No branch of financial data is too obscure for Calcbench to go full nerd, and today we demonstrate that commitment by returning to the world of tax data for a look at one of the newest tax disclosures out there.
Today we look at Global Intangible Low Tax Income, otherwise known as the GILTI tax.
GILTI was created by the U.S. tax reform law enacted at the end of 2017. It’s supposed to be a tax on certain types of foreign earnings, to dissuade U.S. companies from relocating their corporate headquarters (or other valuable intellectual property) to low-tax jurisdictions overseas.
Basically GILTI sets a minimum tax of 10.5 to 13.125 percent on the average foreign tax rate U.S. companies pay around the world. Spoiler: in the two years since its creation, GILTI hasn’t quite had that “keep your valuable asses here” effect lawmakers desired — but then, unintended consequences are nothing new to the U.S. tax code.
Calcbench isn’t interested in the perverse incentives stuff anyway. We just wanted to know how one can find GILTI tax data, so you can do whatever research is on your mind.
Here’s what we did.
First, GILTI turns up in a company’s tax reconciliation. That’s the breakdown every company provides explaining the difference between what it’s supposed to pay according to statutory corporate tax rates, and what it actually pays after various deductions and credits. So if you want to find GILTI payments, start there.
We used our Interactive Disclosure database, our Segments and Breakouts page, and our Raw XBRL Query tool to search those disclosures for “GILTI.” We found 27 companies that reported a reconciliation item related to GILTI. Table 1, below, shows the firms that reported an actual GILTI amount.
Here comes the tricky part. Firms can reconcile their tax disclosures in several ways. Some reconcile by dollar amount; others reconcile by tax rate. A few even reconcile both ways, which is nice.
But this does mean if you want a holistic look at all GILTI disclosures, you need to do some calculations. For example, Merck & Co. ($MRK) reported a GILTI tax payment of $336 million in 2019. Laboratory Corp. of America ($LH), meanwhile, reported that GILTI payments were 1.1 percent of total tax payments — so if you wanted to calculate the dollar amount, you’d need to look at what Lab Corp paid in taxes and do some math.
Financial analysts have another issue: U.S. Generally Accepted Accounting Principles don’t have a standard tag to apply to GILTI payments. That is, all firms report revenue using the same XBRL tag — and ditto for operating income, inventory, future lease payments, and so forth. You can easily find all companies’ disclosure of those items by searching for that tag.
GILTI has no such standard tag. Instead, each company still uses its own extension tag, and that can vary from one firm to the next. We found “GILTI tax,” “GILTI expense,” “GILTI net of foreign tax credits,” and lots of other examples.
In the fullness of time, GAAP might define a GILTI tag that applies to all companies. Today, analysts must still search disclosures and XBRL tags for “GILTI” or closely related terms.
That’s OK. Calcbench still has the data, and the database functionality to find those numbers — quickly and accurately.
Last week Calcbench published an in-depth analysis of trends in executive compensation during the 2010s. We’re proud of it; compensation enthusiasts should give it a read and ponder its points.
Today, however, we want to focus on one specific finding: that as much as average total compensation rose in the 2010s, it still trailed several standard performance metrics — which, for large companies at least, rose even faster in the prior decade.
We measured the change in average total compensation for named executive officers for all publicly traded firms, the S&P 500, and large accelerated filers (firms with market cap above $750 million). Then we also measured the change in return on assets and return on equity for those same firms.
As you can see in Figure 1, below, ROA (the dotted line) and ROE (the dashed line) rose faster than average total compensation (the solid line), for 2010 through 2018. This was true for the S&P 500 and for large accelerated filers.
Among all publicly traded firms, the picture was more mixed: ROE accelerated faster than executive compensation, but ROA didn’t.
Among smaller firms, this trend doesn’t hold. Accelerated filers (market cap of $75 million to $750 million) show ROA and ROE clustering closely around average total compensation. For non-accelerated filers (market cap below $75 million), compensation actually outpaced ROA and ROE. See Figure 2, below.
And, obviously, all three metrics were much lower, and increased more incrementally, than for larger firms as seen above.
The data raise some interesting questions. For example, why did ROA and ROE rise so quickly for large firms, but not smaller ones?
It might be that ROA and ROE exceed growth in compensation at larger firms because net income grew so quickly for those companies. Since net income is the numerator in the formula to calculate both ROA and ROE, faster growth in net income would have the effect of pushing up both metrics more quickly.
Another question: If executives are paid for increasing the firm’s value to shareholders — and that’s the conventional wisdom in corporate finance and governance circles — then as much as executive compensation rose in the 2010s, were executives at larger firms still underpaid, since the two most common metrics of firm value increased even more?
One point to consider is our decision to start tracking compensation data at 2010. We picked that date because (a) it was the numerical start of the decade; and (b) it was the first full year after the global financial crisis, an outlier event. Still, if you believe NEOs were correctly compensated in 2010, that means they are under-compensated now. Or if you believe they were over-compensated in 2010, then the trend could represent a correction.
We at Calcbench don’t presume to know the answers to these questions. We just examine the data, call out interesting trends, and invite financial analysts to reach their own conclusions. There is a lot you could explore here, when you have the data in hand. Thankfully, Calcbench does.
We at Calcbench are as watchful as anyone else about coronavirus and its effects on society and the capital markets. We hope all our subscribers are safe and well.
That said, we are also committed to going on with life and financial analysis, too. So today we have released our latest report on executive compensation, looking at compensation data among all publicly traded firms for 2010 to 2018.
The big conclusion: compensation for the 100 best-paid named executive officers soared away from all others during the 2010s — and yet, by other metrics, executives might still have been under-paid relative to the performance their companies delivered during that time.
The report, “Executive Compensation: What executives get, and whether they’re worth it,” examined compensation data for all U.S.-listed firms (roughly 4,500 businesses) for 2010 through 2018. Our findings:
The findings raise some interesting questions about executive compensation. For example, why does growth in ROA and ROE exceed growth in compensation at larger firms, but not smaller ones? Perhaps net income grew more sharply for large firms than for smaller ones, and net income is what pushes up ROA?
Or another question: if executives are paid for increasing the firm’s value to shareholders — which is the conventional wisdom in corporate finance and governance circles — then as much as executive compensation rose in the 2010s, were executives at larger firms still underpaid, since the two most common metrics of firm value increased even more?
Our point with this report isn’t to answer questions like that. In fact, we were quite surprised by some of the results, such as ROA and ROE rising faster than average total compensation.
But with the granular data Calcbench has on salary, cash bonus, share grants, option grants, pension contributions, and other forms of compensation, we were able to do a comprehensive trend analysis. It’s great to be able to find and study all the data for all firms.
Calcbench will be compiling 2019 executive compensation data over the next several months and will be updating this first report. Meanwhile, visit www.calcbench.com/executivecomp to learn about the elements of executive compensation, how the Top 100 NEOs compensation have fared, and how CEO to company performance has changed over time.
OK, coronavirus is a public health crisis that has quickly led to an economic crisis. The next concern is that the economic crisis will lead to a solvency crisis for at least some firms.
So which ones might be more vulnerable than others? Calcbench decided to do a quick analysis among the S&P 500.
First, we compared assets to liabilities. That just shows: for every dollar of liabilities that firm has, how much of a dollar does the firm also have in assets to cover that liability?
As a whole, the S&P 500 has $35.8 trillion in assets against $28.1 billion in liabilities. That’s a ratio of 1.27, which means that for every dollar of liabilities the S&P 500 has, it also has $1.27 to cover. OK, phew.
Median numbers are even better: the ratio is 1.49.
Except reality is a collection of 500 firms within the S&P 500. So Figure 1, below, is a list of the 20 firms ranked by worst A/L ratios.
Not a surprise to see Boeing ($BA), which has suffered for more than a year under its 737 MAX crisis and would have a poor balance sheet even without the coronavirus crisis. Now its airline customers are also on the brink.
Another way to consider solvency is to ask: what is a firm’s short-term debt, coming due within 12 months; and how much cash does the company have to cover those debts?
Again, Calcbench can whip up that analysis in short order. Among the S&P, 209 firms reported short-term debt for 2019. Those firms had a total of $372.9 billion in short-term debt, and $582.2 billion in cash on hand. That’s a ratio of 1.56 — for every dollar of debt coming due, those firms had $1.56 to cover it. The median was 1.70.
Once again, phew. But you still need to look at individual firms, too. So we went back to our 20 companies from Figure 1 and checked: how many are reporting short-term debt coming due, and how much cash do they have?
We found five out of 20 that reported short-term debt. See Figure 2, below.
We see that Macy’s ($M) and Yum Brands ($YUM) are close to the knife edge, while TransDigm ($TDG) and Philip Morris ($PMI) have plenty of cash for the bills coming first.
This can all be researched with a few keystrokes on our Multi-Company database. You probably have your own ways to test the strength of a company’s balance sheet. Whatever the data you need, it’s in the Calcbench databases somewhere.
Stay well, friends.
Coronavirus has put Wall Street through a tornado of volatility this week. That’s going to drive up the importance of astute financial analysis, as people examine the balance sheets and cash-flows of airlines, hotels, travel businesses, and other firms affected by the virus.
Calcbench has many ways to study those things. Today we want to focus on one item crucial to that analysis: debt.
After all, for the hardest-hit companies, liquidity could become an issue within the next quarter or two. Stockpiles of cash can be great, but if a firm only has lots of cash because it did a bond issue a few years ago and those payments are coming due — that’s less great. It’s about what bills are coming due soon, and where you can access cash to meet those obligations.
We decided to poke around annual filings of the airline industry to get a sense of things.
You can find a company’s disclosures about debt by going to our Interactive Disclosures page, pulling up their most recent filing (for most airlines right now, that’s their Form 10-K for 2019), and selecting the “Debt” option from our pull-down menu of disclosures on the left side of the page.
We started with JetBlue $JBLU. The company reported $1.99 billion in long-term debt and finance lease obligations for 2019, up 46 percent from $1.36 billion the year prior. Most of that debt is long-term notes due anywhere from 2023 to 2036, with interest rates from 2.8 to 4.9 percent. See Figure 1, below.
JetBlue also reports the amount of long-term debt maturing in each of the next five years, plus all future debt thereafter. See Figure 2, below.
You might be thinking, “Wait — those annual debt maturities add up to $2.334 billion, not the $1.99 billion you just mentioned. What gives?” That’s because the annual breakdown includes $344 million in current debt. Subtract that amount from $2.334 billion and you land at $1.99 billion.
Those points of data are a good start, but you might also want to see how these line items compare to JetBlue’s peers. You can do that by using the Multi-Company page to compare JetBlue to its peers for those specific line items.
We held our cursor over the $2.352 billion to see the exact XBRL tag JetBlue used for this item: LongTermDebtAndCapitalLeaseObligations. Then we copied that tag to search for it in the Multi-Company page.
Figure 3, below, shows the results for eight airlines.
From there you can start to do some quick analysis, perhaps exporting to models in Excel you already have. But for example, we can see that long-term debt is a significantly larger portion of American Airlines’ $AAL liabilities (35.7 percent of total liabilities, versus 28 percent for JetBlue), while American’s assets are actually less than liabilities. At least for JetBlue, assets equal 167 percent of liabilities.
Meanwhile, we can also see that Southwest’s $LUV long-term debt is only 11.5 percent of total liabilities, and assets equal 161 percent of liabilities.
So with a few keystrokes, you can quickly start to find critical data about long-term debt totals and maturity dates; and how those numbers for one company compare to those of its peers.
We’ll be doing much more on ways to analyze the strength of balance sheet and operations as the economic uncertainty continues. Suffice to say that if the data is getting reported somehow, Calcbench has it, along with the database tools to find it.
Calcbench is always happy to hear from users putting our financial data to good use, so today we’re delighted to feature this interview with Bridget Stomberg, Associate Professor of Accounting at Indiana University. She uses Calcbench for research on corporate income taxes.
Q: How did you come to find Calcbench?
A. Several years ago I was working on a research project where I needed to get information from the tax footnotes of 10-Ks. I worked with an outside firm to scrape financial data from public company SEC filings. It was a disaster. Out of frustration, I reached out to our data librarian for help. He recommended that I try Calcbench. I contacted Calcbench and the team walked me through how to get the information on my own. The rest is history.
Q. Can you tell us about the research that you do and how you use Calcbench data?
A. I have a few pieces of research that use Calcbench data.
The first is around effective tax rates. Historically companies were subject to a 35 percent statutory tax rate in the United States, but companies record tax expenses at different effective tax rates. I used Calcbench to identify reconciling items to understand why the effective tax rate differs from 35 percent.
I’m also studying the Tax Cuts and Jobs Act (TCJA) that Congress passed in 2017. I have two projects associated with the TCJA that use Calcbench data. The first examines how accurately companies predicted the impact of some key TCJA provisions shortly after the law was passed. The second examines whether firms are modifying executive compensation in response to substantial changes in the deductibility of executive comp. On that latter project, Calcbench provided a first-mover advantage by giving me faster access to compensation data than other data providers.
Q. Are there advantages to using Calcbench over competitors?
A. Calcbench gives me lots of flexibility. I require custom data sets for my research. What I like about Calcbench is that any item a company tags can be found in the raw data pulls. This feature allows Calcbench to provide data that other providers don’t. Plus, I can see the data exactly as the company tagged it.
Q. What are the challenges associated with using the data?
A. Calcbench pulls any tagged information in financial statements. In some cases, companies use non-intuitive tags that can lead to footing issues. I know that’s something that Calcbench is working on — and when you find errors, you report them.
Q. You mentioned that you like the flexibility of Calcbench. What Calcbench tools do you use?
In addition, the biggest time saver is that I don’t have to search for the unit. Calcbench’s Excel Add-in automatically converts the numbers to actual dollar amounts. Especially in the tax footnotes, finding the unit isn’t always obvious.
Q. How do you recommend future Calcbench users get started?
A. I really like the YouTube ‘How to’ videos that you post. The video about using XBRL tags to identify the effect of the recent tax law resonated with me, and showed me the possibilities of using Calcbench to get financial statement information.
Q: What data are you excited to dive into?
A. I’m going to be spending some time looking into CEO pay ratios for another project. Companies only recently started reporting this ratio so it will be interesting to better understand this information (and of course, how it relates to corporate income taxes).
We love financial reporting around here, and do what we can to stay involved in current issues. So when the CFA Society of New York recently asked our CEO and co-founder Pranav Ghai to speak on a panel emerging accounting issues, dude was there like a shot.
Below, you can see a video of Ghai speaking along with several other thoughtful voices from the Financial Accounting Standards Board, Deloitte, Ridgewood Investments, and the law firm O’Melveny.
The whole thing is a tad under 90 minutes long. The speakers cover issues such as new accounting standards for leases, credit losses, and revenue recognition; data quality for the “consumers” of financial statements; tricky issues in corporate valuation; goodwill valuation and impairment, and lots more.
If you have any thoughts about the issues raised here, always feel free to drop us a line at firstname.lastname@example.org. Trust us, we’ll respond — Ghai loves to talk about this stuff!
Our previous post about Yum Brands’ exposure to coronavirus risk got us wondering — what’s the potential financial impact for other companies? If vast swaths of the Chinese economy are currently under quarantine, what firms might feel real pain because of that?
We decided to run a quick analysis of S&P 500 firms that report quarterly revenue from China, comparing their Q1 2019 China revenues against total revenues for that period. Table 1, below, shows the top 12 firms we found.
As you can see, those firms collectively reported $236.8 billion in total revenue for Q1 2019, and about 8.1 percent of that — $19.26 billion — came from China. Firms with the greatest exposure included Apple ($AAPL), Starbucks ($SBUX), and MGM Resorts ($MGM).
This does not mean that these firms, or the S&P 500 overall, will see 8.1 percent of their revenue wiped out for Q1 2020 when filings for that period start arriving in late April. We know that the effect of coronavirus will be bad, but nobody really knows how bad yet.
On the other hand, our numbers above are from firms that report China revenues as a geographic segment — and not all firms do that. Some companies report China revenue as part of an Asia-Pacific geographic segment; or they report revenues from China as part of a worldwide operating segment rather than a geographic one.
All of which means that total revenue from business in China is higher than what firms actually report as segment revenue from China.
This exercise simply shows how Calcbench can sharpen your understanding of financial and operating risks, so you can ask better questions of the firms you follow. For example, these Table 1 numbers come from our Segments and Breakouts database, and they flag businesses self-proclaim significant China revenue.
You can also create email alerts for companies you follow, and fix your settings to be alerted any time those firms file earnings releases or Form 8-K filings — which is typically how a company will communicate that, oh boy, this coronavirus thing is going to make us miss our numbers. That is what Mastercard ($MA), Microsoft ($MSFT), and Apple have all had to say lately.
Then you can bounce over to our Interactive Disclosures database to search their Risk Factors, Management Discussion & Analysis, or earnings releases to see what else they’re saying about coronavirus — such as, say, whether they expect all their China revenues to evaporate for one quarter, or only a portion of China revenue over several quarters.
That’s how you can get to a fuller understanding of this new risk, and respond accordingly.
We pivot back to coronavirus today because things are a lot more serious now than when we first explored coronavirus disclosures last month. Since then, scads of companies have published some sort of warning about potential disruption, and even the Securities and Exchange Commission issued a statement about firms’ disclosure obligations here.
A good example comes from Yum Brands ($YUM), owner of Taco Bell, Pizza Hut, and KFC, among other chains. Yum has extensive operations in China, both at the retail and the supply chain levels. So when Yum filed its Form 10-K on Feb. 20, we gave it a read.
Coronavirus first appears in Item 1A, Risk Disclosures. Nothing specific, and nothing good either:
Many of our restaurants located within mainland China have been temporarily closed, have shortened operating hours and/or have otherwise been adversely affected by the impact of the coronavirus, and these developments have also impacted the ability of Yum China’s suppliers to provide food and other needed supplies at our Concepts’ restaurants in mainland China…
While it is premature to accurately predict the ultimate impact of these developments, we expect our results for the quarter ending March 31, 2020 to be significantly impacted with potential continuing, adverse impacts beyond March 31, 2020.
Further into the filing, however, Yum does elaborate about how coronavirus disclosures might impede financial performance. Yum operates in China through a master franchisee, a spin-off firm known as Yum China ($YUMC) — and Yum China did offer a more fulsome glimpse into the coronavirus in its own earnings release from Feb. 5.
For example, Yum China has closed 30 percent of its 9,200 stores in China. For the remaining stores that were still open, same-store sales fell 40 to 50 percent compared to the year-ago period. Yum China executives weren’t sure when the stores would re-open, or when customer traffic would return to normal levels.
Again, nothing good there. But how might all of this translate into financial impact?
Yum Brands does offer us one other big clue: Yum China pays Yum Brands 3 percent of sales that Yum China reaps in Mainland China.
Moreover, “These continuing fees represented approximately 20 percent of the KFC Division and 16 percent of the PH Division operating profits in the year ended December 31, 2019.”
So if we know what those segment operating profits are, we can start to get a sense of the financial impact to Yum Brands if coronavirus wipes those fees away for a quarter or two.
Thankfully, Yum does disclose operating profits of its major brands. See Figure 1, below, which shows the revenue and operating profits for KFC, Pizza Hut, and Taco Bell.
So if Yum China accounted for 20 percent of Yum Brands’ $1.052 billion in operating profit for KFC last year, that was $210 million. At 16 percent of Pizza Hut profits, that was $59.04 million.
That’s a total of $269 million in operating profit that came from Yum China last year, or 14 percent of Yum Brands’ total operating profit.
Now, the big question: how much could coronavirus reduce an amount of financial activity roughly that size?
Nobody knows. But $269 million is roughly $67.25 million per quarter. Will coronavirus eradicate all of that profit for Q1? Probably. It’s quite reasonable to assume Yum China will operate at a loss for this quarter and further into 2020, and inevitably that will also occupy more of Yum Brands’ time as it tries to help its largest, most important franchisee.
To be clear, this is speculation on our part, but it’s not far-fetched to assume all of that $269 million in Yum China operating profit goes away for Yum Brands in 2020.
That is a guess, but it’s an informed guess. The numbers are there in the disclosures to help reach that conclusion — and Yum Brands is only one of many, many companies starting to confront the implications of coronavirus.
Now we’re off to study the disclosures of pharmaceutical firms, because the sooner somebody finds a vaccine for this thing, the better.
The other day we were skimming recent SEC comment letters to firms asking about their financial filings (because that’s what we do for fun around here), when we came across one exchange between the SEC to Procter & Gamble ($PG).
The SEC had asked Procter & Gamble about the company’s supply chain finance program, where P&G was working with one of its banks to extend payment terms with P&G suppliers. That financing program had $1.9 billion to P&G’s cash flow over the course of 2018, but also stretched its Days Payable Outstanding metric by eight days.
The SEC was curious about that change in “DPO” and wanted more detail from Procter & Gamble about how the program works. It also asked P&G to consider (read: carry out) expanding its liquidity disclosures, in case any contraction in supply chain financing — which P&G said might happen in fiscal 2020 — would have a material pinch on financial statements.
Honestly, most of the exchange is arcane stuff. But the SEC’s question about longer Days Payable Outstanding did catch our eye, because Calcbench can easily benchmark those changes in one company or among many.
First, for those unfamiliar: Days Payable Outstanding is a common metric of efficiency, that measures how long a firm takes to pay its suppliers. You calculate it by dividing accounts payable at the end of a period into “purchase/day,” which is cost of goods sold for the year divided by 365.
And we have all that data in Calcbench.
You can find DPO in two ways. First, go to our Multi-Company Page and search “Days Payable Out” in the standardized metrics field on the left. (You do not want “Days Sales Outstanding,” which is something totally different.)
Or you can visit our Data Query Tool, which lists all sorts of data points you can research. DPO is one of the liquidity ratios listed at the bottom. Set the group of companies you want to research at the top, check the DPO metric at the bottom, and you can export the whole data file to Excel instantly.
Anyway, back to Procter & Gamble. We wondered whether extending its DPO by eight days was highly unusual. What was the change in DPO among its peers? Among the S&P 500 generally? So we ran the numbers for DPO in 2017 and 2018, and totaled up the difference.
As you can see from Table 1, below, P&G’s extra 7.52 days in Days Payable Outstanding isn’t anything unusual among its peers.
That’s one benefit for companies using Calcbench: you can pull up benchmark data quickly, and use that to buttress whatever reply you want to submit for an SEC comment letter. Arguments based on logic and theory can work, but arguments based on data work better.
Analysts, meanwhile, can use Calcbench to verify what companies are saying in the filings. You can compare the company you follow to its peers, and across reams of data points you can get a better understanding of what “normal” really looks like.
Attention power-users of Calcbench and Excel! We’ve received several reports lately that our Excel Add-In is sometimes sluggish or non-responsive. To err on the side of caution we have a new version you can install, at www.calcbench.com/excel.
Just go to that URL, follow the instructions (for Windows, Office 365, or Google Sheets; whichever operating system you use), and then you’ll be good to go.
That page also has lots of other tips and best practices for using the Excel Add-In, and we even have a video tutorial on YouTube. Heck, you can even watch the tutorial here below.
Calcbench now has enough 2019 data from the S&P 500 to start preliminary trend analysis on, well, all sorts of things. So our first pass is a quick take on spending for property, plant, and equipment.
To keep things simple, we pulled the numbers on 76 firms in the S&P 500 that reported “payments to acquire PPE” for 2019 and the prior three years. Then we compared that spending as a percentage of total revenue.
Bottom line: that spending did decline mildly last year compared to 2018, but is still a fair bit above spending in 2016 and 2017. See Figure 1, below.
What can we extrapolate from these findings? To be fair, not much. We cannot say capex spending is in decline; firms report capex in several ways, and this sample only looks at 76 companies. That’s a tiny sliver of the whole.
But by this precise definition, among firms that collectively had $2.45 trillion in revenue last year, which is nothing to sneeze about — yes, outlays for PPE declined last year for the first time in at least four years.
We also examined PPE spending as a percentage of total revenue. Again, that number slid downward last year after three years of small but steady increases. See Table 1, below.
And lastly, while the average percentage spend arrived at 6.64 percent, some firms devoted quite a bit more of their revenue to acquiring PPE. Table 2 shows the top 5.
In the fullness of time Calcbench will take a much deeper dive into capex spending across all industries, as we do just about every year. For now, you can conduct your own research by visiting our Multi-Company search page, selecting a group of firms to research, and then using our standardized metrics or XBRL tag search fields to find the precise data point you want to study.
Talk about a deal that went up in smoke!
As you may have heard, tobacco giant Altria Group ($MO) published its latest earnings release on Jan. 30, and disclosed a $4.1 billion impairment charge for its investment in e-cigarette maker Juul.
This was actually the second big impairment charge Altria has taken over its Juul misadventures. In its Q3 filing from November, Altria coughed up a $4.5 billion impairment as lawsuits, regulatory scrutiny, and bad headlines began to swirl. Since then the news has gotten nothing but worse for Juul, which meant nothing but more impairments for Altria.
So we fired up the Calcbench databases and decided to take a look.
Consider the history year. In December 2018, Altria announced a $12.8 billion investment in Juul for 35 percent of the company. That deal implied a total valuation for Juul (which is not publicly traded) of $37 billion.
Altria financed the investment by short-term borrowing the whole sum, due in December 2019, at 3.5 percent interest. Ouch, but more on that momentarily.
Anyway, that investment might have seemed plausible 14 months ago when it happened. Alas, 2019 was not kind to Juul. Public health officials pieced together the threat of vaping disease, which has killed at least several dozen people across the country and left many more with serious lung problems. Regulators began cracking down on e-cigarettes; Juul, as the biggest player in the business, bore the brunt of that opprobrium.
Things began to unravel in October. Hedge fund Darsana Capital Partners wrote down its investment in Juul by one-third, and cut its estimated value of Juul down to $24 billion. That makes sense; $24 billion is a one-third reduction from $36 billion.
Altria followed suit with its first impairment charge, that $4.5 billion hit that the company disclosed in Q3. As the company diplomatically phrased things:
While there was no single determinative event or factor, Altria considered impairment indicators in totality, including: increased likelihood of U.S. Food & Drug Administration (FDA) action to remove flavored e-vapor products from the market pending a market authorization decision, various e-vapor bans put in place by certain cities and states in the U.S. and in certain international markets, and other factors.
The latest impairment, $4.1 billion in Q4, is apparently due to the spike in lawsuits against Juul. As Altria noted in its earnings release, since Oct. 31, 2019, the number of lawsuits pending against Juul has spiked by more than 80 percent. Ugh.
Those impairment charges have added up for Altria. The company reported $10.3 billion in operating income, but by the time it was done with interest on debt and all those impairments — including another $1.4 billion loss on financial instruments extended to cannabis company Cronos Inc. ($CRON), which we won’t even get into today — Altria was staring at a $1.29 billion net loss for 2019.
First, about that $12.8 billion in short-term debt Altria borrowed to pay for its Juul stake, originally due in December 2019. If you use our Interactive Disclosures page to research things, you find an interesting tale.
Three months after the investment deal, Altria paid off the short-term debt by issuing long-term notes of $11.5 billion and €4.25 billion. The debt is due in various amounts from 2022 to 2059, with interest rates anywhere from 1 to 6.2 percent.
So that giant asteroid of debt did not collide with Altria in Q4 after all, but the company will be paying off its misadventures with Juul for decades to come.
Also, part of the original investment was that Altria would provide various commercial services to Juul through 2024: logistics, distribution, youth vaping education, regulatory affairs, and so forth. And Altria signed a non-compete agreement with Juul that Altria would only dabble in e-cigarettes through Juul. And a clause that allowed Juul to license various bits of Altria intellectual property royalty free.
Like, a generous deal. Juul had been riding high through 2018, and by the end of that year, Altria was ready to pay quite a bit for a piece of that action.
Well, here we are two impairments later, lawsuits everywhere, and this line included in the earnings release from Jan. 30: “Altria will discontinue all other services by the end of March 2020 that were part of the original investment agreement.”
That’s one way to get burned.
Calling all devotees of operating lease assets: Calcbench just published a research note examining the potential impairment of those assets — which, as we say in the note, is no longer potential. It’s happening.
A PDF version of the research note is available to all. We review the changes to accounting rules that have compelled companies to start listing operating leases as assets on the balance sheet; and the rules that guide companies on when to declare an impairment of those assets; and several examples of operating lease impairments reported by actual firms in the last few months.
Of course, impairment of assets is not a new concept — but historically, financial analysts only got their undies in a twist over impairment of goodwill assets. Now that companies are also reporting operating leases as assets, those too can be impaired.
Well, how often might leased assets get impaired? Under what circumstances? Could those impairments lead to a material earnings surprise? Or are impairments more hype than substance, over a company’s long term?
We answer all those questions in the research note.
One good example: Hi-Crush Inc. ($HCR), a mining company that specializes in sand and other aggregates. Business did not go terribly well for Hi-Crush last year, and in Q3 2019 the company declared asset impairments totaling $346.4 million — including a $76.3 million impairment for leased railcars.
That was more than double Hi-Crush’s impairment for goodwill in the same period. So clearly impairment of leased assets can be significant. See Figure 1, below.
Anyway, the research note has several other examples, plus a discussion of the accounting rules that have brought us to this moment. If you need a primer on the issue and how Calcbench can help, give it a read!
Coronavirus is spreading rapidly in China and beyond, and by now you’ve probably seen specific companies announcing steps to curb their exposure to the threat.
For example, Disney ($DIS) has closed two theme parks in China; McDonald’s has closed numerous stores there. UBS, Alibaba, Novartis, and other businesses have told employees in China to work from home until further notice, and some have quarantined employees recently returned from China to their home countries. Nestle has stepped up biometric security at its factories in China. IMAX ($IMAX) has suspended the release of new films there.
You get the idea. Coronavirus is first and foremost a public health menace, and we wish the best to everyone fighting the disease. It is also causing real business disruption, as witnessed by Wall Street’s 454-point plunge in the Dow Jones Average on Monday.
So when will companies start disclosing more specific detail about their risks of coronavirus? Where can you get a sense of that exposure in financial data? Calcbench has a few ideas.
We have seen no disclosures yet that mention the word “coronavirus,” or even “flu” or “influenza” relating to this specific outbreak. That doesn’t mean they aren’t coming. On the contrary, they inevitably will arrive, probably within the next few weeks.
UPDATE: Well that changed quickly. Within 24 hours of us publishing this post, firms including Starbucks, Cirrus Logic, Las Vegas Sands, and others began citing coronavirus in their filings. So it is indeed an issue.
First, as always, use the Interactive Disclosures database to check for keywords — “coronavirus,” “influenza,” “Wuhan” or “outbreak,” for example. You can use the text-search field on the right-hand side of the screen to search for those words.
Most likely, coronavirus will appear in an earnings release, or in the Risk Factors or Management Discussion & Analysis sections of a 10-Q filing. You can use the pull-down menu on the left-hand side of your screen to search those specific disclosure sections, or just err on the side of caution and leave that part unselected, so you search the entire filing.
Second, set up Calcbench email alerts for companies you follow, so you can be notified immediately when a filing hits our database (usually within minutes of it arriving at the Securities & Exchange Commission). Then repeat Suggestion 1, above, to search the text of the filing for keywords related to coronavirus.
Not sure which firms have more operations in China than others? Then third, use the Segments & Breakouts page to search segment reporting specific to China. Use the “Geographic segment” option from the pull-down menu, and then type “China” or even just “CH” to filter results specific to China.
Figure 1, below, shows an example from Apple. We didn’t need to use the filter here because Apple only reports a handful of geographic segments, China among them. But if you were searching all the S&P 500, for example, you’d want to type in “China” as a filter.
A few caveats about searching geographic segment disclosure!
First, be creative with the filters you use and observant of the results you see. Companies might report “APAC ex. China” or “Far East” or “Mainland China” or “China ex. Hong Kong” — or whatever else they want, really. There are no specific rules in how to describe geographic segments. So look for designations that include China but don’t necessarily name China.
Second, you can measure exposure to China in several ways. Apple ($AAPL) shows both. Revenue numbers are (duh) the company’s sales in China, and it’s reasonable to believe that sales would suffer if Beijing orders 60 million people confined to quarters— which it has already done with its quarantine of Hubei province.
On the other hand, you can also measure a company’s China exposure by its PPE (property, plant, & equipment) there. That’s why manufacturers around the world might still be left reeling from coronavirus even if they have relatively small sales in China: their workers at all the PPE there might be off the job.
You can use Calcbench to assess and rank firms’ exposure to China by either metric.
Now we’re off to wash our hands and buy some surgical masks. Stay safe out there, this virus is no joke.
Discovery Energy ($DENR) filed its latest quarterly report this week, and we noticed that the company disclosed a material weakness in its financial reporting.
That unto itself is never welcome news. A material weakness warns investors that a firm’s corporate accounting is shaky, and might not be able to prevent serious errors in financial reporting.
What caught our eye with Discovery, however, was the nature of its material weakness. Discovery doesn’t have enough accountants to prevent people from cooking the books.
Sure, the company draped that fact in more bureaucratic language; it described the problem as “the lack of segregation of accounting duties as a result of limited personnel resources.” But let’s have no illusions here. Discovery has a shortage of suitable accounting talent.
That got us wondering — what other firms have material weaknesses due to personnel issues? What other causes of material weaknesses are out there these days? So we fired up our Interactive Disclosure database to investigate.
First, the mechanics of the process. Looking up material weaknesses is a straightforward exercise in Calcbench. Choose whatever group of companies you want to examine; then set the disclosure type menu (left side of screen) to “Controls & Procedures;” then enter “material weakness” in the text search box on the right, with the “restrict to specified disclosure type” box checked underneath. See Figure 1, below.
We found 31 firms disclosing material weaknesses for Q4 2019 so far — with many more filers yet to come, so that number will likely increase substantially. Some of the more interesting examples include…
AZZ Inc. ($AZZ), an electrical equipment manufacturer based in Fort Worth, Texas. The company first discovered material weaknesses in its controls for revenue recognition. Then as part of a larger review, AZZ also found more weaknesses in its controls for tax compliance. So those are problems of improperly designed accounting procedures rather than lack of accountants — but a material weakness in financial reporting, they are nevertheless.AZZ says in a filing from Jan. 9 that those problems are now fixed and its latest numbers are reliable.
The material weakness from ShiftPixy ($PIXY) makes for even more painful reading. In a filing from Jan. 21, the company admits right away: “current accounting staff is small… we did not have the required infrastructure or accounting staff expertise to adequately prepare financial statements in accordance with U.S. GAAP as well as meeting the higher demands of being a U.S. public company.”
That lack of experienced staff led to the discovery of a material misstatement in Q3 2019 regarding derivative financial instruments ShiftPixy was carrying on the books. So the company hired a new CFO with experience in financial instruments accounting, and is stepping up spending on accounting staff and resources generally. Welcome to NFL football, ShiftPixy.
And Laredo Oil ($LRDC) had this to say in a filing from Jan. 14 that nicely captures the problem for a lot of firms:
Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties. Therefore, it is difficult to effectively segregate accounting duties which comprises a material weakness in internal controls. This lack of segregation of duties leads management to conclude that the Company’s disclosure controls and procedures are not effective to give reasonable assurance that the information required to be disclosed in reports that the Company files under the Exchange Act is recorded, processed, summarized and reported as and when required.
Translation: Laredo can’t hire enough accountants to assure that all transactions will be free from potential tampering (that’s what the “segregation of duties” part means), so the company is simply going to live with the risk. It is taking no new steps to resolve the weakness.
That’s not an ideal answer, but in many cases it’s the best one a company can give. Accountants cost money, and good ones cost a lot of money. For some firms, hiring enough of them to eliminate a material weakness just won’t be economically feasible. So they disclose the weakness to investors and move on with life.
Anyway, those are just a few examples. You can find many more with little difficulty, and then proceed accordingly. We just put the data in your hands to help you make the best decision.
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Calcbench can help you dig deep into text disclosures by allowing you to pinpoint search all disclosures in 8-Ks, 10-Ks, 10-Qs, proxy statements, earnings press releases, and SEC comment letters, or search by disclosure type.
You can search for terms like “tax cuts and jobs act” to see how companies are reporting on issues related to tax reform. Try searching “ESG” to understand how companies are reporting on sustainability. Or, poke around to see who has recently transitioned out of an executive role.
Reviewing the text disclosures allows for easy comparisons, over time and across companies, and brings more usability to the hard-to-find information embedded within financial statements, which many times is text, not a number on a line-item.
To try it out yourself, sign up for a free two-week trial, then visit the Interactive Disclosure Page and select your favorite Footnote/Disclosure Type. Enjoy!
Impairment of assets is something no investor likes to see. Impairments can catch people by surprise and blow up an earnings statement with no warning.
Or what if you could measure that potential risk?
Not the risk of a specific asset being impaired; that takes in-depth analysis over time. We were more curious whether you could measure the potential damage to earnings that an impairment might cause — regardless of the asset getting impaired or the dollar value of the impairment.
Here’s what we did.
Using our Multi-Company search page, we examined the goodwill and right-of-use assets listed by the S&P 500. We also then pulled net income and diluted shares outstanding to calculate earnings per share for third-quarter 2019.
Then we asked: What would happen to EPS if goodwill and ROU assets were impaired by 1 percent?
Mathematically that’s a straightforward exercise. You just subtract 1 percent of goodwill and ROU assets from net income and then recalculate EPS. That’s a measure of how sensitive a firm’s earnings are to impairment.
So we did that, measuring firms’ sensitivity to impairments of 1, 5, and 10 percent.
Below are 10 firms with high impairment sensitivity. That is, even impairments of only 1 percent would lead to relatively large swings in EPS. For example, if Macy’s ($M) declared an impairment of only $65 million, that would have caused a 20-fold drop in its EPS.
To be clear, other firms would suffer larger EPS declines in absolute terms. For example, if Charter Communications ($CHTR) declared a 1 percent impairment on its goodwill and ROU assets, that would be a charge of $306 million and cut net income by $1.38 EPS. But because Charter reported EPS of $2.10 in the third quarter, that actually cuts EPS by only 65 percent.
Nobody would like that, but in relative terms it’s nowhere near the wipeout that any firms in Table 1, above, would experience.
OK, so an impairment sensitivity test exists — what do you do with it?
By modeling a firm’s potential exposure to impairment, that can help financial analysts sharpen the questions they want to ask about management strategy.
For example, if a highly impairment sensitive company is carrying lots of goodwill on the books — say, it’s a highly acquisitive firm that’s collected numerous brands over the years — that can inform questions you might ask management about what it plans to do with those brands, or whether integration plans are moving along well enough to justify whatever the company paid in goodwill. (Don’t forget, you can also look up purchase price allocation on Calcbench to determine how much of an acquisition went to goodwill and other assets.)
Or if you’re following a retailer that has high impairment sensitivity thanks to lots of leased ROU assets, you might ask more pointed questions about customer traffic or potential sub-lease value if the retailer wants to shutter its stores.
Our point is only that the data does exist to model impairment sensitivity. All you need is the data, Calcbench has that in spades.
The new accounting standard for leasing costs is no longer so new, but its secondary effects on financial reporting still are. Today Acuity Brands ($AYI) gave us one glimpse of that, when it declared an impairment on a leased asset.
What happened? Acuity, which sells indoor and outdoor lighting plus assorted other equipment, filed a rather yucky Q1 2020 report. Revenue down by 11 percent, operating profit down 36 percent, net income down 40 percent. The company also announced the arrival of a new CEO to turn things around.
What caught our eye, however, was a $6.9 million item on the income statement labeled “special charge.” See Figure 1, below; with the line-item highlighted blue.
That $6.9 million was far larger than any other special charge Acuity has reported lately, and it’s always wise to look closely at special charges anyway. So we did, using the ever-handy Calcbench Trace feature.
In the footnotes, we then found this disclosure from Acuity:
During fiscal 2020, we recognized pre-tax special charges of $6.9 million. The fiscal 2020 special charge consisted primarily of severance costs and ROU asset lease impairments related to planned facility closures. Additionally, we recognized charges for relocation costs and ROU lease asset impairment charges associated with the previously announced transfer of activities from planned facility closures.
In other words, Acuity is closing a few facilities and that will cost it $6.9 million. Acuity goes on to say that $5.1 million of the charge will be related to severance costs, and the company had been accruing reserves to cover that amount — but the remaining $1.8 million is indeed an impairment of the leased facility Acuity had been using.
This is a big deal because it demonstrates that the new lease accounting standard, which went into effect last year, can indeed affect earnings. Sure, in Acuity’s case this impairment isn’t a material amount of money — but until last year, you wouldn’t see something like this at all. Now you can.
The standard, ASC 842, requires companies to list their leased assets — commercial stores, airport gates, office equipment, data storage facilities, and so forth — on the balance sheet. The costs of the leases are listed as liabilities, the value of the leased items listed as assets. (We discuss all these issues at length in several white papers on our Research Page, if you want to know more.)
Like any other asset, however, that means the value of those leased items could fall, and the company would therefore need to declare an impairment. When that happens, the impairment is reported as a charge against earnings.
This happens with goodwill assets on a regular basis and sometimes with other intangible assets as well, so the idea isn’t new. It’s just expanding to a new type of asset: operating leases.
How common will this be? That’s hard to say right now. We’re not sure any other company has reported a charge like this. In theory, however, an impairment to leased assets might arise if a company signs a long-term lease for something and then economic circumstances around using that item change dramatically.
For example, a large bookseller might have signed a 20-year lease for commercial stores in 2011, and by now Amazon has whittled away the value of those stores — and if the locations are in crumbling shopping malls, who else is going to take that space off the bookseller’s hands before the 20-year lease expires in 2031? That’s how the lease accounting rule could end up forcing companies to serve up an earnings surprise.
Another question is whether these impairments would ever be material. In Acuity’s case, the impairment isn’t; even without it, the overall 10-Q numbers would still be pretty gross.
Still, for devotees of financial reporting, Acuity’s disclosure is a rare bird. We’ll keep looking to see whether any more fly by.
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