We have another study from the crack Calcbench research team, this time looking at the giant tech firms and whether their sky-high market valuations really do overshadow all other firms in the S&P 500.
As you may have seen in the Financial Times and other business press, one idea making the rounds these days is that the five tech giants — Microsoft, Apple, Google, Amazon, and Facebook — have seen such gigantic run-ups in their market valuations that they are pushing up the overall S&P 500 index to artificial highs, and therefore masking weaker performance among the other 495 firms.
That concern isn’t without merit. Apple ($AAPL), for example, has seen its market cap increase by $1 trillion in the last 11 months. Amazon’s ($AMZN) market cap has gone from $887 billion one year ago to $1.596 trillion today. Those are huge spikes in valuation.
So our research note tried to understand: What’s driving this momentum? Are there any metrics that might suggest the over-performance of these five firms — which we’ve dubbed “the MAGAF Group” — could actually be justified?
Well, maybe. Hear us out.
First, the market cap of the MAGAF Group does account for an outsized portion of the S&P 500’s total market cap: roughly 22.1 percent at the end of July. But in first-quarter 2020 they also accounted for 16.1 percent of all net income, 13 percent of operating cash flow, and 13.1 percent of operating income. See Figure 1, below.
Corporate finance theory says that share price is a function of expected net income. So is that outsized financial performance worth the 22.1 percent outsized market cap? You tell us. The numbers aren’t that far apart.
But wait! Corporate finance theory specifically says share price is a function of expected future earnings, and the table above reflects prior earnings.
Our research note tried to address that too, by examining prior growth in net income for the last several years — using those numbers to approximate momentum in earnings growth, if you will.
So if you could “invest” in $1 of net income in the MAGAF Group (we know you can’t do that in the real world, it’s a thought experiment), that $1 would be worth $1.57 today. But $1 of net income in the S&P 500 overall, or the S&P 495 without that MAGAF firms would actually be worth less than $1 now.
That could explain the runaway growth in market cap for the MAGAF firms: because their earnings have been running away from the rest of the S&P 500 firms, too.
Do other factors contribute to the market cap growth? Most likely. For example, the poorer net income growth among the S&P 495 really took a turn for the worse only this year, when the pandemic struck.
So are the MAGAF firms doing so well because they’re relatively immune (no pun intended) to the pandemic’s pressures? Or are they doing so well because so many other firms were hammered by the pandemic, so investors just dumped their money into the only stocks still doing well?
Again: you tell us. We’d be eager to hear your theories; email us at email@example.com.
Our research note is simply one interpretation of the data. We have plenty more data to test your own hypothesis.
Fashion house Ralph Polo Lauren ($RL) filed its latest quarterly report on Tuesday morning. Suffice to say, coronavirus has left the company’s financial performance looking more than a little tattered.
Let’s start with the income statement numbers. Revenues in Q2 2020 was $487.5 million, a 62 percent plunge from Q1 and down 66 percent from the year-ago period. The firm also posted a net loss of $127.7 million for the quarter.
If you want to get academic about it, one could say at least Q2’s declines in operating income, net income, and EPS weren’t as bad as what RPL reported in Q1 — and indeed, those numbers were all worse in the first quarter. See Figure 1, below.
More alarming, however, is this item from the Statement of Cash Flows: net cash generated from operations swung from $754.6 million in Q1 to a loss of $70.3 million in Q2.
That is never a good thing. Yes, RPL still conjured up more cash from financing and investing activities, so it has enough money to keep the bills for now, but negative cash flow from operations can quickly lead trouble for a firm’s ability to continue as a going concern. Any time a firm posts negative numbers like that, management needs to act quickly to right the ship.
So what is going on with Ralph Polo Lauren, exactly? Let’s open the Interactive Disclosures database and take a look at what executives had to say.
Management gives a summary of how COVID-19 has affected business, and Ralph Polo Lauren is getting hammered from numerous directions at once:
This paragraph captures the grim state of affairs:
In connection with the COVID-19 pandemic, the Company has experienced varying degrees of business disruptions and periods of closure of its stores, distribution centers, and corporate facilities, as have the Company’s wholesale customers, licensing partners, suppliers, and vendors. During the first quarter of Fiscal 2021, the majority of the Company’s stores in key markets were closed for an average of 8 to 10 weeks, resulting in significant adverse impacts to its operating results. Although nearly all of the Company’s stores were reopened by the end of the first quarter of Fiscal 2021, the majority are operating at limited hours and customer capacity levels in accordance with local health guidelines, with traffic remaining challenged.
So what has management done in response? The COVID-19 summary lists several measures, most of which we’ve already seen other firms taking, too — suspension of cash dividends and share repurchase programs; employee furloughs; pay cuts for senior executives; stretching out payments to vendors; and so forth.
The company also issued $1.25 billion in new debt to cover general operating expenses while RPL figures out what to do next.
Another point worth pondering: many retail firms like RPL will need to embrace direct-to-consumer e-commerce sales even more if they want to weather the pandemic. Ralph Polo Lauren already does offer such sales on its website.
But when you look at the company’s segment reporting, one finds that RPL only reports geographic segments — not wholesale sales to other stores, sales from RPL stores, or e-commerce. So we have no idea how well any embrace of e-commerce might fare.
At least, there are no such disclosures yet. Maybe that’s a point financial analysts could raise on the next earnings call.
Well here’s news to ponder next time you’re sitting on the throne at home: Kimberly-Clark Corp. ($KMB) reports that its sales of toilet paper spiked in the second quarter.
Revenue from “consumer tissue” (because that’s what we call it in polite circles) rose 12 percent compared to the year-ago quarter, to $1.645 billion. Meanwhile, revenue from its K-C Professional segment, which targets corporate buyers stocking office bathrooms, fell 12 percent to $724 million.
The numbers arrived last week in the firm’s Q2 filing. See Figure 1, below.
Also notable is that operating profit from the Consumer Tissue segment nearly doubled to $428 million. We have to say it: the toilet paper segment is really cleaning up.
This should be no surprise. As coronavirus forced untold millions of people to spend less time at work and more time at home, that had profound implications for the, um, personal sanitation business.
First, everyone stocked up on more toilet paper than usual, leading to a demand spike estimated as high as 845 percent. Second, toilet paper used in the home is different from what we all use in the office, school, or shopping mall; it comes from different paper pulp, and uses different manufacturing processes.
Hence we all saw bare shelves in the tissue aisles of our local stores earlier this spring. That shortage seems to have receded as toilet paper manufacturers retooled their processes (“I feel confident to eat a Burrito Supreme,” our intern said, when we dispatched him to the local supermarket for a spot-check), although even now some stores still impose caps on how much tissue a customer can buy at one time.
Anyway, back to Kimberly-Clark. It’s one of the few toilet paper manufacturers that discloses such sales as an operating segment. Technically the Consumer Tissue segment also includes other types of tissue such as napkins and paper towels; plus “a wide variety of innovative solutions,” which makes us wonder how R&D works in this field — but regardless, the segment is a reliable barometer for revenue derived from this most basic function.
Another firm that sells toilet paper and discloses financials is consumer giant Procter & Gamble ($PG). Procter & Gamble hasn’t filed numbers for its second quarter 2020 yet (they are likely to arrive this week), but we can glean a few clues from its first-quarter filing.
First, P&G rolls up its TP numbers into a segment called Baby, Feminine, and Family Care. That segment includes many other products such as baby wipes, baby diapers, adult diapers, and more, although we do know that all P&G revenue in the first quarter totaled $17.214 billion.
In the Segments disclosures, however, the firm splits out the percentage contribution that each segment contributed to the total — so we can see that Family Care specifically contributed 9 percent of Q1 sales, up from 8 percent in the year-earlier period.
Nine percent of $17.214 billion is $1.55 billion, so that’s a rough estimate of P&G tissue paper sales. See Figure 2, below.
First-quarter 2019 sales were $16.462 billion. So if Family Care accounted for 8 percent of that number, that’s $1.317 billion — which means that product line’s sales rose $233 million for first-quarter 2020, a jump of 17.7 percent.
The details are always in the data.
Commodities can be a risky business, as demonstrated by egg producer Cal-Maine Foods ($CALM). The company filed its latest 10-K report on July 20, and it tells quite a tale of egg prices volatility in the last year. Let’s try to unscramble this.
First, some background on the volume of egg output Cal-Maine produces. The company is the largest producer and distributor of eggs in the United States, with sales mostly across the South and Midwest. Cal-Maine sold 12.84 billion eggs in its fiscal 2020, about 19 percent of total “shell egg” consumption in the U.S.
Turns out, however, that the egg business is rather volatile. That’s true in any given year, but it was especially true this year thanks to Covid-19 — where egg prices were depressed in the first three quarters for Cal-Maine, and then soared in the last quarter as everyone started cooking at home more often.
Figure 1, below, is one snapshot of Cal-Maine’s financial performance over the last three years. Net sales edged down 0.7 percent in 2020, largely thanks to an oversupply of eggs, which depressed egg prices, which depressed net sales even though Cal-Maine actually sold 2.9 percent more eggs last year.
Notice that gross profit also declined for fiscal 2020, by 19.4 percent. As Cal-Maine states in its Management Discussion & Analysis: “The decrease resulted primarily from lower selling prices for conventional eggs through the first three quarters in fiscal 2020.”
So that egg depression really rolled Cal-Maine for the first nine months of its year. Then came the great price spike of Q4 — but alas, it was not enough to turn Cal-Maine’s fortunes sunny side up.
We went to the USDA website for more data on egg prices, and found this chart, below. That giant red spike is egg prices in March and April of this year.
Or to frame the spike another way, Cal-Maine tracks its egg prices to a benchmark known as the UB Southeastern Large Price Index. That index ranged from a low of $1.02 per dozen to $3.18 within second-quarter 2020. Volatility like that would be hard for any firm to manage.
On the bright side, lower commodity prices for feed grains pushed down Cal-Maine’s costs, although said costs had risen appreciably in fiscal 2019, so even the lower costs in 2020 were still above what Cal-Maine was paying in 2018.
Meanwhile, SG&A costs rose a bit, and one big item for disposal costs rose from $33 million to $82 million. So all in all, Cal-Maine’s operating income almost evaporated, from $45.7 million last year to $1.27 million for 2020.
Here’s hoping next year’s numbers have more sizzle.
We all know that airlines have suffered mightily since coronavirus grounded international travel at the start of this year. Now Delta Airlines ($DAL) has filed its report for Q2 2020, and we discovered a secondary crisis: investments Delta made in other airlines, which have since fallen apart and led to more than $2 billion impairments.
Tucked away in the Investments portion of its quarterly report, Delta detailed its three investments in smaller airlines: Virgin Atlantic, LATAM ($LTM), and Grupo Aeroméxico. The latter two filed for bankruptcy reorganization earlier this spring, essentially wiping out Delta’s influence over either one.Virgin Atlantic averted its own bankruptcy with emergency funding arranged by Richard Branson, but is still sputtering so much that Delta had to impair that investment too.
What happened, exactly? Let’s take a look.
LATAM. Delta acquired 20 percent of LATAM for $1.9 billion in January to forge a strategic alliance with the Chilean airline. The company also promised to give LATAM $350 million in “transition payments,” including $200 million paid in 2019 and the remaining $150 million delivered in quarterly payments from September 2020 through 2021.
Alas, LATAM filed for Chapter 11 bankruptcy in May. That prompted Delta to terminate a deal to buy four A350 aircraft from LATAM, with Delta paying a $62 million termination fee. That fee is recorded as a restructuring charge on the income statement.
Moreover, Delta recorded an expense of $1.1 billion in impairments and equity method losses. That item is folded into the $2.06 billion in impairments and equity method losses Delta reported as “Non-Operating Expense” on the income statement. See Figure 1, below; the impairments line is shaded grey.
Grupo Aeroméxico. Delta also has a 51 percent ownership stake in Grupo Aeroméxico, but thanks to a quirk of Mexican corporate law Delta’s voting control is limited to only 49 percent. Hence Delta still reports for its Aeroméxico holding using equity method accounting.
Anyway, Aeroméxico filed Chapter 11 in June. As a result, Delta says, “We no longer have significant influence over Grupo Aeroméxico” and Delta is now accounting for its holding using the fair value method — which included a $770 million impairment.
Virgin Atlantic. Delta had long had a 49 percent investment in Virgin Atlantic, and as recently as Q4 2019 had valued that holding at $375 million. Then came coronavirus, and “Virgin Atlantic has incurred significant losses during 2020,” as Delta so blandly described the situation.
That prompted Delta to record a $200 million impairment for its Virgin Atlantic investment, and to reduce the basis in its investment to zero dollars going forward.
Add up those three impairments, and you get a total of $2.07 billion — which is actually more than the $2.058 billion listed above in Figure 1, thanks to a few other investments that increased in value.
Delta also lost $4.8 billion from its regular operations, for a total pretax loss in Q2 of (gulp) $7.014 billion. The impairments on its investments in other airlines account for 29.3 percent of that loss.
For comparison purposes, Delta had equity investment impairments of only $17 million in second-quarter 2019, and no such losses in the three intervening quarters. The it coughed up (no pun intended) this $2.058 billion impairment monster.
Coronavirus! For some firms, it’s shaping up to be a long-term illness.
Earlier this year, we published a short blog post on how to use Calcbench to get bank data on Loan Loss Provisions. We are now publishing a sample Excel spreadsheet with embedded Calcbench formulas which will do the work for you. You get Wells Fargo and JP Morgan already populated. These filings came in this morning (July 14th).
JP Morgan’s value went up by about $2.2 billion or about 26%. Wells Fargo? Up $5.7 billion or 150%!!
Please note that this spreadsheet will only work with an active Calcbench subscription
Corporate America will start publishing its Q2 2020 earnings releases any day now, followed by complete 10-Q filings by end of the month. These will be the first reports to encompass one full quarter in the era of coronavirus, and we’ll all be looking for numbers, narratives, and other disclosures about how Covid-19 is affecting corporate performance.
To help with that, Calcbench offers this list of tips and tricks to help find relevant disclosures quickly.
First, above all, know that companies you want to follow and set up email alerts for when they file something. Calcbench indexes all manner of filings, usually within minutes of those documents hitting the Securities & Exchange Commission database. So your first step is to be in position to receive news of a new filing when it happens.
To establish a peer group of companies you want to follow, just press the “Choose Companies” button you see at the top of most Calcbench search pages, and follow the instructions from there. We also have a detailed post dedicated to peer groups that is worth reading if you’re new to the service.
Second, rely on the Interactive Disclosures page and our text search capability. Our Interactive Disclosures page is where we index the footnotes and similar disclosures, and remember this law of financial analysis: the most important and juicy stuff is in the footnotes, always!
We recently expanded how subscribers can search corporate disclosures, giving you more ability to narrow the date range. So for example, you could search for all filings from one company (or a set of companies) within the last week or the last month. And you guessed it, we have a detailed post on this feature.
We also urge subscribers to use the text search capability on this page, which is the field on the right side of your screen. There, you can search for terms such as “COVID-19” (all capital letters seems to be the style that filers use), “impairments,” “coronavirus,” or whatever else is on your mind.
Analysts’ best bet might be to combine several of these search features, to get precise, highly relevant results. For example, you could search for “impairment” in earnings releases filed within the last month for whatever peer group of firms you follow, and immediately find who has been taking a write-down since coronavirus began.
Third, when in doubt, visit our Recent Filings page and see who has been updating earnings guidance. We added that category earlier this year, along with all the other types of filings we track — 10-Ks or 10-Qs, proxy statements, earnings releases, and 8-K filings of other news. As always, we have a detailed post dedicated to this subject.
A few other thoughts…
Personally, we’ll be watching Kimberly-Clark ($KMB) for details of its toilet paper business segment. But whatever data point you’re looking for this quarter, Calcbench has it.
Financial analysts are supposed to be able to trust the disclosures that firms report in their financial statements. Usually that’s the case — but not always.
This week we have an interesting example of that phenomenon from agriculture giant CHS Inc. ($CHSCP), which filed its latest quarterly report on Tuesday. Tucked away in the Controls & Procedures part of the report, CHS confessed that it had ineffective disclosure controls and procedures, thanks to a material weakness in its financial reporting.
Translation: CHS has enough weaknesses in the systems it uses to govern its financial transactions that the company can’t guarantee the reliability of what it’s reporting. So analysts and investors should proceed with caution.
That’s the headline message, at least. When you delve into precisely what CHS said, you get a fascinating glimpse into how material weaknesses arise, what a company does to resolve them, and how long that remedial effort can take.
Let’s start with what CHS had to say. First was this:
Our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting disclosed within Management’s Annual Report on Internal Control Over Financial Reporting in Item 9A of our Annual Report on Form 10-K for the year ended August 31, 2019.
OK, so the material weaknesses in question were first reported last summer. That’s easy enough to investigate; just crack open our Interactive Disclosure tool to call up the annual report CHS filed at the time, and see what the company had to say about its controls and procedures then.
That’s what we did, and CHS’ disclosures tell quite a tale. Turns out that CHS has been grappling with weak financial reporting for years. It first discovered material weaknesses in 2018, that led to a restatement of financial results for all of 2016 and 2017, plus parts of 2018.
Three material weaknesses discovered in 2018 were resolved by mid-2019, when CHS filed its 10-K. They involved ineffective controls for intercompany transactions, freight contracts, and the review of journal entries and reconciliations in grain marketing operations.
Alas, CHS still had two more weaknesses unresolved when its fiscal year ended last August. First, it didn’t have effective processes to assure that accounting policies are being followed properly; and it had weak IT controls, which could let miscreants feed bogus data into the accounting systems and inflate financial results.
Those two lingering issues are what CHS is talking about in its Controls & Procedures disclosure filed this week. As you can see, sometimes resolving material weaknesses in financial reporting takes a looooong time.
What, exactly, is CHS management doing to solve the problem? CHS said this in its quarterly report:
The following remediation efforts were taken during the quarter ended May 31, 2020:
We continue to enhance our overall financial control environment through the following:
- Held bi-weekly steering committee meetings consisting of senior finance, legal, information technology (“IT”), operational and human resources leaders to oversee the design and implementation of remediation plans.
- Continued developing, executing and monitoring detailed remediation plans in response to each of the remaining previously identified material weaknesses.
- Continued execution of our plans designed to remediate the two remaining previously identified material weaknesses, including (1) implementing and reinforcing an adequate process for monitoring proper functioning of internal controls… and training and (2) designing and maintaining effective controls over certain IT general controls for information systems that are relevant to the preparation of our financial statements and testing the effectiveness of remediated controls.
- Continued hiring for our teams in functional areas as necessary to ensure the size and skill set of those teams is adequate given the size, scale and complexity of our organization, industry and required internal controls over financial reporting.
So CHS is on a painstaking journey to strengthen its financial reporting. We wish them well.
Audit firms and corporate audit committees would pay the most attention to disclosures like this, so they could, for example, benchmark their own disclosures about material weaknesses against a peer.
Financial analysts should always give controls & procedures the once-over as well, since the disclosures here can offer hints about potential future trouble or just help you understand the risk you’re accepting as you evaluate a firm’s numbers.
As always, the devil is in the details — which are in the footnotes, and Calcbench has captured it all.
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 firstname.lastname@example.org.
Standardized financials from Earnings Press Release and 8-Ks are now available via the Calcbench API minutes after published. Calcbench is leveraging our expertise in XBRL to get many of the numbers from the Income Statement, Balance Sheet and Statement of Cash Flows from the earnings press release or 8-K.
Data for the Dow 30 is @ https://www.dropbox.com/s/9rzxu81w2sitr9l/calcbench_pit_preliminary.csv?dl=0. The data starts in 2010.
The file includes numbers from the press-releases and the subsequent XBRL filings.
True in the
preliminary column indicates the number was parsed from an earnings press-release.
True in the
XBRL column indicates the number appeared in an XBRL document. Therefore,
True in the
XBRL columns indicates Calcbench parsed the number from the press-release and subsequently “confirmed” it in the XBRL document,
True in the
preliminary column with
False in the
XBRL column indicates the number was parsed from the press release and was not subsequently “confirmed” in the XBRL 10-K/Q.
An unconfirmed number could indicate that the number was reported differently in the XBRL document sometimes it will just be a rounding error, or Calcbench parsed the number from the earnings release incorrectly. In the case where the XBRL number differs from a previously reported earnings release number the XBRL number will have a revision number greater than 0.
date_reported column is when Calcbench published the data and it would have been tradable.
This file was created using the code @ https://github.com/calcbench/notebooks/blob/master/standardized_numeric_point_in_time.ipynb.
For a larger sample size and other questions email email@example.com
Impairments related to coronavirus have been on lots of people’s minds this quarter. Now, for the first time, we have a specific glimpse into the SEC’s thoughts on the issue too. Carlisle Companies Inc. ($CSL), a manufacturing business with about $4.8 billion in annual sales, seems to be the first company to have an SEC comment letter asking about Covid-19 impairments.
The letter and Carlisle’s reply were exchanged in May, but SEC comment letters typically don’t become public for several weeks after that. Special thanks to eagle-eyed Olga Usvyatsky, who noticed the comment letter while poking around the SEC comment letter database and posted the news to Twitter.
So what happened? In Carlisle’s first-quarter report (filed on April 23), the company said that it had assessed its goodwill and intangible assets and concluded that despite the likelihood of reduced revenue for the rest of 2020, coronavirus had not affected the value of those assets, so no impairment charges were necessary.
Carlisle even disclosed its valuation methodology and key assumptions it used. See Figure 1, below.
Fair enough; it’s not Calcbench’s place to judge a firm’s statements about impairment. The SEC, on the other hand, has warned firms that impairments related to Covid-19 are a priority item.
Perhaps it’s no surprise, then, that the SEC dashed off a comment letter to Carlisle asking for more clarity about how much the carrying value of its goodwill and intangible assets exceeded book value. Here’s what the SEC had to say:
To provide investors with information to better assess the probability of future goodwill impairment charges, please disclose, if accurate, that the estimated fair values of the intangible assets you quantitatively tested for impairment substantially exceeded their carrying values. For any asset whose estimated fair value did not substantially exceed its carrying value, please disclose the percentage by which fair value exceeded carrying value at the date of the most recent test.
You can see the SEC’s logic here, and it’s a fair point to raise. If its intangible assets were only a hair above book value in Q1 2020, with more Covid-19 disruptions likely to come later this year — then yes, it’s possible that an impairment charge will be necessary sometime soon. On the other hand, if the assets are well above book value, then impairment would be less likely, even with Covid-19.
Carlisle heard the SEC’s message and promised more fulsome disclosure in filings to come. It gave the text below as a sample response, with the relevant material underlined:
In the first quarter of 2020, changes in facts and circumstances and general market declines from COVID-19 resulted in reduced expectations of future operating results. We considered these circumstances and the potential long-term impact on cash flows associated with our reporting units and determined that an indicator of possible impairment existed within our CFT and CBF reporting units. Accordingly, we tested our goodwill for impairment as of March 31, 2020. Those reporting units were tested for impairment using the quantitative approach described above, resulting in fair value that exceeded the carrying amount for each of the reporting units by approximately 10 percent. The carrying amount of goodwill for the CFT and CBF reporting units was $185.6 million and $96.4 million, respectively.
Just food for thought for financial analysts and corporate disclosure executives out there, wondering what you should say about financial risks and Covid-19. You can learn a lot by reading other firms’ correspondence.
Don’t forget, Calcbench subscribers can search SEC comment letters and firms’ responses (once the letters become public on the SEC website, which takes a few weeks).
The letters are indexed on our Interactive Disclosures page. Set up the firms whose disclosures you want to search and the time period in question, and then select “SEC Comment Letters & Responses” from the Choose Disclosure Type menu on the left side of the screen. Then you’re good to go.
A Q&A with Jack Ciesielski, Portfolio Manager and Accounting Analyst
Publisher of The Accounting Observer for 26 years
How did you learn about Calcbench?
It was many years ago. I was at an AICPA-SEC Regulation Current Event and met the team. I did not immediately sign up for Calcbench although I was frustrated with my current solution and was looking for an alternative. At the time when I met Calcbench personnel, the platform was pretty primitive. It took a little while for the platform to evolve to where I could get on board, but I’ve been a Calcbench customer for almost six years and I love it.
What frustrated you about your previous financial data provider?
Within my circle, we all used the same financial data company. That company had a monopoly on the data and knew it. But the solution was not faithful to financial statements, and the quality of the information was poor. Couple that with increasing prices (it was the biggest line item in my budget) and it was a big headache. Even though I disliked the data, and so did others in my field, at least we all spoke the same language. Calcbench is changing that, for the better.
What was the trigger that moved you to Calcbench?
The Calcbench platform had developed and became a very powerful tool. First and foremost, you can access native financial statements with XBRL fields behind it. And what I really like is that the platform is great for time series analysis. You can easily stitch together prior years or have a continuous view. That was a big persuader: data that was more faithful to the reported financial statements.
What features do you use on the platform?
While I don’t consider myself a power user, I do go deep on things like cash flow statement data, pension data, the contractual obligations table, and more. I don’t think that enough financial analysts read the MD&A, but in my line of work, it’s important to understand. The risk factors are especially important to explore and are easily accessible using Calcbench. I also really like the alerts. I keep track of changes in my portfolio companies through the alerts features.
I am fascinated by the revision history, but perhaps that is more for academics. I’m also planning to do more with IFRS filings (for some clients this really matters). And I’m starting to look at employee and auditor data; it’s very interesting.
What features do you expect to use on the platform?
My bread and butter is cash flow analysis. I have a detailed, proven model in Excel. With Calcbench’s Excel Add In, I can just change a ticker and get 90 percent of what’s needed.
Talk about a typical day using Calcbench.
What would you like Calcbench to add to its platform?
For some of my clients, I need access to the Russell indexes. I use the multi-company tool a lot. It would be great to have the Russell 1000, Russell 2000, Russell 3000 for peer comparisons. In addition, I wish there were more standardization around segment data.
Adjusting for Covid: Introducing EBITDA-C Since the start of the COVID-19 crisis, Calcbench has been watching corporate disclosures to see what firms have been saying about the virus’ effect on earnings.
Now one of our comrades-in-arms — Olga Usvyatsky, a doctoral student in accounting at Boston College and a long-time whiz at financial disclosures — has worked up a more thorough analysis of how firms are adjusting for Covid-19 costs. Call it EBITDA-C: earnings before interest, taxes, depreciation, amortization, and coronavirus.
Usvyatsky used our Interactive Disclosures page to search for “COVID-19 related expenses” in Q1 corporate filings. She found more than 40 companies that had included covid costs as a separate line in the adjusted EBITDA or adjusted net income reconciling tables.
You can download Usvyatsky’s paper here, and find the data file on the Calcbench Research Page. For anyone curious about accounting for coronavirus, her paper is worth your time. Meanwhile, let us recap a few of her major themes here.
First, many companies said the adjustments were directly, clearly related to pandemic expenses: buying personal protective equipment, cleaning supplies, or extra IT equipment to help employees work from home. The median adjustment in Usvyatsky’s sample was $1.2 million.
Second, not all companies reported COVID-19 charges as adjustments to net income. AT&T ($T), for example, noted in an 8-K filing that its coronavirus costs were likely to nick earnings by about $0.05 per share.
Third, some firms reported charges that were more sweeping than equipment purchases, but could still be reasonably construed as covid-specific costs. For example, if a firm laid off 20 percent of its staff, complete with compensation costs and other restructuring charges — well, companies adjust net income for restructuring charges all the time. Pandemics can be the cause of a one-time restructuring charge as much as any other economic disaster is.
These adjustments for coronavirus raise an obvious question: “Um, can companies do that?”
As Usvyatsky explains — yes, generally companies can. Adjustments away from Generally Accepted Accounting Principles (GAAP) are known as non-GAAP metrics, and they can play an important role in helping a company explain its financial position to investors. Non-GAAP metrics do, however, need to pass a few SEC rules:
In that case, one can reasonably argue that numerous COVID-19 costs fit within those parameters. For example, a large one-time purchase of protective equipment or IT gear, that you’re never likely to make again in future periods — that’s an unusual, specific, one-time cost. You can identify it as an adjustment to GAAP-approved net income and reconcile it back to the GAAP number.
On the other hand, a company can only report so many unusual, one-time expenses before investors start to call shenanigans. We all hope COVID-19 is a temporary phenomenon, but it may well turn out to be a problem that haunts the world for years. So if a firm ends up buying fresh protective gear every quarter for two years running, declaring that as a non-GAAP adjustment seems kinda fishy.
Anyway, Usvyatsky’s paper covers all this and more, with numerous specific examples. So if coronavirus disclosures are your thing, we recommend her paper highly.
We continue to skim corporate filings for interesting disclosures about coronavirus, and the Q1 2020 report just filed by Williams Sonoma ($WSM) did not disappoint.
Like other retailers, Williams Sonoma did report all the usual signs of calamity we’ve seen lately: store closures, inventory write-down, impairment charges, and so forth. But the numbers weren’t that awful, considering the grim state of retail these days; and the firm also provided decent disclosure about how it arrived at several important decisions.
First, store closures. In the 10-K Williams Sonoma filed on March 27, the company said it had closed 592 stores in the United States and Canada — out of 614 stores Williams Sonoma operates worldwide. In other words, the company pretty much closed its entire physical store footprint, which had accounted for 44 percent of company revenues in 2019.
As of the Q1 2020 filing on June 8, William Sonoma had reopened 350 of those closed stores. We don’t yet know how sales traffic is performing at those locations yet, since most of the stores opened after the company’s quarter end; presumably we’ll get a better sense of that with the next quarterly filing sometime after Labor Day.
Still, we do know that Williams Sonoma is moving to reopen its retail operations. Also, if 44 percent of 2019 revenue came from store sales, that means 56 percent came from other channels — and those other channels weren’t closed during the Covid-19 shutdowns.
Second, impairment charges. The company did record an impairment charge of $11.82 million related to property and equipment; another $11.3 million write-off of damaged inventory that couldn’t be sold elsewhere; and a $3.8 million charge on its operating lease right-of-use assets.
In total, however, that’s still only $26.9 in impairments, against assets at the end of Q4 2019 that totaled $4.05 billion. Plus, Williams Sonoma also tapped a $488 million line of credit when Covid-19 it, so the company’s pile of cash nearly doubled from $432 million in February to $861 million in June.
Third, goodwill impairment. Williams Sonoma carries about $85.3 million of goodwill on the balance sheet, mostly from a few acquisitions in the early and mid-2010s. The company did not declare any impairment to goodwill this quarter.
Why not? Read on…
We evaluated the need to test goodwill for potential impairment. Our most recently completed qualitative goodwill impairment assessment [conducted in November 2019] indicated that the fair values of our reporting units significantly exceeded their carrying values. Further, we currently do not expect the impact of COVID-19 to significantly affect the long-term estimates or assumptions of revenue and operating income growth, nor the long-term strategies of our brands, considered in our most recently completed goodwill assessment. Therefore, we currently do not consider the pandemic to be a triggering event requiring the testing of goodwill between annual tests.
In other words, goodwill assets looked good when Williams Sonoma last tested them in November 2019, and they still look good now, so management saw no need to conduct a formal (and painstaking) impairment test now. The company expects its goodwill to weather the COVID-19 storm.
Is that correct? Financial analysts need to judge that for themselves, but the company does stake out a defensible position. Then again, it also warned that prolonged economic difficulty “may lead to increased impairment risk in the future.” We’ll be curious to see how well that position bears out over the next few quarters.
Fourth, segment disclosures. Williams Sonoma operates stores under its own name, but it also operates as Pottery Barn, Pottery Barn Kids, West Elm, and a few other brand names overseas. How are they all doing? Take a look.
So three of the company’s five operating segments saw revenue improve from the year-ago period, despite coronavirus. Even in Pottery Barn, its biggest segment, sales declined only 2.5 percent from the year-ago period.
Cost of goods sold did rise by 3 percent, and ultimately operating income tumbled from $71.9 million in Q1 2019 to $46.5 million in Q1 2020.
Still, the company made a profit. Not every retailer can say the same.
Over the last few years, we have published notes about using segment disclosures to enhance understanding. Examples include write-ups about:
If you can’t already tell, we love segments at Calcbench. We also love Cloud computing, mostly because it allows firms like Calcbench to build products in a relatively quick and efficient way.
So today, we are going to look at the two biggest Cloud computing firms and try to see what we can learn about their operating margins for each cloud segment.
First, it is important to know that operating segments that are material to a business must be reported in the segment disclosure. You can find these on Calcbench by going to our Interactive Disclosures page and selecting Segment Reporting.
Once there, you can read the disclosure or learn more about how the company tagged the disclosure.
Why is that helpful?
One answer is that it will give you clues on how to extract the data. For example, Microsoft’s Intelligent Cloud segment is where the firm houses its Azure line of business. Similarly, Amazon breaks out AWS as a stand-alone segment.*
Mousing over a line item, will give you the Calcbench tool tip which includes an Excel formula and you can start building:
Each component in the formula is a parameter and can be accessed via a cell reference, so it is easy to set up a template. In fact, that is exactly what we did in determining the profitability of AWS versus MSFT Intelligent Cloud.
So without further ado, here is the time series and the data.
MSFT Intelligent Cloud
As you see, both of these underlying businesses are more profitable, at an operating level, than the corporates as a whole, so expect more investment into these areas. We will leave it to others to come up with other interpretations!
Please send an email to our team for more information. Thanks!
* Intelligent Cloud and AWS are not exactly the same, as IC also includes other businesses like GitHub and Visual Studio, among other things, but for purposes of this illustration, it will do.
The Calcbench Restaurant Week comes to a close today with some different cuisine. After two numbers-driven posts about same-store sales and impairment charges in the restaurant sector, today we serve up some analysis of narrative disclosures.
We begin with the risk factors firms included in their Q1 2020 filings. As one might guess, risks related to Covid-19 are right at the top, and several themes keep showing up:
As always, the amount and quality of these disclosures varies by firm. For example, Fiesta Restaurant Group ($FRGI) dribbles more than 500 words across one long paragraph — with nary a single number anywhere to be seen in the mix.
Compare that to Jack in the Box ($JACK), whose disclosure runs even longer, but the company breaks up that narrative into multiple, focused paragraphs with more detail. For example, here’s what Jack had to say about debt:
As discussed in this report, we have a significant amount of debt outstanding and have recently drawn down on our Variable Funding Notes, which provided us $107.9 million of unrestricted cash, to provide additional security to our liquidity position and provide financial flexibility given uncertain market and economic conditions as a result of the COVID-19 pandemic. A material increase in our level of debt could have certain material adverse effects on us. If the business interruptions caused by COVID-19 last longer than we expect, we may need to seek other sources of liquidity. The COVID-19 outbreak is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity will be readily available or available on favorable terms, especially the longer the COVID-19 outbreak lasts.
Jack even disclosed the risk that Covid-19 might magnify other risks already disclosed in the company’s original 10-K. Meta.
And other firms do discuss Covid-19 risks, but not in the Risk Factors disclosure. For example, the McDonalds ($MCD) Risk Factors section tells people to go read the Management Discussion & Analysis. You do find information about Covid-19 risks there, but the discussion is mostly sprinkled across a wide range of other subjects, such as revenue or segment performance. Only toward the bottom of the MD&A do you find a specific discussion of pandemic risks, in two relatively brief paragraphs.
In theory, a Calcbench subscriber could use our Interactive Disclosure page to compare Q1’s disclosure of pandemic risks to prior quarters’ disclosures. Just use the “Compare to Previous Period” tab at the top of the disclosure, and you could see how the firm changed its disclosures from Q4 to Q1.
Except, of course, Covid-19 wasn’t a thing in Q4, so you’re not likely to find anything worth reading yet. Later this year, however, as we see filings for Q2 and beyond, that comparison feature could be mighty useful.
Here’s his take on using Calcbench for financial analysis.
We interviewed Tom Philips, Adjunct Professor, Department of Finance and Risk Engineering, NYU’s Tandon School of Engineering. In addition to teaching, Tom is a Senior Investment Professor who was previously Global Head of Front Office Risk, BNP Paribas; Chief Investment Officer, Paradigm Asset Management; Managing Director, RogersCasey; Investment Research IBM
How did you learn about Calcbench?
I teach a course at NYU’s Tandon School of Engineering on valuation theory. I needed a source of data for students. I was going to the SEC’s website to get the information. I thought there was a better way to pull the data. In the course of a conversation with Dan Gode, I learned about Calcbench.
How do your students use Calcbench?
The historical data is important for valuations. With Calcbench, students are able to download financial statements over time. They can look at a company’s history going back five, even ten years ago.
For the class I teach, students need to value firms. To do that they need to understand:
Do you have any interesting examples of companies that were over/ under valued that you study?
There are many examples of valuations that don’t match the market price. One example that was a great learning lesson is Asian Paints. It was enormously overvalued.
With Calcbench, we have a lot of fun evaluating Tesla.
What are the challenges of using Calcbench?
Calcbench is powered by XBRL [Extensible Business Reporting Language, the global standard for exchanging business information]. Over time the quality of XBRL has improved dramatically but there have been issues around the data being tagged correctly to get a uniform set of financials. I have always been of the belief that XBRL should be audited the way financial statements are audited. It’s important that electronic representations are an honest representation of the paper representation.
I would also like to see broader coverage. It would be great to be able to access the full set of global companies and smaller cap companies. This will come over time.
There are a few things that I find most helpful about Calcbench. The first is being able to track data over date ranges. I like that I can pull data for a specific company, over time, in a consistent format.
What do you like most about Calcbench?
Calcbench is great for understanding corporate finance. If you are pulling data from the SEC’s Edgar database, Calcbench is orders of magnitude faster. You just download the report into Excel and extract information. It enables you to reduce data pulls from hours to seconds, at worst, minutes.
What other uses for Calcbench do you recommend?
Do you use Calcbench in the classroom or remotely or both?
I teach with Calcbench in the classroom, but students use Calcbench remotely for homework. In class, I like to look at examples on the screen. For the examples that we discuss in class, I have students download the companies financial statements into Excel and do the hard work on their own.
Calcbench kicked off our version of Restaurant Week yesterday, with a post examining same-store sales in the retail food sector and how those revenues have been hurt by coronavirus.
Today comes our second course: asset impairments that restaurant firms are disclosing. We don’t yet have many examples, but the examples we do have convey lots of interesting details. Analysts should take note, so you can ask sharper questions as more firms disclose asset impairments in the quarters to come.
Take Del Taco Restaurants ($TACO) as one example. The company filed its Q1 2020 report on May 4, and disclosed a total of $107.4 million in asset impairments — roughly 12.4 percent of the $862 million in assets Del Taco had at the end of Q4 2019. As shown in Figure 1, below, the impairments happened across a range of asset categories.
The biggest impairment happened in goodwill. How, exactly, did Del Taco reach that number? We used our Interactive Disclosure page to see what the company had to say, and found this:
The consequences of the outbreak of the COVID-19 pandemic coupled with a sustained decline in the Company’s stock price were determined to be indicators of impairment. As such, using Level 3 inputs, the Company performed a quantitative goodwill impairment assessment using both the discounted cash flow method and guideline public company method to determine the fair value of its reporting unit. Significant assumptions and estimates used in determining fair value include future revenues, operating costs, working capital changes, capital expenditures, a discount rate that approximates the Company’s weighted average cost of capital and a selection of comparable companies.
This is interesting because Del Taco is making a lot of subjective judgments to arrive at its impairment number. First, “Level 3 inputs” are asset values that a company derives from its own models and judgments about what seems right. They are not data-driven values you might derive from, say, prices paid for assets on an open market.
Second, the company lists many significant assumptions and estimates about important items, such as revenue, cost, and discount rates. There’s nothing wrong with that per se, but remember that Covid-19 is challenging many assumptions about how business is supposed to work.
Del Taco also impaired $8.3 million in long-lived assets. What’s that about? Again, we found the details in the disclosures:
This is all interesting too, because it touches on our post from yesterday about restaurant closures. The more restaurants a firm closes, the larger these long-lived asset impairments are likely to be.
OK, enough with Del Taco. If steak is more to your liking, consider this very different impairment disclosure from Bloomin’ Brands ($BLMN). Bloomin grouped all of its $65 million in charges related to Covid-19 into one section, and then listed them all in table format. See Figure 2, below.
Again we see impairments for operating leases, goodwill, and fixed assets; plus other interesting charges like $6.2 million in spoiled food and $16.2 million in wages paid to idled employees.
Not all of those are impairments in the strict sense of the term, but Bloomin is serving investors by giving a clear, precise answer to an important question: How is Covid-19 disrupting the business?
Then if you still want the details on specific impairments, you can further investigate. The “goodwill & other impairment” charge, for example, mostly came from a $2 million goodwill cut to Bloomin’s Hong Kong operations.
That’s our second course for Restaurant Week. Coming next: risk factors and forward-looking statements.
Restaurants have suffered enormously since coronavirus began spreading around the world three months ago — and as always, Calcbench wanted a better sense of how much damage restaurant firms have been disclosing.
So we scoured the filings of 110 firms that belong to SIC Group 5812, otherwise known as the retail food sector. Our goal: finding the nuggets of disclosure that tell the true story of Covid-19’s harm to the restaurant business.
Well, we found those nuggets. Today we begin Calcbench Restaurant Week, a three-part series of posts looking at what restaurant firms have been reporting and how Calcbench subscribers can put those insights to good use.
First up: restaurant closures and their effect on sales.
At a high level, Q1 2020 sales were clearly down. We found 30 firms that already reported first-quarter revenue, and collectively that amount fell from $25.4 billion in Q4 2019 to $22.8 billion in the first quarter of this year: a drop of 10.2 percent.
Among those 30 firms, however, the decline in revenue varied widely. For example, Jack in the Box ($JACK) revenue fell 29.7 percent, Papa John’s International ($PZZA) fell 1.8 percent, and Wingstop ($WING) saw sales actually rise 4.2 percent.
Moreover, the exact timing of Covid-19’s arrival matters, too. The virus hit the United States and Europe only in March. That means many firms were having a perfectly fine Q1 through January and February, only to see sales plunge in March. The pattern is so lopsided that a single number for all three months can be deeply misleading.
How misleading? Consider the case of Bloomin’ Brands ($BLMN), corporate parent of Bonefish Grill, Outback Steakhouse, and a few other chains.
In its earnings release filed on May 8, Bloomin had the decency to break out same-store sales for March from the rest of the quarter. See Figure 1, below.
As you can see, those sales were trending upwards for the first two months of Q1, then plummeted in March. That plummet was large enough to pull down same-store sales for the entire quarter. (Bloomin’s total revenue for Q1 was down only 1.35 percent from Q4 2019.)
Likewise, Arcos Dorados Holdings ($ARCO), which operates McDonalds franchise stores across Latin America, had this to say about same-store sales in an earnings release filed on May 13:
Systemwide comparable sales declined 4.5% versus the prior-year quarter, with a 10.9% increase for the two months ended February 29 and a 33.5% decrease in March.
Not every firm discloses this level of detail. If you want to look for it, a good place to start is our Interactive Disclosures page, where you can use the text-search field (right side of the screen) to search for “same-store sales,” “comparable sales,” or similar terms.
This pressure on same-store sales has some interesting implications. For example, we could see a reverse effect in Q2 — where sales are awful in April, but better in May and June as more restaurant locations reopen for business. So where Q1 same-store sales looked artificially good, Q2 numbers would look artificially bad.
How likely is that, really? Nobody knows yet. Many states have barely begun allowing restaurants to resume normal operations, and even when they do, lots of people are staying home. But the whole issue underlines the importance of examining same-store sales in as much detail as possible, including month-to-month breakdowns.
Analysts will also want to pay close attention to the actual number of stores. Many restaurant firms will close at least some locations forever. Presumably those will be the worst-performing stores — so if you examine same-store sales alone, without considering how the total number of stores has changed, that could give you a false sense of performance.
Again, you’ll need to scour the footnotes to find that level of detail. Typically you can find it in the Business Description or Management Discussion & Analysis sections. Bloomin, for example, reported one fewer location in Q1 2020 (1,472 locations) than it had in Q4 2019 (1,473). Chipotle Mexican Grille ($CMG), meanwhile, increased its locations from 2,619 at the end of Q4 2019 to 2,635 at the end of Q1 2020.
That concludes this first course for Calcbench Restaurant Week. More to come soon!
A Q&A with Leslie Robinson, Professor of Accounting, Dartmouth College
How did you find Calcbench?
I was doing an internet search for something related to Purchase Price Allocation (PPA). I came across a Calcbench blog. Calcbench claimed to have what I was looking for. I explored and found that you had a lot more. I signed up for a demo and played around with the free access version till I finally plunged in and became a subscriber.
What do you like about Calcbench?
For me what I especially like is the ease of navigation. The site is very user friendly. I’ve tried other data sources. Many of them require programming. In the past I used to hire someone to write code that would enable me to search words in financial statements. Then I would hire another person to eliminate or keep items. It was time consuming and expensive.
You are an example of a client who uses Calcbench for research, but is planning to use Calcbench in the classroom. Tell us a little bit about this.
I had been using Calcbench for research. As I mentioned, what I like is that it’s user friendly. For students, it’s very natural to be intimidated by financial accounting. I believe that using Calcbench can make accessing and reading financial statements less scary.
How does Calcbench change classroom learning?
The world is moving quickly. So many business cases get old really fast. As a professor, I am tasked with updating material faster than ever before. It’s frustrating to spend weeks writing a case. And if you are using that case for five years, it’s stale. That just isn’t the model anymore. With Calcbench, I have more relevant and accessible examples. Take for example, teaching the early retirement of debt. It’s easily searchable within the financial statement footnotes. With Calcbench I can read through 10-20 examples and can pull out a case quickly.
I will also use Calcbench to write exam questions. Professors often shield students from the financial statements because they are complicated. I think the opposite. Students need to see real financial statements as much as possible.
Calcbench will be used differently across courses. I teach a financial accounting required first year course for MBAs. We teach how financial statements are organized and look at many companies daily. Calcbench will be great for pulling out examples.
Tell us about how Calcbench will be used in the classroom.
Certainly I think that this could be used at a bigger school focused on information technology. One of the things that Calcbench makes you appreciate is how much variation there is in the disclosure of information - the labels, the categories. If you are interested in conveying the nuance, this is essential.
Where else do you think Calcbench can help?
How do you use Calcbench for research?
I like to search the segments, roll forwards and breakouts tool. I am often accessing tax information in the tax footnote. This tool has made research faster and more efficient. It’s helped me also rule out some things. So I don’t have to invest as much in the text analysis.
I am just starting to get into the tagging and labeling. It’s set out in a really intuitive way. But pulling data on your own takes sophistication to do it right. You can reduce time by understanding false positives and false negatives. Recently I wanted to learn something about the effects of a provision in the tax reform. When I got deeper into the disclosures, the information was aggregated and it was hard to separate information so it was not worth spending more time studying this effect.
For those considering Calcbench for teaching and research, what advice do you have?
I expect my use of Calcbench to evolve. Using Calcbench in the classroom will provide a feedback loop to inform my research. For people who want to see patterns in data this tool is great.
I also recommend that people use the cool features like reverse order by years, or divisible by a thousand. Lastly, reach out to customer service if you need support. It’s incredible. Within a couple of hours someone will show you how to get what you need.
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