RECENT POSTS
Wednesday, December 11, 2019
Finding and Assessing ‘Contribution Margin’

Monday, December 9, 2019
Cycling Through Peloton’s Financials

Monday, November 25, 2019
Calcbench and Academic Research

Friday, November 22, 2019
Disney’s Cliffhanger With Hulu

Tuesday, November 19, 2019
Starbucks on Leasing Costs

Friday, November 15, 2019
The Devil Is in the Discount Rate

Tuesday, November 12, 2019
A Look at Product Warranty Accruals

Thursday, November 7, 2019
CHS Limps Through Weather & War

Wednesday, November 6, 2019
Master Class: Preparing for Recession

Sunday, October 27, 2019
When Operating Leases Weigh Down ROA

Wednesday, October 23, 2019
Feeling the Squeeze on China

Tuesday, October 22, 2019
Netflix and the Cost of Content

Wednesday, October 9, 2019
U.S. firms with Sales in China through 2018.

Wednesday, October 9, 2019
Tracking  Pension Data in Calcbench

Friday, October 4, 2019
In Depth: Leasing Costs in Retail Sector

Thursday, September 19, 2019
Alibaba and Cloud Computing

Monday, September 16, 2019
Introducing Critical Audit Matters

Wednesday, September 11, 2019
Our Fireside Chat on Goodwill Assets

Friday, September 6, 2019
Pulling Forward Share Buybacks

Saturday, August 31, 2019
A Quick Catch-Up on VMWare

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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.

Great, right?

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.


Cycling Through Peloton’s Financials
Monday, December 9, 2019

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.

What was Peloton thinking with that crazy Christmas commercial?

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.



Calcbench and Academic Research
Monday, November 25, 2019

Here at Calcbench we’re all for improving the quality of higher education, so we were delighted to discover recently that Calcbench data has been cited dozens of times by accounting professors conducting academic research.

We found this fact on Google Scholar, Google’s online index of academic papers. Type “Calcbench” in the search bar and you’ll get at least 65 results from the last six years.

What are some of the subjects where Calcbench data helped an academic? Well, a random selection of examples includes…

Google Scholar has many more examples online. If you’re an academic looking to see how Calcbench data might be put to use in the research setting, that’s a great place to find inspiration.

We’re also happy to discuss your specific ideas in detail to see how Calcbench might help. Just drop us a line at info@calcbench.com and we’ll follow up with you ASAP. One of our senior executives here even teaches accounting and understands the road you travel.


Disney’s Cliffhanger With Hulu
Friday, November 22, 2019

Disney Corp. filed its 2019 annual report this week, and devout readers of this blog know what that means — more Hulu news!

After all, Disney ($DIS) has been a long-time investor in Hulu, along with Fox Corp., Comcast (now NBC Universal), and Time-Warner. We’ve written about Hulu numerous times over the years, trying to piece together its financial picture from morsels of data those four firms disclose. Since Hulu itself is a private company, assembling a complete picture has been hard to do.

But earlier this year, Disney acquired most of Fox’s assets, including Hulu. That led to big changes in Hulu’s ownership structure and disclosures about its operations — and with Disney’s most recent annual statement, we’ve hit paydirt.

Let’s begin with how much Hulu is worth. Consider the following table from Disney that shows the purchase price allocation for its $69.5 billion acquisition of Fox assets back in March.



First, Disney updated its allocation from the original deal value in March. That’s unusual, but whatever, we’ll get into that another day. Look at the second to last line, where Disney values its original 30 percent stake in Hulu at $4.737 billion as of Sept. 30. That implies a total value of $15.79 billion.

Above that table is the footnote disclosure about Disney’s acquisition of Fox, and there we find much more information.

For example, we already know that with the Fox acquisition on March 20, Disney owned 60 percent of Hulu: its own 30 percent share, plus Fox’s 30 percent share. Then Disney bought out the 10 percent share owned by Time-Warner for $1.4 billion — which makes sense, because that would value Hulu at roughly $14 billion back in April. Which is at least in the ballpark of the $15.78 billion Disney says Hulu is worth today.

Those deals, plus some other negotiating, left Disney owning 67 percent of Hulu, and NBC Universal the other 33 percent. And since the estimated value of Hulu is $15.78 billion, that means NBC Universal’s one-third share is worth $5.26 billion.

Remember that value. We’ll get back to it momentarily.

Does Hulu Make Money?

Well, duh, of course not. But Disney’s 2019 report gives us new insight into just how much money Hulu is losing.

Disney reports that from the date of acquisition (March 20) until the end of the fiscal year on Sept. 30, Hulu had $1.938 billion in revenue and $774 million in losses. If those are the numbers for six months, then we can reasonably guess that Hulu’s full-year performance is roughly double those numbers — $3.876 billion in revenue and $1.548 billion in losses.

That’s consistent with a prior estimate we made back in February, where we calculated that Hulu had lost around $1.5 billion in 2018, based on the share of losses its various owners were disclosing then.

One can hope that starting next year, Disney will report Hulu’s full-year performance annually and we can be done with the guessing games. For now, however, revenue of nearly $3.9 billion and net losses at 40 percent are a pretty good guess.

Now let’s get back to that NBC Universal stake worth $5.26 billion.

When the Bill Comes Due

After those machinations with Fox and Time-Warner, Disney struck a deal with NBC Universal. Starting in January 2024, either party will have the right to compel Disney to buy out NBC Universal’s remaining stake in Hulu (either Disney can force NBC Universal to sell it, or NBC Universal can force Disney to buy it) for fair market value or $27.5 billion, whichever is greater.

Let’s state that more simply for clarity. That one-third stake in Hulu, which is worth $5.26 billion today even though the business is losing money hand over fist? NBC Universal has the right to sell it to Disney four years from now at a 5X markup.

We have many questions about that proposition. For example, in the Business Description segment of Disney’s disclosures, Disney says that Hulu currently has 29 million paying subscribers. None of Hulu’s past owners had disclosed subscribership in earlier years, but one Hulu executive said in February that the business had 25 million subscribers back then, with double-digit subscriber growth.

So the 29 million subscriber number makes sense. But if you divide those 29 million subscribers into that $3.876 billion in estimated annual revenue, that’s $133 per subscriber, or roughly $11.15 per month. (We’re cheapskates here at Calcbench and get the $5.99 minimum package.)

For Disney to justify that $27.5 billion price coming due in 2024, that implies a huge increase in revenue per subscriber (read: higher subscription fees), or a dramatic cut in costs, or some mixture of both. Like, Hulu is nowhere near turning a profit right now — let alone generating enough free cash flow to justify marking up the value from $5.26 billion to $27.5 billion.

In theory, Disney could cut those Hulu costs; Disney does have a bottomless pit of entertainment content, and the pit just got even more bottomless with the Fox acquisition. But Disney is shipping its best content to its new streaming service, Disney+. (We’re two episodes into “The Mandalorian,” by the way. Seems promising.)

So what’s the strategic plan here? Disney runs rival streaming services, where at least one is losing a fortune and has a balloon payment of $27.5 billion due in four years? We don’t know.

We just know the details are in the data — and you can find all that data on Calcbench to tell your own tale.


Starbucks on Leasing Costs
Tuesday, November 19, 2019

Starbucks filed its 2019 annual report last week, and we noticed an interesting detail: the largest coffee shop in the world, with stores all over the place, had not yet adopted the new accounting standard for leases.

That’s because thanks to a quirk of the company’s fiscal year, Starbucks ($SBUX) is one of the last large filers to adopt the new leasing standard, known as ASC 842. Which gives us yet another opportunity to see how ASC 842 can affect a firm’s balance sheet.

Allow us to explain.

First, the standard itself. ASC 842 requires firms to report the value of operating leases on the balance sheet; until now, those numbers had been buried in the footnotes. Every firm must list the value of the leased item as a right-of-use (ROU) asset, and the cost of future lease payments as liabilities.

Second, the adoption date. All firms must begin reporting under ASC 842 with their first fiscal year that began on or after Dec. 15, 2018.

For most large firms, that adoption date was Jan. 1, 2019. But Starbucks’ fiscal year begins every Oct. 1 — so its fiscal 2019 was already underway by Dec. 15, 2018. Starbucks didn’t need to start compliance with ASC 842 until fiscal 2020, which began just a few weeks ago. We won’t see Starbucks’ first filings under ASC 842 until early next year.

Meanwhile, since Starbucks did disclose an estimate of its operating lease assets and liabilities in the footnotes. So we can still build a model that shows us how the application of ASC 842 could affect Starbucks’ balance sheet.

See Table 1, below. Starbucks says that ASC 842 will add “$8 billion to $9 billion” in both ROU assets and operating lease liabilities. We split the difference and added $8.5 billion to the total assets and liabilities Starbucks just reported for 2019.



As you can see, adopting ASC 842 will expand Starbucks’ balance sheet substantially, and that will have follow-on consequences for the company’s debt-to-equity ratio (total liabilities divided by equity) and its return on assets (net income divided by total assets).

All with no real change to Starbucks’ business operations. Indeed, Starbucks says in its accounting policy disclosures that when it does start reporting under ASC 842, the standard will have no material effect on income.

Balance sheet, however — that’s another matter.


The Devil Is in the Discount Rate
Friday, November 15, 2019

So there we were, skimming through average discount rates for operating leases among the S&P 500, because (a) we’re nerds who need a life; and (b) you can do that with Calcbench.

Discount rates are important because they help a company to determine the net present value of future lease payments. Those payments are now listed as liabilities on the balance sheet, thanks to the new accounting standard for leases, ASC 842.

When a company sets its discount rate on the high side, that results in a lower NPV for future lease payments, and therefore a smaller number liability reported on the balance sheet. Conversely, a low discount rate results in a higher NPV for future lease payments, and a larger liability on the balance sheet.

So those discount rates are important — and sharp changes to a firm’s discount rate are also important, since that can lead to big changes in liabilities on the firm’s balance sheet. Which can then lead to all sorts of questions about what’s going on.

Which brings us to Dish Network Corp.

As we skimmed over those discount rates for the S&P 500, we came to Dish Network ($DISH) and noticed that its discount rate had dropped, substantially. In the first and second quarters of 2019, Dish disclosed average weighted discount rates of 9.3 and 9.1 percent, respectively.

Then, in the Q3 statement Dish filed on Nov. 7, the average discount rate was 5.1 percent.

That’s a lot. As you can see in Fig. 1, below, other companies lower their discount rates too, but usually by only a few basis points — 3.5 to 3.38 percent, 4.2 to 4.1 percent, or something like that. Dish cut its discount rate by 400 basis points.



What’s up with that? We used our Trace feature on that 5.1 percent number to pull up the underlying disclosure.

There, we found a footnote disclosure that on Sept. 10, Dish took possession of $495 million in satellites and real estate that Dish had been leasing from Echostar — and remember, Echostar sold a chunk of itself to Dish earlier this spring.

This transfer of satellites and real estate is, apparently, part of that transaction. Dish said in its footnote that those leased assets were transferred over to Property, Plant & Equipment. Sure enough, the PPE line item ballooned from $1.89 billion in Q2 to $2.76 billion in Q3, an increase of 45.5 percent. The operating lease assets transfer was part of that balloon.

How does all that relate to the change in the discount rate to 5.1 percent? We’re not sure. One reasonable guess is that the remaining assets Dish still leases (from Echostar or anyone else) have a different market value or different lease structure, and therefore deserve a lower discount rate.

Regardless, the bigger story is that Dish moved around a substantial number of dollars on the balance sheet, shifting operating lease assets into PPE. That led to a subsequent drop in operating lease assets and operating lease liabilities, but the numbers only shifted around.

That’s why data is good, but data and footnote disclosure together is better. With Calcbench, you can get both.


A Look at Product Warranty Accruals
Tuesday, November 12, 2019

Calcbench prides itself on tracking hard-to-find corporate data, and today we want to explore one niche of corporate reporting that’s always been one of our favorites: product warranty accounting.

A product warranty is a promise that a firm makes to its customers, that the firm will repair certain types of damage or even replace the whole product for a set number of days after sale. As such, companies need to accrue money to cover the cost of those warranties and list those accruals as liabilities (since they represent an obligation the company will eventually need to pay).

Moreover, the company also needs to record those accruals in the same period that the sales are made, so investors can get a better picture of the company’s true financial performance. Otherwise investors might see sales revenue rolling along quarter after quarter, and then suddenly depressed earnings when those warranty claims are finally processed months after initial sale.

We decided to play around with product warranty accruals among the S&P 500 for the last few years. Not many companies actually report these numbers; we found only 83 that reported accruals every year, 2014 through 2018. You can see the totals in Figure 1, below.



As you can see, total accruals jumped 25.4 percent over the last five years, from $33.85 billion in 2014 to $42.45 billion in 2018.

At a high level, one can argue that upward spike is a good thing. More warranty accruals means firms are selling more goods, to which those warranties are attached. Also, General Motors ($GM) accounts for a big portion of these numbers. For example, GM reported $15.2 billion in accruals in 2018, and $16.7 billion in 2017. Strip GM out of the sample, and total warranty accruals only rose 9.1 percent, from $25 billion five years ago to $27.27 billion last year.

We also did a company-by-company look at which firms had the largest increases in accruals, excluding GM. They were:

  • Dentsply Sirona, 225 percent
  • D.R. Horton, 207.4 percent
  • Lennar Corp., 175.3 percent
  • Align Technology, 171.6 percent
  • IPG Photonics, 166.8 percent

Of course, many other factors can drive a firm’s warranty accruals beyond gross sales. The company might change its warranty policy to offer fewer of them, or start selling more products that don’t come with warranties. Management might also decide to change its estimates for how many products might get returned, which would therefore change the accruals.

Calcbench users can get a better sense of those factors by examining warranty items in our Interactive Disclosure viewer. Lennar Corp. ($LEN) is a good example here.

Nominally, Lennar had a huge increase in warranty accruals; see that 175.3 percent increase, above. In the footnotes, however, we see that acquisitions in 2018 drove a lot of that growth, as Lennar assumed responsibility for those warranties issued by the acquired businesses. See Figure 2, below.



You can indeed find details like that, either in the Interactive Disclosure tool or in our Multi-Company page, where you can search a bundle of standard metrics related to product warranties. Those metrics include new warrants issued, additions to warranties due to acquisitions, warranty payments, and more.

You can also read our User Guide for product warranties and guarantees for more information, including visual examples and more detail on exactly how we track this data.

That concludes today’s deep dive into an obscure niche of hard-to-find financial data. We love this stuff, so expect more dives in the future!


CHS Limps Through Weather & War
Thursday, November 7, 2019

Agribusiness giant CHS Inc. ($CHS) filed its Form 10-K for 2019 on Tuesday, and performance of its U.S. agriculture segment might best be described as wilted. It’s a good example of broad economic trends we all see in the headlines also showing up in the data. Let’s take a look.

First, the numbers. Total annual revenue fell by 2.4 percent, from $32.68 billion in 2018 to $31.9 billion this year. Net income did rise by 6.8 percent, but that was mostly due to a mix of good performance in non-agriculture operating units (CHS owns a few oil refineries that did well thanks to favorable pricing of Canadian crude); or special cost savings that might not appear again (the company had some favorable tax treatments that lowered the cost of goods sold, for example).

OK, that’s nice, but CHS is foremost an agriculture business. We started reading through the fine print thanks to our Interactive Disclosures page, and once we got past the oil refineries and tax treatments, we found items like this:

  • We continued to experience significant pressure on grain volume and margins due to slow movement of grain that has resulted from unresolved trade issues between the United States and its trading partners.
  • Poor weather conditions, including heavy snow during the spring and significant rainfall during the summer of 2019 negatively impacted our Ag segment operations. Severe flooding resulting from the heavy snow and rainfall contributed to railroad delays and prevented or delayed planting, which resulted in increased costs, reduced volumes and fewer planted acres.

Translation: bad weather at the start of this year’s growing season put CHS on the back foot, and the trade war has kept CHS in that position ever since.

Figure 1, below, tells the tale. North America sales fell by $1.58 billion, a decline of 5.3 percent. That decline in North America sales — and note the sentence under the chart, which explains that “North America” really just means the United States — was responsible for almost all CHS’s decline in total revenue.


How long will CHS’s difficult position last? Nobody knows. Don’t take our word for it. In the company’s Management Discussion & Analysis, CHS said this:

The agricultural industry continues to operate in a challenging environment characterized by lower margins, reduced liquidity and increased leverage that have resulted from reduced commodity prices. In addition, trade relations between the United States and foreign trade partners, particularly those that purchase large quantities of agricultural commodities, are strained, resulting in unpredictable impacts to commodity prices and volumes sold within the agricultural industry. We are unable to predict how long the current environment will last or how severe the effects will ultimately be.

Translation: CHS doesn’t know how long the trade war will last either. The company did say it’s trying to streamline operations and efficiency, with a few tricks like better internal controls and a new ERP system. Maybe those steps will help. Then again, Sales, General & Administrative expenses rose by 8.9 percent for 2019, so maybe not.

Either way, the key to CHS’s long-term future is an end to the trade war. U.S. and Chinese trade negotiators are supposedly edging toward resolution of the dispute, and may announce a preliminary deal in December.

That would be welcome news to CHS, which right now is stuck reaping the whirlwind.


Master Class: Preparing for Recession
Wednesday, November 6, 2019

Calcbench is proud to announce our latest master class video, now on our Research Page — another conversation with investment manager Jason Voss about how to prepare your portfolio for possible recession.

We post these master class videos every few months, where we take a deep dive into a specific subject related to financial analysis. The first half is an interview who knows the subject matter better than us; the second half then walks through how Calcbench can help you explore whatever topic we discussed in the first half.

Our previous master class videos considered data analytics in financial analysis, and five common mistakes financial analysts make in their work. This time around, Voss — who has a day job as CEO of Active Investment Management Consulting — offers three suggestions on how to position your portfolio to reduce the pain of recession.

We won’t spoil the whole master class for you, but suffice to say Voss’s suggestions range from better risk analysis, to harvesting deferred tax assets and liabilities, to innovative ways to stock up your portfolio with cash. Then Pranav Ghai, our own CEO and co-founder, walks through how you can use Calcbench tools to do those three things.

The whole show lasts about 37 minutes.

If you have suggestions for future master class videos, email us at info@calcbench.com and tell us what’s on your mind. We’re eager for feedback, and hope you find the master classes useful!


When Operating Leases Weigh Down ROA
Sunday, October 27, 2019

Yes, yes — we talk constantly about the new standard for disclosure of operating lease costs, and we just published an in-depth report about the new standard’s effect on the retail sector.

Well, we have even more. Today we look at how the new standard changes the return on assets for two of those retailers: Burlington Stores ($BURL) and Michaels Cos. ($MIK).

Return on assets (ROA) measures how efficiently a firm manages its assets to create a dollar of profit. It’s calculated as net income divided into total assets, and is expressed as a percentage. The higher the percentage, the more efficiently a firm puts its assets to work to make money.

But wait! The new leasing standard (ASC 842, if you care) requires firms to report the value of leased assets on the balance sheet. Mathematically, that means the standard is increasing the denominator of the ROA equation.

So could a firm see its assets expand so rapidly that ROA actually falls, even if net income goes up? Yes it could. Burlington Stores and Michael’s Cos. are two cases in point.

See Figure 1, below. It compares their net income and assets in Q4 2018, just before the ASC 842 standard went into effect; with the same numbers in Q2 2019, after ASC 842 arrived.



As you can see, ROA for both firms fell sharply, solely because of ASC 842. We calculated what their Q2 2019 numbers would have been without operating lease assets included. In both cases, ROA would have risen.

That change in operating metrics isn’t necessarily disastrous. After all, the business operations themselves didn’t change to any material degree; accounting rules did. The trick for firms in this predicament is to communicate the reasons behind that change clearly and effectively, so investors won’t misunderstand what’s happening.

Now we’re off to pick up a new coat and some crafting supplies. Winter is coming and we want to decorate our laptops for the holidays.


Feeling the Squeeze on China
Wednesday, October 23, 2019

Toy-maker Hasbro (ticker: HAS) filed its third-quarter financial statements this week. If anyone wants a good example of what companies are saying about the squeeze they feel over tariffs and the trade war with China — start here.

Hasbro added four paragraphs’ worth of discussion in its risk factors that had not been in prior quarterly reports. Among the company’s new concerns…

  • concentration of manufacturing of the substantial majority of the company’s products by third party vendors in the People’s Republic of China and the associated impact to the Company of social, economic or public health conditions and other factors affecting China…
  • the ability of the company to successfully diversify sourcing of its products to reduce reliance on sources of supply in China…
  • the application of tariffs and other trade restrictions impacting the cost of producing our products and importing them into markets around the world for sale, which could significantly increase the price of the company’s products…
  • the ability of the company to successfully implement actions to lessen the impact of tariffs imposed on our products, including any changes to our supply chain, logistics capabilities, sales policies or pricing of our products;

In other words, Hasbro’s supply chain has deep, extensive ties to Chinese manufacturers, and unraveling those ties won’t be easy. Tariffs might also drive up the costs of Hasbro’s materials and products — and finding ways to alleviate that exposure won’t be easy either.

None of this is a surprise when you think about it. So how can Calcbench users find such new disclosures quickly and easily, that you can get on with pondering the business implications?

Easy, actually.

First, go to our Interactive Disclosures database and search “tariffs,” “China,” “trade war,” or similar terms in the text search box on the right-hand side of the page. Then hit the “Add Previous Period” tab above the disclosures, and presto! Calcbench pulls up those same disclosures for the prior period and a third column color-coding changes between the two filings. Text added to the latest filing appears in green, text removed appears in red.

See Figure 1, below. The column on the left is Hasbro’s third-quarter filing. The column on the right is its second-quarter filing. The column in the middle is what’s changed between the two — and note all that green-coded copy. That’s the four paragraphs we mentioned above.



You can run the same analysis for any company, and on any issue, really. It doesn’t have to be restricted to China, tariffs, or trade wars.

We just expect to see lots more about China and tariffs in the filings to come.


Netflix and the Cost of Content
Tuesday, October 22, 2019

Netflix ($NFLX) filed its third-quarter financial statement last week. Lots of financial press dwelled on the news that Netflix now needs to work harder to grow its subscriber numbers, but Calcbench likes to watch a different story line: content costs relative to total liabilities.

Those costs are no joke. In Q3 Netflix reported a total of $8.28 billion in content liabilities on its balance sheet — up from $3.58 billion five years ago, back when Orange Is the New Black was still all the rage. Now Netflix finds itself in a streaming media arms race, spending more money on content to fend off competitors such as Disney($DIS) and Apple ($AAPL), while hoping that subscriber growth can generate enough revenue to meet those future obligations. (Orange, by the way, ended its seven-season run in July.)

So how large are those content commitments? We have a few data points to consider.

Figure 1, below, shows quarterly growth in content liabilities for the past six years. Liabilities have roughly tripled, from $2.7 billion in Q3 2013 to that $8.28 billion today.



One might also wonder how content liabilities compare to Netflix’s total liabilities — and somewhat to our surprise, that percentage has steadily fallen over the same period. See Figure 2, below.

So as much as Netflix’s content commitments have grown, other commitments (specifically long-term debt, if you’re interested) have grown even faster.

OK, interesting enough, but so far all that information is only what the balance sheet tells us. When you read the footnotes (always read the footnotes, people!) a subplot emerges.

Another $10.8 Billion

When you read the Commitments and Contingencies disclosure for Q3, you see this:

As of September 30, 2019, the company had $19.1 billion of obligations comprised of $4.9 billion included in “Current content liabilities” and $3.4 billion of “Non-current content liabilities” on the consolidated balance sheets and $10.8 billion of obligations that are not reflected on the consolidated balance sheets as they did not yet meet the criteria for asset recognition.

Hold up: $10.8 billion of obligations not reflected on the balance sheet? Isn’t that reason for investors to start breathing into a paper bag?

Not really. That $10.8 billion is a contingent liability — a cost that may come due in the future depending on certain circumstances, or may not. And the rules for reporting a contingent liability offer an intriguing glimpse into Netflix’s business model.

Those rules define three ways to handle contingent liabilities:

  • When the cost is both estimable and probable, report it on the balance sheet;
  • When the cost is either estimable or probable, only include it in the footnotes;
  • When the cost is neither of those things, don’t include it at all.

Well, if Netflix says those contingent liabilities are $10.8 billion, by definition the costs are estimable — but since they are only in the footnotes, that also means those costs are not yet probable.

For example, say Netflix was iffy about a fourth season of its show Daredevil. Executives could estimate those liabilities, since they already know what the first three seasons cost to produce. But they wouldn’t need to report those liabilities on the balance sheet, because they hadn’t yet given a green light for Season 4. So that liability would be part of the $10.8 billion.

(Please note, the above example is entirely hypothetical, because Season 3 stunk and Netflix canceled the series.)

Figure 3, below, shows how those footnote liabilities have climbed over the last five years. The pace isn’t quite as torrid as liabilities reported on the balance sheet, but liabilities have still more than doubled.



That’s a lot of potential obligations lingering out there, not yet come to pass. If subscriber growth keeps charging along and Netflix can get away with more price hikes, that might just mean enough revenue to reboot investor interest in the stock.

Stay tuned.


Periodically, we publish U.S. firms with sales to China and it was past time for an update.

We will also publish in the very near future, a set of data for the firms with material Property, Plant and Equipment in China.

For now, please see the annual sales of U.S. firms to China for the period 2014-2018 on an annual basis. There is no surprise that Apple is the highest with over 50 billion in sales in 2018. Boeing, Intel, Qualcomm and Micron round out the top 5.

Note that 2018 is the first year that Wal-Mart reported sales in China.

Clients who would like to get this data for themselves should reference our ‘How-to’ blog post from earlier this year

Enjoy!

(*All data in $ millions)

Company 2014 2015 2016 2017 2018 Five Year Total
Apple Inc. $ 30,638 $ 58,715 $ 48,492 $ 44,764 $ 51,942 $ 234,551
Boeing Co $ 11,029 $ 12,556 $ 20,108 $ 22,914 $ 26,832 $ 93,439
Intel Corp $ 11,197 $ 11,679 $ 13,977 $ 14,796 $ 18,824 $ 70,473
Qualcomm Inc/DE 0 $ 13,337 $ 13,503 $ 14,579 $ 15,149 $ 56,568
Micron Technology Inc $ 6,715 $ 6,658 $ 5,301 $ 10,388 $ 17,357 $ 46,419
Broadcom Inc. $ 2,106 $ 3,675 $ 7,184 $ 9,460 $ 10,305 $ 32,730
NIKE, Inc. 0 $ 3,785 $ 4,237 $ 5,134 $ 6,208 $ 19,364
Applied Materials Inc /DE $ 1,608 $ 1,623 $ 2,259 $ 2,746 $ 5,113 $ 13,349
3M Co 0 $ 2,945 $ 2,799 $ 3,255 $ 3,574 $ 12,573
Walmart Inc. 0 0 0 0 $ 10,702 $ 10,702
Danaher Corp /DE/ $ 1,728 $ 1,553 $ 1,799 $ 2,012 $ 2,357 $ 9,448
Cummins Inc $ 1,446 $ 1,451 $ 1,544 $ 2,137 $ 2,641 $ 9,219
Advanced Micro Devices Inc $ 2,324 $ 1,145 $ 1,108 $ 1,747 $ 2,516 $ 8,840
Corning Inc /NY $ 2,985 $ 2,710 $ 2,923 0 0 $ 8,618
Smith A O Corp $ 692 $ 787 $ 1,775 $ 2,064 $ 2,142 $ 7,459
Corteva, Inc. $ 2,325 $ 2,067 $ 2,200 $ 818 0 $ 7,410
Qorvo, Inc. 0 $ 1,601 $ 1,866 $ 1,540 $ 2,295 $ 7,302
Skyworks Solutions, Inc. $ 1,574 $ 2,249 $ 971 $ 1,019 $ 1,322 $ 7,136
Borgwarner Inc $ 885 $ 1,009 $ 1,218 $ 1,560 $ 1,801 $ 6,473
Nvidia Corp 0 0 $ 1,305 $ 1,896 $ 2,801 $ 6,002
Air Products & Chemicals Inc /DE/ $ 807 $ 958 $ 1,020 $ 1,143 $ 1,586 $ 5,514
Freeport-Mcmoran Inc $ 790 $ 688 $ 1,125 $ 1,136 $ 873 $ 4,612
Conocophillips $ 1,701 $ 782 $ 551 $ 712 $ 836 $ 4,582
Maxim Integrated Products Inc $ 947 $ 837 $ 843 $ 885 $ 813 $ 4,326
Fortive Corp $ 498 $ 501 $ 995 $ 1,111 $ 1,138 $ 4,243
Johnson Controls International plc 0 $ 0 $ 0 $ 2,046 $ 2,166 $ 4,212
Medtronic plc $ 1,013 $ 1,495 $ 1,589 $ 0 $ 0 $ 4,097
Agilent Technologies, Inc. $ 543 $ 693 $ 839 $ 900 $ 1,015 $ 3,990
Avery Dennison Corp $ 0 $ 0 $ 1,140 $ 1,300 $ 1,430 $ 3,870
Analog Devices Inc $ 459 $ 511 $ 576 $ 843 $ 1,210 $ 3,599
Amphenol Corp /DE/ $ 1,441 $ 1,676 0 0 0 $ 3,116
Arconic Inc. $ 415 $ 565 $ 582 $ 615 $ 632 $ 2,809
National Oilwell Varco Inc 0 $ 1,623 $ 557 $ 298 $ 231 $ 2,709
Merck & Co., Inc. 0 0 0 0 $ 2,184 $ 2,184
Ipg Photonics Corp $ 245 $ 312 $ 358 $ 621 $ 629 $ 2,166
Waters Corp /DE/ $ 239 $ 279 $ 331 $ 387 $ 443 $ 1,679
Mettler Toledo International Inc/ $ 404 $ 363 $ 375 $ 439 0 $ 1,582
Perkinelmer Inc 0 $ 297 $ 337 $ 375 $ 560 $ 1,568
Mosaic Co $ 191 $ 205 $ 171 $ 206 $ 232 $ 1,006
Illumina, Inc. 0 0 0 $ 292 $ 365 $ 657
Fortune Brands Home & Security, Inc. 0 0 0 $ 202 $ 261 $ 463
Align Technology Inc 0 0 0 $ 082 $ 156 $ 237
Ansys Inc 0 0 0 0 $ 114 $ 114
Verisign Inc/CA 0 0 0 0 $ 107 $ 107
Idexx Laboratories Inc /DE 0 0 0 0 $ 58 $ 58
Hanesbrands Inc. 0 $ 5 $ 5 $ 8 0 $ 19

Tracking  Pension Data in Calcbench
Wednesday, October 9, 2019

You may have seen news recently that General Electric ($GE) is freezing pension benefits for 20,000 employees, to help the company close an $8 billion deficit in its pension plan.

We at Calcbench love financial data analytics so much that we plan to keep working until we die. Still, GE’s news is a reminder that corporate pension liabilities are still a big issue — and Calcbench offers numerous ways for financial analysts to understand exactly how big that issue might be for firms you follow.

For example, in our Data Query Tool, we track dozens of footnote disclosures a firm might make about its pension obligations. Scroll to the lower portion of the page and you’ll see a laundry list of “footnote points” we track in corporate filings. Look for “Employee Benefits & Pension” and you’ll see a sub-menu of several dozen more data points we track within that category — everything from defined-benefit plan obligations; to maximum and minimum discount rates; to expected future benefit payments due in coming years. See Figure 1, below.



Mark whatever pension data you want to track, for whatever companies you want to track (don’t forget how to set peer groups you want to research), and then the whole thing is delivered to you via Excel for further analysis.

You can do much the same research on our Multi-Company Page, using the standardized metrics search field on the left side of your screen. Those metrics are the same data points we cited above; on the multi-company page, you can compare them quickly on your screen across numerous companies or other metrics. (Say, defined-benefit obligations compared to total liabilities, among the Dow Jones Industrials — you can get that on your screen in a snap.) See Figure 2, below.



And of course, you can always search our Interactive Disclosure Page for detailed, narrative disclosure of pension items that firms report in the footnotes. Firms do sometimes report pension costs under various headings, so the simplest trick here might be to search “pensions” in the text field and see what comes up.

For real, many firms do still offer pensions and report costs related to those benefits. You won’t just get, “Ha! You’re kidding, right?” when you go looking.

To demonstrate how much pension accounting can matter, we looked at all the discount rates for firms that still offered pension plans in 2018. You can see the scatter plot, below.



Most firms use discount rates somewhere near 4 percent — but many use discount rates below that figure. A few brave filers even use discount rates of zero.

Remember that companies use the discount rate to determine the cost of future benefits, and thus what they must contribute today to cover those benefits in the future. The contributions move in step with the discount rate — so the lower your rate is, the more confident you are that your plan’s current value will endure over time, and the less you need to contribute today.

So if Firm X uses a discount rate of zero, does that seem like a reasonable number, or something you might step in while crossing a cow pasture? That’s for you to decide. Calcbench just serves up plenty of data to help you make your decision.


Our latest research report is now available: an in-depth look at how the new accounting standard for leasing costs is affecting the retail sector — and oh boy, it’s affecting that sector in a big way.

You can find the complete report on the Calcbench Research page. Our main finding is that thanks to this new accounting standard, formally known as ASC 842, major retailers are seeing significant spikes in their assets, liabilities, return on assets, and other key performance metrics — all due to a change in accounting rules, rather than any fundamental change in business operations.

ASC 842 requires firms to list the costs of operating leases as liabilities on the balance sheet, along with a corresponding “right-of-use asset” on the asset side. Since retailers generally lease large amounts of commercial space, we wanted to see how the new standard has altered their financial disclosures.

To do that, we compared the financial data reported by 36 retailers as of Q4 2018, just prior to ASC 842 going into effect; against disclosures reported in Q2 2019, after the standard arrived.

The results? See Figure 1, below.



As you can see, the adjustments that firms made, for both ROU assets and operating lease liabilities, exceeded the change in total assets and liabilities for our sample. In other words, all of the change in assets and liabilities — and those numbers jumped 11.8 and 16.6 percent, respectively — was due to implementing ASC 842.

We then did a comparison of assets and liabilities for each of the 36 retailers in our sample — which included firms such as Abercrombie & Fitch ($ANF), Krogers ($KR), Walmart ($WMT), J.C. Penney ($JCP), and Ross Stores ($ROST), among others. Even at the individual level, most firms owed all their fluctuations in assets or liabilities to ASC 842.

And the Performance Metrics

We also studied how those changes affected return on assets and debt-to-equity ratios. ROA is calculated as net income divided by total assets, which means an increase in assets will drive a firm’s ROA down. Debt-to-equity ratio is calculated as total liabilities divided into stockholder equity, so an increase in liabilities will drive that ratio up.

Sure enough, that’s what we found in the retail sector when we ran the numbers.

The ROA calculation is a special case. For all 36 retailers, ROA actually did rise even with the arrival of ASC 842, but that’s because Walmart had a stellar second quarter with gobs of net income, which had an outsized effect on the whole group. Excluding Walmart, the other 35 retailers actually saw ROA fall with the arrival of ASC 842. See Figure 2, below.



Our paper then considers a few specific firms and their changes to ROA and debt-to-equity. Suffice to say, one can find numerous examples of firms with worse return on assets or D/E ratios solely because of ASC 842 and the accounting change. Exclude those operating lease items, and the metrics look better.

Calculating NPV

Liabilities definitely seem to be where the action is with ASC 842. The standard forced a large increase in liabilities than in assets, and higher debt-to-equity ratios can cause headaches like triggering debt covenants with your lenders.

So as Part III of our study, we examined how firms calculated the net present value (NPV) of those liabilities. That number can depend significantly on the discount rate a firm uses, as well as the average remaining term on its leases. We dot-plotted those numbers on a chart.

Figure 3, below, shows the discount rates. See that one outlier, near 12 percent? That’s J.C. Penney.



Anyway, if you’re an analyst who follows the retail sector, download the paper and have a look. Let us know what you think, or what else we should examine in future reports about the leasing standard. We’ll also be publishing more reports on ASC 842’s effect in other sectors, so stay tuned.


Alibaba and Cloud Computing
Thursday, September 19, 2019

Alibaba ($BABA) is that giant Chinese technology company that claims to do just about everything. Imagine Amazon, eBay, Venmo, Netflix and more, all rolled into one business.

Well, we were skimming Alibaba’s financial numbers the other day, and found something else the company does — lose money on cloud computing.

We didn’t think such a thing was possible, because the economics of cloud computing are so simple. You buy computer servers and rent out space to customers. It’s not a new business model, and anyone with an online presence needs some sort of cloud computing. Losing money at cloud computing is like losing money when you own a casino.

Yet, somehow, Alibaba has done precisely that for at least three years running.

See Figure 1, below. These are the operating segments Alibaba reported in 2018 and 2019 (priced in Chinese renminbi). Cloud computing is the second segment listed, and we flagged the money-losing portion in blue.



So how rare is it to lose money in cloud computing? Calcbench can tell you.

First, we held our cursor over that (5,508) loss to find out how Alibaba tagged that number. As one would expect, the tag is “OperatingIncomeLoss.”

When you know the XBRL tag on a piece of financial data, you can then use our XBRL Raw Data Query page to find all other companies that use the same tag. Yes, many companies do use the OperatingIncomeLoss tag — but only a handful use that tag and cross-reference it to include the word “cloud.”

Indeed, for calendar 2018 we found five firms that used those tags in their filings at all, and only three of them are companies you’ve ever heard of:

  • Microsoft: $13.92 billion Operating Income from Cloud
  • Oracle: $21.587 billion Operating Income from Cloud
  • Alibaba: $776.2 million Operating Loss from Cloud (converted from renminbi).

We can think of other firms that also offer cloud computing services under another name. Amazon Web Services, for example, would technically qualify as cloud computing (it’s data storage via the cloud), although Amazon cross-references to its own secondary tag (technically called a “dimension”) dubbed “AmazonWebServicesSegmentMemeber.”

Like Microsoft and Oracle, however, AWS also makes gobs of money: $25.6 billion in revenue last year and $7.3 billion in profit. (Do the math, and AWS may take over the world around 2046 or so.)

Searching the Text Disclosures

So anyway, why does Alibaba lose money on cloud computing? First we found this description of what that line of business is, from the company’s annual report:

The Company’s cloud computing segment is comprised of Alibaba Cloud, which offers a complete suite of cloud services including elastic computing, database, storage, network virtualization services, large scale computing, security, management and application services, big data analytics, a machine learning platform and Internet of Things (“IoT”) services.

OK. That’s no help.

The MD&A provides a few more statistics about the overall growth of Alibaba’s cloud computing. For example, cloud revenue increased 84 percent from 2017 to 2018, “primarily driven by an increase in average spending per customer.”

That’s nice news unto itself, but cloud revenue was only 7 percent of Alibaba’s overall revenue. So this is a fast-growing segment for Alibaba, but it’s still a small segment — and we still don’t know why the firm is losing money.

One hint came in a discussion of cost of revenue. Alibaba did say costs were up “in bandwidth and co-location fees and depreciation expenses as a result of our investments in our cloud computing,” among other items.

So maybe — maybe — Alibaba’s losses in cloud computing are growing pains. The company says demand is growing for sophisticated cloud-based services like network virtualization. Investment to deliver those sophisticated services ain’t cheap. Maybe the investments now will pay off in black ink for the cloud computing segment later.

Then again, Alibaba has been reporting losses in cloud computing for three straight years. We’ll be curious what the company reports sometime next spring with its next annual report.


Introducing Critical Audit Matters
Monday, September 16, 2019

Financial analysts have another disclosure to consider when you’re trying to evaluate the strength of a company: critical audit matters (CAMs), published by a company’s external audit firm.

CAMs started arriving in corporate annual reports earlier this summer, and you’ll see many more filers start including CAMs in annual reports next year. They are important issues in a firm’s financial reporting processes (hence the “critical” part) as identified by the firm’s external auditor.

CAMs do not necessarily mean anything is amiss with the filer’s financial data, although that can be the case sometimes. Rather, CAMs refer to items in the firm’s financial statements that both (a) are material to the financial statements; and (b) involve “especially challenging, subjective, or complex auditor judgment.”

So CAMs are really a glimpse into which issues an audit firm identifies as potentially important, either because an issue is hard to quantify (say, the precise value of thinly traded derivatives) or because a company’s internal controls for that item aren’t as bulletproof as the audit firm would like those controls to be.

This is a big deal because until now, most audit reports have been pretty boring. In most cases, those reports simply confirmed that the firm’s financial data seems reliable and in accordance with U.S. Generally Accepted Accounting Principles — nothing more. Nice to know, but not terribly informative for financial analysts.

Most firms will have at least one CAM in the auditor’s report; some might have numerous CAMs. Those CAMs might also change over time, as a company updates its internal controls or changes its financial operations.

Large filers had to start including CAMs in their audit reports for fiscal years ending on or after June 30, 2019 — so we’ve seen some CAMs already from filers with June 30 fiscal year-ends, and we’ll see lots more by spring 2020. Smaller firms will start including CAMs for annual reports filed in 2021.

How to Find CAMs in Calcbench

Start at our Interactive Disclosures page. From the “choose footnote/disclosure type” menu on the left, select “Report of Independent Registered Public Accounting Firm.” Then in the text search field on the right, enter “critical audit matters” to see what comes up. See Figure 1, below.



Right now you won’t see too many results, since not too many large filers work on a June 30 fiscal year-end. But we did find some, and have examples below.

Brady Corp. ($BRC) reported a valuation allowance related to taxes as a CAM. The audit firm (Deloitte & Touche) had this to say:

The Company recognizes deferred income tax assets and liabilities for the estimated future tax effects attributable to temporary differences and carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized in the future…

The Company’s determination of the valuation allowance involves estimates. Management’s primary estimate in determining whether a valuation allowance should be established is the projection of future sources of taxable income. Auditing management’s estimate of future sources of taxable income, which affects the recorded valuation allowances, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists.

Cisco Systems ($CSCO) reported this CAM related to revenue recognition, as described by audit firm PwC:

As described in Note 2 to the consolidated financial statements, management assesses relevant contractual terms in its customer arrangements to determine the transaction price and recognizes revenue upon transfer of control of the promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Management applies judgment in determining the transaction price, which is dependent on the contractual terms. In order to determine the transaction price, management may be required to estimate variable consideration when determining the amount and timing of revenue recognition.

The principal considerations for our determination that performing procedures relating to the identification of contractual terms in customer arrangements to determine the transaction price is a critical audit matter are there was significant judgment by management in identifying contractual terms due to the volume and customized nature of the Company’s customer arrangements.

In each case, the audit firm then explained the procedures it used to try to understand the CAM as much as possible. That’s part of what audit firms must now report for CAMs as dictated by accounting industry regulators.

So that’s the critical information about critical audit matters. They can help a financial analyst understand what’s important to watch in corporate financial statements, and how audit firms are approaching those issues.

How you approach those issues is up to you. Calcbench is here to give you a clear path to finding them.


Our Fireside Chat on Goodwill Assets
Wednesday, September 11, 2019

Devotees of goodwill assets and impairments, rejoice! Calcbench and Valuation Research Corporation have just released a “fireside chat” to discuss the growth of corporate goodwill on the balance sheet, goodwill impairment, and techniques financial analysts can use to perform their own assessment of goodwill value.

You can see the video on YouTube, and we’ve embedded it below as well. The speakers are Pranav Ghai, CEO of Calcbench; and PJ Patel, co-CEO the Valuation Research Corporation. Their discussion was moderated by Matt Kelly, editor at Radical Compliance.

Understanding how companies decide on the value of a goodwill asset, and how to identify assets that might be overpriced and due for an impairment sometime in the future — that’s a critical part of financial analysis. We talk about those things extensively in the video.

Why is goodwill so important? For starters, it crops up in corporate mergers all the time. Goodwill is the value an acquiring company places on a target company, above that target’s book value. For example, say Company A has $100 million in inventory and another $50 million in intangible assets (business contracts, trademarks, and so forth), for a book value of $150 million. Company B then acquires Company A for $200 million.

That $50 million extra is goodwill. It might be ascribed to Company A’s reputation in the marketplace, or loyalty of employees, or other hard-to-define qualities that make Company A worth more than the sum of its parts.

As you’ll see in our video, goodwill is an increasingly large part of the corporate balance sheet. Total goodwill assets among the S&P 500 is more than $3 trillion. It rose 38 percent from 2014 to 2017.

On the other hand, goodwill can also be impaired, when a company decides the asset isn’t worth as much as originally thought. Impairments hit the income statement in the period they’re reported, leading to potentially large losses. They’re also embarrassing to the firms that announce them.

So Ghai and Patel review statistics about the growth in goodwill among the S&P 500; preliminary calculations valuation specialists use to assess what goodwill should be; how to find goodwill as part of an M&A deal (Calcbench tracks that stuff, you know); and warning signs that suggest impairment may be coming soon.

Let us know what you think, and if you have questions always feel free to email us at info@calcbench.com. Enjoy!


Pulling Forward Share Buybacks
Friday, September 6, 2019

We saw an interesting item on MarketWatch the other day that might make the financial analyst’s heart go pitter-patter: Starbucks ($SBUX) warned investors that 2020 profit growth will be lower than expected, because the company is spending more money now on share repurchase programs.

As financial disclosures go, this one was rather quirky. Because Starbucks’ share price has been accelerating so rapidly this year, the company decided to spend more money now on its repurchase program — fearing that shares will be even more expensive in the future. So that cash won’t be there in 2020, so profit growth on an earnings per share basis will be lower.

That’s one way to be a victim of your own success. So how could Calcbench help you identify firms that might face a similar predicament?

One place to start is by studying which firms have large piles of cash relative to total assets. That’s easy to do. Go to our Multi-Company database and select the company or companies you want to research. By default, one of the financial categories displayed will be assets. You can then add cash as another column by typing that into the standardized metrics field on the left side of the page. (See Figure 1, below.)



You could then download that data into Excel, divide cash into total assets, and get a sense of which firms have a relatively large amount of cash available. They’d be logical candidates for share buyback programs.

You’d still want to research whether those firms also have other obligations, such as an upcoming debt payment or other liabilities. Fundamentally, however, you want to start by finding firms that have a lot of money tucked away. This is how you’d do that in Calcbench.

One you have those firms identified, you’d need to study which ones have had large (some might say unwarranted) run-ups in share price. That makes shares more expensive, so companies would therefore be able to buy fewer shares. Which means more shares still outstanding, so EPS doesn’t increase as much as you want; the denominator (shares) is still too large.

You would also want to know the number of shares the company has issued, and what’s become of them lately. Calcbench has a lot of data on that point, all available in the standardized metrics field. For example…

  • Shares issued: all the shares the company has issued, regardless of who owns them;
  • Shares in treasury: shares the company issued and then re-acquired, such as when the company buys back shares and keeps them tucked away;
  • Shares outstanding: shares the company has issued that are still floating around, owned by investors;
  • Stock repurchased during period: the number of shares a company bought back;
  • Treasury stock acquired, average cost: how much the company paid for shares it has tucked away in the treasury.

You get the idea. Calcbench has many ways to give you a sense of how many shares are available for repurchase, and how many the company has already repurchased.

So if a firm has lots of liquidity (that is, cash to spare), plus a rapid run-up in share price, that means fewer shares repurchased in the future (because the shares will be more expensive), so lower EPS growth (because more shares are still out there). That’s when a firm might consider pulling forward its share buyback spending from tomorrow into today.

To be honest, issues like this only worry people who obsess about EPS. If you care about other fundamentals like operating income or revenue growth, financial engineering like this is less of a concern. As one analyst in the MarketWatch article said:

“All in, while there doesn’t appear to be any change in [Starbuck’s] broader fundamental outlook …, these adjustments are a reminder that the [Starbucks] story is complicated and that growth is not always poised to proceed in a linear fashion,” analyst Bonnie Herzog at Wells Fargo wrote in a note to clients.

Totally true, and a point not exclusive to Starbucks. Calcbench can help you find those others because whatever financial data you want to pull out and study — we have it, ready for the pulling and studying.


A Quick Catch-Up on VMWare
Saturday, August 31, 2019

Once upon a time — two years ago, to be precise — Calcbench spent a lot of time writing about the then-new accounting standard for revenue recognition.

In particular, we warned that software firms with subscription-based sales models might see more volatility in their quarterly results, because the new standard would require them to recognize more revenue from a long-term contract immediately. So the revenue for any specific quarter might increase (yay!) but fluctuations from quarter to quarter would be more pronounced (boo!).

The firms most at risk for this phenomenon would be those with large amounts of deferred revenue relative to current liabilities. Back in August 2017 we wrote a white paper on the subject, and even identified 11 software firms where deferred revenue exceeded current liabilities by 100 percent or more. They would be the firms most prone to what we’re talking about.

OK two years later, that new revenue recognition standard is now in cemented place. So what happened?

We decided to take a fresh look at VMWare ($VMW) to get a sense of things.

In 2016 VMWare had a deferred revenue-to-current liabilities ratio of 123.5 percent. That was far above the industry average of 47.7 percent, and placed VMWare second on our list of 11 firms. (Web.com was first, but it went private in 2018.)

Figure 1, below, shows VMWare’s quarterly revenue from 2015 through Q2-2019. The new accounting standard went into effect at the start of 2018, when revenue landed pretty much at $2 billion on the nose.



That revenue flow does look more jagged after Q1 2018 than prior to it. Sure enough, in the disclosures VMWare made for its 10-K filed on March 29, 2018, the company said: “Under Topic 606, VMware would generally expect that substantially all license revenue related to the sale of perpetual licenses will be recognized upon delivery.”

We don’t know how much those perpetual licenses account for all licensing revenue; VMWare doesn’t report that separately. And whatever those effects of the standard might be, the market has digested them. VMWare’s share price rose from $96 two years ago to a high of $200 in May, although it’s dropped to around $132 lately.

Still, let it never be said that Calcbench forgets its roots. The new lease accounting standard may be the sexy thing now, but we try to revisit old issues (like revenue recognition) from time to time.)


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