OK, technically that’s two questions jammed together, but that’s precisely our point. If you want a glimpse into broader economic trends, one good way to do that is to study how cautious the Wall Street titans are with their lending business.

For starters, we looked at the quarterly provisions for loan losses for Bank of America ($BAC), Citigroup ($C), JP Morgan ($JPM), and Wells Fargo ($WFC) since the start of 2022. See Figure 1, below.

Those numbers fluctuate quite a lot, but the overall trend is clearly upward. That means the banks have been setting aside more money each quarter for loans that might go sour. 

(And for the eagle-eyed among you, that’s not a typo — Wells Fargo did report a negative provision number at the start of 2022. That means Wells adjusted its total provisions downward because its loan portfolio was doing so well.) 

Does that broad upward trend mean Wall Street’s financial picture is getting more gloomy? From Figure 1 alone, that’s hard to say. Yes, the banks are setting aside more money to cover bad loans, but they’re also extending more loans at the same time; we can’t analyze one variable independently from the other.

Loss Provisions Against Revenue

So we dug further into the data. Using our Multi-Company page, we also pulled the banks’ quarterly revenue, and then divided loan-loss provisions into that number. For example, see Figure 2, below, which shows the result for JP Morgan.

Long story short, this chart tells you that for every dollar of revenue JP Morgan brings in the door, it sets aside 7 cents as provisions for loan losses. That set-aside happens right at the start, before JP Morgan spends its revenue on anything else — like, ya know, running the business. 

Let’s also remember that the 7 cents per dollar for possible loan losses is up from only 5 cents per dollar at the start of 2022. In relative terms, that’s an increase of 40 percent. 

So what does that mean? Is JP Morgan making loans to riskier customers, and prudently setting aside more provisions for loan losses? Or are existing customers sputtering, and the bank is prudently planning for the worst? 

Banks as a Whole

We can also widen the lens a bit to look at Wall Street banks as a whole. For example, Figure 3, below, shows loan loss reserves against revenue for 10 large banks, looking at the past three quarters. 

From that perspective, JP Morgan looks more like an outlier; most of the other banks have kept their loan loss provisions relatively steady. Or, for those of you who prefer to compare loss reserves against assets, we humbly offer Figure 4, below. 

Our point is simply that astute analysis of the banking sector is complex. You need to compare multiple variables against each other, ideally over time; and then compare those answers against multiple banks. 

The good news is that Calcbench has that data, so you can get digging quickly and easily. Or if you have a more complicated project and want advice, drop us a line at info@calcbench.com and tell us what’s on your mind!

Not the ‘Walking Dead’ type, of course, although that was a great show. We’re talking about zombie companies — firms that have such anemic growth and high debt costs that all they can afford to do every year is pay the interest on their debt. They have no other cash to invest in the business and get themselves growing briskly again, so they lurch from one fiscal year to the next, devoting all their operating income to debt service.

How many such companies exist these days? How long have they been zombies? And most importantly, how much longer could they exist as zombies? 

That question has been on Calcbench’s mind since the Federal Reserve cut interest rates in September. If the Fed keeps cutting rates, it will get easier for firms to refinance that debt, especially if they racked up the debt in 2022 or 2023 when interest rates were high. Maybe zombies will come back into fashion.

To find the answers, we first searched all firms with more than $100 million in revenue in 2023 and then asked: how many of them had interest expense in 2023 that exceeded operating income? 

We found nearly 800 firms that fit the profile, including some very large names: Bausch Health Cos. ($BHC), Carnival Corp. ($CCL), PG&E Corp. ($PCG), and National Steel ($SID), to name a few. 

Walking Dead?

One company fitting the zombie profile is Bausch Health, a pharmaceutical company making various treatments for dermatology, gastrointestinal, and neurology disorders. Despite making at least $8 billion in annual revenue since 2015, Bausch’s annual interest expense has exceeded operating income the entire time. See Table 1, below.

What does zombie status mean for share price? Well, consider that Bausch shares hit an all-time high of $236 in July 2015. They have marched steadily downward ever since, and today trade at around $6.50 — and have been $6 to $8 for most of the last two years. 

On the other hand, we also have companies like cruise giant Carnival Corp., where interest expense has exceeded operating income for three years running. But is the zombie label really fair for Carnival? 

After all, the pandemic devastated cruise lines in 2020. They had to take on debt to survive, and reviving operations to pre-pandemic norms was always going to take years. 

For example, compare these key disclosures from 2019 and 2023 in Table 2, below.

OK, the 2023 numbers are kinda gross, but there’s value there. Revenue is up, and operating income isn’t peanuts. This is a company that suffered a single, unforeseeable disruption and is living with the consequences — an economic heart attack, if you will, rather than the economic emphysema that has hobbled Bausch for years. Then again, both patients are still not in good health no matter what the cause.

Speaking of Debt… 

You cannot analyze zombie companies without also considering the source of all their debt. After all, those debt levels drive the interest payments that push a company into zombie status — so where did that debt come from? How long will the payments last? 

We can research those details in the debt disclosure footnote that companies file, which of course is readily available from the Calcbench Disclosures and Footnotes Query page. (Don’t forget our series on debt disclosures, published last year.) 

On June 30, 2023, Bausch disclosed that one of its subsidiaries was acquiring a business called Xiidra (plus a few other small businesses) from Novartis, for a total price of $2.5 billion. Then came this telling detail: Bausch “intends to finance the $1.75 billion upfront cash purchase price with new debt prior to closing.” 

Ah ha! That’s why Bausch needed this $1.4 billion note! 

We kept searching, and found another filing from Sept. 11, 2023, that disclosed the terms of that $1.4 billion note. The complete story is this, excerpted straight from the 8-K:

On June 30, 2023, Bausch + Lomb obtained commitments in respect of a $1,750 million 364-day bridge facility (the “Bridge Facility”), the proceeds of which, if such Bridge Facility were utilized, would have been used to finance all or a portion of the Acquisition (including related costs). In lieu of incurring indebtedness under the Bridge Facility amount on September 29, 2023, Bausch + Lomb incurred $1,900 million, in aggregate principal amount of indebtedness, consisting of: (i) $1,400 million aggregate principal amount of 8.375% Senior Secured Notes due October 2028 (the “October 2028 Secured Notes”) and (ii) $500 million in principal amount of new term B loans with a five-year term to maturity (the “September 2028 Term Facility”). Borrowings under the September 2028 Term Facility, together with a portion of the October 2028 Secured Notes, were used in connection with the Acquisition and effective September 29, 2023, the Bridge Facility was canceled.

One important question here is whether the $1.4 billion loan is callable — that is, whether Bausch could call the loan early and pay off the entire amount, to rid itself of that interest expense early. We found nothing that said Bausch can. 

That’s an important point to ponder as the Federal Reserve starts cutting rates again. It’s possible that Bausch might be able to refinance this debt at a lower rate; but if the loan isn’t callable, that path is foreclosed. Bausch the zombie will need to lumber onward.

The keyest of key performance metrics in the airline industry is a non-GAAP metric known as TRASM, or total revenue per available seat mile. We quickly found Q3 TRASM in today’s earnings release, at 20.58 cents per mile.

Chart Delta’s TRASM over time, and you get Figure 1, below.

At first glance Q3 TRASM might seem underwhelming since it’s trending downward from Q2 and is a fair bit below the year-ago period, when it was 21.15 cents — but wait!

Remember that CrowdStrike IT disaster back in August? The one that grounded Delta flights for days? That disruption was so far-reaching that Delta had to include an explanatory note about the outage in today’s press release. The outage was so severe that it actually pushed TRASM down for the quarter by a material amount.

Specifically, Delta said the outage pushed down TRASM by 1.1 “points.” If one assumes that a point is the same as cents, then third-quarter TRASM would have been 21.6 cents (the 20.58 cents reported + 1.1 more) in some parallel universe where the CrowdStrike disaster never occurred.

By the way, Delta also reported $170 million in costs related to the outage, mostly from refunding customers for canceled flights or compensating them in cash and loyalty points. Except, the outage also forced Delta to cancel 7,000 flights, which led to a fuel savings of $50 million. 

So if you net all that out, the CrowdStrike mess actually cost Delta only $120 million in Q3. (We assume there will be more costs in the future from civil lawsuits, regulatory probes, and other grief related to the meltdown.)

Anyway, Q3 earnings season has taken flight! You are now free to move about the Calcbench databases, seeing what else companies are reporting.

Let’s start with this week’s filings. Conagra filed an earnings release for its fiscal first-quarter 2025, which ended on Aug. 26. That release included the following:

• Net sales decreased by 3.8 percent; and organic net sales decreased 3.5 percent.

• Operating margin declined by 247 basis points to 14.4 percent. 

• EPS rose 44.8 percent to $0.97 (good), but adjusted EPS fell 19.7 percent to only $0.53 (bad). 

And as icing on the cake, Conagra forecast that organic net sales for fiscal 2025 would be flat to 1.5 percent compared to 2024. 

Then we noticed that Lamb Weston (“seeing possibilities in potatoes,” its motto says) also filed an earnings release for its fiscal first-quarter 2025, happening in the same period. Those disclosures weren’t any better:

• Net sales declined 1 percent, to $1,654 million.

• Income from operations declined 34 percent, to $212 million

• Adjusted EPS declined 55 percent to $0.73.

Lamb also announced a restructuring plan that called for closing a production facility in Washington state, temporarily curbing production and schedules in North America, and cutting the workforce (of more than 10,000 employees) by 4 percent. The restructuring plan is expected to result in a pretax charge of $200 million to $250 million.

We follow the food business here at Calcbench because it’s a good indicator of where consumers are financially. If they’re spending less on food, that suggests that either (a) prices are falling; or (b) consumers have less disposable cash to spend on food. Either way, that tells you something about the macro-economic environment.

So we had two food businesses posting distasteful numbers on the same day. Well, what have their peers been saying lately?

One can easily check that by visiting the Company-in-Detail page for whatever firm you’re analyzing; we list that firm’s closest peers in the upper-right corner of the page. Figure 1, below, shows (with a red arrow) the peers we list for Conagra as an example.

Then we cracked open the disclosures for one of those peers: $CPB, otherwise known as Campbell Soup Co. Clicking on the ticker brings you to Campbell’s Company-in-Detail display; from there we jumped to the Disclosure & Footnotes page to pull up Campbell’s most recent earnings release, filed on Aug. 29 to report on its fiscal 2024 year.

Again, underwhelming stuff! Campbell did see net sales jump 11 percent, but that was largely on the back of its $2.9 billion Sovos Brands acquisition, a deal dissected on the Calcbench blog earlier this year. Organic sales, which are a more useful, apples-to-apples comparison, actually decreased by 1 percent.

Further down the earnings release, we saw Campbell’s fiscal 2025 guidance. Net sales are predicted to be up 9 to 11 percent, but again, organic sales are only forecast to rise 0 to 2 percent.

We’re not food industry analysts, so we won’t predict what all this means; but clearly something is going on with large food businesses and anemic growth. You can check that yourself by… 

• Setting up email alerts to receive updates for when food companies you follow file something new;

• Use the Company-in-Detail page for a quick review of the income statement and to find peer firms;

• Use the Disclosure & Footnotes page to dig into the footnotes, where you’ll find disclosures about operating segments, organic growth, future earnings guidance, and more.

Food for thought as we wait for the next crop of earnings releases to arrive.

To help analysts prepare for that deluge of information, Calcbench reminds everyone that we have several earnings analysis templates ready to go, which will automatically capture and report earnings disclosures as your favorite companies and industry sectors file.

For example, we have our pharmaceuticals industry template, which tracks the sales of blockbuster drugs. Each of several pharma industry giants (Merck, Pfizer, Johnson & Johnson) gets their own tab in the spreadsheet, and then each company tab tracks sales of individual drugs that reap $1 billion or more in revenue. 

We also have our airlines industry template, which tracks performance metrics such as revenue per available seat mile (RASM), cost per available seat mile (CASM), ticket revenue, fuel cost per gallon, and more. You can see a summary for all airlines in the current quarter; or historical data per airline with each in their own dedicated tab. 

We are also working on templates for the banking industry, to track deposits and non-performing assets over time, soon to be released to subscribers. And of course, if you have suggestions for other industry templates we should develop, drop us a line at info@calcbench.com any time! We’re happy to collaborate and give you what you need. 

One caveat: the automated population of fresh data into our templates only works if you (1) are a Calcbench professional-level subscriber; and (2) have installed our Excel Add-in. If you need help with either of those requirements, let us know and we’ll walk you through it.

Separately, we also have a bunch of other templates to perform income tax analysis, DuPont ratios, impairments analysis, and more. Those templates also need the Calcbench Excel Add-In to work, but once you have that installed it’s smooth and easy sailing. 

Enjoy your last few days of calm, and stay tuned for lots of Calcbench updates and analysis in another few weeks.

So we wondered: which corporations have the most exposure to China, that they might feel a revenue squeeze if the country continues along its current economic malaise? 

After spending a few minutes in our Segments, Rollforwards, and Breakouts page, we had an answer. Table 1, below, shows the 10 firms with the largest percentage of China-based revenues, based on their most recent annual reports. 

In news that should surprise nobody, all 10 firms are engaged in the manufacture or design of microchips, industrial equipment, or other technology items with huge demand in China. Qualcomm ($QCOM) in particular has had a majority of its revenue come from China for years. 

Further down the list were lots of other names you’d expect to see here, including Tesla, Apple, Texas Instruments, Analog Devices, DuPont, Otis Worldwide, NVidia, and more. 

We next looked at how China revenues changed for those top 10 firms from 2022 to 2023. Except for Lam Research Corp. ($LRCX) and KLA Corp. ($KLAC), the answers ranged from “eh” to “yuck.” See Table 2, below.

In total we found 75 firms in the S&P 500 that report China revenues as geographic segments. You can conduct your own research on revenue from China (or any other geographic region, for that matter) using our Segments page. 

Simply select Geographic Segment from our drop-down menu of choices, and then start typing “China” in the filter that appears. You’ll see something like Figure 1, below.

(Sharp-eyed observers might notice that 3M Corp. and Advanced Micro Devices both have $3 billion-plus in China revenues, but aren’t on our Top 10 list above. Why not? Because that table ranks companies by percentage of revenue from China; 3M, ADM, and others do make gobs of money from China, but not as a percentage of total revenue.) 

Be warned that some firms have lots of China revenue, but don’t necessarily track China itself as a geographic segment. For example, they’ll roll those revenues into an “Asia” or “Pacific Rim” segment, along with other countries. Sometimes you simply won’t be able to calculate precise China revenues unless you call up the investor relations department and pester them.

Where companies do report China revenue, however — yeah, Calcbench has that. Now the question is what those numbers will be for Q3 results that start arriving in October. 

First let’s look at the income statement itself, in Figure 1, below. We pulled up a few prior first fiscal quarter results for comparison.

OK, the financial performance itself seems solid — but wow, Cintas classifies more than 20 percent of its revenue as “Other.” And that Other segment, whatever it is, went from $468.7 million two years ago to $567.7 million today; that’s an increase of 21 percent. That compares to growth of only 14 percent for Cintas’ uniform and facilities rental segment, which supposedly is the star of the show. 

So exactly what’s in that Other segment? Why is it growing so fast, and what else can we learn about its performance? 

Those answers are easy to find if you know where to look.

To start we went to the Disclosures and Footnotes tool, to find Cintas’ earnings release for its fiscal first quarter. (This was not hard; Cintas filed it at 8:32 a.m. on Wednesday and Calcbench had it indexed within minutes.) Read through the release and you’ll find that the Other segment Cintas lists on the income statement is actually two segments — First Aid and Safety Services, and another other segment labeled “All Other.” See Figure 2, below.

Not only do we have a more precise breakdown of operating segments; we have more granular data for each of those segments. For example, we can now calculate that All Other has an operating margin of 15.7 percent; First Aid and Safety has a margin of 24.3 percent; and Uniform and Facilities Rental has one of 23.1 percent. 

From there you could continue digging. For example, you could use our Export History feature to pull up disclosures from prior periods and assess historical performance. We did that, to compile this chart of All Other’s performance for the last 12 quarters. (Actual performance in blue; trend line in red.)

All well and good, but we still have the question: What is “All Other”? 

For that, we used the Disclosures and Footnotes tool again to open Cintas’ Management Discussion & Analysis section from its most recent annual report. Pretty near the top we found our answer: 

The Uniform Rental and Facility Services reportable operating segment consists of the rental and servicing of uniforms and other garments including flame resistant clothing, mats, mops and shop towels and other ancillary items. In addition to these rental items, restroom cleaning services and supplies and the sale of items from our catalogs to our customers on route are included within this reportable operating segment. The First Aid and Safety Services reportable operating segment consists of first aid and safety products and services. The remainder of Cintas’ business, which consists of the Fire Protection Services operating segment and the Uniform Direct Sale operating segment, is included in All Other.

So, direct sales of uniforms and fire protection services; that’s the answer, and you’d only find it by digging into the footnotes. 

So we were delighted when an eagle-eyed researcher — no less than Shiva Rajgopal, head of the accounting department at Columbia Business School — brough an obscure detail to our attention. In its most recent fiscal year, Nvidia’s pretax U.S. earnings exceeded U.S. revenue. Figure 1, below, shows the proof. 

Domestic pretax earnings were $29.49 billion. Domestic revenue was $26.96 billion. That’s less. 

We had never seen something like this before — but in our defense, it’s such a weird concept that we’d never gone looking for it before either. Our first order of business was to use the world-famous Calcbench Trace feature to research exactly what those domestic revenue and EBIT disclosures were all about.

First we traced the $26.96 billion back to the geographic segment disclosure. Figure 2, below, shows that the U.S. market accounted for roughly 44 percent of all Nvidia revenue that year.

Then we traced EBIT, both domestic and foreign. See Figure 3, below.

Interesting, but we’re still stuck on the basic question of how this could even happen. One immediate hunch is that Nvidia had to have some unusually large amount of non-operating income, such as gains from the sale of assets, investments, or one-time extraordinary gains. 

Except, when you look at Nvidia’s segment disclosure of revenue, it’s entirely operating income: $47.4 billion for its AI chips, and another $13.5 billion for graphics chips. So that hunch is incorrect.

Another possibility is that Nvidia had negative operating revenue — again, another weird concept we didn’t much contemplate before, but it’s theoretically possible. For example, if a company has a high amount of returns, refunds, or allowances exceeding gross sales, and also has other forms of income that push EBIT into a positive territory, you could end up with EBIT larger than revenue.

When you study the details, however, Nvidia doesn’t fit that profile either.

How Rare Is This Scenario, Anyway? 

Fully determined to go down this rabbit hole, the Calcbench research team started looking for other examples of EBIT exceeding revenue — and we found them. Still a super-rare scenario, but Nvidia is not alone.

We searched the annual filings of all public filers as far back as 2015, and found 233 instances of this happening. That’s 233 instances out of roughly 80,000 filings, a frequency rate of 0.3 percent. Extremely rare, but definitely a thing.

For example, Moderna ($MRNA) reported such an outcome in 2021: domestic revenue of $6.17 billion, domestic EBIT of $13.11 billion. See Figure 4, below.

Well, hold up. Moderna experienced gigantic revenue growth in 2021 because it launched its covid vaccine that year. Nvidia experienced gigantic revenue growth in 2023 because demand for its AI microchips took off that year. 

Could that be a clue? Is this phenomenon due to sudden global demand for your product, which brings a battalion of tax considerations in tow; and somehow those tax issues lead to domestic EBIT larger than domestic revenue? 

Hmmm. We looked up the tax footnotes for both Nvidia and Moderna, and both are as complicated as a graduate-level finance textbook. 

For example, both companies claimed a benefit in their respective fiscal years for foreign-derived intangible income. That, according to the U.S. Tax Foundation, is income from the use of intellectual property in the United States in creating an export. OK, Moderna used intellectual property in the United States to sell covid vaccines worldwide; Nvidia did the same to sell AI microchips. Figure 5, below, shows the FDII adjustment for Nvidia.

Moderna had a similar FDII adjustment in 2021, although it reported that item as a percentage adjustment (4.7 percent, if you’re curious) to its statutory tax rate; one of numerous adjustments Moderna made as it went from its statutory rate of 21 percent down to an effective tax rate of 8.1 percent. 

We then consulted with a few corporate finance gurus we know, who gave us this consensus answer: it’s about the transfer pricing these companies use as they try to report revenue globally.

For example, say you have sales from U.S. subsidiary A to foreign subsidiary B. Those sales are not recognized as GAAP revenue, but they do create tax revenue and pretax income. If you have enough of those sales (Nvidia selling its chips to foreign subsidiaries, Moderna selling its vaccines), you can generate significant U.S. EBIT — and if you don’t have huge U.S. revenues, yet, the pretax U.S. income can end up exceeding U.S. revenue. 

That also explains another issue we were struggling to reconcile: lots of other large companies also claim that FDII tax adjustment, across a range of industries (Amazon, Netflix, and Mastercard all do, for example), but none of them have domestic EBIT exceeding domestic revenue. Then again, none of them just launched a product with soaring demand globally; they already have large U.S. operations with plenty of U.S. revenue. 

If this all sounds confusing, you’re not alone. One of our gurus said the whole thing is “clear as mud;” others said 10-K financial reporting rules aren’t really designed to address this oddball discrepancy since it’s so rare. 

Regardless, the data itself is there. For financial analysts sleuthing around corporate filings trying to figure out what’s up, Calcbench is an indispensable tool no matter how weird the scenario!

First are the face financial statements, shown in Figure 1, below. Revenue and gross margin were both down more than 7 percent, but we were particularly intrigued with that $166 million asset impairment against Signet’s North America segment. 

Hmmm. We next opened the Disclosures & Footnotes Query page to look at Signet’s geographic segments. North America sales went from $1.501 billion in the year-ago period to only $1.398 billion this quarter, a decline of 6.9 percent. (North America accounts for roughly 90 percent of Signet’s total sales.) We then used the Export History feature to track quarterly North America sales for the last four years. See Figure 2, below.

Well, yuck; the cyclical nature of jewelry sales — with a huge spike every fiscal fourth quarter for Signet, which contains Christmas and ends just before Valentine’s Day — doesn’t give us much sense of the overall trend, which allegedly is downward. So we did some quick Excel-ing to recalculate North America sales as annual amounts. See Figure 3, below.

OK, that gives us a much better sense that North America sales jumped sharply in 2022 but have been trending downward since then. Estimating full-year fiscal 2025 sales is tough since we can’t confidently model that Q4 pop (perhaps you can), but clearly the first half of this fiscal year is underwhelming.

So back to that North America asset impairment. We next searched the Goodwill and Intangibles footnote for more information, and found this:

However, during the second quarter of Fiscal 2025, the Company recognized pre-tax impairment charges in the condensed consolidated statement of operations within its North America reportable segment related to the Diamonds Direct trade name, the Digital Banners reporting unit, and the Blue Nile trade name of $7.0 million, $123.0 million and $36.0 million, respectively, as their respective carrying values exceeded their fair values. 

Add those three sums together, and you get to the $166 million in impairments.

Still, why is the North America market stagnating? For that question we bounced to the MD&A section of the 10-Q. There, management cited a drop in the number of engagements during the pandemic, which has yet to recover to pre-pandemic levels:

The Company anticipates same store sales between -4.5% and +0.5% for full year Fiscal 2025, with sequential improvements expected to continue throughout the year, led by the engagement recovery and strength in fashion assortments and services. Although the engagement recovery has been somewhat slower than we expected, management’s data continues to point to multi-year engagement recovery back to pre-pandemic levels… While overall inflation has moderated, the Company anticipates that spending in discretionary categories may continue to be adversely impacted by high prices on consumer necessities and could further impact sales in Fiscal 2025 across all categories. The Company also continues to monitor the impact of a highly promotional competitive environment and the potential impacts on sales and gross margins for the remainder of the year. 

Notice the negative-to-flat growth rate assumption for same-store sales for the rest of the year; that doesn’t portend well for Figure 3 and FY 25’s rather pitiful sales so far. Signet is also beholden to larger trends of people postponing engagements and possible recession. 

Altogether, those forces raise some pointed questions about Signet’s future, questions that analysts might want to ask during the next earnings call. 

Our point is simply to show how Calcbench data and analytics can be put to good use now, sharpening your insights and refining what you want to study when Q3 earnings reports and quarterly filings start arriving next month. We have the data and the tools; the insights are up to you.

We’ve explored this idea before, looking at:

• Disclosure of risks related to artificial intelligence; 

• Discussion of cash from operating activities;

• Presentation of restricted cash.

Today let’s look at another common headache for issues: disclosure of cybersecurity incidents.

This is a fairly new requirement, driven by SEC rules adopted last year requiring issuers to disclose “material cybersecurity incidents” as 8-K filings within four days of deciding that the incident you just suffered is indeed material. 

Specifically, companies file the 8-K as Item 1.05 — and you can indeed find those disclosures via Calcbench. You can either track individual companies and be alerted when they submit new filings, if you know specific companies you want to follow; or you could visit our Filings page, which lets you see all recent filings and filter them by specific filing type. Just filter for ‘1.05’ and you’ll see a list of recent disclosures for cybersecurity incidents.

For example, we hopped onto the Filings page and searched for cybersecurity disclosures from July 1 through Sept. 10. We found 10 (including several companies that had filed original and then amended 8-Ks). Let’s take a look.

Sonic Automotive

Sonic Automotive ($SAH) first disclosed a cyber incident on July 5, when the company reported that it was one of many auto sales businesses disrupted by a ransomware attack that struck CDK Global ($CDK), a software company that helps car makers and dealerships manage their sales. CDK was knocked on its heels in late June, causing weeks of grief to all manner of other companies.

What caught our eye is that Sonic then filed an updated 8-K disclosure about the attack on Aug. 5, as the full scope of damage to Sonic became more clear:

As of the date of this filing, access to the Company’s information systems affected by the Incident has been restored, including its dealer management system (“DMS”) and customer relationship management system (“CRM”). However, the Company experienced operational disruptions throughout July related to the functionality of certain CDK customer lead applications, inventory management applications and related third-party application integrations with CDK.

The Company has concluded that the Incident had a material impact on the Company’s business during and results of operations for the second fiscal quarter ended June 30, 2024 (“Q2”). The Company’s GAAP earnings per diluted share for Q2 were $1.18, and the Company estimates that the Incident adversely affected its GAAP earnings per diluted share for Q2 by approximately $0.64 without taking into account any potential recoveries related to the Incident and after factoring in estimated lost income and expenses attributable to the Incident.

Sonic also said it does not believe the attack will have any material effects in Q3 or beyond.

Key Tronic Corp. 

Key Tronic Corp. ($KTCC) is a manufacturer of printed assembly boards and other electronic components. The company first reported in May that it had suffered an unauthorized intrusion to its manufacturing systems. What happened then? The company filled in more details in a follow-up 8-K filing on Aug. 6… 

As a precautionary measure, the Company halted domestic and Mexico operations for approximately two weeks during remediation efforts. After production was restarted, these locations returned to near capacity approximately another two weeks later. Other international operations continued production without material disruption from the cybersecurity incident. During the disruption of business, the Company continued to pay wages in accordance with statutory requirements. The Company also deployed new IT-related infrastructure and engaged cyber security experts to remediate the incident. The Company’s operations and corporate functions were restored in mid-June, and we believe that the unauthorized third party no longer has access to the Company’s IT systems… 

The Company has determined that, due to the cybersecurity incident, it incurred approximately $2.3 million of additional expenses, and was unable to fulfill approximately $15 million of revenue during the fourth quarter. Most of these orders are expected to be fulfilled in fiscal year 2025.

Key booked $559 million in annual sales for its fiscal 2024, which ended June 30, so that $15 million loss in its final quarter probably stings. 

Halliburton 

Oil services giant Halliburton ($HAL) suffered an unauthorized intrusion on Aug. 21, and first filed an 8-K disclosure about the attack two days later — a rather bland, six-sentence item that the company was looking into the matter. (“The Company activated its cybersecurity response plan and launched an investigation internally with the support of external advisors.”) 

Ten days later, Halliburton filed a more expansive 8-K drilling a bit more deeply into the situation:

The incident has caused disruptions and limitation of access to portions of the Company’s business applications supporting aspects of the Company’s operations and corporate functions. The Company believes the unauthorized third party accessed and exfiltrated information from the Company’s systems. The Company is evaluating the nature and scope of the information, and what notifications are required.

The Company has incurred, and may continue to incur, certain expenses related to its response to this incident. As of the date of this Current Report on Form 8-K, the Company believes that the incident has not had, and is not reasonably likely to have, a material impact on the Company’s financial condition or results of operations.

Three different companies, three different approaches to providing more detail to investors about cybersecurity incidents. 

External reporting teams grappling with what to say about their own incident will always still need to make their own judgments, based on the facts of your own specific attack and advice of legal counsel; but studying the path that others have trodden can always make your own journey a bit more bearable. Calcbench data is always there to help.

The big picture is that public companies altogether did see higher revenue for Q2 2024 compared to the year-ago period, although smaller firms saw a smaller revenue gain than their larger brethren.

Net income, however, tells a different story. Large firms saw net income rise by 5.7 percent, but smaller firms and those that are domiciled internationally— that is, everyone outside the S&P 500 — saw net income plunge by a painful 24.4 percent.

We submit Figure 1, below. It breaks out year-over-year change in net income for all firms together, all non-financial firms, S&P 500 firms, non-financial S&P 500 firms, and all firms outside the S&P 500.

As you can see, every category enjoyed some amount of net income growth except for those non S&P500 firms. They collectively saw net income fall from $139.1 billion one year ago to $105.2 billion this quarter.  Once you remove international firms from that mix, the smaller US domiciled firms saw Net Income flat as it grew year over year by some 30 basis points.

The data suggests that net income growth is concentrating at the top, rather than across Corporate America overall.

Now consider what happened in the markets for the last six weeks. Large companies filed first, and they were reporting revenue and net income growth in the high single digits; and stock market averages rose. Then the smaller companies started to file, with net income declining, and the market declined. 

Well, share price is a function of expected growth in net income. If net income isn’t growing, share price declines. So what we’ve seen on Wall Street lately shouldn’t be a surprise.

The larger question, so to speak, is whether large companies will also see net income declines when they start filing Q3 earnings reports next month. So stay tuned as earnings releases start to arrive in about four weeks’ time, and the Calcbench Earnings Tracker cranks back up again.

How did you start using Calcbench? 

My friends and I went to the CFA Institute’s website to learn about the benefits of being a CFA Institute member. We were also looking to see what data was available through the CFA Institute’s website, and happened upon Calcbench. 

As a hobby, I’m learning to code in Python. I’m currently a beginner-to-intermediate coder, but hope that as I progress in my coding skills I will eventually be able to integrate Python into my work.

I recently started using Calcbench’s API. 

How easy is it to use the Calcbench API? 

I am currently downloading information into a Jupyter notebook. This is my first attempt at trying to get financial information in a systematic way and it took a little time for the initial setup. Lots of trial and error, and I had to go to Github for help — but once I understood the flow, I was able to extract a lot more data. 

SG&A stands for “sales, general, and administrative” costs, and encompasses pretty much any cost not directly related to making a product or delivering a service. Marketing, shipping, utilities, rent, coffee in the breakroom, ficus trees in the lobby — all of that, and more, rolls into SG&A costs.

We were curious about two questions. First, how much have SG&A costs risen for the S&P 500 in the last several years? Second and more important, how much have those costs risen as a percentage of revenue? 

The first is easy. Using our Bulk Data Query tool, we pulled quarterly SG&A costs for the S&P 500 from the start of 2020 through second-quarter 2024. In total those costs rose 21.6 percent, from $482.9 billion to $587.3 billion. Average SG&A costs per company rose 25.5 percent over the same period, from $1.08 billion to $1.35 billion.

Over those same 14 quarters, however, revenue rose even more: up 38.1 percent for the whole S&P 500 altogether, and up 42.1 percent for the average firm.

Figure 1, below, compares revenue and SG&A costs on an annual basis, since fussbuckets out there will say quarterly revenue fluctuates too much to be a good yardstick.

It’s a bit hard to see the change in those SG&A costs compared to revenue, but clearly revenue (blue) has been rising more than the costs (red).

Meanwhile, Figure 2, below, shows SG&A costs as a percentage of revenue for the last 14 quarters. The fluctuations there do roughly correspond to inflationary periods, such as early 2020 when the pandemic threw everything into turmoil, and mid-2022 into mid-2023, when costs were rising faster than many companies could address through pricing changes. 

By late 2023, however, inflation had decelerated and companies had adjusted their pricing as necessary, so SG&A costs as a percentage of revenue started to trend downward.

Macro-theorists could ask whether the falling lines in 2024 are reflective more of higher prices driving higher revenues, or lower demand leading to job cuts, fewer shipping costs, less utility needs, and the like. That’s not our question to answer. We just provide the data to raise it.

Inspiration for this post came from payments processor Bill.com ($BILL), which filed its latest annual report last week. We were snooping around the company’s business acquisition footnote, and found a discussion of Bill.com’s acquisition of Invoice2Go back in 2021. The deal was valued at $674.3 million, and that purchase price was allocated as follows in Figure 1, below.

As you can see, intangible assets were valued at $91.22 million, or 13.5 percent of the total $674.3 million price. (Goodwill was a whopping 86.8 percent of the total price, but we’ve written about goodwill in acquisitions plenty of times before.) 

So exactly what went into that $91.22 million of intangible assets? We skimmed further down the footnote, and found a nifty table describing the three main elements. See Figure 2, below.

All of those elements are quite typical of a software acquisition. The acquiring company gains new customer relationships, technology developed by the target company, and residual value of the target company’s name until the acquirer washes that name away after some period of time.

At this juncture we should pause to appreciate the accounting rules here. For reasons that only a CPA could love, internally developed software assets are not included on the balance sheet as intangible assets; internally developed software isn’t listed anywhere, actually, other than as an operating expense. So it’s often more advantageous for a high-growth software venture to acquire other software companies, since those other companies’ technology is listed on the balance sheet as an intangible asset.

Like most intangible assets, however, those customer relationships, developed technology, and trade name do depreciate over time. Which means the weighted average useful life disclosure (as seen in Figure 2) can become quite important. 

For example, analysts could ask: Has the company made a reasonable estimate of the useful life? Could external factors (say, a rapid advance in competitors’ technology) shorten or otherwise change that estimated lifespan in the future? Could a poor estimate of the useful life risk an impairment of the intangible asset sometime in the future? 

Bill.com’s discussion of the Invoice2Go acquisition is simply an example of the disclosures one can find with Calcbench. So we wondered — what do other software companies say about the intangible assets involved in their acquisitions?

Searching for Detail

That information is not difficult to find in Calcbench. For example, we went to the Footnote and Disclosures database, then searched for any reference to “developed technology” by the S&P 500 in their 2023 annual reports (and then narrowed the search to companies using that term in their business combinations footnote). We found dozens of results. 

For example, Trane Technologies ($TT, maker of HVAC systems) disclosed multiple acquisitions in 2023 worth a total of $843.4 million. Intangible assets were valued at $330 million, or 39 percent of total acquisition costs. Those intangibles were valued as follows:

Analog Devices ($ADI, maker of various micro-electronic components) discussed its $27.95 billion acquisition of Maxim Integrated Products from 2022. Intangible assets were $12.43 billion (or 44.8 percent) of that deal, and were accounted for as follows:

And for good measure, we should also examine the disclosures of cybersecurity firm CrowdStrike ($CRWD) because it discusses two quite different acquisitions.

First is the company’s acquisition of Bionic Stork, a privately held company that provides an application security posture management platform, whatever that is. CrowdStrike paid $239 million for Bionic last year, including $34.9 million worth of intangible assets. In that $34.9 million, $29.9 million of that sum was assigned to “developed technology” with a lifespan of 72 months.

OK, cool beans; but CrowdStrike also acquired a smaller firm last year called Reposify Ltd. for $18.5 million. That amound included $3.8 million of developed technology, which seems to be the only intangible asset reported from the deal — and CrowdStrike estimated the lifespan of Reposify’s developed technology also at 72 months. (The deal was so small that CrowdStrike didn’t report it in table format so we have nothing to show you.) 

We’re not cybersecurity software developers, so we don’t know whether 72 months is an appropriate lifespan estimate or not — but we did notice that CrowdStrike is using the same estimated lifespan for both acquisitions. Well, why? Does the company use 72 months as a standard benchmark for all acquisitions? Is that appropriate for the cybersecurity industry? 

Those are questions for investors and analysts to ponder. Calcbench simply has the data so that those questions can be brought to the surface, and you can find the answers.

Well, OK… but exactly what are those companies disclosing about AI risks?

After all, it’s easy to see why more companies are talking about AI as a risk: because ChatGPT exploded onto the scene in late 2022. It’s cool and disturbing and everywhere and has potentially huge disruptive effects, so companies can’t really not say at least something about AI’s significance to their operations.

Still, that’s not the same as saying how AI might be a risk to your company. Some firms might see their business models eviscerated; others might see their businesses soar if they’re nimble enough to take advantage of AI in a timely manner. 

To explore this question, we fired up Calcbench’s Disclosures and Footnotes database and searched for S&P 500 companies that mentioned “artificial intelligence” in their risk factors for Q2 filings. 

Most companies kept that discussion of AI simple — say, adding AI as yet another technology that might complicate the firm’s cybersecurity risks, or mentioning AI as a technology the company needs to harness. 

For example, Nike ($NKE) had one sentence that mentioned AI, as part of a larger discussion about the company’s reliance on technology:

To  the extent we integrate artificial intelligence ("AI") into our operations, this may increase the cybersecurity and privacy risks, including the risk of unauthorized or misuse of AI tools we are exposed to, and threat actors may leverage AI to engage in automated, targeted and coordinated attacks of our systems.

Darden Restaurants ($DRI) did much the same, although it managed to stretch its discussion to two sentences:

However, because technology is increasingly complex and cyber-attacks are increasingly sophisticated and more frequent, there can be no assurance that such incidents will not have a material adverse effect on us in the future. For example, the rapid evolution and increased adoption of artificial intelligence technologies may intensify our and our service providers’ and key suppliers’ cybersecurity risks.

A more expansive discussion came from Clorox ($CLX). It mentioned AI multiple times in its risk factor discussions, including the important point that the company’s long-term prospects might suffer if it can’t reap the benefits of new technology quickly:

If the Company is unable to increase market share in existing product lines, develop product innovations, undertake sales, marketing and advertising initiatives that grow its product categories, effectively adopt and leverage existing and emerging technologies, such as artificial intelligence or machine learning, and/or develop, acquire or successfully launch new products or brands, it may not achieve its sales growth objectives.

More specifically, Clorox warned that it might struggle to wield AI in a manner that respects compliance obligations, ethical concerns, and legal risks:

In addition, the legal, regulatory and ethical landscape around the use of artificial intelligence and machine learning is rapidly evolving. The Company’s ability to adopt this emerging technology in an effective and ethical manner may impact its reputation and ability to compete, and this technology could be, among other things, false, biased, or inconsistent with the Company’s values and strategies. Further, the use of generative artificial intelligence tools may compromise confidential or sensitive information, put the Company’s intellectual property at risk, or subject the Company to claims of intellectual property infringement, all of which could damage the Company's reputation.

That’s a good point to raise. Right now the regulatory climate for AI is still a mess (read Radical Compliance if you’re a compliance nerd who wants the deets on AI compliance issues), and nobody quite knows what businesses will need to do to stay on the right side of AI law in, say, 2030.

Fedex Corp. ($FDX) made similar risk disclosures about seizing AI’s potential heightened cybersecurity threats. It also raised an interesting point about AI and social media generating so much digital noise that the company might struggle to keep up with reputation risks:

With the increase in the use of artificial intelligence and social media outlets such as Facebook, YouTube, Instagram, X (formerly Twitter), TikTok, and other platforms, adverse publicity, whether warranted or not, can be disseminated quickly and broadly without context, making it increasingly difficult for us to effectively respond. Certain forms of technology such as artificial intelligence also allow users to alter images, videos, and other information relating to FedEx and present the information in a false or misleading manner.

Somewhat to our surprise, Microsoft ($MSFT) mentioned artificial intelligence only once, despite being a huge player in AI development:

We are investing in artificial intelligence (“AI”) across the entire company and infusing generative AI capabilities into our consumer and commercial offerings. We expect AI technology and services to be a highly competitive and rapidly evolving market, and new competitors continue to enter the market. We will bear significant development and operational costs to build and support the AI models, services, platforms, and infrastructure necessary to meet the needs of our customers. To compete effectively we must also be responsive to technological change, new and potential regulatory developments, and public scrutiny.

In other words, Microsoft is betting the company on the success of AI. That’s not an unwarranted bet, but it’s going to be a big, enterprise-wide, long-term endeavor. 

We could keep going with more examples; we found 39 in Q2 filings alone, and several hundred in annual 10-K filings for 2023 — and that’s all for the S&P 500 alone, never mind all the other businesses out there. 

Filers looking for inspiration on how to describe AI in your risk factors can always start here, comparing yourselves to peers. At the least, those other disclosures would help you have more informed discussions with the legal team, the CTO, or anyone else in your enterprise involved in artificial intelligence, so you’ll know what questions to ask them as you form your narrative disclosures. Whatever data you need, Calcbench has it!

That’s right: Warner Bros. disclosed its impairment charge on Aug. 7, and then rival entertainment behemoth Paramount Global ($PARA) followed suit with a $6 billion impairment charge declared on Aug. 8. 

Both companies offer some fascinating — and eerily similar —  details about why they decided to take a goodwill impairment charge. Financial analysts following the sector should pay close attention, since understanding the how and why of these charges might help you anticipate goodwill impairment charges that other entertainment companies might report in the future.

First, a quick recap of the Warner Bros. impairment. As we discussed in our prior post about the company, Warner was carrying $22.1 billion in goodwill assets from its merger with Discovery Inc. back in 2022. The impairment arose from persistent poor performance in the company’s TV networks segment, which rested on two critical assumptions:

• A long-term growth rate for the Networks division of negative 3 percent.

• A discount rate of 10.5 percent, “reflective of the risks inherent in the future cash flows of the reporting unit and market conditions.” 

Lo and behold, Paramount made almost the exact same assumptions about its own TV networks business. Taken right from its footnote disclosure about the impairment charge:

• A long-term growth rate of negative 3 percent;

• A discount rate of 11 percent. 

So much like Warner Bros., Paramount management pretty much knew that its TV networks business was only going in a downward direction. Impairment was bound to happen sooner or later. 

Figure 1, below, shows quarterly revenue for Paramount’s TV Media segment for the last two years, just like we tracked with Warner Bros. Again, note the alarming trend line (in red).

An ironic twist: even as revenue from the TV unit has been falling in absolute terms, it has been accounting for more and more of Paramount’s total revenue — up from 62.7 percent of total revenue in mid-2022, to 67.6 percent in mid-2024. Heck, it even peaked at more than 70 percent of total revenue for a few quarters in 2023. 

Think about that. If your dominant operating segment is seeing revenue declines, then almost by definition your company is in profound strategic disarray. In that case, no wonder Paramount has been trying to sell itself for years, and finally sold itself to Skydance Media in July. 

Our point is simply that if financial analysts paid close attention to the details disclosed in the footnotes, and compared those details for Company A to peer companies B, C, and D, you’d be in much better shape to anticipate significant events such as billion-dollar impairment charges and sale of the company.

Calcbench does track all those details. All you need to do is start digging.

We can start with the impairment itself, announced as part of Warner Bros.’ second-quarter earnings release filed on Aug. 7. The company declared an impairment of $9.1 billion for its Networks division, which includes operations such as cable TV and other broadcast television operations, both in the United States and abroad.

OK, it’s not news that traditional television has been taking it in the teeth lately, as consumers cut the cable in favor of streaming services. But what exactly caused Warner Bros. to declare a goodwill impairment now, barely two years after the company came into being with the merger of Discovery Inc. and the Warner Media business of AT&T ($T) back in April 2022? 

This is a question worth considering because that merger involved a lot of goodwill — $22.1 billion in a deal with a total value of $42.4 billion, according to the purchase price allocation disclosed by Warner Bros. See Figure 1, below.

So if Warner Bros. is already impairing such a significant part of the deal, could further impairments lurk somewhere down the road? Exactly how bad has business in its Networks segment been, anyway? Could astute analysts have anticipated this impairment landmine and sidestepped it? 

That’s what we wanted to know.

Start With Fair Value Disclosures

Companies are supposed to review their goodwill assets annually and, when necessary, test those assets for possible impairment. An impairment could be triggered by a sudden, specific event (say, a subsidiary that loses exclusive rights to a key product); or by a long, steady, irreversible decline in value of a certain asset or the company’s share price.

According to its footnote disclosure about goodwill, Warner Bros. experienced both triggers. First, and as you may have seen in the news, the network lost its rights to broadcast NBA games; that is one of those sudden, specific events that dramatically weaken the value of the business. (Warner Bros. is now suing the NBA and its decision to broadcast the games on Amazon.) 

More interesting to financial analysts, however, are the criteria Warner Bros. used to monitor the long-term value of its Networks division — exactly the sort of details that could signal potential future trouble, if analysts know where to look and what those signals mean.

There in the goodwill footnote, Warner Bros. disclosed two critical assumptions:

• A long-term growth rate for the Networks division of negative 3 percent.

• A discount rate of 10.5 percent, “reflective of the risks inherent in the future cash flows of the reporting unit and market conditions.” 

Yikes. Taken together, those two assumptions telegraph to investors that Warner Bros. knows that the future of Networks division is only going down. Then came the dust-up over NBA broadcast rights, making matters all the worse.

In other words, astute readers of Warner Bros. financial statements could have anticipated that a goodwill impairment was possible, if you were reading the footnotes and paying attention to external events (the NBA fight) streaking across the headline. Sometimes, when you have 2 and 2, you can calculate that the answer is 4.

More Tricky: Segment Disclosures

Warner Bros. also reports revenue according to three major operating segments: Studios (making content), DTC (direct-to-consumer streaming services), and that troubled Networks division. See Figure 2, below.

Using our show-tag-history feature, we then traced the Network segment’s revenues for the last two years (back to when Warner Bros. Discovery was born in April 2022). As you can see in Figure 3, below, segment revenue has zig-zagged down pretty much from birth, and the trend line in red is alarmingly steep.

You can find even more detail about the Networks segment (and Warner Bros.’ other two segments) if you read the earnings release directly. There, the company breaks down specific lines of business within each segment, complete with comparables to prior periods.

Unfortunately these details are only displayed in a PDF image, so they can’t be indexed for easy and immediate display. But if you know where they are, you can read them and see that the Networks segment is staggering along with a pretty bad limp. See below.

That’s enough for today, but we’ll have more about this impairment in another post — including a look at what other entertainment companies are reporting these days, and how to compare disclosures to suss out what’s what.

In last week’s update, smaller companies (those outside the S&P 500) were finally reporting more revenue than Q2 2023, but were still suffering through lower net income levels. 

Well, that dynamic has not changed. 

As of noon ET on Aug. 9, our Earnings Tracker had crunched the Q2 earnings data of more than 3,100 smaller firms, and net income stood at $76.76 billion — down 10.3 percent from the $85.63 billion in net income that those companies had reported for Q2 2023. 

S&P 500 firms (449 of them so far) were in much better shape, with net income up 12.1 percent. That figure includes large banks and other financial firms, too. When you exclude them and only look at non-financial S&P 500 firms, net income was up even higher, to 14.5 percent.

Figure 1, below, tells the tale.

As you can see, net income is up for all firms collectively, all firms excluding the financial sector, all S&P 500 firms, and even all financial firms in the S&P 500 (although just barely for that last group). Only small firms are seeing net income decline this quarter compared to one year ago. 

Revenue is a better picture. Altogether, the 3,593 firms we have tracked through Aug. 9 reported revenue up an impressive 33.8 percent. Across each sub-category we track revenue was up anywhere from 3.4 to 7 percent— although smaller firms reported the smallest revenue growth, up only 3.45 percent. See Figure 2, below.

We will continue to update our earnings tracker at the end of every week for another few weeks, until Q2 reports slow down to a trickle. 

If Calcbench subscribers wish to get their hands on the template we use for this analysis, so you can conduct your own experiments at home, use this link to the file. 

Please note that it will only work with an active Calcbench subscription. If you need an active subscription (and who doesn’t, really, when swift access to real-time data is so important?), contact us at info@calcbench.com.

The crackerjack Calcbench research team then wondered: how accurate is that hypothesis? What data do we have that might suggest where things are going? 

To answer those questions, Calcbench examined a group of roughly 120 pharmaceutical firms making at least $250 million in annual revenue, tracking their R&D spending as a percentage of revenue for the last 14 quarters. See Figure 1, below.

The blue line is actual spending per quarter, and as you can see it has fluctuated from 15 to 25 percent since the start of 2021. The red line is the underlying trend, and that has been gliding up nicely, even though R&D spending levels have gyrated more wildly in the last year or so.

But that’s not the whole tale, is it? We also looked at trends in free cash flow for that same group of pharmaceutical firms, since free cash flow tells investors how much more money the company could devote to various projects — like, say, new R&D spending. See Figure 2, below.

Oh dear, that’s not good at all. Free cash flow has clearly been on a downward path. If it continues on that trajectory, pharma companies are bound to feel a spending squeeze. Yes, preserving R&D is likely to be a priority; but pressure is pressure, so perhaps Charles River Labs’ warning about an R&D slowdown should not be a surprise after all. 

Some fussbuckets out there will inevitably say that free cash flow fluctuates too wildly from quarter to quarter, and measuring it annually would be more productive. OK then, see Figure 3.

Ack! Free cash flow dropped 17.2 percent from 2022 to 2023! That puts 2023 spending back on par with 2020, the whack-a-doo year of pandemic disruptions. 

The question now is whether that decline in free cash flow will continue through the rest of 2024. If it does, and if the pharma industry’s R&D spending goes into decline for some unknown period — well, that’s not the end of the world, but it does lead to certain strategic questions analysts might want to ponder. 

For example, big pharma might decide to spend more on acquisitions, scooping up privately held pharma or life science startups that are targeting one specific product that might make a nice addition to the acquirer’s pipeline. That’s a time-honored strategy for this sector; maybe it will come back in vogue.

Calcbench can’t predict that future, of course. But we do have all the data you need to ponder the future in more precise terms, and then tailor your investment or financial planning decisions to follow.

In our July 26 update, we saw that large companies (those in the S&P 500) were reporting revenue and net income for Q2 2024 higher than the year-earlier period, while smaller firms (those outside the S&P 500) reported slightly lower revenue and net income. At the time, however, only 788 firms had reported at all, and most of that number were large firms (because the S&P 500 have earlier filing deadlines). 

This week we’re up to more than 1,700 firms, and most are now smaller firms. So what does the Earnings Tracker tell us now? 

As of Friday, Aug. 2, the revenue gap for smaller firms disappeared: revenue for Q2 2024 is now up 3.45 percent compared to Q2 2023. That’s not as good as the revenue increase for large firms (up 4.74 percent), but at least it’s a positive number. 

Net income, however, is an uglier story; it is now down 10.3 percent for small firms compared to the year-earlier period, while net income for large firms is up 12.1 percent. 

As usual, we also have the data in charts. Figure 1, below, tells the tale for revenue across various groups: large versus small, financial firms versus non-financial, and so forth.

Figure 2, below, does the same for net income. The bar charts give the comparison in absolute dollar numbers (the left-side vertical axis), while the gray line is the percentage change (the right-side vertical axis).

The numbers do help to put recent market events into context. For example, if a great number of small companies out there are suffering through declines in net income, that will ultimately lead to lower share price — which certainly squares with the market sell-off Wall Street saw last week. Yes, lots of that sell-off was probably driven by panic selling, but a broad-based decline in net income growth could presage a sluggish market for quarters to come.

We will continue to update our earnings tracker at the end of every week for the next few weeks, as quarterly reports flood into the database. 

If Calcbench subscribers wish to get their hands on the template we use for this analysis, so you can conduct your own experiments at home, use this link to the file. 

Please note that it will only work with an active Calcbench subscription. If you need an active subscription (and who doesn’t, really, when swift access to real-time data is so important?), contact us at info@calcbench.com.