RECENT POSTS
Wednesday, February 13, 2019
Low Latency Calcbench

Monday, February 11, 2019
Now Streaming on Hulu: Red Ink

Thursday, February 7, 2019
Early Look at 2018 Tax Decline

Wednesday, February 6, 2019
You Revised WHAT, Netflix?

Thursday, January 31, 2019
Talking About Huawei Exposure

Wednesday, January 30, 2019
Another Discrepancy in Reported Numbers

Wednesday, January 30, 2019
Finding Revised Facts: Hertz Edition

Wednesday, January 23, 2019
GE Commercial Aviation Services: Bringing Numbers to Light

Monday, January 21, 2019
Differences in Earnings Releases and 10-Ks

Wednesday, January 16, 2019
The Importance of Textual Analysis

Tuesday, January 8, 2019
A Look at Climate Change Disclosures

Wednesday, January 2, 2019
Quants: Point-in-Time Data for Backtesting

Friday, December 28, 2018
Now Showing: Controls & Procedures

Thursday, December 27, 2018
A Reminder on Non-GAAP Reporting Rules

Monday, December 17, 2018
Researching PG&E’s Wildfire Risk

Wednesday, December 12, 2018
Tracking Brexit Disclosures

Thursday, December 6, 2018
Campbell Soup: Looking Behind the Label

Sunday, December 2, 2018
SEC Comment Letters: The Amazon Example

Wednesday, November 28, 2018
Measuring Big Pharma’s Chemical Dependency

Monday, November 26, 2018
Analysts, Can You Relate? A True Story

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Low Latency Calcbench
Wednesday, February 13, 2019

Calcbench has added push notifications. Now algorithms can ingest the numbers and text from 10-K/Q/Press Releases seconds after Calcbench publishes. Previously, Calcbench API clients polled us periodically to download data from new filings.

To listen for notifications, use the new handle_filings method on our Python API client. See an example of how to get the most recent face financial data from each new filing @ https://github.com/calcbench/notebooks/blob/master/filing_listener.ipynb. You will need to contact us for a queue subscription before starting your listener.

If you need fundamental accounting data or text from SEC filings for a time sensitive process contact andrew@calcbench.com.


Now Streaming on Hulu: Red Ink
Monday, February 11, 2019

Comcast Corp. ($CMCSA) filed its 2018 annual report at the end of January, which gives us fresh opportunity to catch up on one of our pet interests: the value of Hulu.

We write about Hulu from time to time because it’s a huge player in streaming media, but isn’t publicly traded — so its financial data is somewhat hard to find. Then again, Hulu is owned by four entertainment giants: Comcast, Disney, and Fox, which own 30 percent each; plus Time-Warner with a 10 percent stake.

So if you know where to look in the filings of those companies, you can assemble a better, although still incomplete, picture of Hulu’s performance over the years.

The best place to look these days is the Comcast filing. There in the Investments section of its disclosures, Comcast reports that it owns a 30 percent stake in Hulu and recorded a $454 million loss in 2018 for its share of Hulu operations.

Well, do the math. If 30 percent ownership gives you a $454 million loss, that implies that Hulu’s total loss for 2018 was (gulp) $1.5 billion.

Yikes, we wondered, could that be right? So we pulled up Fox’s most recent annual report, which it filed last August. (Fox has a June 30 fiscal year-end.) There in the Investments section of Fox’s disclosures, it reported a loss of $445 million for its 30 percent ownership stake.

So, yes. Hulu loses a ton of money. We knew that already, based on previous posts we’ve written about Hulu. Still, for historical perspective, using those same calculations from prior years’ disclosures, Hulu’s losses have been…

  • 2014: $20 million;
  • 2016: $523 million;
  • 2017: $716 million.

Wow. And why, exactly, are those losses ballooning so much? Consider this disclosure from Disney’s most recent annual report, filed last November:

The higher loss at Hulu was due to higher programming, marketing and labor costs, partially offset by growth in subscription and advertising revenue

In fairness, Disney and Hulu’s other owners have been disclosing that sentence for three years running now.

One other detail one can pull from the disclosures: a rough estimate of what Hulu might be worth as a business. Hulu was originally founded by Disney, Fox, and Comcast alone, each owning 33 percent of the venture. Time Warner then bought 10 percent of Hulu in August 2016 for $590 million. That implies a value of $5.9 billion at the time.

So what is Hulu worth today? That’s hard to say. First, Fox is selling its 30 percent stake to Disney as part of larger asset purchase deal. That means Disney will become Hulu’s majority owner with a 60 percent stake in the business. We’re still waiting on that deal to close sometime later this spring, and maybe we’ll get a better sense of the purchase price for this particular asset then.

Meanwhile, one of Hulu’s top executives said just this week that the business had double-digit subscriber growth in 2018 (growing fastest in the United States), and now has 25 million paying subscribers. The Hulu exec was upbeat about Disney owning a majority stake.

Then again, what else would you say when you’re a senior exec trying to keep your job?


Early Look at 2018 Tax Decline
Thursday, February 7, 2019

2018 was the first full year of life with dramatically lower corporate tax rates, and now we’re getting early data on exactly how much less companies expect to pay.

Surprising nobody — they are paying a lot less.

We examined 214 firms in the S&P 500 that have already filed their annual reports for 2018. First we pulled their reported earnings before taxes and provision for income taxes; and then compared those numbers to the same line items the firms reported in the prior three years.

Taken altogether, those firms saw their effective tax rates fall nearly in half, from 27.3 percent in 2017 to 14.2 percent in 2018. Their revenues rose briskly in 2018, while provisions for income taxes tumbled. See Figure 1, below.



We also have a year-by-year breakdown, for those who want to delve into the data. See Table 1, below.



For all you alternative history buffs: these firms had an average effective tax rate of 26.8 percent in 2015-2017, before Congress enacted its corporate tax cut at the end of 2017. If Congress had never enacted that tax cut, and we applied that same 26.8 percent rate to 2018’s pretax earnings of $832.9 billion — that would be an additional $104.4 billion in corporate tax payments.

Then again, if Corporate America were paying higher taxes, its collective net income would be lower, and stock prices would likely be lower too.

That’s how the data looks so far. More to come later this spring.


You Revised WHAT, Netflix?
Wednesday, February 6, 2019

Another day, another example of why attention to detail matters in financial analysis: Netflix ($NFLX) and its most recent annual report, which revised a lot of operating expense numbers from prior years. What was that about?

We noticed this adjustment while studying Netflix on our Company-in-Detail page. Netflix filed its 2018 annual report on Jan. 29, and several of the 2017 and 2016 line-items were highlighted as revised. See Figure 1, below. Those cells outlined in the famed ‘Calcbench mustard’ color are adjusted.



So we peeked at those revised facts by clicking on the Highlight Revised Facts tab above the line-items. When you do this, a small plus sign appears next to the revised number. Click on that plus sign and you can see the actual revisions made: what the number originally was, and when the firm revised to the current number seen on your screen.

Intrigued, we dug into that $8 billion number for Cost of Revenue in its 2017 fiscal year — and saw that several weeks ago Netflix adjusted that number upward by $374 million. See Figure 2, below.



For a moment we felt chest pains; $374 million is a significant amount of money. Then we noticed — revenue and operating income hadn’t changed. So Netflix was only rearranging costs among its line items for Cost of Revenue, Marketing, Tech & Development, and General Administrative.

Still, why?

To learn more, we clicked on that $8 billion number and traced it back to the source in Netflix’s 10-K filing. That took us to the Interactive Disclosure tool, where we could read the full details of why Netflix was changing these numbers.

Turns out that in fourth-quarter 2018, Netflix decided to reclassify those line items, so the spending for each one more closely reflected how the company tracks personnel costs. Or, as Netflix formally phrased it:

The Company is making this change in classification in order to reflect how the nature of the work performed by certain personnel has changed to be more directly related to the development, marketing and delivery of our service as a result of the continued evolution of the Company’s strategy to self-produce and create more of its own content rather than license or procure it from third parties. This change in classification will also align external presentation of personnel related expenses with the way that the Company’s chief operating decision maker expects to assess profitability and make resource allocation decisions going forward.

Netflix also provided a table to show all reclassifications by line-item and year, which was mighty nice of them. See Figure 3, below.



Our heart rate returned to normal after reading that explanation and we put away the nitro. Still, it’s another reminder that firms can revise financial filings all the time — and diligent financial analysts should want to know why.

With a few keystrokes to jump around the Calcbench data archives, we did find out why. So can you.


Talking About Huawei Exposure
Thursday, January 31, 2019

We try to keep up with current events here at Calcbench, so we saw the news earlier this week that U.S. prosecutors have indicted Chinese telecom giant Huawei Technologies on charges of stealing intellectual property and violating trade sanctions against Iran and North Korea.

Corporate disclosure geeks that we are, immediately we then asked: What are U.S. companies disclosing about their dealings with Huawei? Could any of those companies somehow be sucked into the legal and geopolitical vortex swirling around Huawei?

Turns out, more than a few companies do have something to disclose about Huawei. Here’s what we found.

Micron Technology ($MU) received a comment letter from the SEC earlier this year, where SEC staffers were asking about Micron’s exposure to Huawei. Since Micron sells its chip components to Huawei, and Huawei stands accused of selling its products to Iran, Syria, and North Korea — how does Micron work to ensure its products don’t end up in those places?

Micron’s response on 3 July 2018—

With respect to Huawei, the Company sells products that are incorporated into some of Huawei’s mobile phone products for the consumer market, server products for the enterprise market, and other products. Micron requires that Huawei sign and abide by the Company’s “End User Certification and Agreement to End Use Restrictions”… Micron has no visibility into the sale of the millions of Huawei products that are sold worldwide. However, Huawei is required to comply with the Terms and Conditions of Sale as well as the provisions in the End-user Certification and Agreement to End Use Restrictions.

So that is one potential issue for U.S. companies: Are their export control compliance programs addressing Huawei exposure effectively? If not, that could lead to future issues with the Justice Department.

Meanwhile, Cisco Systems ($CSCO) disclosed on 6 Sept. 2018 that it agreed to pay $127 million in legal and indemnification costs to T-Mobile, which was in patent litigation with Huawei. The disclosure:

On January 15, 2016, Huawei Technologies Co. Ltd. (“Huawei”) filed four patent infringement actions against T-Mobile US, Inc. and T-Mobile USA, Inc. (collectively, “T-Mobile”) in federal court in the Eastern District of Texas. Huawei alleged that T-Mobile’s use of 3GPP standards to implement its 3G and 4G cellular networks infringed 12 patents. Huawei’s infringement allegations for some of the patents were based on T-Mobile’s use of products provided by us in combination with those of other manufacturers. T-Mobile requested indemnity by Cisco with respect to portions of the network that use our equipment. On December 22, 2017, the Eastern District of Texas court dismissed Huawei’s four lawsuits after the parties reached settlement, and T-Mobile’s indemnity request was subsequently resolved.

During fiscal 2018, we recorded legal and indemnification settlement charges of $127 million to product cost of sales in relation to these matters. At this time, we do not anticipate that our obligations regarding the final outcome of the above matters would be material.

Qualcomm ($QCOM) lists Huawei as one of its customers (along with ZTE Corp., another Chinese telecom giant already sanctioned by the feds in 2017):

Further, the majority of the leading handset and other wireless device companies (including Huawei, LG, Microsoft, Oppo, Samsung, Sony, vivo, Xiaomi and ZTE) have royalty-bearing licenses under our patent portfolio…

Skyworks Solutions ($SWKS) also lists Huawei as a customer, and in Skyworks’ segment reporting discloses that Huawei accounted for 10 percent of the company’s revenue in 2017 — that is, roughly $365 million of Skyworks’ total $3.65 billion in revenue that year.

We’re more curious about whether corporate disclosures related to Huawei (or ZTE, for that matter) will change in the future. For example, Micron isn’t the only company that sells goods to either of those companies. If the SEC starts asking more questions about export controls, U.S. filers will need to respond with more information. If companies rely heavily on Huawei for revenue, how might they respond if U.S.-China relations strain those business ventures?

You can keep an eye on such disclosures using our Interactive Disclosure Viewer, of course. We suspect we’ll see more of them in the future.


Another Discrepancy in Reported Numbers
Wednesday, January 30, 2019

The other week we noted an occasional quirk in financial reporting, where numbers a company announces in its earnings release don’t match what the company actually files in its 10-K or 10-Q several weeks later.

Today we have another example of that phenomenon — except this time that difference comprises almost all the company’s net income reported for the year, and clearly that detail sailed right off the radar screen of most investors.

The company in question: Virtu Financial ($VIRT), a financial services firm in New York with $1 billion in annual revenue. Here’s what happened.

On 8 Feb. 2018, Virtu filed its earnings release for 2017 full-year results. There on Page 10 of the release, Virtu reported that net income attributable to stockholders of $17.33 million. (Total net income was $33.29 million, but Virtu had to deduct the non-controlling interest portion of $15.96 million.) See Figure 1, below. The net income number is highlighted in yellow.



On 13 March 2018, however, Virtu filed its Form 10-K. There, we can see that net income attributable to shareholders was only $2.94 million. That’s $14.39 million of net income vaporized, a decline of 83 percent. See Figure 2, below, with the net income number highlighted in grey.



What happened?

Much of the answer lies in the line-item just above net income: provision for income taxes.

In the earnings release, Virtu reported its provision for income taxes at $78.13 million. By the time Virtu filed its 10-K five weeks later, its provision for income taxes stood at $94.26 million — a difference of $16.13 million.

Virtu also fiddled with a few other numbers here and there on the income statement. For example, interest and dividends income dropped by $3 million, while commissions on technology services rose by $5 million. The ever popular “other, net” also rose by $1.7 million.

Add up all those fluctuations, and Virtu’s net income pretty much evaporates for the year.

We aren’t entirely sure why Virtu’s tax bill changed so much. That was the first year companies were starting to report after the sweeping corporate tax cut from December 2017, so lots of revaluations were happening. You can investigate further on our Interactive Disclosure Viewer if you’re curious.

Equally interesting is what happened with Virtu’s stock price. We looked it up.

On Feb. 3, the day of the earnings release and reported net income of $17.33 million, Virtu’s stock jumped 22 percent, from $21.65 tyo $26.50.

And on March 13, when Virtu dropped the whole 10-K and net income dwindled down to $2.94? The stock opened at $32.80 and closed at $32.95. In other words, nobody cared. But small discrepancies like that add up over time, and people start to care sooner or later.

Here at Calcbench, we advocate for sooner.


Finding Revised Facts: Hertz Edition
Wednesday, January 30, 2019

You may not have noticed, but on New Year’s Eve the Securities and Exchange Commission hit car rental giant Hertz ($HTZ) with a $16 million fine for sloppy accounting practices in the early 2010s, which ultimately led to a financial restatement in 2015 that shaved $235 million off Hertz’ pretax income. Ouch.

The restatement spanned financial results from 2011 into 2014, and for a company with roughly $440 million in annual pretax income before the restatement, a $235 million hit to the bottom line hurts.

Hertz had cooked the books in two ways. First, it extending the estimated lifespan of its vehicle fleet from 20 months to 24 or 30 months. That meant depreciation of the vehicles was allocated over more periods; those lower depreciation numbers cut operating costs, which in turn raised net income for any given period.

Second, Hertz also kept its allowance for doubtful accounts artificially low after a crucial operations change in 2012. That summer, Hertz decided to turn over many more aging accounts to private attorneys for collections — but assumed, without any evidence, that the allowance for doubtful accounts could stay at around 15 percent of the total. In reality, those private attorneys couldn’t collect on 98 percent of the total.

We recount all these details to show you that Hertz’s poor accounting practices spilled across numerous line items, for numerous years.

And yes, if you’re a curious financial analyst who follows Hertz — Calcbench can show you all those details.

As we’ve written before, our Company-in-Detail page displays all a company’s financial details in line-item detail. But you can also use our Highlight Revised Facts feature to see which line items have been changed at some point in the past. See Figure 1, below.



So when you examine Hertz’s results for the period in question (2011 through 2015), you can see that the company had — gulp — seventy-three revised facts. When you view those revisions, suddenly Hertz’s results light up like a Christmas tree. (Figure 2, below.)



Many companies will revise some facts from time to time. Rarely do we see so many facts revised at once — which is a good thing, since financial restatements are decidedly bad things.

Regardless, if you want to see which numbers a company has changed, to better understand how reliable the firm’s financial reporting may or may not be, Calcbench has you covered.


General Electric ($GE) may be trying to sell its capital aviation services business (GECAS). On Jan. 21, the Wall Street Journal reported that Air Lease Corp. wasn’t interested in buying GECAS. The next day, Barron’s wrote about value of GECAS.

GE has several operating segments: Power, Renewable Energy, Oil & Gas, Aviation, Healthcare, Transportation, Lighting, and Capital. Their performance is reported in the segment footnotes in GE’s 10-Ks and 10-Qs. GECAS, however, is part of GE’s Capital segments — so it performance was not separately reported in those disclosures.

Nevertheless, GE does report information about GECAS. You just need to know where to look.

The information can be found in different places. GE has been reporting GECAS’s performance in “sub-segment” information included in 8-K earning releases, or in the Management Discussion & Analysis (MD&A) section of its filings. More information about GECAS can be found in Supplemental Information About “The Credit Quality of Financing Receivables and Allowance For Losses, as GE reports GECAS’s receivables”.

So, how to make sense out of it? Calcbench can help.

In 2014 and 2015, GECAS was reported in a format that gave the information to you — and Calcbench maintains the ability to get it. You can download information directly, or do a search within our tools. Here is what you will get:


But in 2016, that reporting scheme changed. GE disclosed GECAS in a new format (which Calcbench also has).


And in 2017, GE reporting in a third way:

As you see, the firm now reports the revenues from GECAS as a sub-segment of GE Capital revenues. All you now need to do is to get a time series of GE Capital revenues to start the valuation process. That can be done in Calcbench by accessing the segment disclosure and asking for a time series. (See picture below.)

Now it’s possible to assemble enough information to piece together a valuation framework for GECAS based on historical revenues and some profit levels. *Note that in third-quarter 2017, GECAS stopped explicitly disclosing net income.

It just goes to show that while companies might change up their reporting, often times you can find the insights you want, by pulling together pieces of data sprinkled across multiple disclosures. Calcbench lets you do that.

-30-


So there we were, poring over earnings releases and annual reports, because that’s what we do around here in our spare time, when we came upon Alaska Air Group ($ALK).

That’s when we noticed: the company’s earnings release for full-year 2017 results, filed on Jan. 25, 2018, proudly said net income was $1.028 billion, up 26.3 percent from the prior year.

But wait! On the full 10-K that Alaska Air filed on Feb. 15, it listed net income as $1.034 billion — $6 million more than the number it reported just 21 days earlier.

What happened? Take a look at how Alaska Air reconciled its non-GAAP net income on the earnings statement (at right), compared to its full income statement filed in the 10-K (at left). Look closely.

Do you see it? The “special tax (benefit)/expense” in the earnings release was reported as a $274 million benefit, but that number changed to $280 million by the time the 10-K was filed. That explains the $6 million increase in net income.

According to a footnote in the earnings release, the benefit arose from remeasuring deferred tax liabilities after Congress passed the corporate tax cut in 2017. Apparently that remeasurement was adjusted by the time the Form 10-K was filed. That is legal; numbers in earnings releases don’t have any liability attached to them and aren’t audited, and the amount isn’t material anyway.

Still, our Alaska Air discovery did make us wonder: What other discrepancies do companies have between the 8-K earnings release and the 10-K annual report?

Another good example comes from AmerisourceBergen ($ABC) and its results for fiscal 2017. When Amerisource filed its earnings release on Nov. 2, 2017, it clearly reported net income as $414.5 million. But in its Form 10-K, filed on Nov. 21, net income had dropped to $364.5 million — a decrease of $50 million, or 12 percent. Which is not an immaterial amount of money.

Upon closer inspection, we can see that Amerisource increased its expense for employee severance and litigation by $50 million; that’s the cause of the net income discrepancy. If you compare footnote disclosures in the earnings release and the 10-K (folks, always read the footnotes), we can see the $50 million is specifically an increase in litigation settlements, from $864.4 million to $914.4 million.

Then you can use our Interactive Disclosure page to pull up AmerisourceBergen’s discussion of legal matters and contingencies. It’s a long list, including subsidiaries tampering with syringes to dilute oncology medicines and pending opioid legislation.

We didn’t do a sentence-by-sentence comparison to pinpoint exactly which legal troubles pushed up the settlement budget by $50 million, but any analyst following AmerisourceBergen could. That’s what Calcbench lets you do.

And, as we can see from these two examples, analysts probably should, too. A lot can change between the earnings release and the 10-K.


The Importance of Textual Analysis
Wednesday, January 16, 2019

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.

Do It Quickly

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.


A Look at Climate Change Disclosures
Tuesday, January 8, 2019

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.

Disclosure Requirements

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.


Quants: Point-in-Time Data for Backtesting
Wednesday, January 2, 2019

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 us@calcbench.com. 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 us@calcbench.com or visit our website, www.Calcbench.com, and tap on the “Chat with us!” box in the lower-right corner of your browser.


Now Showing: Controls & Procedures
Friday, December 28, 2018

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 us@calcbench.com.

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.


A Reminder on Non-GAAP Reporting Rules
Thursday, December 27, 2018

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.

Earnings Releases and Calcbench

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:


Researching PG&E’s Wildfire Risk
Monday, December 17, 2018

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.


Tracking Brexit Disclosures
Wednesday, December 12, 2018

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.



So What Are They Disclosing?

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.


    Campbell Soup: Looking Behind the Label
    Thursday, December 6, 2018

    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—

    • One year ago, before the tax cut, Campbell had $382 million in pre-tax earnings;
    • Campbell paid $107 million on that amount, a tax rate of 28 percent;
    • This year, after the tax cut, Campbell had $257 million in pre-tax earnings;
    • Campbell paid $63 million on that amount, a tax rate of 24.5 percent.

    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.


    SEC Comment Letters: The Amazon Example
    Sunday, December 2, 2018

    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.


    Measuring Big Pharma’s Chemical Dependency
    Wednesday, November 28, 2018

    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.




    Analysts, Can You Relate? A True Story
    Monday, November 26, 2018

    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.

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