As you may have seen in the headlines lately, Bed Bath & Beyond ($BBBY) now seems destined for bankruptcy. The company has already missed interest payments on its debt, its financial performance looks awful, and analysts everywhere are predicting a filing within weeks.
Who could have seen this coming? Well, anyone who followed the company’s financial disclosures closely.
We compared Bed Bath & Beyond’s numbers to two competitors: Walmart ($WMT), representing the discount retailers competing against Bed Bath & Beyond from the low end; and Williams-Sonoma ($WSM), representing the upscale retailers competing from the high end.
First we pulled the three companies’ revenue, gross profit, and SG&A expenses for fiscal 2018 through 2022. Then we looked at gross profit margin and SG&A costs as a percentage of revenue for all three companies over those four years. The result is Table 1, below.
Ooof. Those are some pretty painful trends for Bed Bath & Beyond. Gross profit margins fell, while SG&A costs as a portion of revenue went up; that pretty much sets up the whole story. We didn’t even bother to include operating profit, since those numbers were printed in red every single year and Table 1 is colorful enough already.
Meanwhile, Williams-Sonoma saw its gross profit margins rise and SG&A as a portion of revenue fall. Perhaps that’s because Williams-Sonoma caters to a more upscale consumer, and they had plenty to spend during the pandemic thanks to government stimulus payments and (by late 2020, at least) thriving economy. Meanwhile, Walmart kept its margins essentially flat, because Walmart is so huge that it can force suppliers to keep costs low.
Many other circumstances pushed Bed Bath & Beyond to this unfortunate precipice too, of course; we don’t mean to say a quick glance at gross margins and SG&A costs can predict bankruptcy — but those quick glances can tell analysts that something is amiss, and worth further investigation.
Then you can keep digging into the data for better answers, and as always, Calcbench has all that other data too.
Everyone loves to talk about Netflix ($NFLX), either because you want to gab about some great new show you discovered (Kaleidoscope, people!) or you want to complain that there’s nothing on Netflix (us, immediately after finishing Kaleidoscope).
So when the company filed its 2022 annual report the other day, we decided to take a look at the two numbers behind those concepts: total content liabilities Netflix has, for programs it has committed to purchasing; and total number of paying subscribers.
Figure 1, below, shows what we found over the last five years. Fascinating to see that content liabilities (in blue) plunged in 2020 and 2021, presumably because film production shut down during most of the pandemic. When life and art began returning to normal in late 2021, those content liability numbers started to climb again.
On the other hand, subscriber growth — which is the most important factor to determine revenue, let’s remember — is chugging upward (in red) at a pace that’s steady, but by no means brisk. Total paying subscribers stood at roughly 110 million at the start of 2018. It was 230.7 million at the end of 2022, an increase of 108 percent. If you squint, you can see that the pace of subscriber growth increased in 2020 while we were all confined to quarters, but since then subscriber growth has decelerated.
One can see the strategic choices that emerge from these trends. Either Netflix trims its commitment to future programming; or it accelerates subscriber growth massively with, um, pixie dust or something; or it fiddles with its pricing options to raise more revenue from existing subscribers and the new subscribers trickling in over the years to come.
Indeed, Netflix has already started to pursue that third choice, with its idea of a low-cost subscription offering that includes advertising. The company launched that subscription product in November, reportedly to lackluster interest so far. (Netflix hasn’t broken out that advertising tier as a separate operating segment, nor does it report advertising revenue as a separate line item.)
So the other choices are fewer major commitments to content in the future (Bridgerton fans will riot if Netflix goes that route) or ramping up subscriber growth massively. Since just about every household in North America that wants Netflix already has Netflix, that also means said subscriber growth will need to be driven by global markets.
Something to think about when you see all those foreign shows in your feed.
Now that the largest U.S. banks have all filed their Q4 2022 reports, we decided to revisit one of our favorite issues for this sector: the changing revenue streams from interest and non-interest lines of business.
Figure 1, below, shows the changes in net interest income and non-interest income for the six largest banks in the United States (by assets) over the last four years: Bank of America ($BAC), Citigroup ($C), Goldman Sachs ($GS), JPMorgan ($JPM), Morgan Stanley ($MS), and Wells Fargo ($WFC).
Note the two spikes in non-interest income at the start of 2020 and again at the start of 2021 Those spikes coincide with (1) the Federal Reserve first cutting interest rates essentially to zero at the start of the covid-19 pandemic, prompting a wave of corporate loans; and (2) the refinancing boom in home mortgages in 2021.
Then came 2022 and the Fed raising rates to combat inflation. Mortgage rates spiked, home refinancing fell off a cliff — and net interest income jumped 45.1 percent in 18 months, from a low of $45.47 billion in mid-2021 to $65.97 billion at the end of 2022.
Then we wanted to get more granular. Figure 2, below, shows the change in non-interest income among those same six banks over the same four years.
First, note that only three banks now have non-interest income substantially lower than pre-pandemic levels: Bank of America, Morgan Stanley, and Wells Fargo. The other three saw considerable drops from their high-water marks in 2021, but Q4 non-interest income was still in the ballpark of where it was in 2019.
Second, the bank with the widest swings in non-interest income was Goldman Sachs — somewhat surprising, since these are the folks who supposedly know everything. Then again, considering how Goldman just admitted that its foray into consumer banking was a bust, maybe they’re not omniscient after all.
We’ll revisit the banking sector again in a few weeks, once the smaller banks complete their Q4 reports and we have a fuller picture of who’s earning how much from which lines of revenue. Plus, analysts do have one big question to ponder for 2023.
What happens to net interest income and non-interest income when the Fed pauses interest rate hikes? Because that could well happen, and then the shifting lines we see in Figure 1 might change quite a bit.
Just about every big technology company in Silicon Valley has announced layoffs lately. Why? Ostensibly so the company can match its costs (driven by headcount) to a shrinking or changing revenue picture.
To get a better sense of those dynamics, Calcbench decided to chart revenue per employee over the last 14 years at six major tech companies. The result is Figure 1, below.
A few points jump out immediately. First, as usual, Apple ($AAPL) is showing off with stellar numbers that far outpace other big tech companies. Perhaps it’s no surprise, then, that Apple is the only company in our sample group that has not announced large-scale layoffs lately.
On the other hand, one also needs to consider differences in business model. Apple makes high-end hardware with lucrative profit margins, Salesforce ($CRM) is a business-to-business software provider, and some people would argue that Amazon ($AMZN) isn’t even a tech company at all; it’s a tech-savvy retailer with a huge blue-collar workforce that other tech companies don’t have.
One also needs to consider the two variables that make the revenue per employee ratio. So is Apple’s ratio so high because its revenues have grown so much, or because it keeps the pace of hiring prudent?
Facebook ($META) might be an even better example of the question. In late 2022 the company announced that it would lay off 11,000 employees, roughly 13 percent of its workforce. That is certainly unwelcome news to the 11,000 losing their jobs, but remember that Facebook had 87,000 employees at the time — up from 72,000 employees at the start of 2022, just 10 months earlier.
So critics could argue that Facebook “overhired” throughout last year, even as the company started suffering a significant revenue decline thanks to changes in how Apple lets other apps track user activity on iPhones. Did CEO Mark Zuckerberg make a critical misjudgment because he was too busy building the Metaverse? You tell us.
Just for kicks, we also charted net income per employee over the last decade. That’s in Figure 2, below.
Hmmm. This paints a rather different picture. For example, Facebook saw a huge surge in profit per employee in the mid-2010s, which then spluttered in 2019 and has yet to recover in the 2020s. That might qualify as a decline in employee productivity, which (in theory) one might reverse by shedding employees in lackluster product lines while investing in the Next Big Thing.
Also notice how Amazon has a low level of profit per employee. That’s not news, really; the company’s e-commerce segment is a huge part of its overall operations, but that segment has always been hit-or-miss on printing the bottom line in black ink. In many quarters, Amazon’s e-commerce operations actually lose money, and its high-growth, high-profit Amazon Web Services segment is what keeps the total empire afloat.
Updated as of 2/3/23
In the summer of 2020 Calcbench had a post on this blog about wild swings in the price of eggs, and how that volatility affected Cal-Maine Foods ($CALM), the largest producer and distributor of eggs in the United States.
Well, as you may have seen at the supermarket lately, egg prices remain stubbornly high despite signs that inflation is receding in many sectors. That’s partly due to persistent supply chain problems in the egg industry, and partly due to an avian flu virus that emerged in 2022 and devastated the poultry population.
So we decided to revisit Cal-Maine. What do its disclosures say these days about the ceaseless rise of egg prices?
One can start with gross profit, which is revenue minus the cost of revenue. Figure 1, below, charts the astonishing rise in Cal-Maine’s gross profit from the start of the pandemic through the end of 2022.
The story here is simple. Egg prices have soared, so Cal-Maine’s revenue has soared. Its cost of revenue, however, has increased at a much more moderate pace — so the company is generating huge piles of cash to manage its operations. Consider its most recent quarterly report. Revenue grew by 110 percent from the year-earlier period, while cost of revenue only rose 43 percent; that translated into a jump in gross profit of more than 620 percent.
The rest of Cal-Maine’s operations grew at a moderate pace too. So by the time we reach the bottom of the income statement (see Figure 2, below), we arrive at net income growth of 16,830 percent. No, that’s not a typo.
Now let’s widen the lens a bit and look at what else Cal-Maine is disclosing about its egg operations, to get a better sense of potential future growth or pitfalls.
Yep, we used that pun. We do not apologize.
Because Cal-Maine’s latest disclosures come from a 10-Q rather than a full-year 10-K (next one arrives in summer), we have less data than we’d like. But one can still find startling details from the earnings release that Cal-Maine also filed with its most recent quarterly report. See Figure 3, below.
Net average selling price for a dozen eggs essentially doubled, from $1.36 one year ago to $2.71 this quarter — and that blends together both conventional and “specialty” eggs, which we didn’t even know were a thing until just now. Conventional eggs alone had their price take flight from $1.15 to $2.88 per dozen, an increase of 250 percent. That increase is what’s leaving you staring at prices on the supermarket shelf.
We should note, however, that unit sales of eggs didn’t rise all that much: only 5.4 percent, from 269.5 million one year ago to 284.1 million today. That begs a question someone might want to put to Cal-Maine on the next earnings call: given the fierce demand, how much will Cal-Maine invest in future production capacity?
You can kinda sorta get an answer to that from Cal-Maine’s inventory disclosures, since “inventory” is just another word for “chickens” here. Apparently the company has “layers,” which are mature chickens that lay eggs; “pullets,” which are immature chickens too young for the task; and “breeders,” which are roosters and fertile hens used to make the next generation of layers.
As of the latest quarter, Cal-Maine had 10.4 million pullets and breeders, down from 11.5 million last May; and 43.7 million layers, a modest increase from 42.2 million last May. So will that be enough to overcome the avian flu virus still threatening flocks? Are the breeders breeding fast enough? Would Cal-Maine ever want to purchase more chickens to meet rising prices and strong demand?
We don’t know. But we do have the data to help analysts who follow the poultry industry let their analysis take flight.
Today we want to return to our usual fare on the Calcbench blog, noodling over recent financial reports to find interesting pieces of data — and if you want noodles, why not start with supermarket giant Albertsons?
Albertsons (ACI) filed its most recent quarterly report last week. At a cursory glance, its numbers look underwhelming. Revenues rose 8.5 percent from the year-earlier quarter to $18.15 billion, but costs rose even faster, so net income actually fell 11.5 percent. Ouch.
Granted, inflation for supplies and labor has pressured many companies’ margins lately, even as those companies pass along at least some of their higher costs to keep top-line revenue growing. But that might not be the whole story here.
Figure 1, below, shows Albertsons’ most recent quarter compared to the year-earlier period.
Notice the line high-lighted in blue: the ever-popular “Other expense (income)” line. One year ago, Albertsons posted a gain of $38.3 million — which, because it appears on the expense section of the income statement, gets reported as a negative number. In this quarter, that line item was reported an expense of $1.7 million.
Indeed, if you look just a few lines higher, you’ll see that Albertsons also reported a $7.3 million loss on disposition of… well, something; we’ll investigate exactly what shortly. But one year ago, that same line item was a $13.4 million gain.
Taken together, those two “other” items delivered a $51.7 million boost to Albertsons’ net income line one year ago. If you exclude those numbers, net income one year ago would have been $372.8 million, which would’ve been lower than what Albertsons just reported now.
So did Albertsons underperform this quarter? Or did it overperform one year ago thanks to some one-time items?
To learn more about exactly what these other gains and losses are, you can use our Interactive Disclosure page. Just call up the 10-Q for the relevant period, and most times other income is discussed in the Management Discussion & Analysis section.
For example, when you read the MD&A for Albertsons’ quarterly filing one year ago, you find this about that $13.4 million gain:
For the third quarter of fiscal 2021, net gain on property dispositions and impairment losses was $13.4 million, primarily driven by $15.8 million of gains from the sale of assets, partially offset by $2.4 million of asset impairments, primarily related to right-of-use assets.
That could mean the sale of some Albertsons properties, plus an impairment on the value of long-term operating leases (which are carried on the balance sheet as right-of-use assets).
Further down in the MD&A, Albertsons also says this about that $38.3 million in other income:
For the third quarter of fiscal 2021, Other income, net was $38.3 million compared to $19.2 million for the third quarter of fiscal 2020. Other income, net during the third quarter of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement expense, unrealized gains from non-operating investments and income related to our equity investment.
We’ll be honest that we’re not sure what that disclosure means. Then again, that’s really the point here: Calcbench can help you find the data and disclosures you need to help you ask better questions — such as, “Albertsons, could you please translate that into plain English?”
That’s how you can be sure a company is giving you substantive answers, rather than leaving you standing in the baloney aisle.
Our next post on corporate debt is more about practical advice for Calcbench subscribers: a look at the tools you can use within the Calcbench website to find disclosures about corporate debt for the companies you follow.
If you want data from a group of companies, one place to start is our Multi-Company page. First, select the group of companies you want to research. (We have an entire post dedicated to creating a peer group if you need a refresher.) Once that group is set, you can choose from any number of debt-related disclosures we include in our Standardized Metrics field on the left-hand side. Those disclosures include:
Just enter the disclosure you want to research, and presto! Those disclosures will populate for every company in your peer group (assuming the company made those disclosures for the period you’re researching).
You can always use the Multi-Company page for a single company’s disclosures, too; just set your peer group to that sole company. But we also have numerous other ways to research debt disclosures one company at a time.
On the Company-in-Detail page, you can research what the company reports on the income statement and the balance sheet. This approach is somewhat hit or miss, because not all companies report interest expenses on the income statement — although all companies do report debt on the balance sheet. You can pull up the disclosures for the company you follow and see what it reports in the primary financial statements.
If you want a truly deep dive into the debt data, you can also run a Calcbench “Quick Report,” which will export all the debt data we have on your company into an Excel spreadsheet. To do this, click on the Quick Reports tab and then look for the debt report option. See Figure 1, below.
Be warned, this option gives you a lot of data. We selected Apple ($AAPL) at random, and the resulting spreadsheet listed nearly 900 rows of data across dozens of columns — a separate data cell for each debt instrument Apple reported, for every quarter going back to 2013. Suffice to say that a company as large as Apple has many debt instruments, so yes, the Excel spreadsheet really did need to be that large.
You can also get a global sense of a company’s debt disclosures using our Segments, Rollfowards & Breakouts page. Start by selecting the specific company you want to research. Then select “Debt Instruments” from the pull-down menu of dataset options on the left side of the screen.
Figure 2, below, shows some of the results for Oracle ($ORCL).
Again, a lot of information is packed into these results. We give you a list of notes due, the amount, the stated interest rate, the effective rate, and other snippets of information about the date a debt instrument is due.
For example, we can see in Figure 2 that Oracle has a $1 billion loan coming due in July 2023 (July 23, to be exact) with an effective interest rate of 3.73 percent. Given where interest rates are today, does anyone expect Oracle will be able to refinance that debt at a comparable rate in six months’ time? Anyone at all?
For just about all the disclosures you see from the Segments page, you can also hold your cursor over the item and then use our world-famous Trace feature to trace that number back to its exact disclosure in the financial statements. When we traced that $1 billion debt instrument coming due in July, the resulting chart in Figure 3 quickly appeared.
If you squint at Figure 3, you can see one item high-lighted in yellow. That is the original $1 billion number from the Segments results, traced back to the most recent disclosure Oracle made in its footnotes — along with all the other debt instruments Oracle also reported.
That brings us to our final method to research debt disclosures: by looking in the footnote disclosures directly.
Start with our Interactive Disclosures database. Select the company and specific period you want to research. In the list of Notes to the Financial Statements, look for something along the lines of Notes Payable and Other Borrowings (the headline Oracle used), and you should see the full table of debt disclosures. For example, looking up that disclosure for Oracle would present the same table in Figure 3, just a bit larger and more readable.
Not all companies label their debt disclosures as Notes Payable. Many do, but others might label them as Debt, Debt Instruments, or perhaps some other title. Keep your eyes peeled and your mind open, but the data will be in there somewhere.
Today we conclude our series on corporate debt with one other important audience: the CFOs and other corporate finance executives who manage all those debt instruments for their companies.
When the time comes for those executives either to refinance old debt or to secure new debt, they’ll want to know what a fair interest rate might be. To consider that question, the crack Calcbench research team went back to the 22 large, non-financial companies in our sample group and compiled a dot-plot chart of corporate debt interest rates based on the year those debts are due.
The results are in Figure 1, below.
This chart tells us a few things. For example, we can see that most companies in our sample group have a lot of debt coming due in the next five years, and the interest rates on that debt are somewhere in the range of 3 to 4 percent; that’s the cluster of dots in the lower-left quadrant. A fair number of them also have debt due many years into the future, with interest rates more in the 4 to 5 percent range. A few debt instruments are coming due quite soon and have high interest rates, closer to 7 percent.
CFOs (or, more precisely, the junior financial analysts working for the CFOs) could perform a similar dot-plot analysis of your own, using companies comparable to your own for a more accurate sense of what they are paying — and, therefore, what might be a fair interest rate for you to pay, too. Then you can take that information to the negotiating table when you meet with our lenders.
To be clear, our dot-plot chart above is only a crude demonstration of that point. We consolidated all 22 of our sample companies into Figure 1, but they hail from a wide range of industries and credit histories. You’d want to be much more precise in your own analysis.
Then again — Calcbench can help you with that precision! Our previous post explored how you can find and extract company-specific data about debt and interest rates; and the post before that explored how you can find information about debt ratios and other liquidity metrics.
So you could first develop a peer group of, say, companies in your industry and of similar size and debt ratio. Then use our various databases to extract information about those companies’ debt instruments, including interest rates and due dates.
Then pile that data into a spreadsheet and convert it into your very own dot-plot chart. Presto! All that’s left is to print out the chart and staple it to your lender’s forehead.
Our special report on corporate debt continues today with a broader look at the disclosures companies make. That is, aside from specific disclosures about debt instruments, maturity dates, and interest payments; what else can financial analysts look at to evaluate a company’s position?
One disclosure to consider is the company’s debt ratio, defined as total debts divided into total assets. The larger that number, the more indebted a company is.
For example, the average debt ratio for non-financial S&P 500 companies in 2021 was 0.33 — but individual companies’ ratios varied widely, from Domino’s Pizza ($DPZ) at 3.03 and Yum Brands ($YUM) at 1.89, down to dozens of companies with a ratio of zero because they reported no debt at all.
Collectively, the debt ratio for non-financial companies has held remarkably steady in recent years. We looked at a total of 410 non-financial firms, and Table 1, below, shows the collective debt ratio from 2016 through 2021.
Again, however, the change in debt ratio for individual firms varied quite widely. For example, crafting e-tailer Etsy Inc. ($ETSY) saw its debt ratio jump from 0.12 in 2016 to 0.59 in 2021. That was an upward delta of 0.47, the largest jump in our sample group in absolute terms, and a percentage increase of 397 percent.
So what happened at Etsy? We used our Company-in-Detail page to compare its 2016 and 2021 balance sheets. Total assets rose a respectable 560 percent, from $581.2 million to $3.83 billion — but total liabilities ballooned by more than tenfold in the same period to $3.2 billion, and much of that increase was driven by $2.2 billion in long-term debt that Etsy acquired somewhere along the way.
Now circle back to the question we raised at the beginning of this debt series. If Etsy scooped up $2.2 billion in long-term debt recently, while interest rates were low, how might its financial picture change if Etsy needs to refinance that debt at higher rates? What portions of that debt will come due in what years? What interest rates has Etsy been paying so far, and what rates is it likely to encounter when refinancing comes around?
Those are all questions that financial analysts can research on Calcbench, for Etsy or any other company; we’ll show you how in our next post. Once you have that context, you can then ask the CFOs of companies you follow questions that are more precise, and hopefully get answers more comprehensive.
Our previous post introduced Calcbench’s latest research on the debt pressures piling up on corporate balance sheets, and how problematic those pressures might be as companies seek to refinance their debt in 2023’s world of higher interest rates.
Today we want to look at some specific companies with debt coming due in 2023, to give a better sense of the issues involved and how financial analysts can understand them.
First, to recap our overall research here: we examined 22 non-financial companies in the S&P 500 that all filed their latest 10-K reports in recent months, which gave us a chance to get the most current sense of debt loads, average interest rates, and upcoming debt payments. Those companies were carrying a total of $248.3 billion in debt, against $895.89 billion of assets. The weighted average of debt maturing in the next five years ranged from 2.38 percent to 3.22 percent.
Within that sample of 22 companies, we then identified 10 companies whose annual interest expense is greater than 10 percent of net income. See Table 1, below.
The next questions are (1) what interest rates those companies are paying on their debt; and (2) when is that debt coming due? Because if a company has a substantial portion of its debt coming due in 2023, and then needs to refinance that debt at higher interest rates — then annual interest expense will rise sharply, squeezing net income.
Companies do disclose their schedule of debt instruments and interest rates in the footnotes. Table 2, below, shows several examples from the 10 companies mentioned above.
From there, analysts could perform their own modeling to understand the potential hit to earnings that higher interest rates might cause.
For example, if a company has a $518 million loan carrying an interest rate of 1.25 percent (the debt Sysco ($SYY) has coming due in 2023), that implies an annual interest expense of $6.47 million. If the company were then to refinance that amount at a rate of, say, 5 percent, the annual interest expense jumps to $25.9 million.
That increase may not necessarily be a material threat to net income, although it could be. Moreover, the higher interest expenses will always eat into capital that might otherwise be put to more productive purposes: R&D, inventory, technology investments, dividend payments, or just higher EPS.
Perhaps the biggest story in corporate finance for 2022 was the Federal Reserve’s campaign of interest rate hikes to fight inflation. As we enter 2023, however, another story is likely to arise: how that climate of higher interest rates will now affect companies trying to finance their debt loads.
After all, as interest rates rise, so do corporate borrowing costs — and since corporations had previously enjoyed such a long period of extremely low interest rates, those higher costs could be a rude awakening for many firms in 2023.
To explore this issue, the Calcbench research team spent several days sifting through the debt disclosures of nearly two dozen S&P 500 companies with non-standard fiscal years. They all filed their latest 10-K reports in recent months, which gave us a chance to get the most current sense of debt loads, average interest rates, and upcoming debt payments.
The 22 companies we studied were carrying a total of $248.3 billion in debt, against $895.89 billion of assets. The weighted average of debt maturing in the next five years ranged from 2.38 percent to 3.22 percent. Table 1, below, shows the average rate and the portion of debt coming due in each of the next five years.
As one can see, these corporations have a significant amount of debt coming due in the next five years, all of it carrying low interest rates. The logical questions now are:
As a point of comparison, the federal funds rate (as measured by the New York Fed) averaged 3.83 percent as of Dec. 7, 2022. One year ago, that rate was less than 0.1 percent. Current Fed rates are much higher than the rates we see in Table 1, above; suggesting that whatever new rates companies obtain on their new debt will be much higher than what those companies were paying before.
Total debt among non-financial firms in the S&P 500 went from $4.05 trillion in 2016 to $5.49 trillion at the end of 2021, an increase of 35.6 percent. (See Figure 1, below.)
In that same period, interest expense among those firms went from $136.5 billion to $184.8 billion, an increase of 35.3 percent. Especially interesting is that interest payments essentially leveled off in 2021, when interest rates had been cut to historic lows during the pandemic. See Figure 2, below.
As we saw above, however, a significant portion of corporate debt will be coming due in the next several years, when interest rates are likely to be higher — especially in 2023, before any future recession that might prompt the Federal Reserve to cut rates again. When companies seek to refinance their debt, their interest expense is likely to increase substantially, in the same way that higher mortgage rates are saddling homebuyers with much higher monthly payments for the same “amount” of house.
Financial analysts will need to consider how a company’s debt levels, its schedule of debt payments, and the interest rates might affect its operations. For example:
In our next post, Calcbench will consider some specific examples of companies and their debt issues.
And for those clients who are interested, here’s a sample template for the 22 firms in our list with a link to their debt disclosures. Please note, the data will only work with an active Calcbench subscription.
Calcbench has added our standardized fundamentals dataset to the Snowflake Marketplace. Data is extracted from 10-K/Qs and earnings press-releases.
This data is 1,000+ standardized metrics for almost all public US companies with quarterly history back to 2008. Each value has the timestamp when it was published as well as the as history of revisions.
Calcbench has added ratios to our point-in-time standardized fundamentals stream. Now you can back-test the impact of changes in industry standard measures of profitability, liquidity and solvency. See the list of ratios @ https://www.calcbench.com/home/standardizedmetrics.
Ratios are calculated when filings are received. When one component of the ratio is revised a new ratio value is calculated and published with the timestamp of the component.
Calcbench’s point-in-time data is available from our API or on our bulk data page. For help getting the data contact firstname.lastname@example.org.
In an interview with Ari Yezegel, we explore the unique use of the Calcbench’s API to help prepare students for industry work through performing data analytics on real company data.
About Professor Yezegel, PhD, Associate Professor of Accounting, Bentley University
Professor Ari Yezegel teaches Intermediate Accounting and a PhD seminar at Bentley University. In his research, Prof. Yezegel specializes in financial accounting. He also studies sell-side analysts’ stock recommendations and forecasts. While Yezegel mostly uses Calcbench for teaching, he’s also working on an idea to use Calcbench’s API to extract specific parts of SEC filings for a research paper. Here’s what he had to say about teaching using Calcbench.
An Introduction to Calcbench
I first heard about Calcbench several years ago through a presentation by Calcbench at Bentley. It was through this presentation that I learned about the granular-level data offered by Calcbench’s platform. At Bentley University, we subscribe to Calcbench’s API.
Calcbench API Use Case
Intermediate Accounting at Bentley is for accounting majors who want to continue with a career in accounting. I use Calcbench in my Intermediate Accounting courses to get students comfortable with Python [the computer programming language] within a business context. With the Calcbench API, you only need a few lines of Python code to get the data that you need. So in classes where we are teaching a lot of important concepts, Calcbench makes it easy to download the data so that students can spend the time on the analysis.
Intermediate Accounting has a relatively unique structure at Bentley. Intermediate Accounting classes consist of two parts. First, students are given a fictitious case in which they are working for an audit firm and are meeting with a client, GE. Students are asked to review GE’s performance metrics vis a vis GE’s peers to understand its relative performance.
Second, students are asked to help with some detective work. The scenario: An audit partner suspects that firms are inflating earnings to report a profit versus a loss. Students are asked to collect S&P 500 profitability for the past 10 years and to plot a histogram using Return on Assets. Using five to seven lines of code, they can get this historical data. Once students plot the data, they see there’s an unusual number of companies with an ROA hovering right above zero percent versus below zero percent.
The Growing Field of Data Analytics in Accounting
Most Intermediate Accounting students have never coded before. I created some step-by-step videos to show the students how to code, but the students need to adapt the code for the assignment. As a final project, students record a video about the project.
Students have shared that they are impressed by how easy it is to get information using basic Python. They find it powerful to use the Calcbench API to retrieve the data. I’ve had students use this case with recruiters at Deloitte to get internship offers.
For many universities, including ours, we see data analytics as a growth path for the field of accounting. There’s a lot of industry demand for data analysts in accounting. Calcbench is well positioned to help students prepare for a career in data analytics.
Recommendations for Academics Using Calcbench
Rather than having students install and run Python on their machines, we use Google coLab which runs Python on their browser.
In addition, if professors want to use the Calcbench API in the classroom, they can teach students to code; but they can also use apps such as Streamlit.io to download the data and make it available for students to just perform the analysis.
Improving the Calcbench Platform
The API is constantly evolving and being developed. Given the continuous changes, it’s important to understand, perhaps through a bi-annual update email, what changes have been made.
Corporate taxes are an endlessly fascinating niche of financial analysis. Today we have a prime example of that phenomenon, courtesy of a research note shared with us from Morgan Stanley.
The note explores how a recent tax increase meant to cover the costs of corporate tax cuts from 2017 actually lowered tax rates for numerous technology and biotech companies. The note caught our eye because Morgan Stanley used Calcbench data to perform the analysis, and of course we’re shameless self-promoters around here — but also because this truly is a fascinating glimpse into the topsy-turvy world of corporate reporting.
So what happened? As described in the research note, starting this year companies are required to amortize R&D tax deductions over five years (15 years for foreign R&D), instead of those expenses being immediately deductible. Except, that move to raise taxes gives companies more incentive to use something known as the Foreign-Derived Intangible Income(FDII) deduction. That’s a deduction for domestic IP-based goods & services sold to foreign customers, designed as an incentive to keep new tech and intellectual property here in the United States rather than housed in low-tax jurisdictions overseas.
The FDII deduction lets FDII income be taxed at a 13 percent effective rate, rather than the statutory 21 percent rate. So essentially, the push to raise taxes by amortizing R&D is driving companies to use the FDII deduction — and its lower effective rate — more aggressively.
Which firms benefited from this convoluted tax incentive? Morgan Stanley compiled the following chart.
The biggest winners were technology companies; and indeed, almost all companies in the chart above are tech companies or others that run heavy on R&D and intellectual property. The only exceptions are Nike ($NKE) and McDonalds ($MCD).
At specific companies, these pressures lead to disclosures such as this filed by Moderna ($MDNA):
Effective January 1,2022, research and development expenses are required to be capitalized and amortized for U.S. tax purposes. Unless modified or repealed, and based on current assumptions, the mandatory capitalization increases our cash tax liabilities, but also increases our FDII deduction resulting in a decrease to our effective tax rate.
You can conduct your own company-specific inquiries using our Interactive Disclosure tool, searching tax disclosures for key words such as “FDII.” Or we have plenty of other ways to research corporate tax data, neatly summarized in our Guide to Analyzing Tax Disclosures.
Last month we had a post examining the evolving revenue picture at Citigroup ($C), and specifically how the bank’s net interest income vaulted upward this year while its non-interest income wilted like sauteed spinach.
This time around we decided to widen the lens. We performed the same exercise for 10 large consumer banks in the United States, tracking net interest income vs. non-interest income for the last 15 quarters. Figure 1, below, is the result.
As you can see, net income started to soar for these 10 banks at the start of the year. Non-interest income actually started drifting downward at the beginning of 2021, presumably after a flood of home refinancing deals that happened in late 2020 as interest rates were at rock-bottom prices.
How will that spread continue in 2023? Good question. Federal Reserve chairman Jerome Powell said on Wednesday that the Fed might decelerate the pace of its rate hikes, from 0.75 percent per meeting to 0.5 percent — but rate increases will continue, even at that potentially slower pace. Meanwhile, non-interest income is going down the tubes because home sales and mortgage refinancings are at a standstill; that’s not likely to change any time soon.
We’ll just have to wait and see what the next chart will look like.
(PS. The banks in our sample were Bank of America, Capital One, Citigroup, Citizens Financial, Fifth Third Bancorp, JP Morgan, PNC Financial, Truist, US Bancorp, and Wells Fargo.)
We interrupt our usual exploration of weighty financial reporting issues for a subject even more important, which we’re sure is on everyone’s mind these days.
Which companies have something to say about the World Cup?
Just for kicks, so to speak, we pulled up the third-quarter filings of all companies with $500 million or more in annual revenue, and searched “World Cup” in their footnote disclosures. Who would those companies be? Why would they have something to say about the World Cup? Did anyone have some sort of victory default swap against Argentina? Because wow, they really blew it with Saudi Arabia in the opening round.
We found a total of eight companies that mentioned the World Cup in one disclosure or another. A recap is below.
Comcast Corp. ($CMCSA) reported that the adjusted EBITDA for its Sky TV segment fell 27.9 percent compared to the year-earlier quarter, driven by higher operating costs for— you guessed it— broadcasting games related to the World Cup:
The increase in operating expenses primarily reflects higher sports programming costs due to the timing of sporting events, including a shift of certain football matches to the third quarter in advance of the 2022 FIFA World Cup, which will occur in the fourth quarter of 2022…
This raises an interesting point. Normally the World Cup is held over the summer, which means any costs and revenues derived from the event would be reported in the third quarter of that year. This time around, the World Cup is being held in the fourth quarter because Qatar is too hot for summer games. So that could lead to some unusual fourth-quarter reporting once those filings start arriving early next year.
Endeavor Group Holdings ($EDR), a sports marketing company, made much the same point in its own earnings release. The company’s Events, Experiences & Rights segment reported revenue of $440.6 million for the quarter, down 1 percent from the year-earlier period — again, thanks to the odd timing of various sporting events:
The decrease was primarily due to certain media rights deals for events that do not occur annually, including the Ryder Cup, the UEFA Euro Championship and the CONCACAF World Cup qualifying games, as well as the timing of certain events that took place earlier in 2022 than the prior year.
We also have Mercadolibre ($MELI), an e-commerce business in Latin America that sounded so upbeat in its latest earnings release you almost want management to take a Xanax:
After a successful third quarter that delivered strong growth and profitability, our attention is now focused on executing well in the fourth quarter, which brings Black Friday, the FIFA World Cup and Christmas back onto the retail calendar. We remain as optimistic as ever about the fundamentals of our business… On our mission to democratize Latin America's commerce and financial services markets, the best is yet to come.
For the record, quarterly revenue rose 44.8 percent from the year-ago period, and net income was up 35.8 percent. Far be it from us to judge the company’s exuberance with numbers like that.
Visa ($V) reported higher marketing expenses for the quarter, “due to higher spending in various campaigns, including the FIFA World Cup 2022 and the Olympic and Paralympic Winter Games Beijing 2022, and client marketing.” Then the company even included line-item detail on marketing expenses:
$1.336 billion in marketing expenses for Q3, up 17.6 percent from the year-earlier period. How much of that $200 million increase was specifically due to the World Cup? We don’t know, but the event is part of that increase somehow.
You get the gist of it. We don’t have a lot of disclosures in the great wide world of SEC filings, but global entertainment, sports, and consumer finance businesses are all spending big on the World Cup. Here’s hoping for a drama-filled series so there’s lots more to discuss — at the water cooler, and in Q4 filings once those arrive.
Faithful readers of the Calcbench blog might recall that back in May, we wrote a post exploring whether inflation might be about to turn downward. Specifically, we looked at “the bullwhip effect” among large retailers — defined as a rising ratio of inventory to sales, which theoretically would be a harbinger of prices going downward.
Six months later, overall inflation has clearly not gone down, more due to high food, energy, and housing costs than anything else. Still, we wanted to circle back to the 10 large retailers we examined in May, to see whether the bullwhip finally is cracking their backsides.
Figure 1, below, shows the ratio of inventory to sales for all 10 of those retailers combined, from the start of 2019 through Q3 2022. You can clearly see how the ratio dropped sharply in 2020 and stayed low into mid-2021, which coincides with when the supply chain went haywire and we saw goods shortages all over the place.
The red trend line, however, is only a gentle upward slope; and recent inventory-to-sales ratios aren’t terribly higher than they were pre-pandemic. For example, the Q2 2022 ratio was 43.6 percent, slightly lower than the 44.7 percent seen in Q3-2019.
That might lull some people into believing the retail sector is just returning to historical norms, and perhaps on longer time horizons that’s true. But for kicks, we ran the same analysis starting from Q1 2020, excluding those pre-pandemic norms. Figure 2, below, is the result.
Wow. Suddenly the trend line looks much steeper, and the quarterly numbers much more grim. No wonder some large retailers have begun their Black Friday sales before Thanksgiving, promising deep discounts all over the place.
Several questions then arise.
We don’t know the answers to those questions, but we do have the data to help you answer them.
Finally, for those interested in the 10 specific retailers we studied, Figure 3, below, shows the change in inventory levels for each one from Q2 to Q3 of this year.
The higher the change, the more inventory the retailer has clogging up shelves and warehouses. That could presage price cuts, which could presage lower revenues once firms start reporting Q4 early next year. We’ll see.
Dentsply Sirona, the world’s largest supplier of dental equipment, filed its latest quarterly report this week. That gives us an excellent opportunity to review how Calcbench can help you study financial restatements — because Dentsply had plenty of facts it had to restate.
For those who don’t know the history, Dentsply Sirona ($XRAY) disclosed back in May that it had begun an investigation into financial improprieties involving several current and former employees. That led to an eye-popping side story about Dentsply’s former CFO, Jorge Gomez, who got fired one day into his new job as CFO of Moderna when Dentsply disclosed its investigation — but we digress. The news here is what Dentsply said in its latest quarterly report, filed on Monday.
First, management gave a summary of its investigation. In the company’s North America operations, the investigation concluded that several former executives, including the former CEO and the former CFO (Gomez, the one fired from Moderna) “did not maintain and promote an appropriate control environment focused on compliance in areas of the company’s business, nor did they sufficiently promote, monitor or enforce adherence to [Dentsply’s] Code of Ethics and Business Conduct.”
The investigation also concluded that executives in Dentsply’s China operations committed intentional wrongdoing by misleading the company’s local accounting teams, and then “lacking truthfulness” in providing information when Dentsply’s board launched its investigation.
That’s the investigation, anyway. Dentsply also restated results for the three- and nine-month periods ending Sept. 30, 2021; and for the entire fiscal year that ended on Dec. 31, 2021.
One could find those restated details by digging through Dentsply Sirona’s footnote disclosures — but who wants to do that? It’s painstaking and causes eyestrain. Calcbench devised a simpler way.
To find restated financial disclosures, start by looking at the income statement (or balance sheet, as the case may be) using our Company-in-Detail page. Restated financial disclosures can be found using the “Highlight Revisions” tab on the right side of your screen.
For example, Figure 1, below, shows Dentsply Sirona’s disclosures after they have been restated, but before using our Highlight Revisions feature to see exactly what those restatements were. (We also circled the Highlight Revisions tab in blue.)
Figure 2, below, shows what happens when you do activate the Highlight Revisions tab. All line items that were revised are highlighted for easy follow-up.
That’s a lot of revised facts, but then, Dentsply had a rather far-reaching restatement. Other companies might revise only a few facts, and if a company doesn’t need to revise anything then the Highlight Revisions tab won’t work at all because there’s nothing to see.
You’ll also notice that every highlighted revision has a plus sign next to it. Click on that sign and a box will appear that explains the timing and the size of the revision. Figure 3, below, shows the result when we clicked on the net sales disclosure for Q3 2021.
As you can see from the box, Denstply originally reported $1.069 billion for the quarter back in November 2021. Now, after the investigation and restatement, that number has been cut to $1.04 billion.
Just another way that Calcbench tries to track all financial disclosures in the known universe, and then present them to you in an easy-to-use, easy-to-digest format. Much less painful than a root canal!
Calcbench is always game to analyze an impairment charge, and this week cloud services provider Rackspace Technology ($RXT) served up a good one. Let’s take a tour of what the company had to say.
First, the company reported underwhelming numbers generally. Revenue for the third quarter was $787.6 million, up a rather meager 3.3 percent from the year-earlier period. Meanwhile, cost of revenue rose 9.4 percent, meaning gross profit fell 10.6 percent to $207.1 million.
For comparison purposes, cloud services rival Amazon.com ($AMZN) saw revenue in Amazon Web Services rise by 27.4 percent in the same period; and Microsoft ($MSFT) saw revenue rise 20.2 percent in its Intelligent Cloud division. So Rackspace has been battling some big, fierce competitors, and not doing so well.
Anyway, back to the impairment charge. In its Company Overview disclosures, Rackspace described how the company “experienced a sustained decline in our stock price” — about 37 percent, from $7.14 in July to $4.46 by late August, and that’s down from $16.50 at the start of the year).
That prolonged decline triggered an impairment review, and Rackspace ended up declaring several individual impairment charges that altogether were $436.2 million:
As we mentioned, the total for those impairments is $463.2 million, which contributed to an overall operating loss of $476.7 million and a total net loss of $511.7 million. We get it, most of that loss is an ephemeral, one-time thing due to the goodwill impairment charge — but that’s still a lot of red ink.
Were those impairment charges warranted? For a sense of that, we looked at Rackspace’s segment reporting. See Figure 1, below.
Both the Multicloud Services and the OpenStack Public Cloud units saw declines in gross profit, OpenStack particularly so. Revenue was at least growing for Multicloud, which is more than we can say for OpenStack.
We were also intrigued by one more item Rackspace disclosed as a Subsequent Event. Emphasis is our own:
In October 2022, we announced our intention to sell our current corporate headquarters facility located in Windcrest, Texas and relocate our corporate headquarters to leased office space in San Antonio, Texas. Due to current real estate market conditions and the unique nature of the facility, the ultimate sale price of the property will likely be below its current net book value resulting in the recognition of an impairment charge or a loss on the sale, the amount of which could be material.
That “current real estate market conditions” raises an interesting point. Lots of businesses try to cut costs by selling real estate they own and then leasing space elsewhere. With interest rates so high, however, real estate values are starting to fall. Rackspace might not be the last one to find that the value of property it owns isn’t what people were expecting — and that could lead to more impairments in the future.
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