We pivot back to coronavirus today because things are a lot more serious now than when we first explored coronavirus disclosures last month. Since then, scads of companies have published some sort of warning about potential disruption, and even the Securities and Exchange Commission issued a statement about firms’ disclosure obligations here.
A good example comes from Yum Brands ($YUM), owner of Taco Bell, Pizza Hut, and KFC, among other chains. Yum has extensive operations in China, both at the retail and the supply chain levels. So when Yum filed its Form 10-K on Feb. 20, we gave it a read.
Coronavirus first appears in Item 1A, Risk Disclosures. Nothing specific, and nothing good either:
Many of our restaurants located within mainland China have been temporarily closed, have shortened operating hours and/or have otherwise been adversely affected by the impact of the coronavirus, and these developments have also impacted the ability of Yum China’s suppliers to provide food and other needed supplies at our Concepts’ restaurants in mainland China…
While it is premature to accurately predict the ultimate impact of these developments, we expect our results for the quarter ending March 31, 2020 to be significantly impacted with potential continuing, adverse impacts beyond March 31, 2020.
Further into the filing, however, Yum does elaborate about how coronavirus disclosures might impede financial performance. Yum operates in China through a master franchisee, a spin-off firm known as Yum China ($YUMC) — and Yum China did offer a more fulsome glimpse into the coronavirus in its own earnings release from Feb. 5.
For example, Yum China has closed 30 percent of its 9,200 stores in China. For the remaining stores that were still open, same-store sales fell 40 to 50 percent compared to the year-ago period. Yum China executives weren’t sure when the stores would re-open, or when customer traffic would return to normal levels.
Again, nothing good there. But how might all of this translate into financial impact?
Yum Brands does offer us one other big clue: Yum China pays Yum Brands 3 percent of sales that Yum China reaps in Mainland China.
Moreover, “These continuing fees represented approximately 20 percent of the KFC Division and 16 percent of the PH Division operating profits in the year ended December 31, 2019.”
So if we know what those segment operating profits are, we can start to get a sense of the financial impact to Yum Brands if coronavirus wipes those fees away for a quarter or two.
Thankfully, Yum does disclose operating profits of its major brands. See Figure 1, below, which shows the revenue and operating profits for KFC, Pizza Hut, and Taco Bell.
So if Yum China accounted for 20 percent of Yum Brands’ $1.052 billion in operating profit for KFC last year, that was $210 million. At 16 percent of Pizza Hut profits, that was $59.04 million.
That’s a total of $269 million in operating profit that came from Yum China last year, or 14 percent of Yum Brands’ total operating profit.
Now, the big question: how much could coronavirus reduce an amount of financial activity roughly that size?
Nobody knows. But $269 million is roughly $67.25 million per quarter. Will coronavirus eradicate all of that profit for Q1? Probably. It’s quite reasonable to assume Yum China will operate at a loss for this quarter and further into 2020, and inevitably that will also occupy more of Yum Brands’ time as it tries to help its largest, most important franchisee.
To be clear, this is speculation on our part, but it’s not far-fetched to assume all of that $269 million in Yum China operating profit goes away for Yum Brands in 2020.
That is a guess, but it’s an informed guess. The numbers are there in the disclosures to help reach that conclusion — and Yum Brands is only one of many, many companies starting to confront the implications of coronavirus.
Now we’re off to study the disclosures of pharmaceutical firms, because the sooner somebody finds a vaccine for this thing, the better.
The other day we were skimming recent SEC comment letters to firms asking about their financial filings (because that’s what we do for fun around here), when we came across one exchange between the SEC to Procter & Gamble ($PG).
The SEC had asked Procter & Gamble about the company’s supply chain finance program, where P&G was working with one of its banks to extend payment terms with P&G suppliers. That financing program had $1.9 billion to P&G’s cash flow over the course of 2018, but also stretched its Days Payable Outstanding metric by eight days.
The SEC was curious about that change in “DPO” and wanted more detail from Procter & Gamble about how the program works. It also asked P&G to consider (read: carry out) expanding its liquidity disclosures, in case any contraction in supply chain financing — which P&G said might happen in fiscal 2020 — would have a material pinch on financial statements.
Honestly, most of the exchange is arcane stuff. But the SEC’s question about longer Days Payable Outstanding did catch our eye, because Calcbench can easily benchmark those changes in one company or among many.
First, for those unfamiliar: Days Payable Outstanding is a common metric of efficiency, that measures how long a firm takes to pay its suppliers. You calculate it by dividing accounts payable at the end of a period into “purchase/day,” which is cost of goods sold for the year divided by 365.
And we have all that data in Calcbench.
You can find DPO in two ways. First, go to our Multi-Company Page and search “Days Payable Out” in the standardized metrics field on the left. (You do not want “Days Sales Outstanding,” which is something totally different.)
Or you can visit our Data Query Tool, which lists all sorts of data points you can research. DPO is one of the liquidity ratios listed at the bottom. Set the group of companies you want to research at the top, check the DPO metric at the bottom, and you can export the whole data file to Excel instantly.
Anyway, back to Procter & Gamble. We wondered whether extending its DPO by eight days was highly unusual. What was the change in DPO among its peers? Among the S&P 500 generally? So we ran the numbers for DPO in 2017 and 2018, and totaled up the difference.
As you can see from Table 1, below, P&G’s extra 7.52 days in Days Payable Outstanding isn’t anything unusual among its peers.
That’s one benefit for companies using Calcbench: you can pull up benchmark data quickly, and use that to buttress whatever reply you want to submit for an SEC comment letter. Arguments based on logic and theory can work, but arguments based on data work better.
Analysts, meanwhile, can use Calcbench to verify what companies are saying in the filings. You can compare the company you follow to its peers, and across reams of data points you can get a better understanding of what “normal” really looks like.
Attention power-users of Calcbench and Excel! We’ve received several reports lately that our Excel Add-In is sometimes sluggish or non-responsive. To err on the side of caution we have a new version you can install, at www.calcbench.com/excel.
Just go to that URL, follow the instructions (for Windows, Office 365, or Google Sheets; whichever operating system you use), and then you’ll be good to go.
That page also has lots of other tips and best practices for using the Excel Add-In, and we even have a video tutorial on YouTube. Heck, you can even watch the tutorial here below.
Calcbench now has enough 2019 data from the S&P 500 to start preliminary trend analysis on, well, all sorts of things. So our first pass is a quick take on spending for property, plant, and equipment.
To keep things simple, we pulled the numbers on 76 firms in the S&P 500 that reported “payments to acquire PPE” for 2019 and the prior three years. Then we compared that spending as a percentage of total revenue.
Bottom line: that spending did decline mildly last year compared to 2018, but is still a fair bit above spending in 2016 and 2017. See Figure 1, below.
What can we extrapolate from these findings? To be fair, not much. We cannot say capex spending is in decline; firms report capex in several ways, and this sample only looks at 76 companies. That’s a tiny sliver of the whole.
But by this precise definition, among firms that collectively had $2.45 trillion in revenue last year, which is nothing to sneeze about — yes, outlays for PPE declined last year for the first time in at least four years.
We also examined PPE spending as a percentage of total revenue. Again, that number slid downward last year after three years of small but steady increases. See Table 1, below.
And lastly, while the average percentage spend arrived at 6.64 percent, some firms devoted quite a bit more of their revenue to acquiring PPE. Table 2 shows the top 5.
In the fullness of time Calcbench will take a much deeper dive into capex spending across all industries, as we do just about every year. For now, you can conduct your own research by visiting our Multi-Company search page, selecting a group of firms to research, and then using our standardized metrics or XBRL tag search fields to find the precise data point you want to study.
Talk about a deal that went up in smoke!
As you may have heard, tobacco giant Altria Group ($MO) published its latest earnings release on Jan. 30, and disclosed a $4.1 billion impairment charge for its investment in e-cigarette maker Juul.
This was actually the second big impairment charge Altria has taken over its Juul misadventures. In its Q3 filing from November, Altria coughed up a $4.5 billion impairment as lawsuits, regulatory scrutiny, and bad headlines began to swirl. Since then the news has gotten nothing but worse for Juul, which meant nothing but more impairments for Altria.
So we fired up the Calcbench databases and decided to take a look.
Consider the history year. In December 2018, Altria announced a $12.8 billion investment in Juul for 35 percent of the company. That deal implied a total valuation for Juul (which is not publicly traded) of $37 billion.
Altria financed the investment by short-term borrowing the whole sum, due in December 2019, at 3.5 percent interest. Ouch, but more on that momentarily.
Anyway, that investment might have seemed plausible 14 months ago when it happened. Alas, 2019 was not kind to Juul. Public health officials pieced together the threat of vaping disease, which has killed at least several dozen people across the country and left many more with serious lung problems. Regulators began cracking down on e-cigarettes; Juul, as the biggest player in the business, bore the brunt of that opprobrium.
Things began to unravel in October. Hedge fund Darsana Capital Partners wrote down its investment in Juul by one-third, and cut its estimated value of Juul down to $24 billion. That makes sense; $24 billion is a one-third reduction from $36 billion.
Altria followed suit with its first impairment charge, that $4.5 billion hit that the company disclosed in Q3. As the company diplomatically phrased things:
While there was no single determinative event or factor, Altria considered impairment indicators in totality, including: increased likelihood of U.S. Food & Drug Administration (FDA) action to remove flavored e-vapor products from the market pending a market authorization decision, various e-vapor bans put in place by certain cities and states in the U.S. and in certain international markets, and other factors.
The latest impairment, $4.1 billion in Q4, is apparently due to the spike in lawsuits against Juul. As Altria noted in its earnings release, since Oct. 31, 2019, the number of lawsuits pending against Juul has spiked by more than 80 percent. Ugh.
Those impairment charges have added up for Altria. The company reported $10.3 billion in operating income, but by the time it was done with interest on debt and all those impairments — including another $1.4 billion loss on financial instruments extended to cannabis company Cronos Inc. ($CRON), which we won’t even get into today — Altria was staring at a $1.29 billion net loss for 2019.
First, about that $12.8 billion in short-term debt Altria borrowed to pay for its Juul stake, originally due in December 2019. If you use our Interactive Disclosures page to research things, you find an interesting tale.
Three months after the investment deal, Altria paid off the short-term debt by issuing long-term notes of $11.5 billion and €4.25 billion. The debt is due in various amounts from 2022 to 2059, with interest rates anywhere from 1 to 6.2 percent.
So that giant asteroid of debt did not collide with Altria in Q4 after all, but the company will be paying off its misadventures with Juul for decades to come.
Also, part of the original investment was that Altria would provide various commercial services to Juul through 2024: logistics, distribution, youth vaping education, regulatory affairs, and so forth. And Altria signed a non-compete agreement with Juul that Altria would only dabble in e-cigarettes through Juul. And a clause that allowed Juul to license various bits of Altria intellectual property royalty free.
Like, a generous deal. Juul had been riding high through 2018, and by the end of that year, Altria was ready to pay quite a bit for a piece of that action.
Well, here we are two impairments later, lawsuits everywhere, and this line included in the earnings release from Jan. 30: “Altria will discontinue all other services by the end of March 2020 that were part of the original investment agreement.”
That’s one way to get burned.
Calling all devotees of operating lease assets: Calcbench just published a research note examining the potential impairment of those assets — which, as we say in the note, is no longer potential. It’s happening.
A PDF version of the research note is available to all. We review the changes to accounting rules that have compelled companies to start listing operating leases as assets on the balance sheet; and the rules that guide companies on when to declare an impairment of those assets; and several examples of operating lease impairments reported by actual firms in the last few months.
Of course, impairment of assets is not a new concept — but historically, financial analysts only got their undies in a twist over impairment of goodwill assets. Now that companies are also reporting operating leases as assets, those too can be impaired.
Well, how often might leased assets get impaired? Under what circumstances? Could those impairments lead to a material earnings surprise? Or are impairments more hype than substance, over a company’s long term?
We answer all those questions in the research note.
One good example: Hi-Crush Inc. ($HCR), a mining company that specializes in sand and other aggregates. Business did not go terribly well for Hi-Crush last year, and in Q3 2019 the company declared asset impairments totaling $346.4 million — including a $76.3 million impairment for leased railcars.
That was more than double Hi-Crush’s impairment for goodwill in the same period. So clearly impairment of leased assets can be significant. See Figure 1, below.
Anyway, the research note has several other examples, plus a discussion of the accounting rules that have brought us to this moment. If you need a primer on the issue and how Calcbench can help, give it a read!
Coronavirus is spreading rapidly in China and beyond, and by now you’ve probably seen specific companies announcing steps to curb their exposure to the threat.
For example, Disney ($DIS) has closed two theme parks in China; McDonald’s has closed numerous stores there. UBS, Alibaba, Novartis, and other businesses have told employees in China to work from home until further notice, and some have quarantined employees recently returned from China to their home countries. Nestle has stepped up biometric security at its factories in China. IMAX ($IMAX) has suspended the release of new films there.
You get the idea. Coronavirus is first and foremost a public health menace, and we wish the best to everyone fighting the disease. It is also causing real business disruption, as witnessed by Wall Street’s 454-point plunge in the Dow Jones Average on Monday.
So when will companies start disclosing more specific detail about their risks of coronavirus? Where can you get a sense of that exposure in financial data? Calcbench has a few ideas.
We have seen no disclosures yet that mention the word “coronavirus,” or even “flu” or “influenza” relating to this specific outbreak. That doesn’t mean they aren’t coming. On the contrary, they inevitably will arrive, probably within the next few weeks.
UPDATE: Well that changed quickly. Within 24 hours of us publishing this post, firms including Starbucks, Cirrus Logic, Las Vegas Sands, and others began citing coronavirus in their filings. So it is indeed an issue.
First, as always, use the Interactive Disclosures database to check for keywords — “coronavirus,” “influenza,” “Wuhan” or “outbreak,” for example. You can use the text-search field on the right-hand side of the screen to search for those words.
Most likely, coronavirus will appear in an earnings release, or in the Risk Factors or Management Discussion & Analysis sections of a 10-Q filing. You can use the pull-down menu on the left-hand side of your screen to search those specific disclosure sections, or just err on the side of caution and leave that part unselected, so you search the entire filing.
Second, set up Calcbench email alerts for companies you follow, so you can be notified immediately when a filing hits our database (usually within minutes of it arriving at the Securities & Exchange Commission). Then repeat Suggestion 1, above, to search the text of the filing for keywords related to coronavirus.
Not sure which firms have more operations in China than others? Then third, use the Segments & Breakouts page to search segment reporting specific to China. Use the “Geographic segment” option from the pull-down menu, and then type “China” or even just “CH” to filter results specific to China.
Figure 1, below, shows an example from Apple. We didn’t need to use the filter here because Apple only reports a handful of geographic segments, China among them. But if you were searching all the S&P 500, for example, you’d want to type in “China” as a filter.
A few caveats about searching geographic segment disclosure!
First, be creative with the filters you use and observant of the results you see. Companies might report “APAC ex. China” or “Far East” or “Mainland China” or “China ex. Hong Kong” — or whatever else they want, really. There are no specific rules in how to describe geographic segments. So look for designations that include China but don’t necessarily name China.
Second, you can measure exposure to China in several ways. Apple ($AAPL) shows both. Revenue numbers are (duh) the company’s sales in China, and it’s reasonable to believe that sales would suffer if Beijing orders 60 million people confined to quarters— which it has already done with its quarantine of Hubei province.
On the other hand, you can also measure a company’s China exposure by its PPE (property, plant, & equipment) there. That’s why manufacturers around the world might still be left reeling from coronavirus even if they have relatively small sales in China: their workers at all the PPE there might be off the job.
You can use Calcbench to assess and rank firms’ exposure to China by either metric.
Now we’re off to wash our hands and buy some surgical masks. Stay safe out there, this virus is no joke.
Discovery Energy ($DENR) filed its latest quarterly report this week, and we noticed that the company disclosed a material weakness in its financial reporting.
That unto itself is never welcome news. A material weakness warns investors that a firm’s corporate accounting is shaky, and might not be able to prevent serious errors in financial reporting.
What caught our eye with Discovery, however, was the nature of its material weakness. Discovery doesn’t have enough accountants to prevent people from cooking the books.
Sure, the company draped that fact in more bureaucratic language; it described the problem as “the lack of segregation of accounting duties as a result of limited personnel resources.” But let’s have no illusions here. Discovery has a shortage of suitable accounting talent.
That got us wondering — what other firms have material weaknesses due to personnel issues? What other causes of material weaknesses are out there these days? So we fired up our Interactive Disclosure database to investigate.
First, the mechanics of the process. Looking up material weaknesses is a straightforward exercise in Calcbench. Choose whatever group of companies you want to examine; then set the disclosure type menu (left side of screen) to “Controls & Procedures;” then enter “material weakness” in the text search box on the right, with the “restrict to specified disclosure type” box checked underneath. See Figure 1, below.
We found 31 firms disclosing material weaknesses for Q4 2019 so far — with many more filers yet to come, so that number will likely increase substantially. Some of the more interesting examples include…
AZZ Inc. ($AZZ), an electrical equipment manufacturer based in Fort Worth, Texas. The company first discovered material weaknesses in its controls for revenue recognition. Then as part of a larger review, AZZ also found more weaknesses in its controls for tax compliance. So those are problems of improperly designed accounting procedures rather than lack of accountants — but a material weakness in financial reporting, they are nevertheless.AZZ says in a filing from Jan. 9 that those problems are now fixed and its latest numbers are reliable.
The material weakness from ShiftPixy ($PIXY) makes for even more painful reading. In a filing from Jan. 21, the company admits right away: “current accounting staff is small… we did not have the required infrastructure or accounting staff expertise to adequately prepare financial statements in accordance with U.S. GAAP as well as meeting the higher demands of being a U.S. public company.”
That lack of experienced staff led to the discovery of a material misstatement in Q3 2019 regarding derivative financial instruments ShiftPixy was carrying on the books. So the company hired a new CFO with experience in financial instruments accounting, and is stepping up spending on accounting staff and resources generally. Welcome to NFL football, ShiftPixy.
And Laredo Oil ($LRDC) had this to say in a filing from Jan. 14 that nicely captures the problem for a lot of firms:
Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties. Therefore, it is difficult to effectively segregate accounting duties which comprises a material weakness in internal controls. This lack of segregation of duties leads management to conclude that the Company’s disclosure controls and procedures are not effective to give reasonable assurance that the information required to be disclosed in reports that the Company files under the Exchange Act is recorded, processed, summarized and reported as and when required.
Translation: Laredo can’t hire enough accountants to assure that all transactions will be free from potential tampering (that’s what the “segregation of duties” part means), so the company is simply going to live with the risk. It is taking no new steps to resolve the weakness.
That’s not an ideal answer, but in many cases it’s the best one a company can give. Accountants cost money, and good ones cost a lot of money. For some firms, hiring enough of them to eliminate a material weakness just won’t be economically feasible. So they disclose the weakness to investors and move on with life.
Anyway, those are just a few examples. You can find many more with little difficulty, and then proceed accordingly. We just put the data in your hands to help you make the best decision.
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Calcbench can help you dig deep into text disclosures by allowing you to pinpoint search all disclosures in 8-Ks, 10-Ks, 10-Qs, proxy statements, earnings press releases, and SEC comment letters, or search by disclosure type.
You can search for terms like “tax cuts and jobs act” to see how companies are reporting on issues related to tax reform. Try searching “ESG” to understand how companies are reporting on sustainability. Or, poke around to see who has recently transitioned out of an executive role.
Reviewing the text disclosures allows for easy comparisons, over time and across companies, and brings more usability to the hard-to-find information embedded within financial statements, which many times is text, not a number on a line-item.
To try it out yourself, sign up for a free two-week trial, then visit the Interactive Disclosure Page and select your favorite Footnote/Disclosure Type. Enjoy!
Impairment of assets is something no investor likes to see. Impairments can catch people by surprise and blow up an earnings statement with no warning.
Or what if you could measure that potential risk?
Not the risk of a specific asset being impaired; that takes in-depth analysis over time. We were more curious whether you could measure the potential damage to earnings that an impairment might cause — regardless of the asset getting impaired or the dollar value of the impairment.
Here’s what we did.
Using our Multi-Company search page, we examined the goodwill and right-of-use assets listed by the S&P 500. We also then pulled net income and diluted shares outstanding to calculate earnings per share for third-quarter 2019.
Then we asked: What would happen to EPS if goodwill and ROU assets were impaired by 1 percent?
Mathematically that’s a straightforward exercise. You just subtract 1 percent of goodwill and ROU assets from net income and then recalculate EPS. That’s a measure of how sensitive a firm’s earnings are to impairment.
So we did that, measuring firms’ sensitivity to impairments of 1, 5, and 10 percent.
Below are 10 firms with high impairment sensitivity. That is, even impairments of only 1 percent would lead to relatively large swings in EPS. For example, if Macy’s ($M) declared an impairment of only $65 million, that would have caused a 20-fold drop in its EPS.
To be clear, other firms would suffer larger EPS declines in absolute terms. For example, if Charter Communications ($CHTR) declared a 1 percent impairment on its goodwill and ROU assets, that would be a charge of $306 million and cut net income by $1.38 EPS. But because Charter reported EPS of $2.10 in the third quarter, that actually cuts EPS by only 65 percent.
Nobody would like that, but in relative terms it’s nowhere near the wipeout that any firms in Table 1, above, would experience.
OK, so an impairment sensitivity test exists — what do you do with it?
By modeling a firm’s potential exposure to impairment, that can help financial analysts sharpen the questions they want to ask about management strategy.
For example, if a highly impairment sensitive company is carrying lots of goodwill on the books — say, it’s a highly acquisitive firm that’s collected numerous brands over the years — that can inform questions you might ask management about what it plans to do with those brands, or whether integration plans are moving along well enough to justify whatever the company paid in goodwill. (Don’t forget, you can also look up purchase price allocation on Calcbench to determine how much of an acquisition went to goodwill and other assets.)
Or if you’re following a retailer that has high impairment sensitivity thanks to lots of leased ROU assets, you might ask more pointed questions about customer traffic or potential sub-lease value if the retailer wants to shutter its stores.
Our point is only that the data does exist to model impairment sensitivity. All you need is the data, Calcbench has that in spades.
The new accounting standard for leasing costs is no longer so new, but its secondary effects on financial reporting still are. Today Acuity Brands ($AYI) gave us one glimpse of that, when it declared an impairment on a leased asset.
What happened? Acuity, which sells indoor and outdoor lighting plus assorted other equipment, filed a rather yucky Q1 2020 report. Revenue down by 11 percent, operating profit down 36 percent, net income down 40 percent. The company also announced the arrival of a new CEO to turn things around.
What caught our eye, however, was a $6.9 million item on the income statement labeled “special charge.” See Figure 1, below; with the line-item highlighted blue.
That $6.9 million was far larger than any other special charge Acuity has reported lately, and it’s always wise to look closely at special charges anyway. So we did, using the ever-handy Calcbench Trace feature.
In the footnotes, we then found this disclosure from Acuity:
During fiscal 2020, we recognized pre-tax special charges of $6.9 million. The fiscal 2020 special charge consisted primarily of severance costs and ROU asset lease impairments related to planned facility closures. Additionally, we recognized charges for relocation costs and ROU lease asset impairment charges associated with the previously announced transfer of activities from planned facility closures.
In other words, Acuity is closing a few facilities and that will cost it $6.9 million. Acuity goes on to say that $5.1 million of the charge will be related to severance costs, and the company had been accruing reserves to cover that amount — but the remaining $1.8 million is indeed an impairment of the leased facility Acuity had been using.
This is a big deal because it demonstrates that the new lease accounting standard, which went into effect last year, can indeed affect earnings. Sure, in Acuity’s case this impairment isn’t a material amount of money — but until last year, you wouldn’t see something like this at all. Now you can.
The standard, ASC 842, requires companies to list their leased assets — commercial stores, airport gates, office equipment, data storage facilities, and so forth — on the balance sheet. The costs of the leases are listed as liabilities, the value of the leased items listed as assets. (We discuss all these issues at length in several white papers on our Research Page, if you want to know more.)
Like any other asset, however, that means the value of those leased items could fall, and the company would therefore need to declare an impairment. When that happens, the impairment is reported as a charge against earnings.
This happens with goodwill assets on a regular basis and sometimes with other intangible assets as well, so the idea isn’t new. It’s just expanding to a new type of asset: operating leases.
How common will this be? That’s hard to say right now. We’re not sure any other company has reported a charge like this. In theory, however, an impairment to leased assets might arise if a company signs a long-term lease for something and then economic circumstances around using that item change dramatically.
For example, a large bookseller might have signed a 20-year lease for commercial stores in 2011, and by now Amazon has whittled away the value of those stores — and if the locations are in crumbling shopping malls, who else is going to take that space off the bookseller’s hands before the 20-year lease expires in 2031? That’s how the lease accounting rule could end up forcing companies to serve up an earnings surprise.
Another question is whether these impairments would ever be material. In Acuity’s case, the impairment isn’t; even without it, the overall 10-Q numbers would still be pretty gross.
Still, for devotees of financial reporting, Acuity’s disclosure is a rare bird. We’ll keep looking to see whether any more fly by.
Calcbench has released an Excel Add-in for Office 365. Now Mac users can use the Calcbench Excel Add-in.
Professors whose students mostly use Mac can include the Calcbench Excel Add-in in their curriculum. If you are an accounting professor interested in using Calcbench to enhance the use of data analytics and maybe even fulfill the AACSB data-analytics requirement email email@example.com. Anyone can try Calcbench for two weeks by signing up for a trial @ https://www.calcbench.com/join.
If you have a Calcbench account and Office 365 you can install the Add-in by clicking on the Get Add-ins button in Excel and searching for calcbench. More Documentation
Microchip maker Jabil Inc. filed its latest quarterly report last week, where it gave details of a restructuring plan expected to cost the company $85 million over the course of fiscal 2020.
Analysts who follow Jabil might be thinking, “Wait — wasn’t this company already in the middle of a restructuring plan? Hasn’t it been reporting restructuring costs already?”
Correct on both counts, astute Jabil observers. In fact, the company has been in the midst of one restructuring plan or another since 2013.
We noticed this in Jabil’s filing from Jan. 3, for the quarter ending Nov. 30, 2019. That’s when Jabil began detailing some of its expenses relating to the 2020 Restructuring Plan it had announced last September. See Figure 1, below.
The 2020 costs are shown in the column on the left, for the period ending 30 Nov. 2019. Further down the filing (but not shown here) Jabil says this is these expenses are the first phase of its 2020 Restructuring plan, which should cost $85 million.
Fair enough, but we were more intrigued by the column on the right: that $6.025 million related to Jabil’s previous 2017 restructuring plan.
What was that about? How much did that plan cost? And how much did Jabil expect the plan to cost when the company first announced it three years ago?
Calcbench likes to follow restructuring costs because we’ve seen numerous instances of filers estimating one amount of cost at the beginning of a restructuring plan, and ultimately reporting a different amount at the end of the plan.
Kimberly Clark Corp. ($KMB), for example, announced a restructuring plan in 2018 whose costs in the first year ultimately were less than originally estimated. (How will 2019 costs fare? Ask us again in a few months.) At the other extreme, Hewlett-Packard ($HPQ) went through a restructuring in the first half of the 2010s where total costs and layoffs by 2015 were nearly double what HP originally expected in 2012.
Jabil seems not to have that issue about changing costs. We used the Show All History tab at the top of the disclosure viewer to call up its previous statements about restructuring charges. The company announced its 2017 Restructuring Plan in late 2016 and estimated the total cost would be $195 million.
Sure enough, three years later Jabil announced the end of that plan, and total costs were $195 million. The $6.025 million in Figure 1 was the last of it.
But wait! While we were time-traveling backward through Jabil’s disclosures, we noticed that when the company announced the beginning of its 2017 Restructuring Plan, it was also announcing the conclusion of a 2013 Restructuring Plan.
So we went all the way back to Jabil’s 10-Q from July 2013, when the company disclosed its very first restructuring plan. There, deep amid the text, using our hieroglyphics decoding technology, we found this:
The company currently expects to recognize approximately $188.0 million in pre-tax restructuring and other related costs over the course of the company’s fiscal years 2013, 2014 and 2015 under the 2013 Restructuring Plan.
Four years later, however, in summer 2017, we found this statement:
The company currently expects to recognize approximately $179.0 million in pre-tax restructuring and other related costs over the course of the Company’s fiscal years 2013 through 2018 under the 2013 Restructuring Plan.
So Jabil’s first restructuring plan from 2013 cost less money than expected, but took more time — and overlapped with the 2017 restructuring plan. That 2017 plan then brought us up to the 2020 restructuring plan. Jabil’s disclosures even mention a 2014 Restructuring Plan several times, but we think we’ve demonstrated the point here: that Jabil has been going through one restructuring plan after another for most of the last decade.
Is that a legit strategy? It’s not our place to say. Restructuring charges are supposed to relate to one-time actions a firm normally wouldn’t undertake, to align operations to new (usually diminished) business circumstances. Examples would be a plant closure, or integration of two sales forces with attendant layoffs, or something like that. Restructuring costs are often a reason why firms report adjusted earnings: because the costs are one-time items not reflective of normal business operations.
But how many restructurings can a company report before all those efforts are just, ya know, the normal course of business?
That’s an excellent question for financial analysts to ask a CFO during an earnings call. Calcbench is just your humble servant, giving you the right data so you can ask the right questions.
You may have seen news that Uber filed a lawsuit against the state of California on New Year’s Eve, challenging the state’s new employee classification law — a law that could force Uber to reclassify its drivers as full-time employees, and therefore deliver a gut-punch to Uber’s business model.
That led us to wonder: what has Uber ($UBER) been saying about driver classification issues, anyway?
The company’s most recent quarterly filing was published on Nov. 5. It had lots to say about worker classification laws generally and the California law (known as Assembly Bill 5) specifically, such as this passage from the Risk Disclosures section:
Government authorities may, and private plaintiffs have and other private plaintiffs may, bring litigation asserting that Assembly Bill 5 requires drivers in California to be classified as employees… If we are required to classify drivers as employees, this may impact our current financial statement presentation including revenue, incentives and promotions…
Uber went into more detail in the Management Discussion & Analysis section, where it said drivers have already started filing mis-classification lawsuits against the company and more are likely to come.
Uber also said it’s pushing a ballot referendum question to go before California voters that would neutralize much of AB 5’s impact; and said it continues to “explore legal options,” although the company didn’t specifically mention a lawsuit of its own in that Nov. 5 filing. Now we know.
Moreover, aside from AB 5, Uber is already under legal siege from other drivers suing for mis-classification — and it’s settling with those drivers before things get out of hand.
For example, more than 80,000 Uber drivers have entered arbitration agreements with Uber as of Sept. 30, which the company estimates will cost $142 million to $170 million. That disclosure is also tucked away in the Risk Factors. It’s not material to Uber, which had $3.8 billion in revenue for Q3, but you won’t find those amounts unless you read the fine print.
OK, that’s what Uber is saying and doing about worker classification. What about other companies? We opened up the Interactive Disclosures database and searched for the term “independent contractors” used in Q3 filings.
For example, Lyft ($LYFT) discussed AB 5 in California and potential litigation that others might bring against the company under the new law. It also talked about several lawsuits Lyft itself filed in the state of New York over rules the New York City Taxi & Limousine Commission adopted to impose minimum earnings requirements for ride-sharing drivers.
How much might any of these litigation threats cost Lyft? The company didn’t say. Its own lawsuits against the New York TLC are on appeal, and the California law is still so new nobody is ready to declare what its financial consequences might be. Still, the threats are there in the filings.
And while AB 5 is primarily aimed at Gig Economy businesses like Uber, Lyft, Postmates (which is suing California along with Uber) and others, they’re not the only businesses watching this trend in legislation.
For example, Raymond James Financial ($RJF) lists worker classification legislation as a risk factor, although it doesn’t say much about the matter. Warner Music Group ($WMG) worries that AB 5 could have significant consequence if its go-to songwriters are reclassified as employees, and “there is no guidance from the regulatory authorities charged with its enforcement.”
So the risk is real, for more companies than you see in the news headline. Financial analysts will need to dig into the details to find a company’s real exposure to AB 5, but Calcbench has you covered.
Calcbench last looked at the legalized weed business in May, when we noted the run-up of inventory that many Canadian marijuana businesses were disclosing.
We meant to revisit the inventory issue again in November after another wave of filings — but, um, we spaced on the date. We finally took a fresh look at those inventory numbers this week, and suffice to say the overhang issues continue.
If a single chart can tell the tale, it is this comparison of inventory and revenue from Tilray ($TLRY), one of the larger Canadian cannabis companies today.
As you can see, revenue is growing at a respectable rate — from $7.8 million at the start of 2018 to $51.1 million by Q3 2019. But the revenue increase is dwarfed by Tilray’s inventory, which zoomed from $7.4 million to $110.5 million in the same period.
That’s not good when your product is literally intended to go up in flames. No wonder Tilray stock has gone from a high (no pun intended) of $49.30 on July 1 to around $17 these days.
Other major Canadian cannabis players such as Cronos Group ($CRON) or CannTrust Holdings ($CTST) report similar challenges, although they don’t file quarterly statements like Tilray so we can’t conjure up the same nifty charts.
As a Wall Street Journal article noted in November, “The largely Canada-based cannabis sector has struggled as demand has failed to emerge as expected after the country legalized recreational marijuana last year. Oversupply has weighed on cannabis prices, forcing write-downs.”
You can see that in the filings, typically in a weed company’s disclosures about inventory. Tilray, for example, wrote down the value of its Q3 work-in-process inventory by $201,000, on a total value of $81.3 million.
What does all this mean for Calcbench users who follow weed companies?
Above all and as always, read the disclosures. We have them all, tagged and indexed via our Interactive Disclosures page. That’s where you can find items like adjustments to inventory, as well as management statements about big plans to achieve future growth.
CannTrust, for example, has extensive disclosures about how it values its “biological assets” — because, as the company blandly notes, “there is no actively traded commodity market for plants and dried product.” So CannTrust needs to estimate the fair market value of its weed, and therefore shares all sorts of estimates about harvest yield, value per gram of final product, and the like. Cronos does the same.
You can also find some interesting management rationale for the overhang, and plans to achieve stronger growth. Tilray, for example, is plotting more sales in Europe while the Canadian market splutters along.
Will any of this work? We don’t know. We do know, however, that the data is there to help analysts make better judgments. After all, that Wall Street Journal article about inventory oversupply was published in November, and our first post about inventory was published six months earlier.
All you need to do is dig in.
Astute readers of the Calcbench blog will recall that last July we had a post about Knight-Swift Transportation ($KNX), an Arizona-based trucking firm that warning earnings were entering a mid-year slump.
Now we have an update: they’re still in a slump.
Knight-Swift filed posted an update on Dec. 19 to its earnings guidance, guiding fourth-quarter estimates of adjusted EPS downward from an original range of $0.62-$0.65 to $0.50-$0.52. Ouch.
Why the mark-down? “The industry continues to be oversupplied with truckload capacity,” Knight-Swift said its release, “which led to more muted seasonal improvement in the freight market from third to fourth quarter… As a result, our sequential third to fourth quarter rate increases were less than anticipated, leading to reduced revenues and lower than expected operating income.”
So the trucking industry continues to be in a slump, so trucking firms can’t raise prices as expected, so revenue is lower and that crimps operating income. Got it.
This is interesting because in an earnings release from July, Knight-Swift predicted a bit of slowness in the third quarter and then a rebound in earnings by now — like, to adjusted EPS range of $0.73-$0.77. Now we’re moving in the opposite direction from those halcyon mid-summer estimates.
What are some of Knight-Swift’s peers saying about an industry slowdown? We decided to take a look.
Werner Enterprises ($WERN) filed its third-quarter 2019 results on Oct. 25, and the word “down” appeared all over the opening paragraphs. Werner also said this:
During the third quarter, freight demand in our One-Way Truckload fleet was seasonally below average and well below the unusually strong freight demand of third quarter 2018, which was aided by two December 2017 mandates. Tax reform incentives strengthened third quarter 2018 freight volumes…
We’ve heard this theory before: that the corporate tax cuts enacted at the end of 2017 put the economy on a sugar high in 2018; and as that sugar high faded in 2019 business activity cooled. Hmmm.
Schneider National ($SNDR) reported “challenging market conditions” in its Q3 report from Oct. 31, and cut its 2019 earnings estimates from $1.30-$1.38 EPS down to $1.24-$1.30 — but also said that much of that cut was due to an impairment charge Schneider was swallowing on its trucking fleet.
Old Dominion Freight Line ($ODFL) said much the same in its Q3 earnings release, too. Third-quarter results “reflect the challenging operating environment. The domestic economy remained sluggish during the quarter…”
Analysts can interpret these statements in a few ways. First, it’s true that the economy had a lot of uncertainty hanging over it at the time: the trade war with China, Brexit, a potential government shutdown, the future of U.S. interest rates. That much uncertainty can give any economy pause.
Well, we have a lot less uncertainty about all those issues, at least for now. So maybe businesses and consumers will keep the party going into 2020, and presumably that means revived demand for trucking as we move goods around.
On the other hand, when you read the earnings releases of these trucking firms, you see lots of talk about “right-sizing” or “repositioning resources” or just flat-out taking impairment charges, like Schneider did. At some point, prolonged softness in the industry will prod individual firms to trim down into better competitive shape — or, as always, “consider strategic alternatives.”
We at Calcbench don’t know when any of those forces might translate into a material change in prospects, for Knight-Swift or any other firm. We do, however, provide the tools that can help analysts monitor those forces over time. The rest is up to you.
Large corporations have had to address one new accounting standard after another in recent years, and 2020 will be no exception.
Ladies and gentlemen, welcome to the new standard for Current Expected Credit Losses — otherwise known as CECL.
CECL will be 2020’s big honking new accounting standard that companies struggle to implement. It goes into effect on Jan. 1, and requires firms to implement a new methodology to calculate expected credit losses over the lifetime of financial instruments said firms carry on their books.
Those calculations will be a blend of historical experience plus forecasts based on reasonable evidence and analysis of current conditions. Broadly speaking, CECL is likely to make a company’s estimated credit losses more precise in any single quarter, but also more volatile across many quarters — kinda like what happened with the new standard for revenue recognition introduced in 2017.
Suffice to say that CECL is complicated, so Calcbench will be following disclosures and analyzing data all through the coming year. Meanwhile, we’ve already done some preliminary work and have a few pointers for you now.
First, you can always visit our Interactive Disclosures Page and just search for “CECL.” We did, and found hundreds of results in the S&P 500 for third-quarter 2019 filings alone.
For example, American Express ($AXP) said that based on preliminary testing, CECL could lead to a significant increase in reserves for credit losses:
The results of those preliminary simulations continue to indicate that our total reserves for credit losses related to our Card Member loans and receivables portfolios could have a net increase between 25 percent and 40 percent, with an increase in reserves of between 55 percent and 70 percent related to our Card Member loans portfolio and a decrease in reserves related to our Card Member receivables portfolio, all of which is based on the comparison of preliminary CECL estimates as compared to the incurred loss model applied today.General Motors ($GM), meanwhile, had this to say:
Upon adoption, we expect to record an adjustment that will increase our allowance for credit losses between $700 million and $900 million, with an after-tax reduction to Retained earnings between $500 million and $700 million. The amount of the adjustment is heavily dependent on the volume, credit mix and seasoning of our loan portfolio.
And PNC Financial ($PNC) devoted almost an entire page to discussing CECL. The key part was this:
The adoption of the CECL standard could result in an overall [allowable credit losses] increase of approximately 20 percent, as compared to our current aggregate reserve levels. The overall change is primarily due to the difference between current loss reserve periods versus the estimated remaining contractual lives, as required by the CECL standard. We believe that given current conditions, our consumer loss reserves will increase significantly, while our commercial loan reserves will decrease slightly. Additionally, the CECL ACL could produce higher volatility in the quarterly provision for credit losses than our current reserve process.
CECL will foremost affect companies that carry a lot of financial instruments or extend credit to customers. So expect banks, insurers, and other financial firms to have lots to say about CECL; and also businesses with significant customer financing operations — like General Motors, which is why we included the company above.
Allowances for loan losses are listed on the balance sheet, so you can always research a firm using our Company-in-Detail page to find its estimated loan losses. Or use our Multi-Company page to search for loan-loss allowances and then use our world-famous trace function to see the underlying disclosures for more detail.
You can also search for ASU 2016-13, which is the formal name for CECL. Typically companies will mention new accounting standards in their Significant Accounting Policies disclosures, but not always. When we skimmed the S&P 500, we found CECL discussion in the Management Discussion & Analysis, Basis of Presentation, and even in a few earnings releases.
So you’re best served by using our text search to look for the specific standard, regardless of where any specific company might place its disclosures.
That’s all for now. As we said, CECL will be the big financial reporting issue for 2020, so we’ll have lots more to say on the subject throughout next year.
Calcbench was on the road this week, visiting Washington to attend the AICPA’s annual conference on SEC reporting issues. There, a parade of panelists from the Securities and Exchange Commission talked about all things financial data — including non-GAAP data that firms try to report and the SEC watches closely.
Like, say, contribution margin.
Contribution margin is calculated as sales minus variable costs. Those can be items such as labor, the expense of running machinery, or any other cost that would typically rise or fall in step with the volume of sales. (Compared to rent, for example, which is a fixed cost.)
Contribution margin’s biggest claim to fame is that WeWork tried to use that metric to woo and wow investors — and stretched its calculation of contribution margin so far that the SEC told WeWork to drop the disclosure from its IPO documents. Which presaged things to come, since WeWork eventually dropped the IPO entirely.
At the AICPA conference, several SEC officials talked about the perils of contribution margin and how firms should not push their math too far, lest they get rebuked like WeWork.
So we wondered: how many firms report contribution margin, anyway? In what context?
Well, you can find those answers via our Interactive Disclosures page. Just create some peer group you want to review, and then enter “contribution margin” in the text search box on the right side of the page.
For example Cloudera ($CLDR) includes contribution margin in its segment disclosures. Its definition of the term: “segment revenue less the related cost of sales excluding certain operating expenses that are not allocated to segments because they are separately managed at the consolidated corporate level.”
Then the firm reports positive amounts for contribution margin in two segments it defines as subscriptions ($356.2 million) and services ($12.3 million), for a total contribution margin of $368.53 million.
Er, not quite. Then, per SEC rules, Cloudera reconciled its contribution margin back to the most appropriate GAAP metric, which is operating income — or, in Cloudera’s case, loss from operations. Take a look:
As we can see, despite those rosy numbers in Cloudera’s non-GAAP numbers, the company actually lost money according to good ol’ Generally Accepted Accounting Principles.
All of this is legal, of course. So long as a firm defines a credible, plausible non-GAAP metrics that informs investors, and reconciles that non-GAAP metric with its closes legit GAAP counterpart, the SEC will allow it. WeWork went overboard with its cockamamie non-GAAP metrics, but many more firms manage to stay on the SEC’s good side.
Hundreds of firms report something about contribution margin. Restaurant businesses, for example, report contribution margin to give a sense of how much money their sites are making. Lots of software and IT services firms report it too.
The question for analysts is how to assess contribution margin — including the possibility that company management is hoping to distract you with glitzy talk about contribution margin so you’ll overlook those red-ink numbers in operating or net income.
The details are always in the footnotes, people. Calcbench can help you find them.
We strive to keep pace with current events here at Calcbench, so we spent most of last week pondering the same question that transfixed the rest of the civilized world.
Like, if we ever gave Mrs. Calcbench a Christmas gift to help her lose weight, the first thing she’d drop would be us. As to the rest of the Twitterverse commentary about the ad — Was it sexist? Did consumer antipathy really drive Peloton’s stock price down 9 percent in one day? — we offer no opinion.
The controversy did, however, leave us wondering — what does the data tell us about Peloton Interactive ($PTON)?
The data is somewhat scarce, because Peloton only went public in September and so far has filed one quarter of financial statements. Still, you can find a few interesting nuggets even at this early stage.
First, Peloton isn’t turning a profit yet, but it does have growth. Revenue and gross profit in third quarter 2019 both doubled from the year-ago period, while loss from operations fell 8.45 percent to $50.9 million. OK, those numbers are all spinning in the right direction. (Yep, we made that pun.)
When you look at the balance sheet, Peloton has $1.376 billion in cash thanks to that IPO, and only $327.6 million in current liabilities. So while the company isn’t turning a profit yet, it does have ample funds to cover those losses and to keep expanding.
More interesting are Peloton’s disclosures about its segment operations.
Peloton has two primary revenue sources: “Connected Fitness Products,” which are the bikes and treadmills it sells; and subscription to those online fitness instructors who keep
yelling at encouraging you via video screen while you cycle your keister off.
Connected Fitness Products are the larger source of revenue for Peloton — $157.6 million, or 69.1 percent of the $228 million in total revenue. But subscription revenue is growing faster, with better gross profit margins. See Figure 1, below.
That’s interesting for two reasons. First, Peloton could always boost subscription revenue per user by simply by raising monthly fees. In that sense Peloton is kinda like Amazon ($AMZN), which can conjure up extra revenue just by increasing the price of its Amazon Prime membership.
Second, however, is that subscription revenue can be more volatile. If the economy turned south for upwardly mobile fitness geeks, they might cancel those subscriptions. Plus, not everyone will buy a Peloton — and once the company approaches that market saturation point, subscription fees will become a more important part of ongoing revenue. So what happens then?
One could ponder all sorts of questions along those lines. Will Peloton introduce cheaper, lower-end equipment to keep growth alive in its Connected Fitness Product line? Will it somehow sell access to other content providers who want to access Pelotonian customers?
The key to finding answers will be delving into the data, quarter after quarter. You can do that with Calcbench.
We leave you with the famed Peloton ad itself, while we go take a lap.
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