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:
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.
Here’s his take on using Calcbench for financial analysis.
We interviewed Tom Phillips, 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:
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.
There are a few things that I find most helpful about Calcbench. The first is being able to track data over date ranges. I like that I can pull data for a specific company, over time, in a consistent format.
What do you like most about Calcbench?
Calcbench is great for understanding corporate finance. If you are pulling data from the SEC’s Edgar database, Calcbench is orders of magnitude faster. You just download the report into Excel and extract information. It enables you to reduce data pulls from hours to seconds, at worst, minutes.
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 $8.3 million in long-lived assets. What’s that about? Again, we found the details in the disclosures:
This is all interesting too, because it touches on our post from yesterday about restaurant closures. The more restaurants a firm closes, the larger these long-lived asset impairments are likely to be.
OK, enough with Del Taco. If steak is more to your liking, consider this very different impairment disclosure from Bloomin’ Brands ($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.
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.
Calcbench will be used differently across courses. I teach a financial accounting required first year course for MBAs. We teach how financial statements are organized and look at many companies daily. Calcbench will be great for pulling out examples.
Tell us about how Calcbench will be used in the classroom.
Certainly I think that this could be used at a bigger school focused on information technology. One of the things that Calcbench makes you appreciate is how much variation there is in the disclosure of information - the labels, the categories. If you are interested in conveying the nuance, this is essential.
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.
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|
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:
|Activision Blizzard, Inc.||ATVI||5/5/20|
|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|
|Alliant Energy Corp||LNT||5/8/20|
|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|
|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|
|Booking Holdings Inc.||BKNG||5/7/20|
|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|
|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|
|Consolidated Edison Inc||ED||5/7/20|
|CVS HEALTH Corp||CVS||5/6/20|
|Danaher Corp /DE/||DHR||5/6/20|
|Delta Air Lines, Inc.||DAL||4/22/20|
|DISH Network CORP||DISH||5/7/20|
|Dominion Energy, Inc||D||5/5/20|
|DuPont de Nemours, Inc.||DD||5/5/20|
|Eaton Corp plc||ETN||4/30/20|
|Eog Resources Inc||EOG||5/7/20|
|Estee Lauder Companies Inc||EL||5/1/20|
|Federal Realty Investment Trust||FRT||5/6/20|
|Fidelity National Information Services, Inc.||FIS||5/7/20|
|Flir Systems Inc||FLIR||5/6/20|
|Franklin Resources Inc||BEN||4/30/20|
|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|
|Hartford Financial Services Group, Inc.||HIG||4/29/20|
|Henry Schein Inc||HSIC||5/5/20|
|Hilton Worldwide Holdings Inc.||HLT||5/7/20|
|Honeywell International Inc||HON||5/1/20|
|Huntington Ingalls Industries, Inc.||HII||5/7/20|
|Idex Corp /DE/||IEX||4/24/20|
|Idexx Laboratories Inc /DE||IDXX||4/30/20|
|Intercontinental Exchange, Inc.||ICE||4/30/20|
|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|
|Live Nation Entertainment, Inc.||LYV||5/7/20|
|LyondellBasell Industries N.V.||LYB||5/1/20|
|Martin Marietta Materials Inc||MLM||5/5/20|
|Masco Corp /DE/||MAS||4/29/20|
|Molson Coors Beverage Co||TAP||4/30/20|
|National Oilwell Varco Inc||NOV||4/28/20|
|Newell Brands Inc.||NWL||5/1/20|
|NEWMONT Corp /DE/||NEM||5/5/20|
|Nielsen Holdings plc||NLSN||4/30/20|
|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|
|Pinnacle West Capital Corp||PNW||5/8/20|
|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|
|Sherwin Williams Co||SHW||4/29/20|
|Smith A O Corp||AOS||5/5/20|
|Southwest Airlines Co||LUV||4/28/20|
|T-Mobile US, Inc.||TMUS||5/6/20|
|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|
|Verisk Analytics, Inc.||VRSK||5/5/20|
|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|
|Williams Companies, Inc.||WMB||5/4/20|
|Willis Towers Watson Plc||WLTW||4/30/20|
|Xcel Energy Inc||XEL||5/7/20|
|Zebra Technologies Corp||ZBRA||4/28/20|
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.
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 $394 billion gap between those two points.
The report, “Pension Plan Obligations: Analysis of funding levels and shortfalls among the S&P 500,” reviewed the funding levels of defined-benefit plans offered by 292 firms in the S&P 500. Among the findings:
The research raises some interesting questions about corporate pension plans. Firms don’t need to keep their pension plans fully funded at all times — but they do need to meet all those obligations eventually. So for firms with significant gaps, what’s the plan to meet those liabilities when they come due?
The report lists the 10 firms with largest gaps in percentage terms, and the 10 with the largest gaps in total dollars. We also compared each firm’s pension deficit as a percentage of market capitalization. This metric is useful to know because it’s one way to measure how vulnerable the company’s future value (that is, market cap) is to the pension plan obligations the company has.
Table 1, below, lists the top 10.
The report shows how large those obligations are, so financial analysts can consider the implications and ask sharper questions about how a firm plans to meet those obligations. Download, read, and fire away on that next earnings conference call.
One business sector receiving government support during the Covid-19 crisis is the airline industry. And now that major carriers are starting to file their Q1 2020 reports, financial analysts can use Calcbench to see exactly how much support those formerly high fliers are getting.
For example, Delta Airlines ($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.
We examined six major airlines:
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.
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.
For me I like that my students learn basic research skills. In this day and age, it’s easy to just do a Google search. With Calcbench, my students have to work for information (for example, go to various sections of financial statements) to find the information. The click and drill down helps me teach how to dig a little deeper.
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, 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.
Another consequence of the Covid-19 crisis: cuts to executive compensation, which are starting to appear fast and furious in corporate disclosure filings.
You may have seen stories of those pay cuts in the headlines. Well, they also qualify as events to be reported in Form 8-K filings, and you can see them as they arrive in the Calcbench Recent Filings page.
We pulled together just a few from the last two weeks:
You can also search for compensation cuts by doing a “proximity search” on our Interactive Disclosures page. In that case, you want to enter relevant search terms in quotes in the text search box on the right side of the page, followed by a tilde and a number.
For example, if you wanted to search filings that had the words “salary” and “reduction” within 10 words of each other, you’d type “salary reduction”~10. Or you could try “compensation reduction”~10 or “pay reduction”~10 or so forth. See Figure 1, below.
While we’re here, let us also shamelessly plug our Executive Compensation Report from last month, looking at trends in executive compensation across all firms in the 2010s. It explores overall growth in compensation, changes in types of compensation, and how trends in executive pay compare to trends in corporate financial performance.
That study looked at 2010-18. We’ll have an update including 2019 numbers later this spring.
The provisions for loan (credit) losses, PLL, that are hitting the banks income statements this morning, April 15th, 2020, are real. Here are Bank of America (ticker:BAC) , Citi (ticker:C), US Bancorp (ticker:USB), and Goldman (ticker:GS) as percentage of Net Interest Income. PLL at BAC went from 8% of 2019 Q1 NII to 39% of NII in Q1 2020. USB from 12% to 31%. Citi from 17% to 61%. GS from 18% to 71%.
The table with the data is below.
Companies are looking for cash just as many others. The last couple of days we’ve seen a variety of companies announcing entries into agreements (8-K, item 1.01) to borrow money. Many of the agreements include multiple notes for different due dates. Here is a sample of a few agreements:
|Company||Ticker||Amount Raised ($M)||Due Date||Rate||Date Announced|
|Darden Restaurants||DRI||$270||04/05/2021||LIBOR + 300bp*||04/07/2020|
|J M Smuckers||SJM||$500||2030||2.38%||03/10/2020|
* As of 4/9/2020 USD LIBOR - 12 months is 1.05088 %
The interest rates for similar due dates and amount vary significantly. The differences are likely due to the companies’ negotiating power, the lenders’ perceived risk and other terms of the agreement.
The amount of activity with companies raising money, based on this anecdotal sample, may imply that debt market liquidity is not an issue. Even restaurant related businesses are raising money at a rate of about 4%.
Keep on checking Calcbench for new agreements. You can always create an alert to get notified when new agreements are coming in by going to our alerts page and checking off the 8-K material agreement.
Securities regulators have been pumping out guidance, alerts, warnings, and other missives like crazy lately; explaining what they expect firms to disclose about risks related to Covid-19.
For example, the Securities and Exchange Commission published a statement on April 3 listing numerous items in the financial statements that will need extra attention, because those items can involve a lot of subjective judgment from a firm’s executives — and Covid-19 such a profound challenge to corporate operations, that those judgments could come under severe strain.
On the SEC’s list:
Calcbench has extensive data on, well, all of those issues; and you can review our specific research on leases, impairments, taxes, and revenue recognition on our Research page if you like.
Of course, all that research was published before Covid-19 struck. In the fullness of time, we’ll publish fresh research on how the virus is affecting or changing corporate disclosures now.
We did, however, want to call out one item on the list where we’re already seeing lots of action: subsequent events.
A subsequent event is a material item that happens after a firm’s quarterly or annual period ends, but before the firm files its corresponding 10-Q or 10-K. So the firm must include some mention of that event and describe its possible effects as much as possible. Basically, it’s an epilogue to the filing that says, “This other thing just happened, and we know it will be a big deal, so look for more detail later.”
One good example is Copa Holdings ($CPA), a South American commercial airline that trades on the NYSE. Copa filed its latest annual report on April 8, for the fiscal year ending on Dec. 31, 2019 — which means that Covid-19 was included as a subsequent event. Copa had lots to say on the subject. Among its disclosures…
Copa also said it can refinance some of its aircraft fleet and spare parts and tap a few other credit facilities, which altogether could scrape up another $400 million. So that, plus the $300 million already tapped, would be another $700 million in cash; and Copa already had $1 billion in cash on hand as of March 15. Plus, Copa says it can prune back operational expenses so that its monthly cash burn should be around $70 million for the rest of the year.
The bottom line: Copa “anticipates that these initiatives to obtain additional sources of liquidity, along with measures to contain operational expenses and non-essential capex outflows, will provide ample resources to endure a prolonged downturn in demand.”
We leave it to analysts following Copa to decide how reassuring all that is, but it is a lot of disclosure.
We’ve seen a lot of firms including a subsequent event in their filings lately, almost all of them citing Covid-19 (plus, occasionally, other events). Just last week we had a post looking at firms tapping lines of credit to bolster their defenses against the virus, and all the examples were subsequent events.
The SEC clearly believes Covid-19 warrants disclosure ASAP, and if that means including it as a subsequent event, so be it. Audit firms have also been told by their regulator to keep a close eye on what firms are saying about Covid-19, including how firms treat it as a subsequent event.
Calcbench tracks subsequent events via our Interactive Disclosures page. Typically you’ll find it listed under “Other” in our pull-down menu of disclosure options. You can also just read through all of a firm’s disclosures, and watch for subsequent events at the very bottom of the list.
By the end of Q2, Covid-19 disclosures will be part of every firm’s standard filings. Then the exercise will be more about studying how the virus is affecting revenue estimates, lease concessions, impairment of assets, and more. Calcbench will be devoting more attention to all of those issues as soon as we see examples to cite.
Good news for Calcbench subscribers trying to keep pace with firms revising or rescinding their earnings guidance this year: we’ve revamped our Recent Filings page so you can quickly identify those firms and their 8-K filings.
Starting this week, the Recent Filings page now shows you which firms have filed a Form 8-K, plus the category of that filing — including “Guidance Update,” which is becoming quite the popular category as Covid-19 turns previous earnings estimates upside-down.
You can see what we mean in Figure 1, below. Community Health Systems ($CYH) and Genuine Parts Co. ($GPC) are two firms that updated their guidance on April 6, along with a few other filers further down the list and not shown here.
Guidance updates don’t arrive with any particular rhyme or reason; you might see a bunch of them on one day, then none for several more days. So if you want to keep track of which firms are updating guidance, you have two choices.
First, check the Recent Filings page often, to see who has been filing what. Or, build a list of firms that you follow, and set your email alert preferences so that Calcbench gives you an automated head’s up any time one of those firms files something with the SEC.
We typically have those filings indexed and cataloged within minutes of a firm submitting the filing to the SEC, so your alert should arrive promptly.
All part of trying to bring you the most precise data, when you need it.
Calcbench occasionally likes to step away from coronavirus analysis, so today we’re going to revisit one of our favorite macro-economic issues: cost of goods sold by Corporate America.
Why? Because we’ve always kept one eye on the U.S.-China trade war, and how tariffs on various goods and materials coming into the United States have pushed up costs for companies selling finished products. For example, back in 2018 we found that cost of goods sold (COGS) was rising faster than revenue — a condition that inevitably pinches operating profit.
So what’s been the larger trend of COGS among the S&P 500? We investigated.
In Figure 1, below, you see the increase in cost of goods sold for 388 firms in the S&P 500 from 2015 through 2019. These were firms that reported COGS in all five years. Collectively their costs rose 15.72 percent, from $5.31 trillion in 2015 to $6.3 trillion in 2019. Note the pronounced acceleration in COGS that began in 2017, coinciding with the arrival of the Trump Administration and its more aggressive use of tariffs.
OK, but that’s the collective direction; and some of that trend might be driven by outlier firms whose COGS changed drastically because of mergers, divestitures, or other factors.
So we also examined the median change in COGS among our 388 firms. Well, that number actually rose even more: 19.2 percent, from $4.37 billion in 2015 to $5.4 billion last year. See Figure 2, below.
Again, you can see a pronounced increase that coincides with the Trump Administration’s arrival in 2017. Of course that increase isn’t entirely due to tariffs. The economy was humming along quite nicely in the late 2010s and demand for goods was rising around the world; so at least some of the COGS increase just came from generally higher demand for components and raw materials. But plenty of firms also said in recent years that tariffs did increase their costs, so it’s a factor to at least some extent.
At the firm-by-firm level, we also discovered some interesting nuggets.
For example, motorcycle maker Harley-Davidson ($HOG) actually saw its COGS decline 2.3 percent over the last five years — but that’s only because sales declined even faster (down 10.5 percent) over the same period. So the company was buying fewer raw materials, but those materials were more expensive thanks to tariffs.
Contrast that example to Caterpillar ($CAT), which saw its COGS rise by 8.4 percent. Revenue, however, grew by 14.4 percent, giving Caterpillar at least some breathing room to protect operating profit even amid higher materials costs.
Even tech firms were paying more for the services they sell. For example, Google ($GOOG) saw its COGS jump by 60.8 percent. Then again, Google’s revenue also more than doubled, from $75 billion in 2015 to $161.9 billion last year.
And right above Google was Salesforce ($CRM), whose cost of goods sold jumped 60.9 percent — but Salesforce’s revenue nearly tripled, from $6.6 billion to $17.1 billion. So the tech giants aren’t sweating COGS too much.
You can conduct your own research on COGS via the Company-in-Detail or Multi-Company database pages, to give you a sense of the raw numbers reported. Then hop over to the Interactive Disclosures page for whichever firms have caught your eye, and you can find out exactly why those costs were rising or falling by looking into the footnotes.
We interviewed a Vice President, Financial Reporting at a $700M revenue public company. His focus is on technical accounting. Here’s his take on using Calcbench for financial reporting.
Q: How did you find Calcbench?
We were using a competitive product. It was expensive for what we were looking for. We wanted a tool that could help us understand the cash, debt, ROE,… of our competitors. When you are looking at seven or eight companies, it becomes cumbersome. I am not sure how we finally came upon Calcbench, but we cycled through free trials before we settled on purchasing the platform.
Q. What, in particular, do you like about Calcbench?
We do a lot of footnote searches. For us, being able to search XBRL tags and easily pull tables is important. We even started using Calcbench to pull our own data. It’s just an easier lift to get trends.
Q. How can we optimize your Calcbench experience?
We didn’t purchase the Non-GAAP data, but that’s probably the next step. We’d like to understand, for example, the adjusted EBITDA of our competitors. Also, right now we are probably doing more searches than we need to do. Until today, we were not aware of some of the features (e.g., Common Sizing) that might help with our analysis. And, we’re not using things that could probably help us in the future, e.g., competitor alerts.
Q. What’s the Calcbench data being used for?
Generally, we are using Calcbench data to guide our own disclosures. We’re looking to understand market-cap type trends, PE ratios and the like. We’re not using it to understand new accounting standards and how they are reported. We’re also not using it for compliance purposes, but that’s a possibility for the future.
Q. You read the blog. What would you like to see us analyze?
I like the length of the articles. The disclosure world is of interest to us. We’re very interested in current events. In particular, how the coronavirus is affecting companies, what’s the downstream effect of the virus on companies, etc.
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