We now have a critical mass of fourth-quarter 2020 filings for Calcbench to do another of our quarterly “quick analysis” guides, where we do year-over-year comparisons across a range of financial disclosures, to see how Corporate America has been doing lately.

You can download and read the full analysis if you like. Meanwhile, the headline for Q4 2020, compared to Q4 2019: net income down, revenue down, capital and operating expenses down — but cash is way, way up.

Our quarterly quick analysis is a straightforward exercise. We aggregated the disclosures of more than 2,100 firms, excluding financial firms (whose unusual balance sheet structure distorts the overall picture) and most retailers (whose quarterly periods don’t align with the calendar year). Then we do a year-over-year comparison across 12 major financial disclosures that firms make, to see how this quarter compared to the year-ago period.

Figure 1, below, tells the tale for Q4.  

For anyone who can’t quite make out the numbers, the major ones are:

• Revenue: down 4.25 percent
• Net income: down 16.7 percent
• Capex: down 13.9 percent
• Operating cash flow: down 7.1 percent
• Assets: up 5.4 percent
• Liabilities: up 8.5 percent
• Cash: up 38.4 percent
• Debt: up 9.4 percent

Those numbers shouldn’t surprise anyone. The economy was roaring along in those halcyon days of Q4 2019, so even as economic fortunes recovered over the course of 2020 (just look at our restaurant and airline industry posts from a few days ago), comparing any quarter of 2020 to 2019 was going to look grim. Revenue and net income dropped, lots of firms cut expenses, and lots of firms stocked up on debt so they’d have a sufficient pile of cash to carry them into more rosy times in 2021.

Let’s Get Granular

We also did a deeper dive into the 20 largest industry groups according to SIC number. Those 20 industry slices contained roughly 860 firms, 40 percent of our total sample population. Then we did a year-over-year analysis for each financial disclosure.

For example, Figure 2, below, shows the industry breakdown for revenue. As you can see, the two sectors that took the biggest hits were hotels (down 51.5 percent) and oil & gas (down 26.6 percent).

Again, that makes sense, since most of humanity parked the car in the garage and took a staycation for Q4, while a second wave of COVID-19 washed over the Western world.

Figure 3, below, shows the change in net income by industry. Note the jump in computer processing (up roughly 200 percent) and smaller but appreciable jumps in other computer sectors. Such is life when everyone is on Zoom calls, watching Netflix, while placing Amazon orders.

We’ll be back in several more months with our first quarterly quick analysis for 2021, comparing this year’s early numbers to Q1 2020. That should be quite a show. Stay tuned!

Today we have an interesting use case from Indiana University in Bloomington. Our guest interviewee, Terry Campbell, is a Clinical Professor at the Kelley School of Business.

How did Indiana University come in contact with Calcbench?

The first time I came in contact with Calcbench was when I was shown a Strategic Finance example. Then I saw Calcbench displayed at an American Accounting Association meeting and scheduled a demo. The rest is history.

What Calcbench tools do you use?

I like the comparative disclosures, the ability to run side-by-side comparisons,  previous period to previous period. It amazes me and my students that all the manual labor that we used to perform, doesn’t have to be done. 

You do a lot with experiential learning. It’s a big focus in academia now. Tell us Indiana’s program.

At the Kelley School of Business, we have an accelerated MBA program for accountants whereby students work with a company for several weeks during the second semester of their first year. The students perform comparative analysis, valuation, strategic analysis, whatever the company requests.  We dedicate several hundred hours of student time to these projects. The hallmark of the program is that students are actually working for the client during this time. 

While we have been doing this for over twenty years, over the past few years, we’ve been able to intensify the analysis and the comparative work. Calcbench has been an integral part of this. 

How does Calcbench factor into experiential learning?

We’re currently working with a startup in Vietnam in the cinnamon business. The company’s goal is to get into the food chain around the world. To get their ingredient distributed globally they need to connect into very large food manufacturing trade shows and very large multinational brokerages. We try to understand how a tiny minutia business, such as cinnamon,  might be reported. We use tools such as Google Scholar,  Statista to find the world’s largest consumers of cinnamon. Turns out Starbucks in one of them. We use Calcbench to understand the financial data of the industry sector or the companies we’re trying to target. In the case of this cinnamon company, we were able to use Calcbench to find a publicly listed brokerage out of Chicago.

What other courses have you seen Calcbench integrated into?

We demonstrate Calcbench, PowerBI, Tableau and Python in a career success skills course. It’s the beginning of the master’s program just to jumpstart everyone and let them know what they will run into and how to be prepared. The two features that we have almost 100% hit rate on are Calcbench and PowerBI. PowerBI to build planning models and Calcbench to get the data off in a comparative form.

How would you like to use Calcbench in the future?

IFRS is a great addition to Calcbench, but we often need data for European and Asian companies. For that we use Orbis to get revenue and profitability by country. In the luxury good space, where I have a lot of connections, there are a lot of private companies. We use Orbis for that as well and it would be great if the two platforms talked or connected with each other. 

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We’re going to continue our one-year anniversary look at the COVID-19 pandemic today, this time looking at the airline industry.

In April 2020 we noted that United Airlines ($UAL) booked a $50 million impairment charge on the value of its flight routes from the United States to China. In May 2020, we examined the first federal bailout of U.S. airlines.

So today we go back to see what happened to six major airlines:

• Alaska Air Group ($ALK)
• American Airlines ($AAL)
• Delta ($DAL)
• JetBlue ($JBLU)
• Southwest ($LUV)
• United Airlines ($UAL)

To state the obvious, 2020 was not a good year for any of these firms. Year-over-year revenues tumbled by roughly 60 percent; net income turned into note losses for all six. See Table 1, below.

Comparing Q3 and Q4 of 2020, however, we see a bit of lift. Revenues increased by a range of 12 percent for Southwest to 37 percent for United. With the exception of Alaska Airlines, all others saw a decrease in the net loss quarter over quarter.

On the other hand, the pandemic’s effect may be long-lasting. All six airlines took on significant amounts of debt. See Table 2, below.

Moreover, when we examine the footnotes for more information about those debt issuances, it’s clear that some of the debt is quite expensive. For example, Delta Airlines issued $1.3 billion in debt last June with an interest rate of 7.375 percent. JetBlue issued $115 million in debt last August at 8 percent.

At least some of that debt seems to have been salted away as cash, perhaps to be prepared for future challenges. See Table 3, below.

Check out the Excel spreadsheet that was used for this analysis and see what other insights you can find!

Ten months ago, Calcbench introduced Restaurant Week — a series of posts exploring how firms in the restaurant business were faring, given the brutal disruption of the pandemic.

Now that most of the world has weathered one full year of COVID-19, we decided to revisit the restaurant industry again and see how those firms are doing.

To start, we looked up all firms identified as “Retail Eating Places,” otherwise known as the SIC 5812 filing category. We found 113 firms, and 30 of them have already filed their 2020 annual reports. Then we compared both yearly results (2019 against 2020) and recent quarterly numbers (Q3 2020 against Q4 2020).

At the annual level, the results are not good. Most firms saw both revenue and net income for 2020 well below 2019 levels. For example, Aramark ($ARMK) saw annual revenue drop 20.9 percent, while net income went from $448.5 million in 2019 to a $461.4 loss for 2020. McDonald’s ($MCD) saw its revenue drop by 8.9 percent, net income by 21.5 percent.

Not all the news is grim, however. Many restaurant firms seem to have found their footing in the second half of 2020 as we all grew accustomed to new eating habits under the pandemic.

For example, Ruth’s Hospitality Group ($RUTH) saw its annual revenue plunge 40.7 percent compared to 2019 — but revenues in Q4 2020 were 22 percent higher than those in Q3. Net income also went from a $5.3 million loss in Q3 to a $1.4 million profit. Yes, that’s still only a fraction of the $14.5 million net income Ruth’s enjoyed in fourth-quarter 2019, but small profit is better than no profit.

Likewise, Jack in the Box ($JACK) net income fell by 4.95 percent from 2019 to 2020; but it rose 34.4 percent from Q3 2020 to Q4 2020.

And not all firms had a bad 2020. Apparently we ate many pizzas during lockdown; annual revenue for Papa Johns ($PZZA) actually increased in 2020 by 12 percent, and net income soared from $4.8 million in 2019 to $57.9 million last year. Chipotle Mexican Grille ($CMG) also saw annual revenue increase by 7.13 percent, net income by 1.6 percent.

Attached is the spreadsheet we used to conduct the analysis. Download and use it to find your own slice of analysis.

Great news for everyone addicted to auditing, accounting, and data analytics — our webinar on exactly that subject is now available for your viewing pleasure on YouTube!

We had an excellent discussion, exploring everything from the practical steps necessary to use data analytics in a project; to the skills necessary to put analytics to best use in the corporate world; to several examples from our speakers of how they use analytics in their work today.

Our speakers, by the way, were two leading thinkers in the field:

• Brian Woholan, partner in charge of the audit innovation team at Grant Thornton; and a member of the data analytics task force at the Public Company Accounting Oversight Board.
• Vern Richardson, professor of accounting at the University of Arkansas, who has been working in data analytics for years and literally wrote the book the subject — aptly named Data Analytics for Accounting.

Anyway, you can watch the full webinar (roughly one hour long) on the Calcbench YouTube channel, or just press play for the embedded video below.

As always, if you have a suggestion for our next webinar or other analytics projects we should undertake, drop us a line at info@calcbench.com any time.

For the past few years, we have published a list of firms and their sales to China.  With 10-K season winding down, we thought that we would publish the list again.  This year we are doing it slightly differently.  We are publishing the entire file.  Please note that it does have embedded Calcbench formulas in it, so  for it to work, you will need a Calcbench subscription.  

Here’s a picture of the top firms that sell to China as a percentage of total revenue.  

Cybersecurity firm SolarWinds Corp. ($SWI) filed its Form 10-K this week, giving analysts their latest glimpse into how much financial harm SolarWinds might suffer from its role in that massive cyber attack Russia launched on the U.S. government last year.

As you might recall, the feds discovered late last year that Russian operatives placed malware into the Orion Software Platform that SolarWinds sells to corporate and government customers. That maneuver allowed Russia to penetrate the cybersecurity defenses of a vast swath of the U.S. government and Corporate America; the president of Microsoft ($MSFT) called it “the largest and most sophisticated attack the world has ever seen.”

Calcbench previously looked at what SolarWinds had to say about the event in a blog post from December, when the business announced the attack on Dec. 14 in a Form 8-K filing. Now we have SolarWinds’ first quarterly report since everything went sideways, so let’s review the latest.

The company offered 590 words of disclosure related to the cyber attack, right at the top of the Commitments & Contingencies section in the 10-K. Most notable: in the 17 days from Dec. 14 (when SolarWinds first announced the attack) through Dec. 17 (the end of the filing period), SolarWinds racked up $3.5 million in expenses related to the attack.

For the record, SolarWinds also reported $1.02 billion in revenue for 2020 — so the attack expenses were only 0.34 percent of that number. Not a material amount per se, but the $3.5 million was incurred in only 17 days. Presumably the ongoing costs will be much higher as 2021 unfolds.

As SolarWinds proceeds to note, “As a result of the cyber Incident, we are subject to numerous lawsuits and investigations … In addition, there are underway numerous investigations and inquiries by domestic and foreign law enforcement and other governmental authorities related to the cyber Incident, including from the Department of Justice, the Securities and Exchange Commission, and various state Attorneys General.”

Translation: a whole lotta lawyers are coming after SolarWinds. Whatever the final costs of that litigation might be — and SolarWinds does not provide any estimate of that number — the process will not be cheap.

What Happens Next

SolarWinds did disclose that it maintains a $15 million insurance policy for cybersecurity attacks. Obviously that amount will help, but it’s unlikely to cover the full cost of things. (Nevermind the potential loss of business from customers too spooked to keep doing business with the firm.)

In that case, SolarWinds will likely need to set aside cash over time, placing it in a contingency account as the true cost of the cyber attack becomes more clear.

The good news is that the company does seem to have that money. For example, gross profit was $744.6 million in 2020; and operating profit after sales and marketing, R&D, and other routine expenses was still $107 million. See Figure 1, below.

On the balance sheet, we see that SolarWinds had $370.5 million in cash at the end of 2020, roughly 6.5 percent of $5.71 billion in total assets.

On the other hand, SolarWinds was also carrying $4.25 billion in goodwill. So if the firm suffers a loss of reputation in the market, which then translates into lower revenue or share price over the long-term — could that lead to a goodwill impairment? Which could, then, slash into stockholder equity since so much of the company’s total assets are tied up specifically in goodwill?

That’s only speculation on our part. We do know, however, that any hit to customer loyalty or revenue isn’t yet reflected in SolarWinds’ financial statements, because the attack happend so late into the company’s fiscal year. And while the company has seen a plunge in share price since December, when you look at the prior 12 months altogether (Figure 2, below), the plunge isn’t so bad.

What’s next? Check back with us in three months, or set SolarWinds as one of the firms you track with our email alerting function. Whenever there’s new data to study, rest assured that Calcbench has it.

Some firms disclose only a little about their goodwill testing and impairments; other firms disclose a lot.

And then, once in a blue moon, you get a disclosure like what Kraft Heinz Co. ($KHC) included in its annual filing on Feb. 17 — an opus nearly 4,000 words long, and a fascinating glimpse into how shifting corporate strategies translate into shifting numbers on the balance sheet.

First, let’s look at the headline numbers Kraft reported. As you can see in Figure 1, below, Kraft started 2020 with $35.55 billion in goodwill and ended it with $33.09 billion. That’s a drop of $2.46 billion, or 6.9 percent.

Those numbers, however, barely begin to tell what Kraft was doing last year. As always, you need to read the details in the footnotes!

First, Kraft reorganized both its internal operations and its reportable operations in early 2020. For example, it moved its Puerto Rico operations from its Latin America division to its U.S. division, and consolidated all its European operations into one, new International division. Ultimately Kraft landed on three reportable segments divided by geography: the United States, Canada, and International.

That’s important because a change so significant prompted Kraft to do two impairment tests of its goodwill assets — one immediately before the reorganization, the other immediately after. (Like, the two tests were performed on the same day, since the “reorg” was really just management moving items around from one P&L statement to another.)

The impairment test done after the reorganization resulted in two impairment charges totaling $226 million: one charge of $83 million for the Australia, New Zealand, and Japan unit; and another for $143 million in the Latin America unit. (Both units now included in one new International segment for reporting purposes.)

Impairment Tests, Part II

After those reorganization-related impairment tests at the beginning of 2020 came Kraft’s standard goodwill impairment test, which the company always conducts on the first day of its second quarter — March 29, 2020.

That test resulted in another impairment of $1.8 billion across four internal operating divisions:

• $815 million charge in Kraft’s Canada Retail unit
• $205 million charge in its Canada Foodservice unit
• $655 million charge in its U.S. Foodservice unit
• $142 million charge in its EMEA East reporting unit

Add those numbers together, plus the $226 million impairment charge from the reorganization test, and you get $2.043 billion — the amount reflected in Figure 1, above.

What drove those impairments, you ask? The company had this to say:

These impairments were primarily due to the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020. Management, in completing the five-year operating plan, developed updated expectations regarding revenue growth and profitability opportunities associated with our reporting units and, as a result, has recalibrated our future investments to align with the opportunities for which we see greater potential for a return on those investments.

Translation: Kraft is tempering its expectations for future growth, as consumer tastes drift away from mass-produced food in a box toward fresh produce and more organic food. This isn’t news per se; recall that several years ago Kraft took an impairment charge of $15.4 billion in 2019. That impairment was an earlier, much larger example of shifting consumer trends hammering Kraft’s goodwill valuation.

But Wait, There’s More

Kraft then reorganized the operations within its U.S. reporting structure — “to align to the management of our new platforms, which were established to support the execution of our new enterprise strategy and five-year operating plan” — which meant the company had to perform a third impairment test, this time in June 2020.

That test didn’t result in any new impairment charges. But also that quarter, Kraft announced “the Cheese Transaction,” where the company agreed to sell its global cheese business to Groupe Lactalis for $3.3 billion. The Cheese Transaction was still pending at the time Kraft filed its 10-K (the deal should close sometime this spring), so to account for everything properly, Kraft had to shift $580 million from goodwill to assets held for sale. That number is also reflected in Figure 1, above.

We’re going to stop here because we have lives to lead, but analysts could delve into Kraft’s goodwill and impairment details all day long. Heck, right after the goodwill impairment analysis, Kraft launches into an equally long discussion of impairments to its intangible assets.

And don’t forget, you can also skim our Calcbench Research Guide for Goodwill & Intangible Assets. As Kraft demonstrates, there’s a lot of stuff to consider here.

“Human Capital” is a new disclosure item required by the Securities and Exchange Commission as of Nov. 9, 2020. All filers are supposed to include details about their workforce such as:

• Total number of employees, and employees per business segment when those segments are material to the business;
• Any “human capital metrics or objectives,” such as employee turnover, tenure on the job, or percentage of employees in unions; and
• Any information the business deems material about diversity and inclusion, either among employees as a whole or management specifically.

In our recent blog, Human Capital Disclosures, we share some recent examples of what’s included in Human Capital disclosures, including Sirius XM $SIRI and homebuilder MDC Holdings $MDC. 

Given that these Human Capital disclosures have a lot of room to share information about their people, we thought we would do a more comprehensive look and put Human Capital disclosures from the S&P 500 into a visual for you. 

Enjoy!

We want to follow up today on our previous post about critical audit matters (CAMs), to take a closer look at one particular set of CAMs: uncertain tax items. 

You might have noticed that tax-related items accounted for a significant portion of the CAMs we’ve seen so far in 2020 annual reports. We found 13 CAMs related to uncertain tax positions, plus another three related to unrecognized tax benefits. Taken together, that’s nearly 20 percent of the 85 CAMs we identified in total.

Well, exactly what are those tax positions? What’s the nature of the uncertainty, and what makes these disclosures qualify as critical audit matters?

Let’s first remember what a critical audit matter is. As dictated by accounting regulators, all CAMs have two parts:

• They relate to items or disclosures that are material to the financial statements; and
• They involve “especially challenging, subjective, or complex auditor judgment.”

In that case, you can see how various corporate tax issues might qualify as critical audit matters. Plenty of tax disclosures can be quite large and therefore material to the financial statements. And given the complexity of modern tax law in the United States and around the world, uncertain tax disclosures will almost always meet the second criteria, too: especially challenging, subjective judgment on the part of the auditor.

One example of this is Pepsico ($PEP), which reported $1.6 billion in reserves the company is salting away for unrecognized future tax benefits. That is, Pepsico might get that $1.6 billion sometime in the future, if certain disputes with tax regulators go the company’s way — but if not, Pepsico will have the cash to cover taxes due.

Pepsico’s auditor, KPMG, still flagged the issue as a CAM. In its auditor’s report (where audit firms disclose CAMs), KPMG had this to say:

The Company establishes reserves if it believes that certain positions taken in its tax returns are subject to challenge and the Company likely will not succeed, even though the Company believes the tax return position is supportable under the tax law. The Company adjusts these reserves, as well as the related interest, in light of new information, such as the progress of a tax examination, new tax law, relevant court rulings or tax authority settlements.

We identified the evaluation of the Company’s unrecognized tax benefits as a critical audit matter because the application of tax law and interpretation of a tax authority’s settlement history is complex and involves subjective judgment. Such judgments impact both the timing and amount of the reserves that are recognized, including judgments about re-measuring liabilities for positions taken in prior years’ tax returns in light of new information.

What does Pepsico itself have to say about unrecognized tax benefits? You can find that using the Interactive Disclosures tool and pulling up the firm’s tax disclosures. For example, in the 10-K Pepsico filed on Feb. 11, the company mentioned a $364 million gain in 2018 from a tax dispute with Russia that was resolved in Pepsico’s favor. The company also disclosed this table, below, showing how its tax reserves changed over the course of the year.

If you’re feeling ambitious, you can also use our Multi-Company Page and search for “unrecognized tax benefits” in the Standardized Metrics search field on the left side of the page. Then you could, say, identify all firms in the S&P 500 where unrecognized tax benefits were a material amount of money; and next search the auditor reports for those firms to see if any have unrecognized tax benefits as a CAM.

Uncertain Tax Positions

A close cousin of unrecognized tax benefits are uncertain tax positions. They’re conceptually similar — firms reporting a tax item as a potential payment or benefit — but uncertain tax positions encompass a wider range of tax items, including potential losses that might not materialize.

Amazon.com ($AMZN) is a good example of what we mean here. The company reported this table of tax contingencies in its annual report from Feb. 3:

Even for Amazon, $2.8 billion in uncertain tax positions is a material amount of money. And sure enough, we see that the company’s auditor, Ernst & Young, flagged this as a CAM. 

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions and, as discussed in Note 9 of the consolidated financial statements, during the ordinary course of business, there are many tax positions for which the ultimate tax determination is uncertain. As a result, significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more likely than not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. As of December 31, 2020, the Company accrued liabilities of $2.8 billion for various tax contingencies.

Auditing the measurement of the Company’s tax contingencies was challenging because the evaluation of whether a tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings.

Companies can be a bit more liberal in how they tag uncertain tax positions, so you might need to search the XBRL tag field on the Multi-Company page for this disclosure. Try “LiabilityForUncertainTaxPositionsCurrent” or “LiabilityForUncertainTaxPositionsNonCurrent,” and that should get you the results you’re looking for.

In 2019 we first wrote about how to access Critical Audit Matters (CAMs) from corporate financial statements using Calcbench.

Today, we will re-examine the information from the latest set of filings that have come in. Please note that we are still early in filing season, so don't draw too many conclusions from this just yet!

Some summary-level data first:

1. We examined 86 S&P 500 firms 10-Ks.
2. Identified a total of 124 CAMS in our sample (for example, Amazon reports one CAM while Becton Dickinson reports three, so that's a total of four CAMs).
3. Eight-five firms reported at least one CAM.
4. Seven firms reported three CAMs.

We compiled a summary of the most commonly reported CAMs in the table below.

Please note that this is our initial attempt to organize CAMs by topic. There is much more detail behind this summary. In addition, here is a link to the file that contains each firm we reviewed, its primary auditor, and the list of CAMs reported in its 10-K.

Lastly, in the list, we found 2 cases that had personal interest. These were from Disney (ticker:DIS CashTag:$DIS) and Netflix (ticker:NFLX CashTag:$NFLX). Both had to do with the Amortization of Content related costs. In Disney's case, this was a new CAM, whereas Netflix had also presented this CAM in last years 10-K.

Now that the 10-Ks for 2020 are rolling in, you may be noticing a new disclosure item in those reports: “human capital” factors.

What are those, exactly? They are new disclosures required by the Securities and Exchange Commission as of Nov. 9, 2020. All filers are supposed to include details about their workforce such as:

• Total number of employees, and employees per business segment when those segments are material to the business;
• Any “human capital metrics or objectives,” such as employee turnover, tenure on the job, or percentage of employees in unions; and
• Any information the business deems material about diversity and inclusion, either among employees as a whole or management specifically.

Human capital disclosures will typically be reported in the Business Description part of the 10-K. For now those disclosures will also vary quite a bit, because the SEC didn’t include a definition of “human capital” or any specific metrics that must be reported. Each firm can decide for itself what counts as a material item related to human capital that should be disclosed. (Compared to financial disclosures, for example, where firms have extensive and precise guidance on what goes into the filing.)

Anyway — yes, Calcbench can help you find these human capital disclosures! Just use our Interactive Disclosure tool, selecting “Business Description” from the pull-down menu on the left side. Skim down through the text, and you should see the material under a heading like “Human Capital.”

Firms only started making human capital disclosures in 10-Ks filed after Nov. 9, 2020; which means we don’t have many examples to study yet. But now that year-end filers are starting to submit their reports, Calcbench traipsed through a few examples. Here’s what we found.

MDC Holdings

Home-builder MDC Holdings ($MDC) is interesting because it provided a breakdown of employees by business unit in table format, in the 10-K it filed on Feb. 2. See Figure 1, below.

The rest of the disclosures are all narrative, which is fine although nothing terribly interesting. MDC only jumped out at us because on that same day, its rival Pultegroup ($PHM) also filed its 10-K, and didn’t use table format. Instead, Pulte described the same human capital information in written format:

On December 31, 2020, we employed 5,249 people, of which 945 were employed in our Financial Services operations. Of our homebuilding employees, 282 are involved in land acquisition and development functions, 1,752 are involved in construction and and post-closing customer care functions; 1,189 are involved in the sales function; and 1,081 are involved in procurement, corporate, and other functions. Our employees are not represented by any union. Contracted work, however, may be performed by union contractors. We consider our employee relations to be good.

So similar firms can take different approaches to the same disclosures. You’ll have to look carefully.

A More Extensive Example

If you want to see what maximal disclosure might look like, bounce over to the 10-K that Sirius XM ($SIRI) also filed on Feb. 2. That disclosure — nearly 1,100 words! — ranged from number of employees, to philosophy on corporate culture, to diversity and inclusion programs, to support for local COVID-19 relief measures.

Sirius didn’t include too many numbers, but did give glimpses into its human capital programs. For example, the firm included this about its corporate culture:

We are focused on creating a corporate culture of integrity and respect, with the goal of working together to drive our business to be creative, innovative and competitive. To achieve these objectives, we have adopted and regularly communicate to our employees the following core values, which we call “AMPLIFY”:

• Applaud and encourage new thinking
• Move forward and be purposeful in our desire to win
• Prioritize honesty, integrity and respectful communication
• Lean on each other and learn from one another
• Invest in our actions and commit to the follow through
• Find ways to give back by focusing on community and feeding your individuality
• You Matter. We embrace our differences, empower each other and include everyone

We operate a performance-based environment where results matter and financial discipline is enforced. We have tried to create a highly collaborative culture in which employees feel a sense of pride that their input is sought after and valued. At the same time, we believe in holding individuals accountable and have tried to create a culture in which employees “do what they say they are going to do.” Still, we believe that our culture is a long-term competitive advantage for us, fuels our ability to execute and is a critical underpinning of our employee talent strategy.

Those are only a few of the disclosures that are pouring into the database these days. If researching that data is your bag — yep, Calcbench has it.

Today Calcbench has a guest post from Olga Usvyatsky, doctoral student in accounting at Boston College and a long-time whiz at financial disclosures.

Last summer we had a post exploring how companies adjust their EBITDA metrics to account for COVID-19 costs. We identified a sample of more than 40 companies that chose to present pandemic-related costs as a separate line in the reconciling non-GAAP tables, and noted that in many cases, the adjustments were related to direct pandemic-related expenses such as protective equipment.

That was then. What’s been happening lately? Lots.

In December 2020, the SEC’s Division of Corporate Finance clarified that it wouldn’t object to the presentation of COVID-19 adjustments, so long as those costs were directly attributable to the pandemic and certain other conditions were met. Notably, SEC staff warned that adjusting for lost revenue would not be appropriate.

Meanwhile, companies continued to present non-GAAP COVID-19 expenses in third-quarter 2020, but the magnitude of those adjustments appeared to decline. For example, T-Mobile US ($TMUS), a wireless network operator that we looked at in our June blog, disclosed $117 million in Covid-19 costs in first-quarter 2020, and another $341 million for the second quarter. By Q3, however, T-Mobile said that “employee payroll, third-party commissions, and cleaning-related COVID-19 costs were not significant for Q3 2020.”

Non-GAAP metrics need to be presented consistently across periods (see Question 100.02 in the SEC’s Compliance & Disclosure Interpretations). Yet, changes in economic conditions or certain company-specific developments may prompt companies to modify the presentation and introduce new metrics or adjustments. So, what were the non-GAAP modifications introduced in 2020?

The first adjustment we looked at was related to the U.S. Treasury Department’s extended Payroll Support Program (PSP) established in early 2020 to provide payroll support to airline carriers. The relief provided by the program was material to many (if not all) of the airlines, whose business was severely disrupted by the pandemic. Notably, although most non-GAAP adjustments improve net income, PSP adjustments cause non-GAAP income to be lower than the number reported under GAAP. (Most times, non-GAAP income is higher than GAAP income, a trend Calcbench noted in a post last week.)

To illustrate, let's look at the non-GAAP section of Alaska Air Group ($ALK). In third-quarter 2020, Alaska Air recorded a "Payroll Support Program wage offset" adjustment that decreased non-GAAP income by $398 million (and by an aggregate $760 million through the first nine months of 2020). Based on Alaska’s latest quarterly report, the company “expects to record an additional $10 million in wage offset in the fourth quarter.”

To better understand how other airlines reported PSP adjustments in the non-GAAP section, we looked at American Airlines Group’s ($AAL) disclosure. The company didn’t provide the PSP relief as a separate reconciling line. Still, American did clarify in a footnote that in Q3 of 2020, $1.9 billion and $228 million of PSP assistance were included in mainline and regional operating special items non-GAAP adjustments.

We can’t provide an opinion about whether any of the metrics are compliant with Regulation G (the SEC rule governing non-GAAP reporting), and we are not implying that any of these disclosures are incorrect or non-compliant. Yet, as we approach the filing season, it’s worth remembering that Question 100.03 of the SEC’s CD&I states that if a company excludes charges in the calculation of a non-GAAP measurement, it should also exclude gains.

Non-GAAP and Taxes

The second type of adjustment we looked at was related to changes in tax legislation in 2020. One such change in legislation, the U.K. Finance Act of 2020, was signed into law effective April 2020. The law abandons plans to reduce the corporate tax rate from 19 percent to 17 percent — which results in an increased tax liability estimate for some companies (because their expected tax cut didn’t arrive).

For example, in third-quarter 2020, Hasbro ($HAS) modified its GAAP income by a discrete "tax reform" adjustment of more than $13 million and stated that the adjustment was caused by “revaluation of Hasbro's U.K. tax attributes in accordance with the Finance Act of 2020 enacted by the United Kingdom on July 22, 2020.”

In another example, L Brands (LB) adjusted its Q3 net income by $23 million and disclosed that the adjustment was related to “foreign investments and recent changes in tax legislation.” Notably, in Q2 of 2020, the company also recorded a discrete tax benefit of $21 million related to “changes in tax legislation included in the CARES Act.”

Some of the adjustments introduced in 2020 appear to be company-specific. A recent blog by Calcbench discussed an unusual "civil disruption cost" adjustment recorded by a grocery chain Albertson ($ACI). Calcbench was unable to identify any other retailer that adjusted GAAP results for a similar item.

Finally, the pandemic put economic pressure on whole sectors such as retailers, forcing companies to restructure operations and re-evaluate their expansion plans. Unsurprisingly, these restructuring costs may show up as a “new” adjustment in the non-GAAP section.

Earnings releases for full-year 2020 results are starting to arrive, which means lots of firms reporting adjusted earnings numbers again. So before everyone gets swept up in non-GAAP financial disclosures this year, we decided to rehearse our data analytics dance moves with a quick study of non-GAAP numbers from last year.

Our analysis was straightforward: compare the GAAP-approved net income of the S&P 500 for 2019 against the adjusted, non-GAAP net income those firms also reported last year. We wanted to know…

• How many firms reported non-GAAP numbers smaller than net income?
• What was the total difference between the two? Specifically, how much larger was adjusted, non-GAAP net income than plain ol’ net income?
• How many firms reported non-GAAP numbers larger than net income?

Using our Multi-Company research page, pulling the data was easy enough. The standardized metrics we track include both net income and non-GAAP income, so you can find both numbers for the S&P 500 immediately. See Figure 1, below (where net income is already displayed, and we’re about to pull non-GAAP net income).

Analyzing those numbers is a bit more tricky than pulling them. We can’t simply total up GAAP and non-GAAP income because while all firms do report GAAP income, many firms (240 of the S&P 500) don’t report non-GAAP income. To measure the difference between the two accurately, you should only count firms that report both types of numbers.

When we perform that more focused analysis, the answers we get are these:

• For the 260 firms in the S&P 500 that reported both types of numbers, total non-GAAP net income was $80.6 billion higher than GAAP income.
• 196 firms reported non-GAAP net income higher than GAAP income, on average about $675.3 million higher.
• 64 firms actually reported non-GAAP income lower than GAAP income, on average about $834.9 million lower.

GAAP vs. non-GAAP Examples

Who had the biggest differences? Figure 2, below, shows the 10 firms with the largest non-GAAP numbers above GAAP net income.

Among those firms, the largest drivers of adjustment were goodwill impairment, amortization of intangibles, and litigation costs. (Although the exact reasons for each difference varied from firm to firm, so as always, read the tables and the footnotes.)

We were also curious about those 64 firms who reported non-GAAP net income lower than regular GAAP income. Why?

The 10 firms with the biggest spreads with non-GAAP income below GAAP are in Figure 3, below.

Again, exactly why a firm would report non-GAAP income that’s lower than GAAP income varied widely. Eli Lilly & Co. ($LLY), for example, had a one-time gain of $3.68 billion in 2019, stemming from discontinued operations: it had cashed out of an animal health business it had spun off. That led to non-GAAP net income of $5.56 billion and GAAP income of $8.32 billion. We had a whole post on Lilly and others with earnings boosts due to discontinued operations earlier this month.

So there are all sorts of ways that firms can report some very large differences between GAAP and non-GAAP income, both positive and negative. Food for thought as those 2020 earnings releases start rolling in.

We had another example of how to put Calcbench to use land in our email box the other day, when a subscriber asked us for help in finding firms that recently emerged from bankruptcy.

It didn’t take long for us to point that subscriber in the right direction. Let’s walk through those steps again here, so everyone else can see how you might use Calcbench search techniques for similar needs you might have.

Start on our Interactive Disclosures page, and as always, select the group of companies you want to research. In this instance, we decided to search all firms (the “whole universe” option you see at the top of the page) for 2019.

Then in the full-text search field on the right side of the page, we entered "bankruptcy emerge”~10. (Quotes around “bankruptcy emerge,” tilde mark and 10 on the outside of it.) That tells our databases to search for any instances of the words “bankruptcy” and “emerge” appearing within 10 words of each other. See Figure 1, below.

This method isn’t perfect. You may find several false positives, where the words “bankruptcy” and “emerge” do appear in close proximity, but the disclosure isn’t about a firm emerging from bankruptcy.

That said, this method does provide the raw material that you can keep narrowing until you find examples of what you are looking for. For example, one of the first results in Figure 1 is Pacific Drilling ($PACD), where the relevant disclosures very much were about the firm coming out of bankruptcy the prior year.

That ends today’s lesson in how to Calcbench. No matter what you’re looking for, we’ve got the data in there somewhere!

Earlier this week we had a post about Albertsons Cos. ($ACI) reporting an adjustment to earnings last year for “civil unrest” — and we mentioned that by using our non-XBRL Data Query Tool, we found virtually no other large firms made a similar disclosure last year.

A Calcbench subscriber then emailed us with an excellent question: “Hey, can you show us how that non-XBRL Query thing works?”

Indeed we can. Here’s a tutorial on how the query page works.

The non-XBRL Query Page lets you search for terms in earnings releases or quarterly reports even when those items are not tagged in XBRL. That’s the data classification technology used for GAAP-approved financial data, and we have a query page dedicated to those terms, too.

But data in an earnings release, and especially non-GAAP financial disclosures, are not required to be tagged in XBRL. So if you want to conduct in-depth analysis of that information, an XBRL search tool won’t help. Hence the Calcbench non-XBRL Query Page.

How It Works

Figure 1, below, shows what the non-XBRL query page looks like. As you can see, the left side is where you enter the “fact” you want to research, the right side where you enter the relevant periods of time.

First, as always, select the company or group of companies you want to research using the Choose Companies buttons at the very top of the page.

Second, enter the fact you want to research using the “label or metric” field at the top of the left column. For example, in our Albertsons case, the label could be “unrest” or “civil” since those words were the label that Albertsons used for that non-GAAP item. Also, select the right operating symbol from that pull-down menu in the middle that starts with an equals sign. You’ll see a range of choices, such as

• =
• Contains text
• Starts with
• Ends with
• and a few other choices.

We were searching for labels that included the text phrase “civil unrest,” so we set that operating symbol to “contains text.” Then we entered “unrest” in the third field.

The other fields further down that side of the page simply help to narrow your search field. You can choose whether to search earnings guidance or not; to search specific filing types such as proxy statements, guidance updates, 10-Ks and Qs, and so forth. You can even enter whether a term is non-GAAP or not.

The fields on the right side of the page help you narrow the period of time you want to search, and they’re pretty self-explanatory. You can search by fiscal quarters or calendar quarters; one specific filing period or numerous periods of time; or even by specific filing date if you know that detail.

Then you press Search or Direct to Excel at the bottom, and see what results come up.

Figure 2, below, shows the search we ran for our Albertsons post. It was a simple exercise of searching the S&P 500 for any firms that used the text “unrest” in their filings sometime in 2020. (Be warned, when searching large groups of companies or large swaths of filings, the data crunching can take a while.)

How to Read the Results

Figure 3, below, shows some of the results we received at the bottom of the search page. As we noted in our Albertsons post, most of the results that mention unrest aren’t about civil unrest from last year’s social justice protests. To discover that, however, we had to expand the two columns named “column label” and “label.”

This image shows some of the results for AIG ($AIG) — an insurance firm, where it’s no surprise that the company has costs related to damages from civil unrest. Then the results shift to Avalon Bay ($AVB), and we can see from the Label column that those mentions of “unrest” aren’t related to last year’s protests.

Anyway, that’s a quick tutorial on the non-XBRL Query Tool. It’s available to Calcbench Professional subscribers only; if you need more detailed help or support with a search project you have, always feel free to drop us a line at info@calcbench.com.

Earnings Before Civil Unrest

Here at Calcbench we’re constantly on patrol for unusual disclosure items, but occasionally one slips by unnoticed for a quarter or two. So you can imagine our surprise when we were reading Albertson Cos. ($ACI) latest quarterly report, filed today, and noticed that last year the company included a non-GAAP adjustment to earnings for “civil disruption costs.”

What?

The disclosure came in a reconciliation table Albertsons included in its press release, showing how the grocery business was adjusting its GAAP-approved net income of $1.06 billion over the last four quarters to a non-GAAP adjusted EBITDA of $4.36 billion. Near the bottom was a $13 million adjustment for “civil disruption related costs.” See Figure 1, below; relevant line item shaded blue.

One would assume those costs came from the social justice protests that wracked the United States last summer. Sure enough, the explanation in Footnote No. 5 for that line item goes on to say: “Primarily includes costs related to store damage, inventory losses and community support as a result of civil disruption during late May and early June in certain markets.”

Intrigued, we then looked at Albertsons’ quarterly report for the relevant period, which ended June 20. In that filing, however, Albertsons reported its civil unrest costs as $14.9 million. See Figure 2, below.

Why the $1.9 million discrepancy? We’re not quite sure, except that Albertsons adjusted $1.9 million back to earnings in the subsequent quarter. That only explains the numerical difference, however, not what prompted the change.

Nor does Albertson ever elaborate on the specific damages related to its civil unrest adjustment, beyond that one-sentence description we noted above. Then again, even the whole $14.9 million is barely material (equal to 2.5 percent of $586.2 million in net income for the period), and the item seems to be reported only in that specific quarter.

We did wonder whether any other firms reported similar adjustments last summer. Using our non-XBRL Data Query Tool, we tried to find other firms that disclosed a spending item related to “disruptions” or “unrest.” Several insurance firms such as AIG ($AIG), Travelers ($TRV), and Hartford Financial Services ($HIG) all reported costs related to “civil unrest” in 2020, although that’s to be expected from property & casualty insurers.

We found no businesses like Albertsons, reporting costs related to physical damages they incurred. So Albertsons may stand alone with this oddball entry in the Earnings Adjustment Hall of Fame.

Businesses had to engage in some deft footwork last year to retool their operations amid the disruptions of coronavirus. One firm taking the right steps seems to be Nike ($NIKE).

The sneaker giant filed its most recent quarterly report on Jan. 5, and all the important numbers on the income statement looked good. Revenue up 8.8 percent from the year-ago period to $11.24 billion; pre-tax income up 16.5 percent to $1.45 billion. Even total overhead and sales expenses declined by 1.7 percent — an impressive feat of cost management, considering all the new expenses firms have had to pay as part of operating during a pandemic.

OK, but exactly what is Nike doing to get these numbers? We’d written before about retailers making a pivot into e-commerce sales since physical stores are no longer reliable sales channels. Was that part of Nike’s strategy?

First we looked at Nike’s segment disclosures. Figure 1, below, shows lots of geographic segments.

That’s informative unto itself—revenue up in all four regions—but it doesn’t tell us anything about e-commerce versus other sales channels. We did, however, notice this item in the narrative discussion that preceded the table disclosures: “The Company's NIKE Direct operations are managed within each NIKE Brand geographic operating segment.”

That bit about NIKE Direct sounded like a clue to us. So we hopped over to the Management Discussion & Analysis section, and found considerably more detail about that part of the business.

As one might guess from the name, NIKE Direct is the firm’s business that sells directly to consumers, both through e-commerce sales and company-owned stores. (Nike also has a wholesale operation where it sells its gear to other retailers like Footlocker ($FL), for example.)

Nike does disclose revenue from NIKE Direct in the MD&A, and that line of business was up in the last quarter, too. See Figure 2, below.

Except, the $4.31 billion in that line item still combines both e-commerce and company-owned stores. So we kept reading, and finally found this paragraph tucked away on Page 28:

On a reported basis, NIKE Direct revenues represented approximately 40 percent of our total NIKE Brand revenues for the second quarter of fiscal 2021 compared to 33 percent for the second quarter of fiscal 2020. Digital sales were $2.4 billion for the second quarter of fiscal 2021 compared to $1.3 billion for the second quarter of fiscal 2020. On a currency-neutral basis, NIKE Direct revenues increased 30 percent, driven by digital sales growth of 80 percent, which more than offset comparable store sales declines of 4 percent primarily due to reduced physical retail traffic, in part resulting from safety-related measures in response to COVID-19.

There you have it. Digital sales grew by $1.1 billion in the most recent quarter (from $1.3 billion one year ago to $2.4 billion today), and if it weren’t for that e-commerce growth, total revenue for Nike would have declined from the year-ago period. As management itself says, digital sales growth more than offset any physical store sales declines.

So that’s another retailer making the pivot to e-commerce. Deft footwork, indeed.

We were sifting through 2019 annual reports the other day, reacquainting ourselves with all the ways firms adjust net income, when we came upon an interesting item from Eli Lilly & Co. ($LLY).

Lilly reported non-GAAP net income lower than actual net income, which is an unusual thing; most firms report non-GAAP income that’s higher than actual net income. And why did Lilly do that? Because the company had a one-time gain of $3.68 billion in 2019, stemming from discontinued operations: it had cashed out of an animal health business it had spun off.

Hmmm, we wondered. How many other firms report large gains from discontinued operations? Do any firms report gains that are so large, or report those one-time gains so often, that income from discontinued operations actually exceeds operating income?

So we dug into the data to find out. The answers are yes and yes.

We examined operating income among the S&P 500 for 2016 to 2019, and compared that to net income from discontinued operations for the same period. Collectively, the S&P 500 reported $5.66 trillion in operating income during those four years. They also reported $32.92 billion in income from discontinued operations — only 0.58 percent of operating income.

That’s only the large picture, however. When you zero into specific firms, some of them tell quite a different picture.

Table 1, below, shows the 10 firms with the largest percentage of income from discontinued operations relative to operating income. As you can see, six of the 10 firms actually had more income from discontinued operations 2016-2019 than they did from regular operations.

We know what you’re thinking: “Oh sure, the overall percentage might be high — but that could be from one huge divestment or spin-off. You’re still looking at such a large picture that the numbers aren’t that meaningful.”

Ha! We considered that too. When you look at each of the 10 firms above one year at a time, you still find several that had significant income, year after year, from discontinued operations. One good example of what we mean is Dow ($DOW), below.

Granted, Dow went through quite a bit of tumult over the late 2010s as management first merged the company and DuPont de Nemours ($DD) in 2017, and then split the merged business again into Dow, DuPont, and a third business called Corteva ($CTVA) in 2019. Not every firm will see that many operations discontinued in such a short period.

Another example is Fortive ($FTV), the industrial conglomerate spun out of Danaher ($DHR) in 2016. Fortive’s gains from discontinued operations weren’t quite as eye-popping as those from Dow, but they were still significant. See below.

What were all these discontinuations about? We didn’t delve into that question, although you can always use our trace feature and the Interactive Disclosures database to see exactly what a firm had to say about those one-time gains.

Regardless, the numbers are the numbers — and they show that for at least some firms, getting out of operations can be just as lucrative as staying in them.

As we wind down 2020, we thought it might be interesting to poke around with our latest obsession: Special Purpose Acquisition Companies (SPACs). We’ve written about these vehicles before. At the end of November, we discovered how many there were and did an introductory piece on the topic.

Today, we will show our users how to do some sleuthing of their own, and try to learn something together.

First, we come up with our list of SPACs. To do that, visit the Multi-company page on Calcbench and click on the choose companies button. You will get a form that opens up and you can select the entire SIC group by entering “6770” like the picture below.

Next, pick your metrics. We chose assets and cash. Our naïve assumption was that all (or most) of the assets of the SPACs were “dry powder” and would be ready to deploy at a moments notice. We discovered that our assumption was inaccurate. As you can see in the figure below, most SPACs’ assets are something other than cash.

Since we now show about 2-3 percent of assets of the SPACS in cash, we wondered (out loud) about what was going on.  

Hint: Read the footnotes!

We created a smaller peer group and went to the Interactive Disclosures page on Calcbench, where we found two interesting cases. First, Pershing Square has a SPAC. For those who know, Pershing Square is the hedge fund run by famed financier Bill Ackman. This SPAC was the biggest one that we found (measured by assets), so we thought it worth examining. It turns out that most of the assets are in a trust that, while technically not cash, are liquid. 

 See the Accounting policy below:

Next, we looked at another SPAC further down the list, AgroFresh Solutions. Maybe it has a trust too? 

No, but look at what we did find. AgroFresh has 75 percent of its assets in intangibles. 

Looking a bit deeper, the footnote for Intangibles and Goodwill tells you that it sits mostly in Developed Technology.

OK, but exactly what developed technology is in that line item? You have to go back to the 2015 10-K to find out.

Hopefully you found this tutorial helpful. Calcbench looks forward to seeing more of our readers in 2021, so to all of you, Happy New Year!