line (shown in green) about investing heavily in “hiring talent” to its 2017 report that didn’t exist in its 2016 language.
To find those changes, all you need to do is press the “Show All History” or “Add Previous Period” options immediately above the disclosure panel. The most recent disclosure will always appear in plain text. Changes will appear in the prior period: additions in green, deletions in red.
There’s also that point in the NYT article that many investors apparently don’t notice or understand changes in the text for quite some time. To find a competitive advantage, then, Calcbench users can define peer groups of companies they follow, and set email alerts for when those companies have new filings.
Once you get the alert that some new statement has been filed, you can hop onto Calcbench and compare that disclosure to prior statements using our process defined above.
Last month we had a post about Pacific Gas & Electric’s disclosures related to California wildfires and to climate change generally. Those disclosures (across multiple filing periods) were fairly extensive: they cited wildfires specifically, and connected the dots from climate change to extreme weather events to wildfires squeezing PG&E ($PGE) operations financially.
So as the 2019 proxy season starts warming up (no pun intended), we wondered what other firms have been saying about climate change lately. By the way, if you want to be able to do some of these look-ups yourself, here is a handy tutorial
Some firms say a lot about current or probable regulation, without saying much about how those regulations affect the firm itself. For example, paper and packaging manufacturer WestRock ($WRK) included more than 1,000 words about climate change in its most recent annual report. The disclosure ranged from requirements under the Paris Accords, to possible changes to Clean Air Act regulations, to greenhouse gas trading schemes in Quebec.
Useful to know, but how do all those rules specifically affect WestRock? The company said only this:
The regulation of climate change continues to develop in the areas of the world where we conduct business. We have systems in place for tracking the GHG emissions from our energy-intensive facilities, and we carefully monitor developments in climate change laws, regulations and policies to assess the potential impact of such developments on our results of operations, financial condition, cash flows and disclosure obligations.
Still, that’s more disclosure than what Tyson Foods ($TSN) had to say. The company cited the existence of environmental regulation and the possibility that more regulation could cost Tyson more money, but that’s about it:
Increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change may result in increased compliance costs, capital expenditures and other financial obligations for us. We use natural gas, diesel fuel and electricity in the manufacturing and distribution of our products. Legislation or regulation affecting these inputs could materially affect our profitability. In addition, climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience and may require us to make additional unplanned capital expenditures.
We were hoping for a statistic about cows and their, um, methane production. No such luck.
Starbucks ($SBUX) mentioned climate change only once, in passing: “The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, such as weather (including the potential effects of climate change)…” Other firms, such as Apple, made similar disclosures that simply noted climate change could cause big weather problems, which could disrupt operations. That’s not wrong, although not particularly detailed, either.
Meanwhile, Air Products & Chemicals ($APD) gives a more precise discussion of how its products and operations create carbon dioxide, and which regulations therefore might affect its business:
We are the world’s leading supplier of hydrogen, the primary use of which is the production of ultra-low sulfur transportation fuels that have significantly reduced transportation emissions and helped improve human health. To make the high volumes of hydrogen needed by our customers, we use steam methane reforming, which releases carbon dioxide. Some of our operations are within jurisdictions that have or are developing regulatory regimes governing emissions of greenhouse gases (“GHG”), including carbon dioxide…
The company goes on for a few more paragraphs. Again, no discussion of possible financial impact from climate change issues, but it’s still more than what other companies say.
We should note here that SEC rules don’t require companies to disclose specific financial implications of climate change anyway. Guidance published in 2010 only directs companies to discuss the potential implications of environmental regulations in response to climate change, or how climate change might increase or decrease demand for the company’s products.
Little surprise, then, that the disclosures above do veer to discussing regulatory regimes; that’s tangible, and fodder for disclosure. So is the generic boilerplate akin to what Starbucks said, that climate change might ruin the coffee beans.
On the other hand, shareholder activists do push for more climate change disclosure, and proxy season (which will start in another six weeks or so) is when they push. So if anyone is curious to see what companies already disclose, to help you understand how a proxy fight might shake out, our Interactive Disclosures database can be a great place to start. Search “climate change” in the text field on the right-hand side, and see what you find.
Here at Calcbench we love all analysts, so today we want to give a reminder to all the quantitative analysts out there — we have plenty of time-stamped financial data that can help you backtest your algorithms, and are happy to share.
Our standard dataset consists of this, from the S&P 500. It’s what you see when you open our Multi-Company Page.
We have all that data above, plus other key data and financial metrics, all time-stamped. Those time-stamped data fields include data reported, period start and end, fiscal year and fiscal period, and a few other items.
If you need that data as the raw material to field-test your algorithms, just drop us a line at firstname.lastname@example.org. We’re happy to discuss what you need and how we can get the right data to you.
For the non-quants wondering what all this is, let us explain. Quants create algorithms based on financial data. They test those algorithms using historical data, and need to know the time each piece of data became available to avoid “look-ahead bias.”
That bias happens when your model is running through a year’s worth of data, but you accidentally include some event that happened the 22nd of the month, while your model is still working as if today is the 18th of the month. The algorithm is simulating events, but mistakenly using data it would not have known at some given point in time.
Quants can download this example of our time-stamped data, looking at Microsoft’s data. We have much more, for many more companies, and are happy to work with you to deliver the data you need. Just ask us at email@example.com or visit our website, www.Calcbench.com, and tap on the “Chat with us!” box in the lower-right corner of your browser.
Calcbench has another feature we’re happy to offer to subscribers at our professional level: a quick, easy way to find companies that have changed their financial controls and procedures lately, and to see what those changes were. Here’s how it works.
First, go to our Multi-Company database page and select the group of companies you want to study. As always, you can use one of our pre-selected groups (the S&P 500, the Dow Jones Industrial Average), or build a peer group of your own.
Then start typing “Controls and Procedures” in the Find Standardized Metrics field on the left side of the page. Select that choice, and a list of every firm that reported a change will appear. See Figure 1, below.
You might also notice the Trace feature on the right side of each entry. Click on that trace, and you’ll see the actual disclosure the company reported. For example, if you trace ADM’s disclosure about changed to controls, you get this:
The Company is implementing a new enterprise resource planning (ERP) system on a worldwide basis as part of its ongoing business transformation program, which is expected to improve the efficiency and effectiveness of certain financial and business transaction processes. The implementation is expected to occur in phases over the next several years. The Company has currently implemented changes to certain processes in corporate finance, two processing businesses, and in over 200 locations, and will continue to roll-out the ERP system over the next several years. The Company has appropriately considered these changes in its design of and testing for effectiveness of internal controls over financial reporting and concluded, as part of the evaluation described in the above paragraph, that the implementation of the new ERP in these circumstances has not materially affected its internal control over financial reporting.
More interesting are the companies that disclose a material weakness or “not maintain” flag. That generally is a sign of serious trouble in financial reporting. For example, Cognizant Technology Corp. disclosed a material weakness, and that traces back to this discussion:
10-Q for the third quarter of 2017, we disclosed a material weakness in our internal control over financial reporting as we did not maintain an effective internal control environment. Specifically, we did not maintain an effective tone at the top as certain members of senior management may have participated in or been aware of the making of potentially improper payments and failed to take action to prevent the making of potentially improper payments by either overriding or failing to enforce the controls established by the Company relating to real estate and procurement principally in connection with permits for certain facilities in India.
This relates to possible bribery of foreign government officials, which is a violation of the Foreign Corrupt Practices Act and a big no-no in the eyes of the Justice Department. Cognizant disclosed that investigation in 2016 (along with the departure of its then-president), and the above item just confirms that, yep, its accounting procedures still need of some reconstructive surgery.
Again, to be clear: this feature is available only to subscribers at our professional level. We have two tiers of subscription, professional and premium; plus a free basic service. You can visit our subscription page to see what features each category of service gets, and of course if have questions about your own subscription you can always email us at firstname.lastname@example.org.
Most companies report effective internal controls most of the time, so you won’t see lots of these flags cropping up. That said, changes in controls and procedures can be a big deal, so when they do arise in a company you’re following, it’s worth a closer look. Calcbench just wants to give you a simple, fast way to do that.
Here’s something you don’t see often: the Securities and Exchange Commission rapping a company on the financial knuckles for violations of non-GAAP reporting.
The agency hit ADT (yes, the home security people) with a $100,000 fine for poor disclosure relating to ADT’s financial statements for fourth-quarter and full-year 2017, plus first-quarter 2018. Specifically, ADT “did not afford equal or greater prominence to comparable GAAP financial measures” — which violates federal securities rules.
What exactly did ADT ($ADT) do? According to the SEC’s administrative order, ADT’s non-GAAP metrics it reported in 2017 included adjusted EBITDA, adjusted net income, and free cash flow before special items. None of those measures are improper unto themselves, if a company also reports the closest comparable GAAP measure with equal prominence. That equal prominence part is what ADT didn’t do.
For example, in the headline of ADT’s FY 2017 earnings release, the company proudly said that adjusted EBITDA was up 8 percent year-over-year (yay!) but omitted the detail that net income (the closest GAAP metric to adjusted EBITDA) was actually down for the same period. ADT did the same with the headline of its Q1 2018 earnings release.
ADT had a second non-GAAP indiscretion in its Q1 2018 earnings release, too. Aside from the headline issue, ADT then listed “FIRST QUARTER 2018 HIGHLIGHTS” on the first page of the earnings release, followed by nine bullet points. Three of those bullet points reported non-GAAP metrics: adjusted EBITDA, adjusted net income, and adjusted net income per share.
ADT did not, however, also include the closest comparable GAAP metrics right there in the bullet points (or, “the HIGHLIGHTS section,” as the SEC said in its settlement order). Only further down in the second and sixth full paragraphs did ADT report that its net loss grew from $141 million in Q4 2017 to $157 million in Q1 2018.
Calcbench does track earnings releases from SEC registrants. Subscribers can find earnings releases in our Interactive Disclosures database, by selecting the Earnings Release choice from our pull-down menu of disclosures on the left-hand side of the screen.
We pulled up ADT’s Q1 2018 earnings release to take a look. The offending headline and bullet points (also known as “HIGHLIGHTS”) are in Figure 1, below.
To the untrained and uncynical eye, those HIGHLIGHTS do look good. Only in the second paragraph, as the SEC noted, do we see the statement that net income was actually a net loss, and the net loss was getting larger.
Worry about the proliferation of non-GAAP was all the rage in 2016, and on this blog we’ve chronicled several non-GAAP enforcement actions by the SEC since then. Still, non-GAAP reporting is permissible under SEC rules, and is widespread among the S&P 500. The three crucial reporting principles are that a company: (a) explain why it believes its non-GAAP metric is worth including; (b) also reconcile that non-GAAP metric to the closest GAAP metric; and © give both GAAP and non-GAAP disclosures equal prominence in the earnings release.
For those of you who want to geek out on our prior non-GAAP discussions, feast on this:
Calcbench noticed last week that public utility Pacific Gas & Electric ($PCG) has proposed a rate hike of nearly $2 billion on California consumers, with more than half of that sum earmarked for PG&E to fight wildfires.
That’s a lot of money. It would increase the average California consumer’s electric bill by $10 per month. PG&E critics are already harping about the rate hike — a “shameless request,” according to the San Francisco Chronicle — and right now it remains unclear exactly how much of that rate hike state regulators will actually approve.
At Calcbench, however, we had a different question: What has PG&E already disclosed about its exposure to wildfire risk? After all, the scientific consensus is that climate change is drying out the California landscape, increasing the chance and severity of wildfires. And under SEC rules, firms are required to discuss risk from climate change.
So what has PG&E said about the issue? With our Interactive Disclosure database, you can see for yourself.
We simply pulled up PG&E’s risk factors and searched for “climate.” Lo and behold, there was wildfire risk right in the firm’s most recent 10-K—
In particular, the risk posed by wildfires has increased in the Utility’s service area (the Utility has approximately 82,000 distribution overhead circuit miles and 18,000 transmission overhead circuit miles) as a result of an extended period of drought, bark beetle infestations in the California forest and wildfire fuel increases due to record rainfall following the drought, among other environmental factors… Events or conditions caused by climate change could have a greater impact on the Utility’s operations than the Utility’s studies suggest and could result in lower revenues or increased expenses, or both.
The company mentions wildfires specifically, and warns that its response to climate change might lead to increased expenses. Increased expenses are exactly what PG&E’s requested rate hike are all about: to cover the costs of new utility poles, better weather forecasting software, and cameras to monitor for wildfires and damage.
In the firm’s most recent quarterly report, filed Nov. 5, PG&E had even more to say, including this line—
The combined effects of extreme weather and climate change also impact this risk. For example, in 2017, there were nearly double the number of wildfires than the annual average, including five of the most devastating wildfires in California’s history.
We could find other examples, but you get the picture. PG&E does treat climate change and its consequent effects as something important enough to discuss with investors. Maybe the ratepayers aren’t happy, but investors can’t say they were not warned.
More than 2,000 corporate securities lawyers and accountants convened in Washington this week for the annual AICPA conference on public company accounting issues, where a parade of officials from the Securities and Exchange Commission took the stage to talk about what they want to see in corporate disclosures.
One subject that came up repeatedly: Brexit.
As you may have seen already, the British government is having a nervous breakdown right now because it can’t figure out what sort of departure it wants to have with the European Union — even though the deadline for a “hard Brexit” is March 29, barely one quarter away.
So, um, what exactly are companies supposed to disclose about Brexit, if the Brits themselves don’t know what they’ll do? And whatever companies might disclose about Brexit, how can you easily find it in Calcbench?
The SEC wants companies to disclose anything that might be material to investors. Bill Hinman, director of the SEC Division of Corporation Finance, told the AICPA conference folks that could be anything from currency fluctuations, to regulatory uncertainty, to supply chain disruptions from goods that might no longer flit back and forth between Britain and the EU.
OK, not a ton of specificity there, but better than nothing. So where do financial analysts dig up Brexit disclosure on Calcbench?
As always, start with our Interactive Disclosure database, where you can easily search narrative text. Set the group of companies you want to search, the range of periods you want to search, and then type “Brexit” into the text field on the right-hand side. That’s really all there is to it. See Figure 1, below.
A wide range of statements, to say the least. Most of the time, Brexit disclosures appear in the company’s discussion of risk factors, sometimes in the Management Discussion & Analysis. We also noticed them in the Controls & Procedures section, Subsequent Events, and even in the occasional earnings release.
Here’s a rather skimpy example from Starbucks ($SBUX), filed in its 10-K on Nov. 16. Starbucks was listing various risks to its international business, and then said —
uncertainties and effects of the implementation of the United Kingdom’s referendum to withdraw membership from the European Union (refer to as “Brexit”), including financial, legal, tax and trade implications;
That’s all Starbucks had to say, which was not much. At the AICPA conference, Hinman specifically frowned on companies that roll through Brexit risk as one bullet point among many (although he didn’t identify Starbucks or any other company by name).
Contrast that disclosure to what Mattel ($MAT) said in its most recent quarterly filing on Oct. 25:
During June 2016, the referendum by British voters to exit the European Union (“Brexit”) adversely impacted global markets and resulted in a sharp decline of the British pound sterling against the U.S. dollar. In February 2017, the British Parliament voted in favor of allowing the British government to begin the formal process of Brexit and discussions with the European Union began in March 2017. In the short-term, volatility in the British pound sterling could continue as the United Kingdom negotiates its anticipated exit from the European Union. In the longer term, any impact from Brexit on Mattel’s United Kingdom operations will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. Mattel’s United Kingdom operations represented approximately 4% of Mattel’s consolidated net sales for the nine months ended September 30, 2018.
That seems much more in step with the SEC’s line of thinking. Mattel mentions currency fluctuations and regulatory uncertainty, and gives an estimate of how much U.K. revenue contributes to overall sales.
And don’t forget, you can also use the Show All History tab at the top of the disclosure viewer to see how a company’s disclosure may have changed from one period to the next. In Mattel’s case, we can see that essentially nothing has changed all year long, except to update references to the last three, six, or nine months. (See Fig. 2, below.)
Is that static disclosure reasonable, given how the Brexit drama-rama has unfolded in 2018? It’s not Calcbench’s place to answer that question — but it could be yours, if Mattel is a company you follow. We simply offer you a crisp, easy way to find Brexit disclosures and then decide whether you should ask more questions.
That’s all for now. We’re off to watch the BBC live feed to see what happens next.
From time to time at Calcbench we sound a somewhat skeptical note about how much longer many companies can keep the good economic times rolling. Today Campbell Soup ($CPB) filed its latest quarterly report, and it demonstrates a few examples of the pressures we see.
At the top line, revenue growth looks good — up 24.6 percent, to $2.7 billion. Except that growth largely comes from two acquisitions Campbell closed earlier this year. Organic growth fell 3 percent.
We watch Campbell Soup because it relies heavily on aluminum for its soup cans, and we’re mildly obsessed with the Trump Administration’s tariffs on raw materials like aluminum. So we’re always looking for materials-heavy companies to see how their cost of revenue numbers are changing. The theory being that their costs may be rising due to tariffs and other expenses, eating away any revenue growth they see.
Well, Campbell saw big jumps in cost of revenue (up 35.7 percent), and marketing costs (up 13.2 percent), and administrative costs (up 18.1 percent). Throw in some restructuring charges, a slight trim in R&D costs, and you end up with total costs rising 34 percent — well above that 24.6 percent increase in revenue we just mentioned. See Figure 1, below.
In other words, those acquisitions earlier this year have Campbell working harder just to stay in place. Yes, that’s allowed to happen right after a large acquisition, since integrations are not easy. Still, financial analysts might want to tuck that fact away for a few quarters, to see whether the synergies Campbell promised at time of the deal closing actually come to pass.
Then we get to taxes. Yes, Campbell enjoyed a nice boost this year thanks to the corporate tax cuts Congress enacted last year. But in that case do the math—
So if we had never passed a corporate tax cut, and Campbell had to pay the same 28 percent rate on this year’s $257 million in earnings — that would be $72 million in taxes, and cut its net income from the $194 million it actually did report to $185 million.
In other words, the tax cut is propping up Campbell’s net income because organic growth isn’t there. You could also argue that the M&A deals earlier this year propped up revenue growth.
And once those tax cuts and M&A deals aren’t there — what happens then?
In theory, what happens is Campbell continues to remake itself away from a seller of soup to a seller of soup, snacks, and other food products. (The acquisitions earlier this year were in the snack business.) That is somewhat happening: soup sales actually fell in Q3 2018 compared to one year ago, while snack and other meal categories boomed (thanks to the acquisitions).
Will Campbell’s continue to pull off that re-engineering? Let’s hope so. 2018 was tough on Campbell: its share price steadily declined from $50 one year ago to $38 today.
One might even say Campbell got crunched like, well, an empty can.
We noticed an interesting item the other day about Amazon.com, and a squabble the company seems to be having with the Securities and Exchange Commission over how Amazon ($AMZN) is — or is not — reporting revenue from Amazon Prime membership.
The debate is unfolding via comment letters: written notices that SEC staffers sometimes send to a company, when those staffers have questions about something reported in the company’s financial statements.
For example, the SEC sent a comment letter to Amazon on Aug. 13, stating:
We note from statements in your Current Report on Form 8-K filed on April 18, 2018 that you have exceeded 100 million paid Prime members globally and that you shipped more than five billion items in 2017 with Prime worldwide. In future periodic reports, please disclose the percentage of net sales attributable to sales to Prime members versus sales to non-Prime members.
OK, that sounds more like a command than a comment or request to us, but such is life when you get correspondence from the SEC. Still, companies can politely tell the SEC that they’re sticking to their guns — which is what Amazon did in a reply on Aug. 30.
We respectfully do not believe that net sales attributable to Prime members versus sales to non-Prime members is meaningful or useful information… As with Alexa, our Kindle e-readers, and other offerings and services, Prime is only one element that supports our focus on selling a wide range of products and services. As a result, whether sales are associated with Prime membership does not reflect on or provide useful information about the nature of our net sales and does not reflect how management views the business.
We won’t speculate on who’s right or wrong in this dispute about Prime member revenues. We simply want to remind Calcbench subscribers that you can tap into all these comment letters as they become public.
How? Simple. Visit the Interactive Disclosures page, and select the company you want to research. Then open the “Choose Footnote/Disclosure Type” menu on the left side of your screen, and select “SEC Comment Letters & Responses.” Our magical databases will do the rest for you. (See Figure 1, below.)
Subscribers can also vist a special page we created to post recent comment letters. The URL for that page is plain old https://www.calcbench.com/recentcommentletters.
All SEC comment letters are eventually made public, but they are not immediately made public. By law the SEC must wait at least 20 days before publishing a comment letter, and under some circumstances (say, a pre-IPO company that has submitted its S-1 Registration Statement), the wait can be longer.
Suffice to say that like all other securities filings, once those comment letters are indexed and uploaded to the SEC database, Calcbench is on the case — you’ll be able to see that correspondence in our own databases, properly tagged and searchable, within minutes of it hitting the SEC. And yes, you can use our email alerting function to get a notification when we have a new comment letter, too.
Finally, we noticed that this story about Amazon hit the financial reporting press about seven days after those comment letters became public. So there really is an advantage to setting your preferences for email alerts any time one of your favorite companies gets a comment letter — you might be able to get ahead of the pack, because you saw the data first.
Here at Calcbench, high-quality data is what makes us feel hale and healthy. For everyone else, however, today we’re going to take a quick look at sales of blockbuster drugs in the pharmaceutical industry.
We first identified all listed pharmaceutical and life sciences firms in our database. Then we visited our Segments, Rollforwards, and Breakouts page, to find firms that listed specific product sales that exceeded $1 billion in 2017. (That was our threshold for “blockbuster” drugs.) We wanted to know: to what extent do any large pharmaceutical firms depend heavily on blockbuster drugs for their revenue stream?
First place went to Alexion Pharmaceuticals ($ALXN), with 89 percent of its total $3.55 billion in 2017 revenue attributed to one blockbuster drug: Soliris, an intravenous treatment for autoimmune disorders. Alexion reported $3.14 billion in Soliris revenue last year.
Altogether, however, we found 20 pharmaceutical firms dependent on blockbuster drugs. Table 1, below, shows the top 10 as ranked by dependency.
Dependency on blockbuster drugs is useful to know because that hints at broader corporate strategy. A firm can be relatively small, like Alexion, and still depend heavily on a few blockbuster drugs. A firm can also be huge, like Pfizer or Merck, and depend on many blockbuster drugs.
In either case, the same questions arise: what happens when the patents on those blockbusters expire? What is the company doing now to keep the pipeline of future blockbuster drugs full?
Conversely, a firm like Mylan or Abbott might have large total revenues, but no blockbusters. In that case, the firm probably sells generics. There’s nothing wrong with that per se, but it’s a fundamentally different business model with much lower profit margins. So even though Abbott and Gilead Sciences are nearly the same size in total revenue, they are radically different companies because of blockbuster drugs. Abbott has none, Gilead has lots.
A person wouldn’t necessarily know that unless he or she looked at the revenue details for each company. That’s what Calcbench lets you do.
Users would need to export the Segment data into Excel, and then apply a few rules to get the total blockbuster sales by company. But the exercise itself is not hard (took us less than an hour), and then a financial analyst can have that data-drive, specific insight you might want to put in a client note or put to the CFO on that next earnings call.
Calcbench: helping you take the red pill of data analytics since 2011.
A senior research analyst we know, AJ, was interviewing for a spot at a large asset management company. As part of the process, AJ was asked to “review” a bank and prepare a financial analysis, to present at an interview in two weeks’ time.
At the pension fund where he previously worked, AJ had access to a range of financial data resources including CapIQ, FactSet, and Bloomberg. Now, on his own, AJ needed a way to access significant amounts of data quickly.
AJ, like many others, was accustomed to looking at 10-year history. After all, banks are cyclical, so you want to catch two cycles of information to understand how metrics behave over time. Manually collecting the data would have taken a week (and fingers crossed there were no restatements), which left little time for analysis.
What to do?
Fortunately, AJ had friends at Calcbench. Within two days AJ was able to collect the data he needed for the bank and export it into his model, an exercise that he said would have taken a full week to do on his own. In addition, AJ was able to move confidently into his analysis phase since the data was cleaned and vetted.
AJ — who eventually landed the job — was thrilled. “Using other products like CapIQ, Bloomberg and FactSet, you have to find the data,” AJ said. “At Calcbench, it’s the first thing that you pull up. You can see the financial statement in its basic form, just the way we’re used to seeing it. And it’s in line with the way the company wants you to see it.”
AJ was happy that the financial statements were not “genericized” like some providers offer. He didn’t have to interpret data or determine how to track it. Above all, however, he just saved lots of time.
So what’s this analyst’s plan moving forward? First, get settled in the job. Second, get the word out that Calcbench is a great tool for financial analysis.What can Calcbench do for you?
We noticed an article on Bloomberg this week about the healthcare industry, and the frustration some medical practices are experiencing with high-deductible healthcare plans — that patients with those plans aren’t paying their bills on time, forcing medical practices to spend more time collecting overdue debts.
Interesting, we thought, because Calcbench grumbles about health insurance costs as much as anyone else these days. So how might a financial analyst following healthcare companies use our data to get a clearer sense of that problem in the companies you follow?
We did a quick experiment here using lab testing kingpin Quest Diagnostics as the target.
First, we visited our Multi-Company Page and entered Quest as our company to study. Immediately results started appearing on our screen, of both Quest and its peers: Laboratory Corp. of America, First Choice Healthcare Solutions, Genomic Health, and a bunch more.
A good start, but the standard results you see are revenue, operating income, operating cash flow, and assets. We wanted to explore unpaid debts and how that line item may be changing over time.
Well, unpaid debts are reported as account receivables. So we went to the Search Standardized Metrics field above our list of results and started typing in “receivables.” Right away, one option that came up was “increase or decrease in receivables.” We selected that one, and a new column of data appeared listing that change for each company we were staring at.
Better, but we specifically want to see the changes reported at Quest over the last several years. How do to that?
Move your cursor back to the listing for Quest Diagnostics on the left side, and a few options will magically appear — including one that says “history.” (We’ve enhanced the image below and noted it in red.
Click on the history feature, and you’ll see a period-by-period summary for each line item for that specific company you selected. See Figure 2, below.
Now we can see the historical data we wanted to find. Then it’s a matter of exporting that data to Excel (shout here for our Excel Add-In feature), so you can run whatever analysis you want. We decided to compare period-by-period trends in revenue and change in account receivables. You can clearly see the trend line for revenue is going up, while the trend in receivables is going down.
So yes, Quest might be having more difficulty collecting payment from patients with high-deductible plans, but the data doesn’t suggest any calamity that might be material to the company. You could also then visit our Interactive Disclosures page to dive into the data more deeply, perhaps searching for “deductible” or “debts” in the narrative disclosures for more detail.
Most important for Calcbench users is simply the ease of finding all this data. We ran these searches within a few minutes. Professional analysts who know exactly what they want to search can do the same, and get results with, well, surgical precision.
A solid majority of the S&P 500 have now filed their third-quarter 2018 numbers, so you know what that means: another look at whether cost of revenue and SG&A costs are accelerating faster than revenue.
Calcbench began studying that question earlier this year amid trade wars and tight labor markets, to see if those pressures were outpacing revenue growth. From time to time they were outpacing revenue, which consequently must lead to a decline in operating income. That pressure could also explain some of the stock market decline we’ve seen across 2018.
Overall, the third quarter looked much better for large companies. We examined the filings of more than 360 of the S&P 500. The bottom line: revenues up briskly, expenses up modestly, and therefore operating income rose a pleasant 12.2 percent compared to the year-ago period. See our nifty chart, below.
That said, the devil remains in the details. In our sample of 361 companies, 148 of them had the cost of revenue growing faster than revenue overall, and 158 had SG&A costs rising faster than revenue overall. So while the collective picture might look good, financial analysts will still find plenty of specific companies where the direction of revenue and costs does not look good.
And for those who need a reminder — why are we doing this at all?
Because if costs rise faster than revenue, operating income falls. In theory, companies facing that predicament could still please the Wall Street gods with good net income thanks to certain outside factors, such as last year’s huge corporate tax cut. That’s exactly what we saw at the start of this year when companies reported 2017 numbers.
The problem: for many companies, that tax cut accounted for most of their growth in net income. The feel-good high from that one-time injection to the income statement is long gone. Congress won’t be cutting corporate taxes again this year.
So now companies need to boost net income the old-fashioned way, by generating revenue and controlling costs. They need to do that just as several new outside factors — tariffs and a tight labor market — make controlling costs more difficult. So increasing revenue becomes more important.
Right now it seems like plenty of companies are navigating that path well enough. Then again, plenty of other companies aren’t.
Calcbench has been hot on the new accounting standard for operating leases lately, since the standard goes into effect on Dec. 15 and could have significant implications for companies that carry large operating lease obligations on their balance sheet.
Now, if you want an example of just how significant those implications can be, look no further than rival shipping giants FedEx and UPS.
We picked them because the two firms are roughly similar in revenue, net income, assets, and liabilities. FedEx, however, pursues a business model where it leases much more space than UPS does. The upshot: FedEx’s obligations for future lease payments are 11 times larger than those for UPS.
Now, recall that the new lease accounting standard requires companies to report those future lease payment obligations as liabilities on the balance sheet; and to add a corresponding “right of use” asset on the asset side of the balance sheet too.
Well, return on assets equals net income divided by total assets. So when you add items to the asset side of the balance sheet, you are expanding the denominator of that formula and your ROA must decline. It’s math.
Take a look at this comparison of FedEx and UPS, all pulled from Calcbench data.
We examined the companies’ current leasing obligations, added them to the liabilities side, and then added an equal amount to the asset side for the offsetting right-of-use asset. Then we recalculated an adjusted ROA according to the new leasing standard.
This is the result: Two companies of similar size, but one (FedEx) experiencing a considerable change in ROA simply because of an accounting change, rather than some fundamental change in business operations.
Financial analysts, therefore, might want to ask FedEx on its next earnings call: do you have any debt covenants that might be triggered when ROA falls below 7.5 or 7 percent? Do any executive compensation agreements tie to ROA? Anything else we should know about involving changes to ROA?
You get the picture. (Like, literally; we supplied the picture three paragraphs above.) Calcbench can dig up the data you need. Whether you feed it into your own Excel models or just fiddle around on the fly, we have it. You can find it.
Great news for financial analysts paranoid about getting the latest data as soon as it’s filed! Calcbench has overhauled our email alert function so you can be even more specific in what alerts you want to receive for the companies you follow.
Our expanded alert system lets you designate email alerts for standard 10-K and 10-Q filings as always — plus earnings releases, SEC comment letters, IPO prospectuses (prospectii?), and a bevy of other events that trigger Form 8-K filings. You can now get alerts on 8-K events such as merger announcements, material agreements, delistings, auditor changes, executive officer departures, and more.
Even better, we have redesigned the user interface to set those alerts. Now just visit your email alert preferences at https://www.calcbench.com/account/emailalertpreferences, and you’ll see all the peer groups and companies you follow in neat rows with check-boxes for the types of alerts you want. Take a look at Figure 1, below.
These are the actual peer groups of a certain Calcbench staffer who obsesses over the retail sector and competitors to Dunkin Donuts, among other firms. Along the top are the types of alerts available for each group. Then you can check the box for whatever alert you want, for each peer group or company you follow.
That’s really all there is to it. Any time a firm then files a triggering event with the Securities & Exchange Commission, Calcbench will index that filing within a few minutes; and the email alert will be in your inbox soon after that.
Any time you want to change your alert preferences, just return to the preferences page and click away. You can also clear prior settings, or simply check the “all filings” option and get everything we have.
Financial reporting is a wide world where you see lots of unusual things — and we saw another odd one recently, from software company PTC Corp.
PTC filed its latest earnings release on Oct. 24. This was the first time PTC reported revenues according to ASC 606, the new accounting standard for revenue recognition that all firms had to start using this year.
Important point: PTC sells software, and specifically sells subscription-based software. And as we’ve noted in prior posts, software firms in that line of work are particularly prone to changes in the nature and timing of their revenue streams thanks to that new standard.
Essentially, ASC 606 forces software companies to recognize revenue from long-term subscription contracts all at once. So a firm implementing ASC 606 for the first time might see a spike in revenue for that specific quarter, as it recognizes all that subscription revenue; and then lower, more volatile revenue streams in future quarters.
Sure enough, PTC fits that description. So first the company gave investors this head’s up in its disclosures:
In connection with its adoption of ASC 606, PTC expects to record an adjustment to retained earnings of $350 million to $380 million related to deferred revenue and unbilled deferred revenue amounts… This adjustment will be reflected on PTC’s consolidated balance sheets for the first quarter of fiscal 2019 ending December 29, 2018. We estimate this adjustment will reduce future annual subscription revenue as follows: for FY’19: $200 million - $220 million; FY’20: $100 million - $105 million; FY’21: $35 million - $40 million; FY’22: $15 million.
We expect that this will have a material adverse effect on reported revenue in FY’19 that will be only partially offset by the upfront revenue recognition of the license portion of new subscription contracts and renewals. In FY20 and beyond, we expect the adverse impact related to the retained earnings adjustment will be more than offset by upfront revenue recognition of the license portion of subscription contracts.
In other words, turbulence lies ahead for PTC in fiscal 2019. Fair enough; we’ve seen other software firms make similar disclosures.
Then PTC went above and beyond with its estimates for 2019. The company presented its business outlook twice — once according to ASC 606 as required by accounting rules; and again under the old accounting standard, ASC 605.
Take a look. Figure 1 on top presents PTC’s outlook according to the old ASC 605 standard. Figure 2 at the bottom is the outlook according to the new ASC 606 standard.
The subscription revenue line-item (flagged in red) is the key point here. ASC 606 cuts that revenue from somewhere around $141 million (the old standard) to $93 million (under the new standard).
Can a firm do that with its financial reporting? Um, sure; there’s no law against it. PTC does obey all SEC rules about presenting both versions in identical format and clearly stating why PTC believes the older standard is worth noting. That’s what a company has to do to include a non-GAAP metric, which the outdated revenue standard now is.
We just didn’t expect a firm to go to such extremes. Then again, that’s what makes financial analysis so interesting.
Reduce the amount of time analysts spend reading 10-K/Qs by highlighting the sections which change the most between periods.
The cosine distance between Term Frequency - Inverse Document Frequencey (TF-IDF) vectors of 10-K sections is a useful proxy for semantic change in 10-K sections across time.
Calcbench offers a wealth of data and analytical tools to our subscribers. Today we’re going to focus on one of our lesser known but quite nifty features: purchase price allocation.
All mergers and acquisitions have a total price that you read about in the headlines. The details are usually reported much later, where the company discloses how it allocated that total price across various components: how much for inventory, how much for accounts receivable, how much for goodwill, how much for other intangible assets, and so forth.
That’s purchase price allocation — commonly abbreviated as “PPA” and yes, we track that stuff. Here’s how you can find it.
Start at our Segments, Rollforwards, and Breakouts page. You’ll see a blank page when you first arrive, so you’ll need to select a company or group of companies to research. For our purposes here, we’ll work with one of our defaults, the Dow Jones Industrial Average.
Once you select your group, a menu option will appear on the left side of the page. Open it and a list of about 25 choices will appear. Toward the bottom are three choices related to business combinations. In the middle you’ll find “Business Combinations — Purchase Price Allocation.” (See Figure 1, below; PPA is highlighted in blue.)
Once you select that choice, you get a list of records on your screen — and be warned, this can be a long list. We return one record for every PPA item disclosed by every company, in every period you select. So you might see something that looks like Figure 2, below.
In the above image, we focused on a few PPA items disclosed by Caterpillar and DowPuPont (because that’s all we could fit on one sample screen), for calendar year 2017. We couldn’t even include all PPA items for either company in Figure 2.
So if someone wants to search all PPA disclosures in the whole S&P 500 for several years, you can see that suddenly we’re talking about lots of data. Calcbench has it all; just understand what you’re getting into.
Once you get those records, you can then use the handy Calcbench Trace Feature to investigate whatever number catches your eye. That will whisk you back to the exact disclosure the company made, where usually you can see all the details of how the company allocated the purchase across all line items.
Let’s use the very first record in Figure 2 as an example. Caterpillar reported $26 million in receivables for a freight rail acquisition it did in 2017. Move your cursor to that $26 million and the Trace option appears. Click on that, and you get a disclosure as seen in Figure 3, below. (We’ve magnified that image a few times for clarity.)
As you can see, that $26 million relates to Caterpillar acquiring the Downer Freight Rail business for $99 million, in a deal that closed on Jan. 2 of 2018. That acquisition included $92 million of tangible assets — including $26 million of accounts receivables.
If you wanted, you could scroll to the top of that sidebar and find the “Open in Disclosure Viewer” option. Click on that, and Calcbench whisks you to our Interactive Disclosure Viewer where you’d find the exact same disclosure, presented as Caterpillar presents in the footnotes. It would still be presented in writing, and rather dense to read at that.
Not every PPA disclosure will be dense narrative like that. Lots of them will be presented in tabular format.
For example, we scrolled further down and the first entry for Intel was $10.3 billion of goodwill acquired during an acquisition. We traced that number and the disclosure is shown in Figure 4, below. That $10.3 billion relates to Intel’s acquisition of Mobileye in August 2017 for $14.5 billion.You can see the exact $10.3 billion number in a blue square, and several paragraphs above is a line-by-line accounting of the whole price: $4.4 billion in intangible assets, a few other items for $500 million or less — but the vast majority of the purchase price was allocated to goodwill. Was it worth it? That’s not for Calcbench to say. That’s for analysts to ask about. We just show you how to find the exact numbers as reported, so you can ask quickly and precisely.
Netflix filed its latest quarterly report last week, and we first were poking around its Commitments and Contingencies disclosures to see what leasing obligations the company might have.
Almost immediately, however, we stumbled upon a different commitment Netflix reports: streaming content obligations. That makes sense, given that Netflix has huge licensing and royalty expenses to stream all that content to its customers.
We just weren’t prepared for the staggering size of Netflix’ streaming content obligations — more than $18.6 billion dollars, as of Sept. 30.
How fast have those obligations been growing, we wondered? And were Netflix revenue and income keeping pace?
Answering those questions is actually quite easy in Calcbench. Here’s how we did it.
First, we saw that $18.6 billion amount in Netflix’ disclosures. Of course that figure is a number, so as always, we could use the Calcbench Trace feature to find where that number comes from. We simply moved our cursor over the $18.6 billion, and several boxes magically appeared. See Figure 1, below.
In the lower box, you get an option called “Show Tag History” (circled in red). Click on that option, and a display will appear that lists the values for that specific financial item as far back as Calcbench has the data. In our case here, we could see the history for “PurchaseObligation” that Netflix had reported, as far back as second quarter 2012.
We wanted more, however. So we went to the other box that magically appeared above the $18.6 billion (circled in blue) giving us the “Export History” option. We pressed that, and blammo! Calcbench downloaded all that data into an Excel spreadsheet for us.
Then we just worked in Excel to create the chart below for you to see. It shows that obligations rose by 293 percent — from $6.38 billion to $18.6 billion — over the last six years. Wow. (See Chart 1, below.)
That’s a lot of obligation, so we then wanted to see whether Netflix’s revenue and operating income were growing at comparable rates. Yes, we could use the Trace feature and Export History option two more times, but we were too lazy to do all that again twice.
Instead, we went to the Data Query Tool. There, we could set our search range for Q2-2012 through Q3-2018, and then select revenue and operating income from the choices on the Income Statement list. (See Figure 2, below.) Scroll to the bottom of the page, press the Export to Excel button, and blammo again! Now we had all the quarterly data for both items.
Then it was just a matter of putting that data on charts again. We found that revenue rose 373 percent, from $1.07 billion to $4 billion last quarter (see Chart 2, below); and operating income rose more than 800 percent — from $57.1 million to $480.7 million (see Chart 3, below).
Now, revenue and operating income do fluctuate more than streaming obligations, but that’s no surprise. Spending obligations are often dictated by contracts with orderly payment schedules, while revenue and operating income are subject to the whims of customers and changes in operations costs.
Any way you cut it, however, you have to give Netflix its due. The company might be racking up expenses at a brisk pace, but sales and income are moving even faster.
And you can confirm all that multiple ways through Calcbench.
US Bancorp filed its third-quarter earnings release on Wednesday, and we noticed something in the nitty-gritty: its net interest income rose much faster from second quarter (1.7 percent) than non-interest income (0.2 percent).
That’s not surprising, of course. The Federal Reserve has been raising interest rates slowly but surely since 2016, and one would therefore expect banks to follow suit with their rates, and see more interest income. We just hadn’t noticed that change until today. (So much financial data to read, after all.)
So we started to wonder — is that hypothesis true? Are financial firms seeing more growth in interest income than non-interest income? Are total revenues tilting that way?
Indeed they are.
We visited our handy Data Query Tool and pulled up the data for all depository institutions — a list of 853 firms ranging from publicly traded community banks all the way up to Citigroup, Bank of America, and the other big boys. Then we looked for interest income and non-interest income from first-quarter 2015 to second-quarter 2015.
Across all quarters, interest income has always been larger than non-interest income. So we also divided interest income into non-interest income, and expressed that number as a ratio. The ratio went from 1.24 at the start of 2015 to 1.42 by summer 2018.
OK, that sounds like a lot, but too many numbers make our head hurt. So we graphed them onto a chart, and got this, below.
The trend-line in red tells the tale. Interest income is pulling away from non-interest income as the primary revenue source for banks. The slope on that line is 14.5 percent. Try that on a treadmill and your hamstrings will never speak to you again.
And while we don’t show it in this chart, when you examine the changes within each year and from one year to the next (we did), that growth in interest income is accelerating. So we’ll be back in a few weeks once third-quarter numbers are completely filed with an update.
Analysts following financial firms, meanwhile, may want to contemplate what that acceleration toward interest income means.
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