Monday, June 29, 2020

The latest Calcbench research note turns to an item important in corporate tax reporting, that nevertheless can leave financial analysts confused: a firm reporting growth in net operating losses, even when its pretax income is also rising.

That sounds like a contradiction in terms. Net operating losses are supposed to arise when a firm is losing money. The company then carries those “NOLs” on the books until some future fiscal year, when it can deduct some of the NOL against the current year’s pretax income. That is supposed to normalize the company’s tax payments over time.

That’s the theory, anyway. Here in the real world, we recently noticed that Facebook ($FB) had reported a spike in its NOLs for 2019 and growth in pretax income.

Which left us wondering: how does such a thing happen? How many other firms report growth in pretax income and growth in operating losses at the same time?

Apparently it happens more often than one might guess. We reviewed the 2019 filings of firms in the S&P 500 (excluding financial firms) and found several dozen that fit the profile. Our latest research note (available to download as a PDF if you like), provides an overview of how such a thing can come to pass.

For example, some firms acquire others that already carry NOLs on their books, and the acquiring company then gets the NOLs too. That’s what happened with Fiserv ($FISV), which acquired First Data Corp. in 2019 and inherited $1.69 billion in NOLs.

On the other hand, we also see firms like Facebook. Its NOLs grow from $7.88 billion in 2018 to $9.06 billion in 2019 — a rise of $1.18 billion, or 15 percent. At the same time, its pretax income in 2019 was $24.8 billion.

Analysts need to do some sleuthing to figure out how that NOL increase happened, and even after digging around in the footnotes you only find clues that suggest a possible explanation.

For example, Facebook reported a spike in deferred tax liabilities, specifically in depreciation & amortization and in right-of-use operating leases. See Fig. 1, below.



Those numbers don’t explain the full $1.18 billion growth in NOLs, but they do explain at least part of it.

Our research note walks through the Facebook example in more detail, and presents a list of other firms that saw significant growth in NOLs while also reporting pre-tax income. We also have some suggestions about how Calcbench subscribers can use our Interactive Disclosures database and other research capabilities to do your own exploring with whatever firms are on your radar screen.

Enjoy! And of course, if you have suggestions for other research notes, drop us a line any time at info@calcbench.com.


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