The latest Calcbench research note turns to an item important in corporate tax reporting, that nevertheless can leave financial analysts confused: a firm reporting growth in net operating losses, even when its pretax income is also rising.
That sounds like a contradiction in terms. Net operating losses are supposed to arise when a firm is losing money. The company then carries those “NOLs” on the books until some future fiscal year, when it can deduct some of the NOL against the current year’s pretax income. That is supposed to normalize the company’s tax payments over time.
That’s the theory, anyway. Here in the real world, we recently noticed that Facebook ($FB) had reported a spike in its NOLs for 2019 and growth in pretax income.Which left us wondering: how does such a thing happen? How many other firms report growth in pretax income and growth in operating losses at the same time?
Apparently it happens more often than one might guess. We reviewed the 2019 filings of firms in the S&P 500 (excluding financial firms) and found several dozen that fit the profile. Our latest research note (available to download as a PDF if you like), provides an overview of how such a thing can come to pass.
For example, some firms acquire others that already carry NOLs on their books, and the acquiring company then gets the NOLs too. That’s what happened with Fiserv ($FISV), which acquired First Data Corp. in 2019 and inherited $1.69 billion in NOLs.
On the other hand, we also see firms like Facebook. Its NOLs grow from $7.88 billion in 2018 to $9.06 billion in 2019 — a rise of $1.18 billion, or 15 percent. At the same time, its pretax income in 2019 was $24.8 billion.
Analysts need to do some sleuthing to figure out how that NOL increase happened, and even after digging around in the footnotes you only find clues that suggest a possible explanation.
For example, Facebook reported a spike in deferred tax liabilities, specifically in depreciation & amortization and in right-of-use operating leases. See Fig. 1, below.
Those numbers don’t explain the full $1.18 billion growth in NOLs, but they do explain at least part of it.
Our research note walks through the Facebook example in more detail, and presents a list of other firms that saw significant growth in NOLs while also reporting pre-tax income. We also have some suggestions about how Calcbench subscribers can use our Interactive Disclosures database and other research capabilities to do your own exploring with whatever firms are on your radar screen.
Enjoy! And of course, if you have suggestions for other research notes, drop us a line any time at info@calcbench.com.
Standardized financials from Earnings Press Release and 8-Ks are now available via the Calcbench API minutes after published. Calcbench is leveraging our expertise in XBRL to get many of the numbers from the Income Statement, Balance Sheet and Statement of Cash Flows from the earnings press release or 8-K.
Data for the Dow 30 is @ https://www.dropbox.com/s/9rzxu81w2sitr9l/calcbench_pit_preliminary.csv?dl=0. The data starts in 2010.
The file includes numbers from the press-releases and the subsequent XBRL filings. True in the preliminary column indicates the number was parsed from an earnings press-release. True in the XBRL column indicates the number appeared in an XBRL document. Therefore, True in the preliminary and XBRL columns indicates Calcbench parsed the number from the press-release and subsequently “confirmed” it in the XBRL document, True in the preliminary column with False in the XBRL column indicates the number was parsed from the press release and was not subsequently “confirmed” in the XBRL 10-K/Q.
An unconfirmed number could indicate that the number was reported differently in the XBRL document sometimes it will just be a rounding error, or Calcbench parsed the number from the earnings release incorrectly. In the case where the XBRL number differs from a previously reported earnings release number the XBRL number will have a revision number greater than 0.
The date_reported column is when Calcbench published the data and it would have been tradable.
This file was created using the code @ https://github.com/calcbench/notebooks/blob/master/standardized_numeric_point_in_time.ipynb.
For a larger sample size and other questions email us@calcbench.com
Impairments related to coronavirus have been on lots of people’s minds this quarter. Now, for the first time, we have a specific glimpse into the SEC’s thoughts on the issue too. Carlisle Companies Inc. ($CSL), a manufacturing business with about $4.8 billion in annual sales, seems to be the first company to have an SEC comment letter asking about Covid-19 impairments.
The letter and Carlisle’s reply were exchanged in May, but SEC comment letters typically don’t become public for several weeks after that. Special thanks to eagle-eyed Olga Usvyatsky, who noticed the comment letter while poking around the SEC comment letter database and posted the news to Twitter.
So what happened? In Carlisle’s first-quarter report (filed on April 23), the company said that it had assessed its goodwill and intangible assets and concluded that despite the likelihood of reduced revenue for the rest of 2020, coronavirus had not affected the value of those assets, so no impairment charges were necessary.
Carlisle even disclosed its valuation methodology and key assumptions it used. See Figure 1, below.
Fair enough; it’s not Calcbench’s place to judge a firm’s statements about impairment. The SEC, on the other hand, has warned firms that impairments related to Covid-19 are a priority item.
Perhaps it’s no surprise, then, that the SEC dashed off a comment letter to Carlisle asking for more clarity about how much the carrying value of its goodwill and intangible assets exceeded book value. Here’s what the SEC had to say:
To provide investors with information to better assess the probability of future goodwill impairment charges, please disclose, if accurate, that the estimated fair values of the intangible assets you quantitatively tested for impairment substantially exceeded their carrying values. For any asset whose estimated fair value did not substantially exceed its carrying value, please disclose the percentage by which fair value exceeded carrying value at the date of the most recent test.
You can see the SEC’s logic here, and it’s a fair point to raise. If its intangible assets were only a hair above book value in Q1 2020, with more Covid-19 disruptions likely to come later this year — then yes, it’s possible that an impairment charge will be necessary sometime soon. On the other hand, if the assets are well above book value, then impairment would be less likely, even with Covid-19.
Carlisle heard the SEC’s message and promised more fulsome disclosure in filings to come. It gave the text below as a sample response, with the relevant material underlined:
In the first quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced expectations of future operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our reporting units and determined that an indicator of possible impairment existed within our CFT and CBF reporting units. Accordingly, we tested our goodwill for impairment as of March 31, 2020. Those reporting units were tested for impairment using the quantitative approach described above, resulting in fair value that exceeded the carrying amount for each of the reporting units by approximately 10 percent. The carrying amount of goodwill for the CFT and CBF reporting units was $185.6 million and $96.4 million, respectively.
Just food for thought for financial analysts and corporate disclosure executives out there, wondering what you should say about financial risks and Covid-19. You can learn a lot by reading other firms’ correspondence.
Don’t forget, Calcbench subscribers can search SEC comment letters and firms’ responses (once the letters become public on the SEC website, which takes a few weeks).
The letters are indexed on our Interactive Disclosures page. Set up the firms whose disclosures you want to search and the time period in question, and then select “SEC Comment Letters & Responses” from the Choose Disclosure Type menu on the left side of the screen. Then you’re good to go.
A Q&A with Jack Ciesielski, Portfolio Manager and Accounting Analyst
Publisher of The Accounting Observer for 26 years
How did you learn about Calcbench?
It was many years ago. I was at an AICPA-SEC Regulation Current Event and met the team. I did not immediately sign up for Calcbench although I was frustrated with my current solution and was looking for an alternative. At the time when I met Calcbench personnel, the platform was pretty primitive. It took a little while for the platform to evolve to where I could get on board, but I’ve been a Calcbench customer for almost six years and I love it.
What frustrated you about your previous financial data provider?
Within my circle, we all used the same financial data company. That company had a monopoly on the data and knew it. But the solution was not faithful to financial statements, and the quality of the information was poor. Couple that with increasing prices (it was the biggest line item in my budget) and it was a big headache. Even though I disliked the data, and so did others in my field, at least we all spoke the same language. Calcbench is changing that, for the better.
What was the trigger that moved you to Calcbench?
The Calcbench platform had developed and became a very powerful tool. First and foremost, you can access native financial statements with XBRL fields behind it. And what I really like is that the platform is great for time series analysis. You can easily stitch together prior years or have a continuous view. That was a big persuader: data that was more faithful to the reported financial statements.
What features do you use on the platform?
While I don’t consider myself a power user, I do go deep on things like cash flow statement data, pension data, the contractual obligations table, and more. I don’t think that enough financial analysts read the MD&A, but in my line of work, it’s important to understand. The risk factors are especially important to explore and are easily accessible using Calcbench. I also really like the alerts. I keep track of changes in my portfolio companies through the alerts features.
What features do you expect to use on the platform?
While COVID expense exclusions are not part of what I currently look at, over time such special geography on income statements will become important and things like supplemental employee benefit costs may have a material impact – and require analysis.
Talk about a typical day using Calcbench.
In addition, I am a heavy user of the data query tool. Getting historical, empirical data is primarily how I use Calcbench.
What would you like Calcbench to add to its platform?
For some of my clients, I need access to the Russell indexes. I use the multi-company tool a lot. It would be great to have the Russell 1000, Russell 2000, Russell 3000 for peer comparisons. In addition, I wish there were more standardization around segment data.
Adjusting for Covid: Introducing EBITDA-C Since the start of the COVID-19 crisis, Calcbench has been watching corporate disclosures to see what firms have been saying about the virus’ effect on earnings.
Now one of our comrades-in-arms — Olga Usvyatsky, a doctoral student in accounting at Boston College and a long-time whiz at financial disclosures — has worked up a more thorough analysis of how firms are adjusting for Covid-19 costs. Call it EBITDA-C: earnings before interest, taxes, depreciation, amortization, and coronavirus.
Usvyatsky used our Interactive Disclosures page to search for “COVID-19 related expenses” in Q1 corporate filings. She found more than 40 companies that had included covid costs as a separate line in the adjusted EBITDA or adjusted net income reconciling tables.
You can download Usvyatsky’s paper here, and find the data file on the Calcbench Research Page. For anyone curious about accounting for coronavirus, her paper is worth your time. Meanwhile, let us recap a few of her major themes here.
First, many companies said the adjustments were directly, clearly related to pandemic expenses: buying personal protective equipment, cleaning supplies, or extra IT equipment to help employees work from home. The median adjustment in Usvyatsky’s sample was $1.2 million.
Second, not all companies reported COVID-19 charges as adjustments to net income. AT&T ($T), for example, noted in an 8-K filing that its coronavirus costs were likely to nick earnings by about $0.05 per share.
Third, some firms reported charges that were more sweeping than equipment purchases, but could still be reasonably construed as covid-specific costs. For example, if a firm laid off 20 percent of its staff, complete with compensation costs and other restructuring charges — well, companies adjust net income for restructuring charges all the time. Pandemics can be the cause of a one-time restructuring charge as much as any other economic disaster is.
Remember the Non-GAAP Rules
These adjustments for coronavirus raise an obvious question: “Um, can companies do that?”
As Usvyatsky explains — yes, generally companies can. Adjustments away from Generally Accepted Accounting Principles (GAAP) are known as non-GAAP metrics, and they can play an important role in helping a company explain its financial position to investors. Non-GAAP metrics do, however, need to pass a few SEC rules:
- They must be reconciled to their closest counterpart in GAAP;
- The company must explain why it believes its non-GAAP metric conveys some useful piece of information;
- Non-GAAP metrics cannot be displayed more prominently, such as in a large headline that eclipses worse GAAP metrics buried in fine print.
In that case, one can reasonably argue that numerous COVID-19 costs fit within those parameters. For example, a large one-time purchase of protective equipment or IT gear, that you’re never likely to make again in future periods — that’s an unusual, specific, one-time cost. You can identify it as an adjustment to GAAP-approved net income and reconcile it back to the GAAP number.
On the other hand, a company can only report so many unusual, one-time expenses before investors start to call shenanigans. We all hope COVID-19 is a temporary phenomenon, but it may well turn out to be a problem that haunts the world for years. So if a firm ends up buying fresh protective gear every quarter for two years running, declaring that as a non-GAAP adjustment seems kinda fishy.
Anyway, Usvyatsky’s paper covers all this and more, with numerous specific examples. So if coronavirus disclosures are your thing, we recommend her paper highly.
We continue to skim corporate filings for interesting disclosures about coronavirus, and the Q1 2020 report just filed by Williams Sonoma ($WSM) did not disappoint.
Like other retailers, Williams Sonoma did report all the usual signs of calamity we’ve seen lately: store closures, inventory write-down, impairment charges, and so forth. But the numbers weren’t that awful, considering the grim state of retail these days; and the firm also provided decent disclosure about how it arrived at several important decisions.
First, store closures. In the 10-K Williams Sonoma filed on March 27, the company said it had closed 592 stores in the United States and Canada — out of 614 stores Williams Sonoma operates worldwide. In other words, the company pretty much closed its entire physical store footprint, which had accounted for 44 percent of company revenues in 2019.
As of the Q1 2020 filing on June 8, William Sonoma had reopened 350 of those closed stores. We don’t yet know how sales traffic is performing at those locations yet, since most of the stores opened after the company’s quarter end; presumably we’ll get a better sense of that with the next quarterly filing sometime after Labor Day.
Still, we do know that Williams Sonoma is moving to reopen its retail operations. Also, if 44 percent of 2019 revenue came from store sales, that means 56 percent came from other channels — and those other channels weren’t closed during the Covid-19 shutdowns.
Second, impairment charges. The company did record an impairment charge of $11.82 million related to property and equipment; another $11.3 million write-off of damaged inventory that couldn’t be sold elsewhere; and a $3.8 million charge on its operating lease right-of-use assets.
In total, however, that’s still only $26.9 in impairments, against assets at the end of Q4 2019 that totaled $4.05 billion. Plus, Williams Sonoma also tapped a $488 million line of credit when Covid-19 it, so the company’s pile of cash nearly doubled from $432 million in February to $861 million in June.
Third, goodwill impairment. Williams Sonoma carries about $85.3 million of goodwill on the balance sheet, mostly from a few acquisitions in the early and mid-2010s. The company did not declare any impairment to goodwill this quarter.
Why not? Read on…
We evaluated the need to test goodwill for potential impairment. Our most recently completed qualitative goodwill impairment assessment [conducted in November 2019] indicated that the fair values of our reporting units significantly exceeded their carrying values. Further, we currently do not expect the impact of COVID-19 to significantly affect the long-term estimates or assumptions of revenue and operating income growth, nor the long-term strategies of our brands, considered in our most recently completed goodwill assessment. Therefore, we currently do not consider the pandemic to be a triggering event requiring the testing of goodwill between annual tests.
In other words, goodwill assets looked good when Williams Sonoma last tested them in November 2019, and they still look good now, so management saw no need to conduct a formal (and painstaking) impairment test now. The company expects its goodwill to weather the COVID-19 storm.
Is that correct? Financial analysts need to judge that for themselves, but the company does stake out a defensible position. Then again, it also warned that prolonged economic difficulty “may lead to increased impairment risk in the future.” We’ll be curious to see how well that position bears out over the next few quarters.
Fourth, segment disclosures. Williams Sonoma operates stores under its own name, but it also operates as Pottery Barn, Pottery Barn Kids, West Elm, and a few other brand names overseas. How are they all doing? Take a look.
So three of the company’s five operating segments saw revenue improve from the year-ago period, despite coronavirus. Even in Pottery Barn, its biggest segment, sales declined only 2.5 percent from the year-ago period.
Cost of goods sold did rise by 3 percent, and ultimately operating income tumbled from $71.9 million in Q1 2019 to $46.5 million in Q1 2020.
Still, the company made a profit. Not every retailer can say the same.
Over the last few years, we have published notes about using segment disclosures to enhance understanding. Examples include write-ups about:
And Alibaba and Cloud computing
If you can’t already tell, we love segments at Calcbench. We also love Cloud computing, mostly because it allows firms like Calcbench to build products in a relatively quick and efficient way.
So today, we are going to look at the two biggest Cloud computing firms and try to see what we can learn about their operating margins for each cloud segment.
First, it is important to know that operating segments that are material to a business must be reported in the segment disclosure. You can find these on Calcbench by going to our Interactive Disclosures page and selecting Segment Reporting.
Once there, you can read the disclosure or learn more about how the company tagged the disclosure.
Why is that helpful?
One answer is that it will give you clues on how to extract the data. For example, Microsoft’s Intelligent Cloud segment is where the firm houses its Azure line of business. Similarly, Amazon breaks out AWS as a stand-alone segment.*
Mousing over a line item, will give you the Calcbench tool tip which includes an Excel formula and you can start building:
Each component in the formula is a parameter and can be accessed via a cell reference, so it is easy to set up a template. In fact, that is exactly what we did in determining the profitability of AWS versus MSFT Intelligent Cloud.
So without further ado, here is the time series and the data.
| |
AMZN AWS |
MSFT Intelligent Cloud |
|---|---|---|
| 2017_Q1 |
24.31% |
32.25% |
| 2017_Q2 |
22.34% |
33.49% |
| 2017_Q3 |
25.55% |
30.87% |
| 2017_Q4 |
26.48% |
36.33% |
| 2018_Q1 |
25.73% |
33.61% |
| 2018_Q2 |
26.90% |
40.61% |
| 2018_Q3 |
31.10% |
34.21% |
| 2018_Q4 |
29.30% |
34.96% |
| 2019_Q1 |
28.89% |
33.25% |
| 2019_Q2 |
25.31% |
39.52% |
| 2019_Q3 |
25.14% |
35.86% |
| 2019_Q4 |
26.08% |
38.18% |
| 2020_Q1 |
30.09% |
37.13% |
As you see, both of these underlying businesses are more profitable, at an operating level, than the corporates as a whole, so expect more investment into these areas. We will leave it to others to come up with other interpretations!
Please send an email to our team for more information. Thanks!
* Intelligent Cloud and AWS are not exactly the same, as IC also includes other businesses like GitHub and Visual Studio, among other things, but for purposes of this illustration, it will do.
The Calcbench Restaurant Week comes to a close today with some different cuisine. After two numbers-driven posts about same-store sales and impairment charges in the restaurant sector, today we serve up some analysis of narrative disclosures.
We begin with the risk factors firms included in their Q1 2020 filings. As one might guess, risks related to Covid-19 are right at the top, and several themes keep showing up:
- Inability to predict when restaurants will be able to reopen, or what customer activity the restaurants might see once they do;
- Potential closures of restaurants or other facilities after they reopen, if a Covid-19 outbreak strikes the location;
- Uncertainty about rent concessions that firms are trying to obtain from their landlords;
- Questions over firms’ ability to secure necessary capital to maintain liquidity; and
- Potential supply chain disruptions, including volatility in food commodity prices and the ability of key suppliers to continue as a going concern.
As always, the amount and quality of these disclosures varies by firm. For example, Fiesta Restaurant Group ($FRGI) dribbles more than 500 words across one long paragraph — with nary a single number anywhere to be seen in the mix.
Compare that to Jack in the Box ($JACK), whose disclosure runs even longer, but the company breaks up that narrative into multiple, focused paragraphs with more detail. For example, here’s what Jack had to say about debt:
As discussed in this report, we have a significant amount of debt outstanding and have recently drawn down on our Variable Funding Notes, which provided us $107.9 million of unrestricted cash, to provide additional security to our liquidity position and provide financial flexibility given uncertain market and economic conditions as a result of the COVID-19 pandemic. A material increase in our level of debt could have certain material adverse effects on us. If the business interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity. The COVID-19 outbreak is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 outbreak lasts.
Jack even disclosed the risk that Covid-19 might magnify other risks already disclosed in the company’s original 10-K. Meta.
And other firms do discuss Covid-19 risks, but not in the Risk Factors disclosure. For example, the McDonalds ($MCD) Risk Factors section tells people to go read the Management Discussion & Analysis. You do find information about Covid-19 risks there, but the discussion is mostly sprinkled across a wide range of other subjects, such as revenue or segment performance. Only toward the bottom of the MD&A do you find a specific discussion of pandemic risks, in two relatively brief paragraphs.
In theory, a Calcbench subscriber could use our Interactive Disclosure page to compare Q1’s disclosure of pandemic risks to prior quarters’ disclosures. Just use the “Compare to Previous Period” tab at the top of the disclosure, and you could see how the firm changed its disclosures from Q4 to Q1.
Except, of course, Covid-19 wasn’t a thing in Q4, so you’re not likely to find anything worth reading yet. Later this year, however, as we see filings for Q2 and beyond, that comparison feature could be mighty useful.
We interviewed Tom Philips, Adjunct Professor, Department of Finance and Risk Engineering, NYU’s Tandon School of Engineering. In addition to teaching, Tom is a Senior Investment Professor who was previously Global Head of Front Office Risk, BNP Paribas; Chief Investment Officer, Paradigm Asset Management; Managing Director, RogersCasey; Investment Research IBM
How did you learn about Calcbench?
I teach a course at NYU’s Tandon School of Engineering on valuation theory. I needed a source of data for students. I was going to the SEC’s website to get the information. I thought there was a better way to pull the data. In the course of a conversation with Dan Gode, I learned about Calcbench.
How do your students use Calcbench?
The historical data is important for valuations. With Calcbench, students are able to download financial statements over time. They can look at a company’s history going back five, even ten years ago.
For the class I teach, students need to value firms. To do that they need to understand:
The students are asked to look through the footnotes and study the Management Discussion & Analysis and see if there’s anything noteworthy in their valuation assessment.
With Calcbench, students get information from financial statements that would ordinarily take a long time to pull from the SEC’s website. Using Calcbench makes the students more productive.
Do you have any interesting examples of companies that were over/ under valued that you study?
There are many examples of valuations that don’t match the market price. One example that was a great learning lesson is Asian Paints. It was enormously overvalued.
With Calcbench, we have a lot of fun evaluating Tesla.
What are the challenges of using Calcbench?
Calcbench is powered by XBRL [Extensible Business Reporting Language, the global standard for exchanging business information]. Over time the quality of XBRL has improved dramatically but there have been issues around the data being tagged correctly to get a uniform set of financials. I have always been of the belief that XBRL should be audited the way financial statements are audited. It’s important that electronic representations are an honest representation of the paper representation.
I would also like to see broader coverage. It would be great to be able to access the full set of global companies and smaller cap companies. This will come over time.
What do you like most about Calcbench?
I also find the restatement feature very useful. It’s an unusual feature but great to compare as-originally reported and restated financials with just a click on a button. There are many reasons why numbers may change: from a change in an accounting treatment, to the SEC “cracking the whip,” to a company thinking it’s in their advantage to restate a number. The challenge is that some portion of the financials may be restated but the restatement is not always adjusted throughout so you have to be careful. But it’s helpful to understand why a company might restate.
I also really like the disclosure segments. I like to click on the various footnotes. The hyperlinks are terrific. You can go to an Income statement, for example, click on a footnote and quickly explore. Calcbench doesn’t just give you the ability to go deeper, it encourages you to go deeper. Calcbench encourages you to explore.
Lastly, the massive speed up allows for sophisticated in-class discussions that can be backed up (or debunked!) very quickly by analyzing data downloaded from Calcbench.
What other uses for Calcbench do you recommend?
Do you use Calcbench in the classroom or remotely or both?
I teach with Calcbench in the classroom, but students use Calcbench remotely for homework. In class, I like to look at examples on the screen. For the examples that we discuss in class, I have students download the companies financial statements into Excel and do the hard work on their own.
Calcbench kicked off our version of Restaurant Week yesterday, with a post examining same-store sales in the retail food sector and how those revenues have been hurt by coronavirus.
Today comes our second course: asset impairments that restaurant firms are disclosing. We don’t yet have many examples, but the examples we do have convey lots of interesting details. Analysts should take note, so you can ask sharper questions as more firms disclose asset impairments in the quarters to come.
Take Del Taco Restaurants ($TACO) as one example. The company filed its Q1 2020 report on May 4, and disclosed a total of $107.4 million in asset impairments — roughly 12.4 percent of the $862 million in assets Del Taco had at the end of Q4 2019. As shown in Figure 1, below, the impairments happened across a range of asset categories.
The biggest impairment happened in goodwill. How, exactly, did Del Taco reach that number? We used our Interactive Disclosure page to see what the company had to say, and found this:
The consequences of the outbreak of the COVID-19 pandemic coupled with a sustained decline in the Company’s stock price were determined to be indicators of impairment. As such, using Level 3 inputs, the Company performed a quantitative goodwill impairment assessment using both the discounted cash flow method and guideline public company method to determine the fair value of its reporting unit. Significant assumptions and estimates used in determining fair value include future revenues, operating costs, working capital changes, capital expenditures, a discount rate that approximates the Company’s weighted average cost of capital and a selection of comparable companies.
This is interesting because Del Taco is making a lot of subjective judgments to arrive at its impairment number. First, “Level 3 inputs” are asset values that a company derives from its own models and judgments about what seems right. They are not data-driven values you might derive from, say, prices paid for assets on an open market.
Second, the company lists many significant assumptions and estimates about important items, such as revenue, cost, and discount rates. There’s nothing wrong with that per se, but remember that Covid-19 is challenging many assumptions about how business is supposed to work.
Del Taco also impaired $8.3 million in long-lived assets. What’s that about? Again, we found the details in the disclosures:
- $4.2 million of operating lease right-of-use assets
- $1.3 million of furniture, fixtures and equipment
- $2.8 million of leasehold improvements
This is all interesting too, because it touches on our post from yesterday about restaurant closures. The more restaurants a firm closes, the larger these long-lived asset impairments are likely to be.
Another Serving of Impairment
OK, enough with Del Taco. If steak is more to your liking, consider this very different impairment disclosure from Bloomin’ Brands ($BLMN). Bloomin grouped all of its $65 million in charges related to Covid-19 into one section, and then listed them all in table format. See Figure 2, below.
Again we see impairments for operating leases, goodwill, and fixed assets; plus other interesting charges like $6.2 million in spoiled food and $16.2 million in wages paid to idled employees.
Not all of those are impairments in the strict sense of the term, but Bloomin is serving investors by giving a clear, precise answer to an important question: How is Covid-19 disrupting the business?
Then if you still want the details on specific impairments, you can further investigate. The “goodwill & other impairment” charge, for example, mostly came from a $2 million goodwill cut to Bloomin’s Hong Kong operations.
That’s our second course for Restaurant Week. Coming next: risk factors and forward-looking statements.
Restaurants have suffered enormously since coronavirus began spreading around the world three months ago — and as always, Calcbench wanted a better sense of how much damage restaurant firms have been disclosing.
So we scoured the filings of 110 firms that belong to SIC Group 5812, otherwise known as the retail food sector. Our goal: finding the nuggets of disclosure that tell the true story of Covid-19’s harm to the restaurant business.
Well, we found those nuggets. Today we begin Calcbench Restaurant Week, a three-part series of posts looking at what restaurant firms have been reporting and how Calcbench subscribers can put those insights to good use.
First up: restaurant closures and their effect on sales.
At a high level, Q1 2020 sales were clearly down. We found 30 firms that already reported first-quarter revenue, and collectively that amount fell from $25.4 billion in Q4 2019 to $22.8 billion in the first quarter of this year: a drop of 10.2 percent.
Among those 30 firms, however, the decline in revenue varied widely. For example, Jack in the Box ($JACK) revenue fell 29.7 percent, Papa John’s International ($PZZA) fell 1.8 percent, and Wingstop ($WING) saw sales actually rise 4.2 percent.
Moreover, the exact timing of Covid-19’s arrival matters, too. The virus hit the United States and Europe only in March. That means many firms were having a perfectly fine Q1 through January and February, only to see sales plunge in March. The pattern is so lopsided that a single number for all three months can be deeply misleading.
How misleading? Consider the case of Bloomin’ Brands ($BLMN), corporate parent of Bonefish Grill, Outback Steakhouse, and a few other chains.
In its earnings release filed on May 8, Bloomin had the decency to break out same-store sales for March from the rest of the quarter. See Figure 1, below.
As you can see, those sales were trending upwards for the first two months of Q1, then plummeted in March. That plummet was large enough to pull down same-store sales for the entire quarter. (Bloomin’s total revenue for Q1 was down only 1.35 percent from Q4 2019.)
Likewise, Arcos Dorados Holdings ($ARCO), which operates McDonalds franchise stores across Latin America, had this to say about same-store sales in an earnings release filed on May 13:
Systemwide comparable sales declined 4.5% versus the prior-year quarter, with a 10.9% increase for the two months ended February 29 and a 33.5% decrease in March.
Not every firm discloses this level of detail. If you want to look for it, a good place to start is our Interactive Disclosures page, where you can use the text-search field (right side of the screen) to search for “same-store sales,” “comparable sales,” or similar terms.
Points to Consider
This pressure on same-store sales has some interesting implications. For example, we could see a reverse effect in Q2 — where sales are awful in April, but better in May and June as more restaurant locations reopen for business. So where Q1 same-store sales looked artificially good, Q2 numbers would look artificially bad.
How likely is that, really? Nobody knows yet. Many states have barely begun allowing restaurants to resume normal operations, and even when they do, lots of people are staying home. But the whole issue underlines the importance of examining same-store sales in as much detail as possible, including month-to-month breakdowns.
Analysts will also want to pay close attention to the actual number of stores. Many restaurant firms will close at least some locations forever. Presumably those will be the worst-performing stores — so if you examine same-store sales alone, without considering how the total number of stores has changed, that could give you a false sense of performance.
Again, you’ll need to scour the footnotes to find that level of detail. Typically you can find it in the Business Description or Management Discussion & Analysis sections. Bloomin, for example, reported one fewer location in Q1 2020 (1,472 locations) than it had in Q4 2019 (1,473). Chipotle Mexican Grille ($CMG), meanwhile, increased its locations from 2,619 at the end of Q4 2019 to 2,635 at the end of Q1 2020.
That concludes this first course for Calcbench Restaurant Week. More to come soon!
A Q&A with Leslie Robinson, Professor of Accounting, Dartmouth College
How did you find Calcbench?
I was doing an internet search for something related to Purchase Price Allocation (PPA). I came across a Calcbench blog. Calcbench claimed to have what I was looking for. I explored and found that you had a lot more. I signed up for a demo and played around with the free access version till I finally plunged in and became a subscriber.
What do you like about Calcbench?
For me what I especially like is the ease of navigation. The site is very user friendly. I’ve tried other data sources. Many of them require programming. In the past I used to hire someone to write code that would enable me to search words in financial statements. Then I would hire another person to eliminate or keep items. It was time consuming and expensive.
You are an example of a client who uses Calcbench for research, but is planning to use Calcbench in the classroom. Tell us a little bit about this.
I had been using Calcbench for research. As I mentioned, what I like is that it’s user friendly. For students, it’s very natural to be intimidated by financial accounting. I believe that using Calcbench can make accessing and reading financial statements less scary.
How does Calcbench change classroom learning?
The world is moving quickly. So many business cases get old really fast. As a professor, I am tasked with updating material faster than ever before. It’s frustrating to spend weeks writing a case. And if you are using that case for five years, it’s stale. That just isn’t the model anymore. With Calcbench, I have more relevant and accessible examples. Take for example, teaching the early retirement of debt. It’s easily searchable within the financial statement footnotes. With Calcbench I can read through 10-20 examples and can pull out a case quickly.
I will also use Calcbench to write exam questions. Professors often shield students from the financial statements because they are complicated. I think the opposite. Students need to see real financial statements as much as possible.
Tell us about how Calcbench will be used in the classroom.
I also teach a Financial Accounting elective that uses cases in financial reporting. We talk about one company in each class and go deeper into what’s happening. I think that’s what Calcbench is made for.
Lastly, as a director of the undergraduate class for the summer, we are going to experiment with Calcbench this summer. Our usual classroom studies have moved to online. We are going to ask students to evaluate a company remotely using Calcbench. Students will have to read various parts of the annual report and calculate ratios.
With more advanced courses I will use Calcbench to show examples during class. We’ll put Calcbench on the big screen and search real-time. With the first-year class, we’ll use it more for student tasks, e.g., finding numbers in footnotes.
Where else do you think Calcbench can help?
How do you use Calcbench for research?
I like to search the segments, roll forwards and breakouts tool. I am often accessing tax information in the tax footnote. This tool has made research faster and more efficient. It’s helped me also rule out some things. So I don’t have to invest as much in the text analysis.
I am just starting to get into the tagging and labeling. It’s set out in a really intuitive way. But pulling data on your own takes sophistication to do it right. You can reduce time by understanding false positives and false negatives. Recently I wanted to learn something about the effects of a provision in the tax reform. When I got deeper into the disclosures, the information was aggregated and it was hard to separate information so it was not worth spending more time studying this effect.
For those considering Calcbench for teaching and research, what advice do you have?
I expect my use of Calcbench to evolve. Using Calcbench in the classroom will provide a feedback loop to inform my research. For people who want to see patterns in data this tool is great.
I also recommend that people use the cool features like reverse order by years, or divisible by a thousand. Lastly, reach out to customer service if you need support. It’s incredible. Within a couple of hours someone will show you how to get what you need.
Financial analysts in the retail world have all heard numerous tales of chain stores not paying rent to their landlords during the Covid-19 crisis. Calcbench, however, decided to take a different approach to the issue.
What are the landlords saying about rent payment?
After all, publicly real estate investment trusts (REITs) need to disclose significant risks and changes to business operations like anyone else. So we pulled up the Q1 filings of several REITs to see what they said about tenants paying rent — or the lack thereof.
For example, Vornado Realty Trust ($VNO) had this to say in its quarterly filing on May 4:
We have collected substantially all of the rent due for March 2020 and collected 90 percent of rent due from our office tenants for the month of April 2020 and 53 percent of the rent due from our retail tenants for the month of April 2020, or 83 percent in the aggregate. Many of our retail tenants and some of our office tenants have requested rent relief and/or rent deferral for April 2020 and beyond. While we believe that our tenants are required to pay rent under their leases, we have implemented and will continue to consider temporary rent deferrals on a case-by-case basis.
A considerably different picture from Welltower ($WELL), , which rents primarily to care facilities, and its filing on May 7:
We have received approximately 97 percent of rent due in April from operators under Triple-net lease agreements (primarily seniors housing and post-acute care facilities) and we have either received or approved short term deferrals for approximately 95 percent of Outpatient Medical rent due in April. Approximately 8 percent of our April Outpatient Medical rent was approved for 60-day deferral to be repaid by year end.
Another glimpse of the disparity between retail and office tenants, this time from SI Green Realty ($SLG). The company had this to say about rent payments in its quarterly filing dated May 11:
As of the date of this filing, we have collected approximately 87.8 percent of rent due for the month of April 2020 from all tenants, including 93.4 percent from office tenants and 63.4 percent from retail tenants.
Analysts will find disclosures like these in various places in the filing. For example, Vornado included a section titled, “Extraordinary and Unusual Items: Covid-19 Pandemic,” and put all its details there. SI Green placed its coronavirus details in the Management Discussion & Analysis. Others might file the news as a Subsequent Event, or Risk Factors, or other places.
Your best bet to find Covid-19 disclosures is just to use our text search field on the right-hand side of the screen, searching for “COVID-19,” “coronavirus” or other appropriate search terms.
Look for More Pieces of the Puzzle
Analysts might also piece together a more precise sense of a REIT’s exposure by looking at whatever breakdown of property portfolio the REIT provides. For example, SI Green gives an extensive breakdown of its properties and occupancy rate in its Basis of Presentation. Take a look:
That tells us that retail space comprises only 2.4 percent of SI Green’s total commercial space. We don’t know which retailers are in that space, or how much they pay (at least, not from this chart; the data might be elsewhere in the filings), but we can surmise that even if all of the firm’s tenants declared a rent strike or went bankrupt — that will sting, but it won’t be calamitous.
Periodically at Calcbench, we take a look at the time between earnings announcements dates and the subsequent 10-K, or 10-Q. It was something that we originally did back in 2016.
We followed that up with another post in 2018.
So we took another shot today and looked at the most recent 10-Q filing period for 405 firms in the S&P500. Here’s a table of results. As you can see, 62.5% of firms in our sample, filed both documents within a day of each other, with over 40% filing in the SAME day!
Unlike in 2016 when we started tracking this data, today, we actually collect 8-K data and have clients using it. So if you want to learn more, drop us an email or use the chat function on calcbench.
Let us know if you want more.
| Days Btw Releases | Firms | % of Total | Cumulative %-age |
|---|---|---|---|
| 0 | 168 | 41.5% | 41.5% |
| 1 | 85 | 21.0% | 62.5% |
| 2 | 23 | 5.7% | 68.1% |
| 3 | 14 | 3.5% | 71.6% |
| 4 | 10 | 2.5% | 74.1% |
| 5 | 12 | 3.0% | 77.0% |
| 6 | 7 | 1.7% | 78.8% |
| 7 | 11 | 2.7% | 81.5% |
| 8 | 15 | 3.7% | 85.2% |
| 9 | 8 | 2.0% | 87.2% |
| >= 10 | 52 | 12.8% | 100.0% |
Many of our readers have also expressed the desire to see the list of the companies who publish both on the same day. Here they are:
| Company | Ticker | Date Filed |
|---|---|---|
| 3M Co | MMM | 4/28/20 |
| Activision Blizzard, Inc. | ATVI | 5/5/20 |
| Aes Corp | AES | 5/7/20 |
| Air Products & Chemicals Inc /DE/ | APD | 4/23/20 |
| Alexandria Real Estate Equities, Inc. | ARE | 4/27/20 |
| Alexion Pharmaceuticals, Inc. | ALXN | 5/6/20 |
| Allegion plc | ALLE | 4/23/20 |
| Alliant Energy Corp | LNT | 5/8/20 |
| Allstate Corp | ALL | 5/5/20 |
| Altria Group, Inc. | MO | 4/30/20 |
| American Airlines Group Inc. | AAL | 4/30/20 |
| American Electric Power Co Inc | AEP | 5/6/20 |
| American Express Co | AXP | 4/24/20 |
| American Tower Corp /MA/ | AMT | 4/29/20 |
| American Water Works Company, Inc. | AWK | 5/6/20 |
| Amerisourcebergen Corp | ABC | 5/7/20 |
| Ametek Inc/ | AME | 5/5/20 |
| Ansys Inc | ANSS | 5/6/20 |
| Anthem, Inc. | ANTM | 4/29/20 |
| Aon plc | AON | 5/1/20 |
| Apache Corp | APA | 5/7/20 |
| Aptiv PLC | APTV | 5/5/20 |
| Atmos Energy Corp | ATO | 5/6/20 |
| Baxter International Inc | BAX | 4/30/20 |
| Becton Dickinson & Co | BDX | 5/7/20 |
| Berkshire Hathaway Inc | BRK | 5/4/20 |
| Boeing Co | BA | 4/29/20 |
| Booking Holdings Inc. | BKNG | 5/7/20 |
| Borgwarner Inc | BWA | 5/6/20 |
| Bristol Myers Squibb Co | BMY | 5/7/20 |
| Broadridge Financial Solutions, Inc. | BR | 5/8/20 |
| Cabot Oil & Gas Corp | COG | 5/1/20 |
| Cadence Design Systems Inc | CDNS | 4/20/20 |
| Cboe Global Markets, Inc. | CBOE | 5/1/20 |
| Cbre Group, Inc. | CBRE | 5/7/20 |
| CDW Corp | CDW | 5/6/20 |
| Centene Corp | CNC | 4/28/20 |
| Centerpoint Energy Inc | CNP | 5/7/20 |
| Charter Communications, Inc. /MO/ | CHTR | 5/1/20 |
| Church & Dwight Co Inc /DE/ | CHD | 4/30/20 |
| Cincinnati Financial Corp | CINF | 4/27/20 |
| Clorox Co /DE/ | CLX | 5/1/20 |
| Cms Energy Corp | CMS | 4/27/20 |
| Colgate Palmolive Co | CL | 5/1/20 |
| Comcast Corp | CMCSA | 4/30/20 |
| Consolidated Edison Inc | ED | 5/7/20 |
| Cummins Inc | CMI | 4/28/20 |
| CVS HEALTH Corp | CVS | 5/6/20 |
| Danaher Corp /DE/ | DHR | 5/6/20 |
| Davita Inc. | DVA | 5/5/20 |
| Delta Air Lines, Inc. | DAL | 4/22/20 |
| Discovery, Inc. | DISCA | 5/6/20 |
| DISH Network CORP | DISH | 5/7/20 |
| Dominion Energy, Inc | D | 5/5/20 |
| DOVER Corp | DOV | 4/21/20 |
| DuPont de Nemours, Inc. | DD | 5/5/20 |
| Eaton Corp plc | ETN | 4/30/20 |
| Edison International | EIX | 4/30/20 |
| Eog Resources Inc | EOG | 5/7/20 |
| Estee Lauder Companies Inc | EL | 5/1/20 |
| Evergy, Inc. | EVRG | 5/6/20 |
| Exelon Corp | EXC | 5/8/20 |
| Federal Realty Investment Trust | FRT | 5/6/20 |
| Fidelity National Information Services, Inc. | FIS | 5/7/20 |
| Firstenergy Corp | FE | 4/23/20 |
| Flir Systems Inc | FLIR | 5/6/20 |
| Flowserve Corp | FLS | 5/7/20 |
| Fortive Corp | FTV | 4/30/20 |
| Franklin Resources Inc | BEN | 4/30/20 |
| Garmin Ltd | GRMN | 4/29/20 |
| Gartner Inc | IT | 5/7/20 |
| General Dynamics Corp | GD | 4/29/20 |
| General Motors Co | GM | 5/6/20 |
| Genuine Parts Co | GPC | 5/6/20 |
| Global Payments Inc | GPN | 5/6/20 |
| Hanesbrands Inc. | HBI | 4/30/20 |
| Hartford Financial Services Group, Inc. | HIG | 4/29/20 |
| Henry Schein Inc | HSIC | 5/5/20 |
| Hershey Co | HSY | 4/23/20 |
| Hess Corp | HES | 5/7/20 |
| Hilton Worldwide Holdings Inc. | HLT | 5/7/20 |
| HollyFrontier Corp | HFC | 5/7/20 |
| Hologic Inc | HOLX | 4/29/20 |
| Honeywell International Inc | HON | 5/1/20 |
| Humana Inc | HUM | 4/29/20 |
| Huntington Ingalls Industries, Inc. | HII | 5/7/20 |
| Idex Corp /DE/ | IEX | 4/24/20 |
| Idexx Laboratories Inc /DE | IDXX | 4/30/20 |
| Incyte Corp | INCY | 5/5/20 |
| Intercontinental Exchange, Inc. | ICE | 4/30/20 |
| Invesco Ltd. | IVZ | 4/23/20 |
| Ipg Photonics Corp | IPGP | 5/5/20 |
| Iron Mountain Inc | IRM | 5/7/20 |
| Jacobs Engineering Group Inc /DE/ | J | 5/6/20 |
| Johnson Controls International plc | JCI | 5/1/20 |
| Kansas City Southern | KSU | 4/17/20 |
| Kimberly Clark Corp | KMB | 4/22/20 |
| Kimco Realty Corp | KIM | 5/8/20 |
| Leidos Holdings, Inc. | LDOS | 5/5/20 |
| Linde Plc | LIN | 5/7/20 |
| Live Nation Entertainment, Inc. | LYV | 5/7/20 |
| Loews Corp | L | 5/4/20 |
| LyondellBasell Industries N.V. | LYB | 5/1/20 |
| Martin Marietta Materials Inc | MLM | 5/5/20 |
| Masco Corp /DE/ | MAS | 4/29/20 |
| Mastercard Inc | MA | 4/29/20 |
| Microsoft Corp | MSFT | 4/29/20 |
| Molson Coors Beverage Co | TAP | 4/30/20 |
| Mosaic Co | MOS | 5/5/20 |
| National Oilwell Varco Inc | NOV | 4/28/20 |
| Netflix Inc | NFLX | 4/21/20 |
| Newell Brands Inc. | NWL | 5/1/20 |
| NEWMONT Corp /DE/ | NEM | 5/5/20 |
| Nielsen Holdings plc | NLSN | 4/30/20 |
| Nisource Inc. | NI | 5/6/20 |
| Noble Energy Inc | NBL | 5/8/20 |
| Norfolk Southern Corp | NSC | 4/29/20 |
| Northrop Grumman Corp /DE/ | NOC | 4/29/20 |
| Norwegian Cruise Line Holdings Ltd. | NCLH | 5/5/20 |
| Nrg Energy, Inc. | NRG | 5/7/20 |
| Omnicom Group Inc. | OMC | 4/28/20 |
| PENTAIR plc | PNR | 4/30/20 |
| Pepsico Inc | PEP | 4/28/20 |
| Phillips 66 | PSX | 5/1/20 |
| Pinnacle West Capital Corp | PNW | 5/8/20 |
| PPL Corp | PPL | 5/8/20 |
| Public Storage | PSA | 4/30/20 |
| Pultegroup Inc/MI/ | PHM | 4/23/20 |
| Qualcomm Inc/DE | QCOM | 4/29/20 |
| Raytheon Technologies Corp | RTX | 5/7/20 |
| Regency Centers Corp | REG | 5/8/20 |
| Regeneron Pharmaceuticals, Inc. | REGN | 5/5/20 |
| Rockwell Automation, Inc | ROK | 4/28/20 |
| S&P Global Inc. | SPGI | 4/28/20 |
| Sealed Air Corp/DE | SEE | 5/5/20 |
| Sempra Energy | SRE | 5/4/20 |
| Sherwin Williams Co | SHW | 4/29/20 |
| Smith A O Corp | AOS | 5/5/20 |
| Snap-on Inc | SNA | 4/21/20 |
| Southern Co | SO | 4/30/20 |
| Southwest Airlines Co | LUV | 4/28/20 |
| Starbucks Corp | SBUX | 4/28/20 |
| T-Mobile US, Inc. | TMUS | 5/6/20 |
| Teleflex Inc | TFX | 4/30/20 |
| Tractor Supply Co /DE/ | TSCO | 5/7/20 |
| Trane Technologies plc | TT | 5/5/20 |
| TransDigm Group INC | TDG | 5/5/20 |
| Travelers Companies, Inc. | TRV | 4/21/20 |
| Tyson Foods, Inc. | TSN | 5/4/20 |
| Union Pacific Corp | UNP | 4/23/20 |
| United Rentals, Inc. | URI | 4/29/20 |
| Valero Energy Corp/TX | VLO | 4/29/20 |
| Ventas, Inc. | VTR | 5/8/20 |
| Verisign Inc/CA | VRSN | 4/23/20 |
| Verisk Analytics, Inc. | VRSK | 5/5/20 |
| ViacomCBS Inc. | VIAC | 5/7/20 |
| Vulcan Materials CO | VMC | 5/6/20 |
| W.W. Grainger, Inc. | GWW | 4/23/20 |
| Walt Disney Co | DIS | 5/5/20 |
| Waste Management Inc | WM | 5/6/20 |
| Western Union CO | WU | 5/5/20 |
| Weyerhaeuser Co | WY | 5/1/20 |
| Williams Companies, Inc. | WMB | 5/4/20 |
| Willis Towers Watson Plc | WLTW | 4/30/20 |
| Xcel Energy Inc | XEL | 5/7/20 |
| Xylem Inc. | XYL | 5/5/20 |
| Zebra Technologies Corp | ZBRA | 4/28/20 |
| Zoetis Inc. | ZTS | 5/6/20 |
Covid-19 was inevitably going to cause economic strain and lead companies to impair the assets carried on their books — everyone knew that already. Then the situation got even more difficult, with the price of oil crashing and leaving oil & gas companies bracing for impairment too.
Now, as more first-quarter reports keep coming, we are starting to see just how large those impairments are.
As of May 8, Calcbench had found 51 firms in the S&P 500 declaring asset impairments. The group split roughly in half: 25 firms impairing goodwill assets, 26 impairing other assets but not goodwill.
The total breakdown among the 51 firms is as follows:
These numbers tell a few different stories, depending on how you look at them.
First let’s look at that $61.45 billion in total impairments. That amount is 1.68 percent of total assets for the firms — but total assets still actually rose from fourth quarter 2019, when total assets were $3.15 trillion. So yes, large firms were racking up asset impairments, but they were still increasing overall assets even faster.
Will that protection of total assets last in later quarters this year? We don’t know.
Second is the $32.68 billion in goodwill impairment. That is an 11.36 percent cut from the $287.58 billion in goodwill assets at the end of fourth-quarter 2019.
You may ask — if companies impaired $32.68 billion in goodwill, why was the total decline in goodwill only $24.6 billion? Because several firms were adding some goodwill assets at the same time they were impairing others. At the end of all that arithmetic, the net difference is a decline of $24.6 billion.
One of the more eye-popping examples of this comes from home construction company Pultegroup ($PHM). Pulte acquired a Florida construction company in January known as Innovative Construction Group, and booked $48.7 million of goodwill as part of the deal.
Six weeks later, however, the company declared an impairment on that same deal:
As a result of the significant decline in equity market valuations that occurred during the period between our acquisition of ICG in January 2020 and March 31, 2020, we determined that an event-driven goodwill impairment test was appropriate for the ICG goodwill, which resulted in an impairment totaling $20.2 million.
This means Pulte still carries $20.5 million in goodwill on its books from this acquisition.
Pulte stressed that the impairment “reflects the broad-based declines in the market capitalizations of publicly-traded construction companies in the short period of time since the acquisition,” rather than any problem or surprise specific to ICG.
The Bigger Impairment Picture
Pulte’s impairment is a good example for another reason. Usually firms review their assets every fourth quarter to report possible impairments in their annual 10-K. Under extraordinary circumstances, however — like, we dunno, a global pandemic strangling economic activity or the collapse of oil prices — a firm may decide to declare impairments during an interceding quarter.
And for a firm to record an asset and impair it within the same quarter — well, wow. That’s as rare as a covid antibody test that actually works.
Pulte is, however, a harbinger of impairments to come. We only found 51 firms declaring impairments so far this quarter, but by no means are they the last.
The crack Calcbench research team has done it again, releasing a fresh report this week about the assets and liabilities in corporate pension plans — and the $394 billion gap between those two points.
The report, “Pension Plan Obligations: Analysis of funding levels and shortfalls among the S&P 500,” reviewed the funding levels of defined-benefit plans offered by 292 firms in the S&P 500. Among the findings:
- Of 292 firms in the S&P 500 that we identified as offering pension plans, only 40 were fully funded as of Dec. 31, 2019. The other 252 firms were under-funded.
- Among the 252 firms with under-funded plans, their total obligations were $1.95 trillion while total assets were only $1.55 trillion — a gap of $394 billion, or 25.3 percent.
- The largest funding gap in dollar terms was a $27.7 billion shortfall at General Electric ($GE).
- The largest funding gap in percentage terms was at Omnicom Group ($OMC), which has $293.5 billion in pension obligations but only $64.3 billion in assets — a shortfall of 78 percent.
- Only a handful of firms were severely under-funded. 78 firms were under-funded by 0 to 10 percent, and another 63 firms were under-funded by 10 to 20 percent.
- General Motors ($GM), Ford Motor Co. ($F), and Delta Airlines ($DAL) each had shortfalls in their pension plans equalled more than half of their market cap as of mid-April — a warning that the firms’ future value could be jeopardized by pension plan liabilities.
The research raises some interesting questions about corporate pension plans. Firms don’t need to keep their pension plans fully funded at all times — but they do need to meet all those obligations eventually. So for firms with significant gaps, what’s the plan to meet those liabilities when they come due?
The report lists the 10 firms with largest gaps in percentage terms, and the 10 with the largest gaps in total dollars. We also compared each firm’s pension deficit as a percentage of market capitalization. This metric is useful to know because it’s one way to measure how vulnerable the company’s future value (that is, market cap) is to the pension plan obligations the company has.
Table 1, below, lists the top 10.
The report shows how large those obligations are, so financial analysts can consider the implications and ask sharper questions about how a firm plans to meet those obligations. Download, read, and fire away on that next earnings conference call.
One business sector receiving government support during the Covid-19 crisis is the airline industry. And now that major carriers are starting to file their Q1 2020 reports, financial analysts can use Calcbench to see exactly how much support those formerly high fliers are getting.
For example, Delta Airlines ($DAL) filed its quarterly report on April 22 with a note devoted to Covid-19 disclosures. One section addressed support Delta received from the government as part of the $2 trillion CARES Act, and it included the details of the bailout — direct grants and low-interest loans Uncle Sam will send Delta’s way, in exchange for warrants letting the U.S. Treasury buy Delta shares at a fixed price over the next five years.
So what are those details? The U.S. government has pledged to give Delta $3.8 billion as a direct grant of cash, plus another $1.6 billion delivered as a 10-year loan. That loan will have a 1 percent interest rate through April 2025, and then a floating rate equal to the Secured Overnight Financing Rate plus 2 percent for the remaining five years.
In exchange, the Treasury gets warrants to acquire 6.5 million shares of Delta common stock, at an exercise price of $24.39 per share. For comparison purposes, Delta had been floating around the upper $50s for most of the last 12 months, and then plummeted to $21 in early April. Right now it’s hovering around $24.
OK, those are the details of this specific bailout — but how large is that bailout relative to Delta’s overall business? And how does Delta’s bailout compare to what rival airlines are receiving?
We decided to take a look.
Cash Grants and Revenue
We examined six major airlines:
- Alaska Air Group ($ALK)
- American Airlines ($AAL)
- Delta
- JetBlue ($JBLU)
- Southwest ($LUV)
- United Airlines ($UAL)
All six received two types of aid: direct cash grants, and 10-year loans with the same low-interest rate terms we described for Delta. In exchange, all six airlines gave the U.S. government warrants for common stock with an exercise price based on the firm’s April 9 share price.
What did the airlines actually get? See Figure 1, below.
Which airline received the best deal? That depends on how you define “best.”
For example, if you define success as the smallest dilution of shareholder value, that honor would go to Southwest. Its 2.6 million warrants will dilute shareholders by only 0.48 percent.
On the other hand, Southwest will also see its long-term debt balloon by 51.3 percent, thanks to that $948 million loan — which is, we might note, one of the smaller loan amounts the airlines received. Southwest also took the largest cash grant as a percentage of revenue.
American Exceptionalism
We also need to call out American Airlines for its unusually confusing bailout disclosure. The other five airlines followed one clear pattern: “We received this much in direct grant and this much as a loan, in exchange for this many warrants at this exercise price.” Like, pretty straightforward stuff, right?
Not so for American.
American stated that the company would receive $5.8 billion from the Treasury — but $1.7 billion of that amount would fund a promissory note American will give back to the Treasury, plus warrants for 13.7 million in AAG stock. Take a look:
As partial compensation to the U.S. Government for the provision of financial assistance under the Payroll Support Program, AAG and its subsidiaries expect to issue an aggregate principal amount of approximately $1.7 billion under a promissory note and warrants to purchase up to 13.7 million shares of AAG common stock (assuming the full $5.8 billion of financial assistance is received).
Well, it’s clear that the total bailout for American is $5.8 billion. If the company is also pledging $1.7 billion of that sum back to the Treasury, that means the total direct grant is only $4.1 billion. Hence the figures we included in Figure 1, above.
Also, American has applied for a separate loan from the U.S. government for $4.75 billion, in exchange for warrants worth another 38 million shares. That loan was still pending and unapproved when American filed its 10-Q on April 30, so it is not included in our totals above.
Filed under: High Flyers No More.
Calcbench is always striving to give our subscribers more access to financial data, and that includes more ways to find the specific pieces of data you’re searching for.
So today we’re pleased to announce two new features that will let subscribers narrow the parameters of their searches on the Interactive Disclosures page, so you can find relevant data more quickly and easily. Here’s how it works.
First, we have new filters letting you search by date range. As shown in Figure 1, below, you can now search for all filings within the prior week, month, quarter, or year. You can also specify your own date range, if that’s more your cup of tea.
Given the turmoil in the markets these days, we wanted a way to search recent filings more effectively. So for example, you identify a group of companies and then search the text string “COVID-19” across all filings within the last month — everything from an earnings release, to an emergency 8-K filing, to a typical 10-Q or 10-K.
Second, you can also restrict search results to a specific type of filing: either a standard quarterly report, or a Form 8-K. This is in addition to restricting results to a certain type of disclosure, such as risk factors or contingencies. See Figure 2, below.
For example, you could restrict your searches for “COVID-19” to mentions in 10-Ks or 10-Qs only; or 8-Ks only. You could also restrict them to mentions only in risk factors, or contingencies, or some other standard disclosure.
You cannot do restrictions across both, because not every standard disclosure appears in every type of filing. So you can do one or the other, but not both.
A Q&A with Kristy Brooks-Olk, Associate Professor of Accounting, Finance and Business at Colorado Mountain College
Tell us about Colorado Mountain College.
Colorado Mountain College was started by a small group of individuals who wanted rural students in Colorado to have access to post-high school education without leaving their communities. The college has 11 campuses across the state from Breckenridge to Salida to Rifle, Colorado, and uses real-life training and an alternative modality structure to teach classes. You can attend in-person, online or hybrid modality classes (half online, half in-person). This creates a dynamic distance learning environment and exposes students to different economic settings.
How did you start with Calcbench?
I was attending a class taught by Kristine Brands. I took the class to get additional credentials for teaching. Kristine pitched Calcbench as a tool being used in industry. I was sold. I have been using Calcbench for two years in classes that I teach annually: Accounting for Managers, Intermediate Accounting and Financial Accounting for Corporations.
How is Calcbench used in the classroom?
Calcbench is built into the master course plan for my Accounting for Managers syllabus. This is a class for business students who will likely not be accountants when they graduate, but will need to understand how accounting information can help with strategic decisions. The students in this class do a project each week and ultimately deliver a pitch paper at the end of the semester. On the discussion board we pose questions - how can you compare performance of Nike verses Skechers for example? The students need to understand that Nike outsources a lot of production and Skechers handles its own manufacturing and understand how that affects margins, debt, and more. We also ask questions around profitability - students learn, for example, that Costco generates most of its profitability from membership fees versus other retailers, like Lowe’s, that have a different model.
I always choose companies that students know (Coca Cola, Home Depot, et cetera) so that the students can relate to the exercises. This keeps them engaged. We use Calcbench to look at companies over time so students can see the base accounting but also how and why choices are made. Students ultimately develop recommendations and justifications on how to improve an organization.
In addition, I use Calcbench in Intermediate Accounting and Financial Accounting for Corporations. One is a sophomore class, the other class is for the intent of licensing for the CPA. In the latter, we look at companies like Apple, Google and Amazon. Discussion boards prompt students to look at several areas including cash. For cash, they need to understand all items that relate to cash and tell me how the company is using the cash. Another example is MD&A. I have the student read the CEO notes and see if they can relate them back to news. One of the companies I like to focus on is Energizer Holdings. I ask the students to look back at various hurricane seasons to see if they can predict how they will perform during future natural disasters. We look at ratios. It’s a pretty efficient exercise with Calcbench.
Other financial data tools exist. What do you like best about using Calcbench in the classroom?
We noted in a previous post that both the Securities and Exchange Commission and the audit world are paying more attention to several items in the financial statements that are likely to be hit particularly hard by Covid-19.
Among those items was impairment of goodwill or intangible assets. Today in its first-quarter earnings release, United Airlines ($UAL) gave us a great example of that headache.
United declared a $50 million impairment on the value of its flight routes to China. Here’s what the company had to say:
The company recorded $63 million of special charges, primarily associated with a $50 million impairment for its China routes. The company conducted impairment reviews of certain intangible assets in the first quarter of 2020, which consisted of a comparison of the book value of those assets to their fair value calculated using the discounted cash flow method. Due to the COVID-19 pandemic and the subsequent suspension of flights to China, the company determined that the value of its China routes had been impaired.
One might assume that this $50 million impairment is unwelcome, but not terribly significant considering United’s many other business challenges at the moment. After all, United listed $3 billion in intangible assets as of Dec. 31, and $1.15 billion of that sum was specifically related to flight routes.
A $50 million impairment does qualify as material (4.4 percent of that $1.15 billion), but not by much.
This isn’t the first time United has impaired intangible assets related to flight routes, either. In 2018 it recorded a $105 million charge for routes in Brazil, and another charge of $206 million for flights to Hong Kong.
But here’s where it gets interesting — United’s impairment analysis for flight routes was flagged as a Critical Audit Matter.
CAMs: A Refresher
CAMs, as you may recall, are new disclosures that audit firms are required to make about their clients. CAMs are any line-item that can be material to the financial statements, and also relies heavily on complex, subjective judgment.
Declaring something a CAM doesn’t necessarily mean something is amiss in that line item, although that can be the case. It’s more akin to the audit firm telling investors, “This line item here is material, but it’s really hard for us to get an empirical, data-driven assessment of how reliable it is. There’s a lot of judgment involved.”
As we were sifting through United’s 10-K for more detail about its intangible assets, we found that CAM disclosure from the firm’s auditor, Ernst & Young. Here’s what EY had to say:
Auditing management’s annual route authorities indefinite-lived intangibles impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value. The fair value estimate was sensitive to significant assumptions such as revenue growth rate, cost per available seat mile and the discount rate, each of which is affected by expectations about future market or economic conditions. As a result of the subjectivity of the assumptions, adverse changes to management’s estimates could reduce the underlying cash flows used to estimate fair value and trigger impairment charges.
That’s disclosure of the CAM itself. EY also had to explain the steps it took to address the complexity of the disclosure:
To test the estimated fair value of the Company’s route authorities indefinite-lived intangibles, we performed audit procedures that included, among others, assessing the fair value methodology used by management and evaluating the significant assumptions used in the valuation model. We compared significant assumptions to current industry, market and economic trends, and to the Company’s historical results. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the intangible assets that would result from changes in assumptions. We also involved a valuation specialist to assist in our evaluation of the Company’s valuation methodology and discount rate.
Analysts who follow United might want to keep all this in mind, especially as United grinds through what is likely to be a terrible year for airlines. We might see more impairments of other routes, or more impairments of routes that had already suffered impairments in the past. All of that will flow through to the income statement, making already bad numbers that much worse.