RECENT POSTS
Saturday, April 13, 2019
When AWS Takes Over the World

Thursday, April 11, 2019
Data Trends in Focus: Restructuring Costs

Sunday, April 7, 2019
How One Customer Crushed It With Calcbench

Thursday, April 4, 2019
TJX Shows Complexity of Leasing Costs Reporting

Tuesday, April 2, 2019
CEO Pay Ratios: Some 2018 Thoughts

Wednesday, March 27, 2019
Corporate Spending: Where It Goes, 2017 vs. 2018

Monday, March 25, 2019
Health Insurers: A Bit Winded?

Friday, March 22, 2019
Our New Master Class Video

Thursday, March 21, 2019
Tech Data’s Goodwill Adjustment

Tuesday, March 19, 2019
There’s Taxes, and There’s Taxes

Saturday, March 16, 2019
Adventures in Tax Cuts and Net Income

Monday, March 11, 2019
Big Moves in Goodwill, Intangible Value

Friday, March 8, 2019
CVS, Goodwill, and Enterprise Value

Thursday, February 28, 2019
Summary of Our Goodwill Research/ How-To

Wednesday, February 27, 2019
What Does ‘Other’ Mean? An Example

Thursday, February 21, 2019
Another Tale, Buried in the Footnotes

Wednesday, February 13, 2019
Low Latency Calcbench

Monday, February 11, 2019
Now Streaming on Hulu: Red Ink

Thursday, February 7, 2019
Early Look at 2018 Tax Decline

Wednesday, February 6, 2019
You Revised WHAT, Netflix?

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When AWS Takes Over the World
Saturday, April 13, 2019

We were trolling through Amazon.com’s latest annual report the other day, and can confirm yet again: Amazon is a highly profitable web-hosting company, with a side business as the world’s largest retailer.

What piqued our interest was Jeff Bezos’ most recent letter to shareholders. There, in the 13th paragraph, Bezos had this line about the company’s web-hosting business, Amazon Web Services: “AWS is now a $30 billion annual run rate business and growing fast.”

We knew AWS was a lucrative operating segment for Amazon ($AMZN) — but $30 billion? That lucrative?

So we visited Amazon’s segment disclosures. And, yes, AWS really is tearing it up right now.

You can see the tale from Figure 1, below. Amazon does generate an enormous portion of total revenue from online retail sales, particularly North America. Eighty-nine percent of the company’s $232.9 billion in revenue last year came from retail. North America sales alone, $141.37 billion, accounted for 60.7 percent.



AWS revenue was only $25.6 billion in 2018 — but growth momentum is clearly with AWS, not retail. AWS revenue more than doubled from 2016 to 2018. In the same period, retail sales grew only 67.4 percent.

AWS’ fourth-quarter 2018 revenue was $7.43 billion. Annualize that out, and it’s $29.7 billion for a full year. Therefore, Bezos is correct. AWS has a $30 billion run rate. Its operating profit has more than doubled in three years. Heck, its operating income is now larger than operating income from retail.

What Comes Next

So AWS has a compound annual growth rate of 28.07 percent, compared to a CAGR of only 18.76 percent for Amazon retail. If you carry those rates forward, then AWS will become Amazon’s primary revenue stream in 2046. AWS would have revenue of $26.2 trillion that year, compared to $25.5 trillion for retail. See Figure 2, below.



Sound far-fetched? Before you roll your eyes, consider this. The United Nations estimates that the world population will be 9.8 billion by 2050. Let’s cut that to 9.5 billion by 2046, just to be conservative. That would be $2,688 spent by every man, woman, and child on Amazon retail in 2046.

We don’t know about you, but we’re doing our part to spend that much on Amazon right now.


Now that 2018 annual reports are filed for most firms in the S&P 500, we are picking over the data for interesting nuggets. Today’s data point — restructuring costs.

We last looked at restructuring costs three years ago, and found that Corporate America spent $84 billion on that line item from 2012 through 2015. Since then, the pace of restructuring costs has actually accelerated, to $78.6 billion in the three years of 2016 through 2018. (Which implies $104.8 billion over four years, if you average and extrapolate the numbers.)

That acceleration might be a bit misleading, however.

See Figure 1, below. The high-water mark for restructuring costs came in 2016, at $29.3 billion. Since then total costs are below $25 billion, although they’re still well above annual averages in the first part of the 2010s.



It’s also worth looking at average restructuring costs per filer. Those costs are up 14.7 percent, from $131.5 million in 2017 to $150.9 million in 2018 — and they are well above the average of $118.8 million we saw 2012-2014.

Critical point: the number of firms reporting restructuring costs also fell, from 190 in 2017 to 161 last year — and we’re still waiting on roughly 50 more 2018 reports from the S&P 500. So it’s possible that by the time those last firms file, their numbers might shift the average substantially. We don’t know.

Severance Costs

Meanwhile, severance costs seem to be moving in three-year cycles, with spikes in 2012, 2015, and (apparently) 2018. Total costs for the S&P 500 are gently rolling downward, but average costs per filer are moving upward. See Table 1, below.



We pulled this data together quickly from our Data Query Tool, which is just the thing when you want to find trends in data among large groups of companies. In these cases here, we asked the search tool to return aggregate and average numbers — but you can also get results for individual companies within your sample.

When we did that, we quickly found the 10 largest restructuring charges of the last three years. Topping the list was Kimberly-Clark Corp., with a $4.18 billion charge it announced for 2018. The top 10 are below, in Table 2.


And what were those charges about, exactly? Then you can shift to our Interactive Disclosures database and research whatever firm catches your eye. Typically, that footnote disclosure will include details such as which operations may be scheduled for restructuring, how many employees might lose their jobs, and more.

It’s also worth watching how those disclosures change over time. As we noted in our original restructuring post three years ago, firms have a habit of announcing one set of targets with a restructuring goal — and then somehow expanding those numbers and costs over time.


How do our subscribers use Calcbench to solve real problems in the real world? Here’s one tale from a customer running the accounting and external reporting function at a large public company, in his own words.

The Issue

We decided to implement ASU 2016-18, Restricted Cash, but we didn’t know how to present and tag our Statement of Cash Flows properly. Given the young age of the standard, we were unsure how widely it had been adopted, fearful we wouldn’t know how others presented their Cash Flow statement. We also had a tight deadline and needed a solution our controller would approve and our auditors would agree to — fast.

What We Usually Would Have Done

We would have tasked a few analysts to search for any company that had restricted cash, and then see whether that company had adopted the new accounting standard. The analysts would have grabbed the list of roughly 15 other peer companies, maybe a few prime companies as well, then headed to the SEC website and hunted in the haystack — crossing their fingers that they found this specific scenario.

What We Accomplished With Calcbench

Using Calcbench, we went to the Multi-Companies page, selected “Choose companies” from the Screen/Filter tab, and typed in “restric” (that is, the first few letters of “restricted cash”).

Immediately, I could see that less than 10 percent of filers employed the tag RestrictedCashAndCashEquivalents. From there, I set my results to be “not equal to zero” and hit “go.” Lastly, I entered the same tag to add a column, selected Q1 2017 to get the most recent filings and sorted by dollar value. That was it! (See Figs. 1 and 2, below, searching for Q4 2018 filings.)




In less than five minutes, we had our list of companies with restricted cash balances. To complete the task, we:

  • traced the tag to the company’s filing, to understand the nature of its restricted cash;
  • drilled to the filing to see if the company had adopted the ASU;
  • selected the company name to see the company’s balance sheet and cash flow presentations; and
  • reviewed the actual tag used.

So within minutes, we found other filers that had recently adopted the new standard and had restricted cash balances. We also had data on how they presented their Statement of Cash Flows. We took that information, marched into our controller’s office, and won approval for our suggestion — which, in turn, was also approved by our auditors.

Without Calcbench, our process would have suffered severe delays as we hunted through the haystack. Instead, we found the needle in minutes, and had our whole problem sovled in less than a day.

OK, readers, this is the Calcbench crew again. That’s one tale of Calcbench in practice. If you have others, drop us a line at us@calcbench.com and let us know!


Retailer TJX Cos. ($TJX) filed its latest Form 10-K report this week, for its 2018 fiscal year that actually ended on Feb. 2, 2019. Heed that date, because it’s an important reminder about the nuances of lease accounting and corporate balance sheets.

As we’ve written many times now, a new accounting standard for leasing costs went into effect on Dec. 15, 2018. Under the new rule (formally known as ASC 842), companies must start reporting the costs of operating leases as liabilities on the balance sheet, rather than bury those costs away in the footnotes.

For retailers like TJX, those operating leases can be expensive. TJX currently had $9.8 billion in leasing commitments on the books as of Feb. 2, according to the Commitments section of disclosures in the 10-K footnotes.

But wait, you say! Didn’t we just note two paragraphs earlier that the new accounting rule requires firms to report those costs on the balance sheet? What’s this footnotes business we’re mentioning now?

That’s why the Feb. 2, 2019 date is so important. Firms must adopt ASC 842 for the fiscal year beginning on or after Dec. 15, 2018 — and for TJX, its next fiscal year began on Feb. 3, 2019.

Little surprise, then, that TJX had this to say in its accounting policies disclosures about adopting ASC 842:

We will adopt this standard on February 3, 2019 using the optional transition method… On adoption of this standard we will recognize an operating lease liability of approximately $9 billion on our statement of financial condition as of February 3, 2019 with corresponding right-of-use assets based on the present value of the remaining minimum rental payments associated with our more than 4,300 leased locations.

Translation: TJX implemented a significant change to its balance sheet exactly one day after filing its 2018 annual report, where disclosure of that change was tucked away in the footnotes.

To be clear, this is entirely legal — and to a certain extent, even logical. After all, you have to pick some day to adopt a new standard; the start of a new fiscal year is a reasonable choice.

We only call out TJX today because noticing such details is important for astute financial analysis. The $9.8 billion in lease liabilities that piled onto TJX’s balance sheet on Feb. 3 is larger than all the company’s other liabilities, $9.2 billion, that existed there 24 hours earlier.

Shifts like that could have consequences for a firm’s debt covenants, if current liabilities suddenly cross some critical threshold as a portion of total liabilities. These shifts will also affect how a firm’s return on assets is calculated, since ASC 842 requires companies to add a “right of use” asset on the asset side of the balance sheet, to offset the liabilities.

TJX isn’t the only company with large leasing liabilities piling onto the balance sheet one day after filing the 10-K. In our recent master class video with Jason Voss, we called out Chipotle as another example. You can visit our Research page or search our blog archives for all the other material we’ve written about leasing costs. We even have a dedicated report on leasing expenses from last July, with a 2019 version coming this summer.

Suffice to say, there are plenty of examples to choose from.


CEO Pay Ratios: Some 2018 Thoughts
Tuesday, April 2, 2019

Now that 2018 annual reports are mostly filed, the 2018 proxy statements are starting to arrive. That means we can move on to our next piece of financial data to analyze: the CEO Pay Ratio.

That number compares the CEO’s total annual compensation to annual compensation of the firm’s median employee. The SEC began requiring pay ratio disclosure in 2017 proxy statements — which means this year’s proxy statements offer our first instance to see how that ratio is changing over time.

Calcbench users can search for CEO Pay Ratio disclosure. Just go to our Multi-Company or Interactive Disclosures pages, and enter “CEO Pay Ratio” in the standardized search metrics field on the upper left. That will return the pay ratio disclosed by whatever companies you are researching.

What can we say about CEO pay ratios so far? A few things…

First, it’s early in the proxy season, so financial analysts don’t have many 2018 pay ratio disclosures so far. We searched the S&P 500 and found only 21 firms that have reported pay ratios for both 2017 and 2018. But more such disclosures will be coming as proxy season unfolds, so if CEO pay is something you study, you’ll want to check back with us regularly.

Second, those pay ratios we do already have are mostly trending upward — but perhaps not as widely as cynics might expect. Of the 21 firms we examined, 12 have higher pay ratios in 2018, but eight more had lower ratios. (One firm’s ratio held steady.)

Then again, it’s still early. Maybe as more firms file 2018 pay ratios, the balance will skew higher and the cynics will be vindicated. We don’t know yet. Table 1, below, shows the five firms with the largest 2018 pay ratios so far.



An important point to consider here is why pay ratios might be fluctuating. For example, if a CEO receives most of his or her compensation in the form of stock awards, the company’s shares might have done quite well in 2018.

That would certainly enlarge the CEO’s total compensation, and therefore boost his or her pay ratio. But that’s not the same as a Scroogey McScrooge CEO reporting a higher pay ratio because he cut the median employee’s salary while raising his own base pay.

Critics of the CEO Pay Ratio Rule — and don’t die of shock here, but many CEOs do dislike this rule — say the number can be confusing, or even misleading. They’re not wrong; it can be misleading, if financial analysts don’t understand where the numbers in the ratio come from and how those numbers fluctuate from year to year.

Calcbench subscribers can do this by using our Trace feature to see how a CEO pay ratio was calculated. The trace will whisk you back to the proxy statement and the underlying data.

For example, American Electric Power ($AEP) reported a 2018 pay ratio of 111. That comes from CEO Nick Akins’ total compensation of $12.2 million last year, compared to the median employee compensation of $110,125.

You could also then compare that against AEP’s disclosure from 2017, when the pay ratio was 102 — stemming from $11.5 million in CEO compensation, against $113,085 for the median employee.

Now, you might ask: where did those changes in Akins’ compensation come from? Jump to AEP’s summary compensation tables, and you can find the answer. Akins did get a raise in base salary of $40,00o to $1.415 million, and he also got a much larger incentive bonus: $2.9 million, compared to $1.7 million last year. His stock awards, pension contributions, and other compensation, however, actually fell.

Searching standardized metrics, tracing back to the source disclosure, comparing to previous periods; that’s how you can do better financial analysis. Calcbench lets you do it with just a few keystrokes.


Earlier this month, a corporate client asked us if we knew where firms were spending their projected benefits from last years TCJA. He told us what their firm did. So, we set out to help our client answer the question. Here’s the story.

We examined the 2017 and 2018 spending among more than 2,600 publicly traded firms that all reported more than $1 billion in assets. That is, many more firms than those in the S&P 500, but substantial firms with real operations and assets nonetheless.

First we have Figure 1, below. 2017 spending is in blue, 2018 spending in orange. We totaled up corporate spending in four categories, R&D, capital expenditures, pension plan contributions and share buybacks.



As you can see — spending is lower across the board, except for share buybacks. Spending there rose from $660.4 billion in 2017 to $803.3 billion last year.

One important caveat: we have not seen all companies submit their 2018 filings yet. In our study here, we have 2,400 filers in our 2017 pool, but only about 1,900 in our 2018 pool.

So as more 2018 filings arrive, might our exact totals and percentages change? Yes. But we already have all the largest filers included for both years, so our basic conclusion should remain the same: lots more spent on share buyback programs, less spent on everything else.

You can also see the spending shift in our two pie charts, below. 2017 spending is on top, 2018 spending below. These charts are looking at what the average firm spent on each of these four categories in each of the last two years. In the R&D case, only 567 firm observations exist in 2018, so the average spent per firm is relatively high as a percent of total spending.





Yellow and orange are the most important slices. The yellow (share buybacks) expanded from 30.8 percent of all spending in 2017, to 35.2 percent in 2018. That may not sound like much, but do the math: that’s an increase of 440 basis points, or a 14.3 percent increase from 2017 totals.

Meanwhile, capex spending (the orange slice) shrank by 402 basis points, while R&D (blue) and pension contributions (green) stayed essentially flat.

We will revisit and update these numbers later this spring, and of course, the conclusions we draw here today are about collective corporate spending — spending among individual companies may differ quite sharply from the broad tale told here.

You can always use our Company-in-Detail and Multi-Company pages to research these questions yourself, but that’s how the big picture looks at this juncture.

By the way, if you have any financial data questions you want answered, we’re always happy to help. Email us at us@calcbench.com and tell us what’s on your mind. We’ll get cracking on an answer.


Health Insurers: A Bit Winded?
Monday, March 25, 2019

From time to time we revisit how large, for-profit health insurers are faring financially. Now that 2018 numbers are filed for seven of the largest such firms, we can declare that they are still alive — although perhaps not as hale and hearty as they were 12 months ago.

We pulled up data for the following firms:

  • Anthem
  • Centene
  • Cigna
  • Humana
  • Molina Healthcare
  • UnitedHealth Group
  • Wellcare Health Plans

We reviewed their revenue, operating expenses, operating income, operating cash flow, and net income; comparing 2018 to 2017, and 2017 to 2016.

Table 1, below, shows the most recent numbers for all seven firms collectively. At first glance they look OK. Revenue, operating income, net income all going up; that’s good. Can’t say we love the decline in operating cash or the increase in operating expenses, but nobody needs to administer CPR for a data table like this.



Now let’s look at Table 2, comparing 2016 to 2017. We see a much more rosy complexion here: revenue not growing quite as quickly, but operating expenses growing more slowly, and operating cash flow popping along with a 31.2 percent increase. Net income popped even higher.



What happened? For starters, six of our seven companies saw declines in operating cash flow; only UnitedHealth ($UNH) kept cash growing. Humana ($HUM) also saw operating income drop by 27 percent, which pulled down net income by 31 percent.

You can research the numbers yourself on our Multi-Company page, for health insurance or any other sector you follow. And as the guest on our most recent master class video, Jason Voss, stressed — look at the financial data over longer periods of time. As our example above shows, what looks good across two years may look a lot less healthy across three or more.


Our New Master Class Video
Friday, March 22, 2019

Rejoice, lovers of all things Calcbench! We have posted another master class video, to explore important lessons in financial analysis and how you might use Calcbench tools to put those points into practice.

As usual, this video is divided into two parts. First we have an interview with Jason Voss, a financial analyst, investment manager, prolific author and writer, and (for real) student ninja. We spent 20 minutes chatting with Voss about three practices every analysis should embrace:

  • Connecting the numbers in a company’s financial disclosures to the narratives management is telling people — or, also, finding the disconnect between numbers and narrative;
  • Considering financial performance across time periods, and identifying when fluctuations from one period to the next may be more significant than they seem;
  • Reading the footnotes for all the juicy detail management might prefer that you overlook.

Those are solid best practices, and Voss gives examples of each one with real filers.

In the second half of the master class, our own CEO Pranav Ghai picks up story. He shows how Calcbench database tools can be used to research Voss’s three points, and we offer three more examples, all pulled from current filings made by large firms.

Don’t forget our first master class video, featuring former FASB member Marc Siegel. That one talks about the evolution of financial analysis in the last 15 years and how technology has moved to the center of things.

We’ll also be posting more videos in the future. If you have ideas about what subject we should explore, drop us a line at us@calcbench.com.


Tech Data’s Goodwill Adjustment
Thursday, March 21, 2019

We often like to talk about goodwill on the corporate balance sheet, and whether the goodwill reported in a corporate merger lives up to expectations. Today we have an small example of how quickly those thoughts can change.

The example comes from Tech Data Corp. ($TECD), a data services firm based in Florida. In February 2017 Tech Data acquired the assets of “TS,” the technology solutions subsidiary of Avnet, for $2.8 billion. The deal was meant to expand Tech Data’s reach globally, including into Asia-Pacific. Remember that detail.

The purchase price included $727 million recorded in goodwill (roughly 26 percent of total deal price), as shown in the purchase-price allocation Tech Data elaborated, below.



OK, sounds reasonable enough so far. But Tech Data took 18 months to integrate TS into its operations fully. When Tech Data finally filed its 2018 Form 10-K on March 20, we skimmed the goodwill disclosures and noticed this gem below. Emphasis added in blue.



In other words, by the time Tech Data’s TS integration was fully complete, its Asia-Pacific operations were deemed not all they were once cracked up to be. So Tech Data had to trim the goodwill from this deal by 6.5 percent of the original $727 million.

As we said, it’s a small example, but a telling one. (We also have much more goodwill research you can peruse on our Research page.) Calcbench subscribers can always try to anticipate goodwill impairments by poring over segment disclosures, following management discussion and statements closely — and of course, setting up email alerts on the companies you do follow, so you can start digging into the data as soon as fresh data arrives.


There’s Taxes, and There’s Taxes
Tuesday, March 19, 2019

Companies report tax payments, and companies make tax payments. Many times, those two things are not the same.

As part of our ongoing look at how the corporate tax cut of 2017 has been affecting net income, we recently tried to quantify just how much those two things are not the same. Studying that gap across several years helps to understand how much corporate tax numbers were distorted in 2017 itself (more on that presently), and whether corporate tax payments today are dramatically different from what companies paid before 2017.

What We Did

We compared the difference in provision for income taxes (what a company plans to pay in taxes for a year) and income taxes paid (what the company actually did pay) for 400 firms in the S&P 500, 2014 through 2018. Then we expressed that difference as a ratio of actual taxes paid to the provision for income taxes.

For four of the five years we studied, the median firm in our population actually paid anywhere from 75 to 85 percent of what it had made provisions to pay. See Figure 1, below.

The exceptional year is 2017, where the ratio spiked to 98.4 percent. That is, almost all the taxes our median company prepared to pay, it actually did pay.

Why? Because when Congress enacted the corporate tax cut in 2017, companies suddenly had to pay large one-time “deemed repatriation taxes” on unremitted foreign earnings; or had to revalue deferred tax assets and liabilities; or do both. And those one-time tax moves had huge effect on companies’ tax payments and tax rates.

Calcbench wrote about this several times in the first half of 2018, as companies were reporting some sky-high effective tax rates in their 2017 annual reports. Our chart above is one aggregate glimpse of that effect.

Table 1, below, shows the tax payments-vs.-provisions for our 400 firms collectively. You’ll notice the percentage ratio here is different from what we have in our chart above. That’s because of outliers at both the top (they paid much more than their provisions) and the bottom (they paid much less), tugging at the average numbers.

That brings us to our final point for today: that individual companies have seen some large differences between tax provisions and taxes paid; and seen large changes in those numbers from one year to the next.

For example, in 2017 Gilead Sciences ($GILD) had provision for income taxes at $8.88 billion, but paid only $3.34 billion — a ratio of 37.6 percent. In 2018, however, Gilead had a tax provision of $2.34 billion but paid $3.2 billion — a ratio of 136.7 percent (because Gilead paid more than it had in its provisions).

Why Are We Doing This?

We do this to amplify a point we made in our previous post about IBM ($IBM) — that drawing conclusions about how the corporate tax cut affects a firm is a complicated, company-specific exercise. You really need to delve into a company’s specific tax disclosures to get a sense of what is going on.

Yes, some companies are experiencing a “tax cut sugar high,” where all their growth in net income for 2018 can be attributed to paying less in taxes, rather than from better operating income. But some also paid so much in one-time taxes in 2017, that they were destined to pay less in 2018, and their tax payments now might be only marginally lower than what they paid in 2016 or prior.

So is that a sugar high now, or was it sour lemons last year? You can use Calcbench to find the answer for whatever companies you follow, but it’s a question that needs thoughtful research to find the right answer.


Adventures in Tax Cuts and Net Income
Saturday, March 16, 2019

Avid readers of the Calcbench blog know that we’ve been watching corporate financial data closely here to understand a complicated, subtle question: How much has the sweeping corporate tax cut enacted at the end of 2017 been responsible for growth in net income?

Economists have pondered that question too, wondering whether the tax cut was a sugar high that goosed corporate earnings in 2018 — with the implication that after the sugar high wears off (say, in 2019), growth in net income might stall.

As companies file their annual reports for 2018, we can now start to answer that question. Somewhat to our chagrin, the answer is more complicated than we expected.

In theory, you would see the sugar high in a company where pretax earnings from operations remained flat or fell, but because the company paid so much less in taxes, net income would rise anyway. That is, the company’s net income didn’t increase because sales were growing or costs were kept in check; net income only grew because Uncle Sam decided to take less in taxes.

So if Washington had not enacted that tax cut in 2017, and the company paid 2018 taxes at the same effective rate as it did in 2017 — then net income might have held steady or fallen, but it wouldn’t have grown. That would be the sugar high.

Do we see that phenomenon at play when comparing 2018 to 2017 numbers? Yes, but with an asterisk. And that asterisk says a lot about how financial analysts need to look at a company’s numbers carefully if you want to get a correct read on its situation.

Example: IBM

A good example of this situation is IBM ($IBM). We hopped over to our Data Query page and pulled up Big Blue’s earnings before taxes, income tax provision, and net income for both 2017 and 2018. The results were as follows in Figure 1, below.

As we can see, IBM’s pretax earnings actually drifted downward last year, but its income tax provision plummeted by more than $3 billion — an amount larger than $2.98 billion increase in net income.

Therefore, all of IBM’s growth in net income can be ascribed to the company paying less in taxes. And sure enough, when you look at IBM’s numbers on the Company-in-Detail page, they’re pretty mopey. Revenue, gross profit, and expenses for 2018 are all within 1 percent of 2017 numbers. That’s what stagnant growth looks like.

The tricky part, however, is in IBM’s effective tax rate. Yes, technically speaking, if IBM paid a 49.5 percent tax rate again in 2018 — that would have meant an income tax provision of $5.6 billion, and net income essentially unchanged at $5.73 billion.

Except, why was IBM’s effective tax rate that high in the first place? Because its effective tax rate in 2016 was only 4 percent (thank you again, Data Query page), and its effective tax rate in 2018 is 23.1 percent. Clearly IBM’s effective tax rate fluctuates quite a bit.

So you can’t assume that without the corporate tax cuts arrived in 2018, IBM would have faced the same higher effective tax rate as 2017, and therefore stalled on net income growth. The 2017 effective tax rate may have been an artificially high number itself.

How would you unravel that mystery? By studying IBM’s numbers on our Company-in-Detail page, and then tracing the tax provision line-item back to our Interactive Disclosure page, which lets you see the narrative explanation for that 49.49 percent.

Sure enough, when we trace the line-item back to the source, we find that IBM recorded a one-time charge of $5.5 billion in fourth-quarter 2017 — the famed “deemed repatriated earnings” tax that so many firms paid that quarter, as part of corporate tax reform. That $5.5 billion charge accounted for 48 points in that 49.49 percent.

More or Less Sugar?

IBM shows us the importance of tax management to a company’s bottom line — not really one-time sugar high this year, as much as an ongoing effort to minimize tax payments every year, which can leave net income growth divorced from operational reality.

We’ll keep looking at the sugar high phenomenon here, and try to draw broader conclusions about how real it may be.

Calcbench subscribers, meanwhile, can zigzag from our Data Query page, to the Company-in-Detail page, to the Interactive Disclosure page — all to connect the numbers companies report to the narrative they offer.

Then you can see how much those things do, or do not, align over time.


Last week we had a post noting the sharp increase in goodwill and intangible assets listed on the balance sheet of CVS Health ($CVS). Those assets ballooned last year as result of CVS’s merger with Aetna, so that they now account for 58.6 percent of all assets the company lists.

That single example got us wondering: what other companies have reported a sharp increase in the value of goodwill and intangibles? So we visited our Multi-Company database page to investigate.

Our study was straightforward. We identified 263 firms in the S&P 500 that have reported goodwill and intangible assets for both 2018 and 2017. First we calculated how much those two line items were as a percentage of total assets, in both 2017 and 2018. Then we sorted our sample population based on largest gain in percentage from 2017 to 2018.

You can see our results in Table 1, below.



Some context: Among our 263 firms collectively, goodwill and intangibles accounted for 21.8 percent of all assets in 2018, unchanged from 2017. The median firm was a bit different: 30.8 percent in 2018, up from 28.5 percent. That’s a jump of 230 basis points in one year.

The nine above, however, are all well beyond the median. So financial analysts following any of these firms would have two questions. First, why the firm you’re following see such a sharp increase? Second, do you believe that increase is warranted, given all the other information you have at hand?

For example, sometimes the increase could be due to a large merger. Well, is the acquiring firm placing a lot of goodwill on the value of the target; or did the target bring a lot of goodwill with it because the target had acquired other firms in the past? That answer could leave a financial analyst with more questions to ponder about management quality and strategy, and whether that goodwill will meet expectations.

Or perhaps the increase comes more from other intangible assets rather than goodwill. Those could be patents, trademarks, contractual obligations — that is, things that are more reliable producers of cash. You might still have questions about whether those things are producing enough cash, or might be vulnerable to other forces that could devalue the asset. But questions about the value of intangible assets are different (sometimes very different) than questions about goodwill.

To demonstrate our point about follow-up questions, Table 2, below has our same list of companies with their changes expressed in dollar terms, rather than percentages. Look at Pentair ($PNR), ranked No. 1.



The value of Pentair’s goodwill and other intangibles actually fell from 2017 to 2018 in dollar terms. But total assets fell even more, so goodwill and intangibles ended up accounting for a larger percentage of the total anyway. Why? That’s an excellent question to ask Pentair executives.

Do It Yourself

All of this is easy to find in Calcbench. Just select the peer group you want to study, and use our Multi-Company page to pull up goodwill, intangibles, assets, and any other line-item you want. (For example, you might also want to compare goodwill and intangibles to shareholder equity.)

That gives you the data itself. Then you can use our Trace feature to bore down to the narrative disclosure that accompanies goodwill and intangible assets data, to find the context you want — or, if not enough context is there, to help you frame the questions you might ask on the next earnings call.


CVS, Goodwill, and Enterprise Value
Friday, March 8, 2019

CVS Health filed its 2018 financial statements on Feb. 28, and one fact almost screamed at us from the balance sheet — CVS has a huge amount of value tied up in its goodwill and intangible assets.

As you can see from Figure 1, below, the firm specifically has $115.2 billion reported for goodwill and intangible assets. That’s (checking calculator…) 58.6 percent of total assets, tied up in items that don’t actually exist here on the material plane.



To be sure, some of those items do create value for CVS. Intangibles, for example, must include copyrights, patents, and other agreements that generate revenue for the firm. Still, some of that value is also tied up in, say, the brand value of the CVS trademark. Let’s recall that Kraft-Heinz also placed a lot of worth on the intangible value of its Kraft and Oscar Mayer brands, right until the company took a $8.3 billion impairment charge against them last month.(Plus another $7.1 billion impairment against goodwill.)

Then there is CVS’ $78.7 billion in goodwill, which alone amounts to 40 percent of the company’s total assets. That’s more than double the goodwill CVS reported in 2017, because CVS merged with Aetna last year. So lots of the goodwill number is the result of a gigantic merger, and we all know how those deals tend to fall short of expectations.

Perhaps most alarming, however, is the number at the bottom of the balance sheet: total shareholder equity is $58.5 billion, roughly half the value of the company’s goodwill and intangibles. So if CVS-Aetna fails to live up to its promise and the company announces a gigantic write-down some day (see Kraft-Heinz, above), that impairment could leave shareholders wiped out.

Bigger Picture

The CVS example got us curious: what is a normal level of intangibles and goodwill tied up on the balance sheet, anyway? So we looked at what the S&P 500 collectively reported for goodwill and intangible assets, compared to total assets, for 2013 to 2017. (We don’t have quite enough 2018 reports yet to include last year.)

Then we expressed that ratio as a percentage, and got this chart, below.



So those items are rising as a portion of total firm value, from 9.37 percent in 2013 to 12.66 percent in 2017 — but CVS is still way, way above the norm.

Just food for thought while you’re waiting to fill your next prescription.


Summary of Our Goodwill Research/ How-To
Thursday, February 28, 2019

The examples below are only observations and are NOT to be construed as investment advice. Nor are these examples of good or bad transactions. They are simply observations and a collection of data for an analyst to use in drawing their own conclusions. This piece was originally written prior to the asset impairment reported by Kraft Heinz on February 21, 2019. We stand by the data and the story.

In order to enable a greater degree of transparency, visit our goodwill page to go through a few examples of acquisitions by large firms and how these acquisitions may be monitored through corporate filings in a systematic way.



A lot of bad feelings can arise from how companies handle goodwill.

That is unfortunate, because goodwill has become an increasingly large and important part of the corporate balance sheet. In our analysis of the S&P 500, we found that more than $3 trillion in goodwill now sits on the balance sheets of those firms (Table 1). Average amount of goodwill per filer has risen 35.4 percent in the last four years, from $5.1 billion in 2014 to $6.9 billion in 2017. In fact, the ratio of goodwill to assets across the universe now sits at 8.77% compared to just over 7% in 2014.

This means that questions about impairment of goodwill, and whether the goodwill paid in an acquisition has lived up to expectations, may have become more urgent. According to one famous study from 2011, at least 70 percent of M&A deals fail to achieve desired returns.1 The implicit criticism there is that acquirers either did not adjust goodwill in those deals downward with appropriate speed, or they simply paid too much for the target in the first place — and didn’t confront that fact until a painful impairment announced to investors.

It should be no surprise, therefore, that the International Accounting Standards Board (IASB) is considering allowing firms to write off a fixed amount of goodwill every year.2 A better analysis of goodwill is crucial to evaluating corporate performance, and to anticipating possible impairment of goodwill before it happens.

TABLE 1 : Goodwill and Impairment Over Time

2014 2015 2016 2017
Goodwill ($B) $ 2220 $ 2489 $ 2791 $ 3069
Firms with Goodwill 436 441 442 445
Avg. Firm Goodwill ($B) 5.093 5.643 6.314 6.898
Avg. Goodwill to Assets Ratio(%) 7.10% 7.84% 8.34% 8.77%
Firms with Impairment 57 69 69 72
Impairments ($B) $ 20.04 80.45* $ 24.61 $ 27.16
Avg. Impairment ($B) $ 0.352 1.166* $ 0.366 $ 0.377
*Energy complex write-downs in 2015 exceeded $55 Billion USD. Removing those brings the average impairment to $243 million per S&P 500 firm.

Initial Conclusion

Impairment numbers are going up, so are goodwill balances and the number of firms reporting both items. Given the trend, we can likely expect that losses from Impairment will grow into the future.

But we are far from finished. Is there anything that we can do to consider what may be coming down the pike?

As we stated in our disclaimer, while we are not in the advisory business, we are in possession of data that can better inform an analyst of potential outcomes.

The Devil in the Details

The topic is making its way into the press as well. The Economist quotes Hans Hoogervorst, the IASB’s chairman, “…many of the computers behind factor funds, a popular type of statistically driven investing, don’t adjust properly for goodwill.”3

At Calcbench, we would posit that an intelligent process be able to anticipate what is coming down the road. To show how this might happen, we combine data from the Business Combinations footnote with the information provided in Table 1. We would also systematically combine that data with segment disclosure information to help in determining the efficacy of the merger.4

Transparency is Good… a Procedure with Transparency is better

At Calcbench we believe that data transparency gives our clients (investor, analysts, academics and auditors) better methods and tools to help answer questions based on complex accounting pronouncements and their impact on financial statements.

1https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook
2https://www.ifrs.org/news-and-events/2018/12/speech-are-we-ready-for-the-next-crisis/
3https://www.economist.com/business/2018/08/30/disputes-over-goodwill-can-seem-arcane
4If an M&A transaction is material, the acquiring company must put the transaction through a purchase price allocation (PPA) process. At Calcbench, we collect and disseminate the data from the PPA in line-item detail. One of those line-items is goodwill per transaction.


What Does ‘Other’ Mean? An Example
Wednesday, February 27, 2019

We’re always fascinated by unusual lines of business here at Calcbench, but one line of business intrigues us more than most — “Other.”

How do companies decide what qualifies as Other? How large can Other be, before the company gives it a more specific name? Does the person running Other have “vice president of Other” on his or her business card?

These questions were on our mind lately thanks to our recent post about American Water Works ($AWK), which has an Other division that seems to do nothing but lose money. We’re not even sure AWK’s Other division is a division, as much as it’s a hodge-podge of homeless operating costs that need to go into a segment somewhere.

As a simple experiment, we researched all firms that have filed 2018 financial statements so far an included an item tagged “Other Sundry Current Liabilities” and found 48. Then we compared that amount to the firm’s total current liabilities, expressed as a percentage. The table below shows our Top 10.



One logical question would be what these other current liabilities are or where they come from. Here’s the thing: lots of companies don’t say.

That is, you can find the disclosure itself. Just use our Multi-Company page and search by the XBRL tag for that line item, “OtherSundryLiabilitiesCurrent.” You’ll get a list of all companies that filed some line-item using that tag.

In theory, you could then use our Trace feature to follow that number back to some more detailed disclosure the company made about that line-item — except, for most companies, they have nothing to say about Other. Why would they? If it were material to the business, you’d call it something else.

Still, if you are Tyson Foods ($TSN) with $805 million in Other current liabilities, or Sprouts Farmers Market ($SFM) with nearly 20 percent of your current liabilities going to Other, that’s not exactly chump change.

So we continue to wonder about Other and what it means. At least our data analytics can help you get started on answering such questions, too.


Another Tale, Buried in the Footnotes
Thursday, February 21, 2019

Footnotes matter, people. Here is today’s example of how true that is.

American WaterWorks Co. ($AWK), one of the largest publicly traded water utilities in the United States, filed both its annual report and its earnings release for its 2017 operations on Feb. 20, 2018. The company reported a revenue increase of 1.36 percent from the prior year, which seems like good news at first glance.

In the earnings release, AWK reported consolidated GAAP earnings per share of $2.38 and consolidated non-GAAP earnings of $3.03 per share. It also reported GAAP and non-GAAP net income for its regulated business of $559 million and $552 million, respectively.

Read that again carefully. Non-GAAP earnings per share were considerably higher than GAAP earnings per share, but non-GAAP net income for the regulated business was lower than GAAP net income.

That’s weird. AWK is a water utility; they are supposed to be boring, stable businesses, with boring, stable earnings numbers. Why such a big gap between GAAP and non-GAAP earnings per share? Why would non-GAAP net income be lower than GAAP income? What’s with that “regulated business” qualification, anyway? Did the company have other business segments that weren’t mentioned on the earnings report?

There’s more. We had also noticed that AWK’s earnings release included a disclosure about its non-regulated “Market-Based Business.” (The earnings release didn’t say much beyond that to clarify AWK’s business structure.) For that non-regulated unit, AWK reported GAAP net income of $38 million and non-GAAP net income of $43 million — so, opposite of the regulated side of the business, where the non-GAAP number had been lower than the GAAP number. Huh?

Clearly, we had questions. So we turned to our Segments Disclosures page for answers.

That is where we discovered that AWK reports numbers separate numbers for its regulated and non-regulated business segments. The non-regulated segment is then further split into “Market-Based Business” and the ever-popular “Other.”

The Other segment had a loss of $171 million — equal to roughly 40 percent of AWK’s consolidated GAAP net income of $426 million. (The $559 million from from the regulated business, plus $38 million from the non-regulated business, minus this $171 million from Other.) See Figure 1, below.



Exactly what does this Other business segment do? AWK describes it as follows:

“Other” includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, fair value adjustments and associated income and deductions related to the acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Other as they are excluded from segment performance measures evaluated by management.

That suggests to us that Other is a AWK’s financial reporting equivalent of your favorite kitchen drawer, where you stow all the junk that you don’t know where else to put it.

Equally interesting: Other has been operating at a loss for years. Remember, you can always move your cursor over any number displayed in Calcbench to see how the filer tags that value — including a “Tag History” option that will display the value for previous periods. (See Figure 2, below.) Other had a net loss of $43 million in 2016 and $39 million in 2015. In fact, AWK reported its 2018 numbers earlier this week, and Other had a $67 million loss last year, too.



So once more, with feeling: reading the footnotes is important. Those numbers can tell a very different story from what companies choose to report in the earnings release, where executives have far more discretion to call out the good stuff.

The footnotes, however, is where all the stuff is reported. That matters.


Low Latency Calcbench
Wednesday, February 13, 2019

Calcbench has added push notifications. Now algorithms can ingest the numbers and text from 10-K/Q/Press Releases seconds after Calcbench publishes. Previously, Calcbench API clients polled us periodically to download data from new filings.

To listen for notifications, use the new handle_filings method on our Python API client. See an example of how to get the most recent face financial data from each new filing @ https://github.com/calcbench/notebooks/blob/master/filing_listener.ipynb. You will need to contact us for a queue subscription before starting your listener.

If you need fundamental accounting data or text from SEC filings for a time sensitive process contact andrew@calcbench.com.


Now Streaming on Hulu: Red Ink
Monday, February 11, 2019

Comcast Corp. ($CMCSA) filed its 2018 annual report at the end of January, which gives us fresh opportunity to catch up on one of our pet interests: the value of Hulu.

We write about Hulu from time to time because it’s a huge player in streaming media, but isn’t publicly traded — so its financial data is somewhat hard to find. Then again, Hulu is owned by four entertainment giants: Comcast, Disney, and Fox, which own 30 percent each; plus Time-Warner with a 10 percent stake.

So if you know where to look in the filings of those companies, you can assemble a better, although still incomplete, picture of Hulu’s performance over the years.

The best place to look these days is the Comcast filing. There in the Investments section of its disclosures, Comcast reports that it owns a 30 percent stake in Hulu and recorded a $454 million loss in 2018 for its share of Hulu operations.

Well, do the math. If 30 percent ownership gives you a $454 million loss, that implies that Hulu’s total loss for 2018 was (gulp) $1.5 billion.

Yikes, we wondered, could that be right? So we pulled up Fox’s most recent annual report, which it filed last August. (Fox has a June 30 fiscal year-end.) There in the Investments section of Fox’s disclosures, it reported a loss of $445 million for its 30 percent ownership stake.

So, yes. Hulu loses a ton of money. We knew that already, based on previous posts we’ve written about Hulu. Still, for historical perspective, using those same calculations from prior years’ disclosures, Hulu’s losses have been…

  • 2014: $20 million;
  • 2016: $523 million;
  • 2017: $716 million.

Wow. And why, exactly, are those losses ballooning so much? Consider this disclosure from Disney’s most recent annual report, filed last November:

The higher loss at Hulu was due to higher programming, marketing and labor costs, partially offset by growth in subscription and advertising revenue

In fairness, Disney and Hulu’s other owners have been disclosing that sentence for three years running now.

One other detail one can pull from the disclosures: a rough estimate of what Hulu might be worth as a business. Hulu was originally founded by Disney, Fox, and Comcast alone, each owning 33 percent of the venture. Time Warner then bought 10 percent of Hulu in August 2016 for $590 million. That implies a value of $5.9 billion at the time.

So what is Hulu worth today? That’s hard to say. First, Fox is selling its 30 percent stake to Disney as part of larger asset purchase deal. That means Disney will become Hulu’s majority owner with a 60 percent stake in the business. We’re still waiting on that deal to close sometime later this spring, and maybe we’ll get a better sense of the purchase price for this particular asset then.

Meanwhile, one of Hulu’s top executives said just this week that the business had double-digit subscriber growth in 2018 (growing fastest in the United States), and now has 25 million paying subscribers. The Hulu exec was upbeat about Disney owning a majority stake.

Then again, what else would you say when you’re a senior exec trying to keep your job?


Early Look at 2018 Tax Decline
Thursday, February 7, 2019

2018 was the first full year of life with dramatically lower corporate tax rates, and now we’re getting early data on exactly how much less companies expect to pay.

Surprising nobody — they are paying a lot less.

We examined 214 firms in the S&P 500 that have already filed their annual reports for 2018. First we pulled their reported earnings before taxes and provision for income taxes; and then compared those numbers to the same line items the firms reported in the prior three years.

Taken altogether, those firms saw their effective tax rates fall nearly in half, from 27.3 percent in 2017 to 14.2 percent in 2018. Their revenues rose briskly in 2018, while provisions for income taxes tumbled. See Figure 1, below.



We also have a year-by-year breakdown, for those who want to delve into the data. See Table 1, below.



For all you alternative history buffs: these firms had an average effective tax rate of 26.8 percent in 2015-2017, before Congress enacted its corporate tax cut at the end of 2017. If Congress had never enacted that tax cut, and we applied that same 26.8 percent rate to 2018’s pretax earnings of $832.9 billion — that would be an additional $104.4 billion in corporate tax payments.

Then again, if Corporate America were paying higher taxes, its collective net income would be lower, and stock prices would likely be lower too.

That’s how the data looks so far. More to come later this spring.


You Revised WHAT, Netflix?
Wednesday, February 6, 2019

Another day, another example of why attention to detail matters in financial analysis: Netflix ($NFLX) and its most recent annual report, which revised a lot of operating expense numbers from prior years. What was that about?

We noticed this adjustment while studying Netflix on our Company-in-Detail page. Netflix filed its 2018 annual report on Jan. 29, and several of the 2017 and 2016 line-items were highlighted as revised. See Figure 1, below. Those cells outlined in the famed ‘Calcbench mustard’ color are adjusted.



So we peeked at those revised facts by clicking on the Highlight Revised Facts tab above the line-items. When you do this, a small plus sign appears next to the revised number. Click on that plus sign and you can see the actual revisions made: what the number originally was, and when the firm revised to the current number seen on your screen.

Intrigued, we dug into that $8 billion number for Cost of Revenue in its 2017 fiscal year — and saw that several weeks ago Netflix adjusted that number upward by $374 million. See Figure 2, below.



For a moment we felt chest pains; $374 million is a significant amount of money. Then we noticed — revenue and operating income hadn’t changed. So Netflix was only rearranging costs among its line items for Cost of Revenue, Marketing, Tech & Development, and General Administrative.

Still, why?

To learn more, we clicked on that $8 billion number and traced it back to the source in Netflix’s 10-K filing. That took us to the Interactive Disclosure tool, where we could read the full details of why Netflix was changing these numbers.

Turns out that in fourth-quarter 2018, Netflix decided to reclassify those line items, so the spending for each one more closely reflected how the company tracks personnel costs. Or, as Netflix formally phrased it:

The Company is making this change in classification in order to reflect how the nature of the work performed by certain personnel has changed to be more directly related to the development, marketing and delivery of our service as a result of the continued evolution of the Company’s strategy to self-produce and create more of its own content rather than license or procure it from third parties. This change in classification will also align external presentation of personnel related expenses with the way that the Company’s chief operating decision maker expects to assess profitability and make resource allocation decisions going forward.

Netflix also provided a table to show all reclassifications by line-item and year, which was mighty nice of them. See Figure 3, below.



Our heart rate returned to normal after reading that explanation and we put away the nitro. Still, it’s another reminder that firms can revise financial filings all the time — and diligent financial analysts should want to know why.

With a few keystrokes to jump around the Calcbench data archives, we did find out why. So can you.


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