Calcbench Research
Jason Voss Master Class
A Calcbench Master Class on Financial Statement Analysis
with Jason Voss and Pranav Ghai

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MATT KELLY: Hello everyone, and welcome to this webinar hosted by Calbench to explore issues in financial reporting and financial statement analysis. I'm your host, Matt Kelly, moderator. We're delighted that you could join us.

Today's webinar will run about 40 minutes and will be divided into two sections. First, I'll interview our guest for today. That is Jason Voss. He is a longtime investment strategist and financial analyst. Jason is going to address several points that analysts should consider when they are looking at financial statements. Then, we'll have a second half where Calcbench walks us through some of those same examples again, demonstrating how you can use Calcbench data analysis tools to find information about corporate filers that might better help you understand what they're reporting.

One housekeeping detail before we begin, this webinar is recorded, so we are not taking live questions from listeners. But if you do have questions, we're eager to hear them. Feel free to email us at and one of the team here will reply to you within 24 hours.

So, as I mentioned earlier, our first guest today is Jason Voss. He is an award-winning thought leader, strategist, speaker, author, and investment manager. These days, Jason is the CEO of Active Investment Management Consulting. He previously was content director for the CFA Institute. Prior to that, he was a portfolio manager at the Davis Appreciation & Income Fund. He's also co-founder of the Sarasota Institute, a think-tank that explores various public policy and economic issues. Jason has written several books on investment analysis. As you can see at the bottom of your screen, in his spare time Jason is a student of ninjutsu, which is the martial art of being a ninja. So, with all that said and without any other delay, Jason, welcome.

JASON VOSS: Thanks very much. It's nice to be here, Matt.

MATT: Here's what we were planning to do here today. As everybody can see on your screen, we're going to focus on three points of financial analysis that Jason has written about previously. That is analysis practices that not enough people do or do well. They are: not connecting numbers to narratives, failing to consider comparisons across time, and ignoring the footnotes. Jason, for each of these points, I'm going to read off something that you have written previously about that point and then ask you to elaborate a bit more and maybe walk us through some examples. How does all that sound?

JASON: Perfect, it's my pleasure.

MATT: All right, so then let's go with point number one, not connecting numbers to narratives. Your point that investors need to think that through as companies report all of these things to investors. This below quote is from a post you wrote last year and I'll just read it out. "Ideally, unmodified financial statements are examined, and the amounts reported in these statements are matched to specific narratives of the business as revealed in the management discussion and analysis section." First, just tell us a bit more here about what you mean and why this is so important.

JASON: Sure. I think the first point to put out there is that financial statement numbers are evidence after the fact of management's behavior. That behavior is frequently in accord with a strategy and some sort of long-term view of the industries in which they operate. One of the tricks that I used to utilize when I was portfolio manager of the Davis Appreciation & Income Fund was to begin my analysis with the reading of the manager’s discussion analysis section. Alias the MD&A, you'll sometimes hear it referred to as. And begin to sort of get in tune with how management saw their business, and these narratives before the fact are just that. They're sort of the mythology or fiction or stories that they're telling themselves, that they're telling the employees at the firms that they manage and that they're telling investors are going to happen. Then, afterward, the expectation is that you then do the financial statement analysis and try and match up those numbers relative to the narrative. Said another way, if management puts down a bet A) the financial statement after the fact B) are the verification that those narratives are authentic and worth paying attention to. It's been my experience that analysts oftentimes don't connect the numbers to the narratives ahead of time like that. Instead they dive straight into the numbers and the narratives are sort of left behind.

MATT: Give us an example of what you mean there.

JASON: I'll say ahead of time for each of the three major points today on the webinar, I'm using companies that are still around, going back in time in some cases two decades ago to essentially protect the companies. This is not an indictment of the companies currently, this is an indictment or a reveal about companies as they existed in some cases 15, 20 years ago. To protect the innocent, as they say.

MATT: All right.

JASON: For this bullet point Xerox is my example. Back in the day, the narrative about Xerox from Wall Street and from the investment community was that they were being handed a bad deal by the dot-com companies. Essentially, Xerox was no longer seen as a technology company that was competitive, but that was failing and going to be rapidly failing in the face of everything that was happening in the dot-com era. Xerox, of course, was very sensitive to this and not surprisingly their shares were not very competitive. I think the PE dropped massively. Xerox came out with this new "strategy" that they're going to put in place to drive revenues. They waxed philosophic about it in their MD&A and they said that they were going to be delivering top-line revenue growth of 10% for the next five years. Yet, if you were to check their numbers against that narrative after the fact, you would have discovered several things. First of all, they weren't changing their product portfolio, which is a part of the narrative. There's also verification of that in their 10-Ks you didn't see any new products being launched. Any technological advancements that they were making were incremental. New features, essentially, on the same copy machines and fax machines that they were selling at the time. There's nothing earth-shaking in terms of what was happening. They're also going to be using the same distribution network for their sales.The sales force was incentivized in exactly the same way. There wasn't a lot of evidence in the narrative that they're going to be able to deliver this. If you actually check the numbers you would see that in the preceding three years up until the moment that they've sort of launched their new narrative around sales, the very best that they had been able to deliver was in 1998, which is what you see on your screen. That had been 9.6%. That had been the very best sales performance Xerox had delivered in approximately two decades. Every single thing had gone right for them that year. They were essentially saying they're going to exceed that for the next five years, having changed nothing. The next bit of narrative and the next bit of wisdom to couple with the numbers here is their competition was not going to sit still. If somebody prints 9.6% top-line revenue growth on a multi-billion dollar company, the competition will respond. It was finally unlikely they're going to be able to deliver 10%. In summary, Xerox was claiming 10% top-line revenue growth for the next five years in 1998 and it just didn't match the economic reality as described in the numbers as well as the discussion and the MD&A.

MATT: When you describe it all like this, and of course we have the benefit of hindsight today, but when you describe it all like this it's an eminently sensible thing that you're saying here. I'm just curious, is this hard for financial analysts to do in your opinion? Or do they simply not do it enough or well enough, or what's going on?

JASON: Well some do, yes. Any prospective decision is always difficult. I didn't just highlight this because it was something that I successfully assessed. It's just the case that the special technique I'm advocating for here is to start with the MD&A and to look at the narratives ahead of time. In 1998, when I was a lowly research analyst at the Davis Funds, not even a portfolio manager at the time, I started with the MD&A, listened to what management was saying about the business, and then and only then did I go back and look at the numbers to see if they had delivered on their promises. If you just start with the numbers and it doesn't exist in the narrative you can rationalize as an analyst. You could also listen to management's sort of Monday morning quarterbacking of their lack of results. For example, you started looking at Xerox in 1998 and you looked at 1998’s numbers right away, management is already providing an explanation for why they may have failed at delivering what they'd been talking about two years prior. It’s, I think, more important to reverse the order of that. Start with their claims, the fictions, the myths, the stories that they're weaving about their company in its prospective performance. Then, check after the fact the numerical story. What you would see with Xerox is that their MD&A was sensitive to the fact that they weren't seen as competitive with the dot-com companies and that they had a big grand strategy that they were launching. Then, when you actually check the numbers you didn't see evidence that they've been able to deliver that. I'm really essentially arguing for making sure you get your order correct in terms of your analysis.

MATT: Now we will move on to your next point; looking or failing to look at comparisons across time. We have this statement on the screen now that you had written. "The temporal dimension for the income statement, balance sheet, and cash flow statement are all different… Consequently, analysts must put all of the financial statements on the same temporal dimension." Same question as before, tell us more about what you mean here and why this is so important.

JASON: It's important because you want to compare apples to apples. The income statement, for example, in the second quarter that's reported in a 10-Q in the United States shows the aggregate income statement rather than the quarterly income statement. If you make a comparison to the balance sheet it's going to be slightly off. If you're going to make a comparison to the cash flow statement you also have the aggregated cash flow statement up to the second quarter. You're not getting a quarterly comparison. It's been my experience that companies will hide fluctuations in their business to take advantage of the fact that they've got, in the second and third quarter in particular, an aggregate income statement and an aggregate cash flow statement. It's essentially just saying if you're making comparison for the second quarter you want all second quarter numbers. If you're looking at the third quarter you want all third quarter numbers, and likewise the fourth quarter. Importantly, the fourth quarter and first quarter are reported on the same basis. The annual numbers, for example, are all reported annually, but still feel what the fourth quarter number you're going to have to solve for that. Quickly, the way you do that is you take the annual numbers as reported in the 10-K and you subtract out, for example, through with the fourth quarter number, the performance of the first three quarters of a given year to isolate the fourth quarter numbers.Then, you can make your comparison against the balance sheet, which is always a snapshot at the end of a period of time. You have to do the same with the cash flow statement. Essentially, it asks of the analyst that they do a little bit more work than most, in my experience, are prepared to do. When you do that, you begin to see some of the games that companies play. You also can begin to see the vagaries of seasonality in the business more clearly. You can also begin to see any sort of, especially, subtleties of the business. Networking capital investments sometimes can be very high in some quarters and lower in others. You can begin to isolate some of those effects. Essentially I'm just arguing the philosophy of high level apples to apples.

MATT: Speaking of games that companies might play or timing, we had this example of yours from Crown Castle Incorporated. Walk us through it.

JASON: Crown Castle, again this is going to tie in to the first point about matching narratives to numbers. The narrative of Crown Castle circa 2001 was that they were a part of the cell phone tower owners globally. The investment community and the sell-side community in particular were hyping up which of the companies at the time were going to be the first to print positive operating cash flow, positive free cash flow for a given period. Until that time, everybody had sort of been negative cash flow businesses. The two frontrunners were Americans Tower AMT and Crown Castle CCI. That's bullet point one.

Bullet point two is that a part of the narrative was that you had to understand the tower business. The tower business essentially is a fixed cost investment of the tower. Then, you add antennas onto the towers in order to increase the rental revenue or the lease revenue that the companies like Crown Castle and American Tower collect. Above 1.8 approximately antennas tower was cash flow positive. It ought to be a very stable business because the carriers, the cell phone companies themselves, they have to have these antennas in place so they don't have drop calls for the customers. It ought to suggest that a company like Crown Castle, once it became cash flow positive, oughta have very stable cash flows at the operating level because they're just writing more leases, they're adding more antennas onto these towers. You don't expect or anticipate that they'll be subtracted from the tower.

Now, drop yourself into time period 2001. They printed a second quarter operating cash flow number whose operating cash flow was barely above what it had been in the first quarter. But here's the thing, Crown Castle was widely celebrated in first quarter 2001 as having been the first of the tower companies to print positive operating cash flows. They experienced the subsequent bid up in their shares in the second quarter. Though, you would expect approximately doubling if not a slight increase of first quarter operating cash flows, because, again, the number of antenna on their towers should have stayed stable all gone up. Instead, what you saw was barely a tick up. I only saw that because I had broken out the first quarter operating cash flow number apart from the second quarter 10-Q reported numbers. By subtracting first quarter from the aggregated numbers report in that second quarter 10-Q I could see that the operating cash had just barely gone up.

That just did not jive with the narrative understanding that I had of the business. It made no sense. I looked at the balance sheet to try and see if I could explain what had happened. I tried to analyze the net income statement or the income statement and I couldn't figure it out. I called the company to figure out what was going wrong or what was happening there. I received a call back approximately two weeks later that featured the controller for the company, the CFO, as well as the corporate counsel. What they confessed to me, back in the day I actually recorded using recording equipment all of our interactions with management as well as conference calls on the tape, this is how long ago this was. I recorded the conversation and what they confessed to me was, rather sheepishly, that they had executed a sales lease-back with the BBC to acquire the BBC's collection of towers in the UK. What they had negotiated with the BBC was delaying the payment on the lease-back portion of the portfolio by one day. It was due March the 31st of 2001. They had negotiated for a little bit of extra interest as well as probably some sort of consideration with the BBC to pay on April the 1st. Thus, they printed a very high positive cash flow number quarter one. Quarter two barely a tick up because they actually owed that lease payment and so that's why you saw that that effect. Nonetheless, if you were to just look at the second quarter aggregated cash flow from operations you would see positive operating cash flow. They still were positive but if you subtracted one Qtr from two Qtr you saw that it had dropped significantly in the second quarter. It only made sense once you got what had happened from the company.

In another way the company had engaged in, I don't know if you'd call it fraud, there was no disclosure about it in their statements. I would say it's borderline fraudulent what they did. Subsequently, we sold the shares.

MATT: Now, your last point about reading the footnotes. Here is the money quote: "Most analysts do not read them. Nor do most analysts take the numbers from the footnotes and put them into the main three financial statements." First, let me say that everyone here at Calcbench loves reading the footnotes, so we're with you on this. Why, in your estimation, do people not take enough time for this footnote exercise.

JASON: Well, that's a very long answer if you wanted to excavate it fully. I think there are two main reasons. One, I think oftentimes on the buy side it's a dirty dark secret that many folks on the buy side don't do their own research. Another way, they're reliant upon the sell side and what the sell side reports. Going back just half a step to the Crown Castle example. In the Crown Castle example, nobody on Wall Street noticed what I noticed. They kept waiting for Lehman Brothers, which was the investment bank of those tower companies, to report and they never really did report about the fraudulent activity. I don't think their analyst ever noticed it. I didn't see any other evidence of it. I talked to others on the buy side about it, nobody mentioned it. That meant that nobody was doing what I was doing. I seemed to have been the only person who noticed what Crown Castle had done. That's the first reason why I think people don't look at the footnotes. They just don't do their own research and they're reliant upon the sell side to a large degree.

Second, they're relying on data aggregators like Bloomberg Backset, so on, not Calbench. One of the reasons I love Calcbench, you guys provide the ability to do some of the things that I'm describing. For example, putting things in the same template basis, that's something that Calcbench can do. The footnote information can be added to the financial statements. Unless you're using the right data aggregator, it's just not possible. I always hand entered my data. I was a throwback in that way. I entered it directly from the 10-K’s, 10-Q’s, proxy statements, etc. That's why I was able to have the flexibility to do some of these things. If the aggregator doesn't let you do it, then most don't.

The third reason I think many buy side folks don't do it is they're just under time pressures. The big firms, like Fidelity, for example, Franklin Templeton, they can afford to have a team of analysts do this kind of work. An average-sized active investment manager, say a firm size of 15 to 20, may not have the time to indulge this. You're really checking in with the 10-Q’s and 10-K’s to make sure that there aren’t any trainwreck-type situations. You don't necessarily go back and analyze the footnotes. Those are my top three reasons why I think most people don't look at the footnotes even though they should.

MATT: Then an example of how to put the footnotes to good use, we have this example from Skechers, the sneaker people, what was going on there?

JASON: This goes back to circa 1999-2000 with Skechers. Skechers, again, narratives to numbers. The context of Skechers at the time was that they were a superior manager of the shoewear business because they were asset light. That matched the narrative that was quite popular in the late 90s and early aughts, which favored businesses as investors that have solved the high fixed costs of property equipment and other assets problems. I was somewhat dubious. I didn't understand how Skechers was able to do asset light given that they manufactured shoes. That seems like a business for which you need to do that. I went into my understanding Skechers a little bit dubious. By the way, as a customer of Skechers I just enjoyed their sneakers and I had sort of Doc Marten knockoffs that I used to wear that I really thought were comfortable from Skechers. I was a fan of them as a customer, but I was dubious of the claim that they'd somehow solved the asset light problem. I didn't know how that was possible.

What Skechers was taking advantage of was the sort of gap that's generally accepted accounting principles criteria for which you use operating and capital leases.That's left to the discretion of management. There's not necessarily a legal definition of that. If you are using leases to do something substantial and significant for your business that is considered essential for the business you're supposed to report those as capital leases. Those capital leases are therefore considered a part of your capital structure and reported on the balance sheet typically as a part of your long-term debt. Some companies actually break it up in a separate number. Skechers had made the determination at the management level that the manufacturing of their shoes would be handled as operating leases. Now, I don't know about you, but that doesn't match the narrative. The narrative is that they're a shoe company and that's what they do - sell shoes. It doesn't make any sense that they would offload all of the capital involved in manufacturing their shoes into operating leases, which then are off balance sheet and only reported in their footnotes. They disclose that in their footnotes. Ergo, they've met the legal requirement of actually disclosing this. Their justification for it wasn't really given. It just said that in explaining their operating leases it just very dryly said, "Skechers has a significant portion of the manufacturing of its shoes reported and handled by operating leases," and here are the operating lease disclosures.

What it requires the analysts to do is A) notice the narratives relative to the numbers, but then you actually have to capitalize the operating leases as a form of capital. You can do that, Calcbench does it for you, but the technique for doing that is to look at the payments owed on operating leases. You can use a debt rate for a comparable company. Say in the case, for the sake of argument, Skechers is a triple B credit. You can take the current yield on a triple B piece of paper and divide that into the average operating lease payment to scale-up and capitalize the operating lease payment to get approximately how much capital they have offloaded to footnotes. Then, what you do is recalculate all the financial ratios like long-term debt ratio, for example, to look at the capital structure as well as things like return on invested capital to sort of see how they do relative to the competition. What I discovered is that when you do that Skechers actually had worse performance, not better, relative to the competition. Which was completely contrary to the narrative being reported by the sell-side about Skechers.

MATT: All right, well, Jason that is the third of the three we wanted to cover and that's all the time we have in this section of the podcast today. You gave us plenty to think about. Thank you very much for your time, we really appreciate it.

JASON: My pleasure.

MATT: Now we're going to shift gears to our next segment to discuss how you can use Calcbench data analysis tools to explore the very issues Jason has been talking about. Our guest for this segment is Pranav Ghai. He is co-founder and chief executive officer of Calcbench. Pranav manages the day-to-day operations of the firm and he has more than 20 years experience in financial analysis. Pranav previously had worked at TIAA and ITG and he was vice president at Morgan Stanley, where he was in charge of ModelWare and quantitative and derivative strategies there. Aside from Calcbench, Pranav also serves as a board member of XBRL-US. He is on the Technical Computing Advisory Board for Microsoft and he's a member of the CFA Institute's Corporate Disclosure Policy Council, which looks at issues affecting the quality of financial reporting and disclosure worldwide. Pranav, welcome, thank you.

PRANAV GHAI: Hey Matt, how's everything?

MATT: Pretty good. Before we get into specific thoughts about what Jason Voss discussed, just give me the elevator pitch about why Calcbench is so useful for financial analysts and some of the features and capabilities you think they should know about. What do you have for us here?

PRANAV: Sure. We started Calcbench, Alex and I, seven/eight years ago with the idea that there had to be a better way to get data for researching companies than the methods that existed. Alongside all of the experience that we had doing this in our previous work was this new tool that the SEC mandated called XBRL, "extensible business reporting language." That's an acronym that rolls off the tongue for a lot of us now. XBRL is a machine readable data source. What it allows computers to do is to ingest data from the financial statements in this readable form for them and grab it. We can put it into databases and bring the interfaces for people to look at these things and make decisions very quickly. Calcbench lets people go from, you know, the face statements, the income statement balance sheet and cash flow, as the company actually filed it and not with an intermediary in the way. Even though we are an intermediary, we don't actually get in the way of that process. You actually see the data the way the company filed it and intended for you to see it. In addition to that, Calcbench gives you the ability to go deep into the footnotes and explore the hidden corners of all of these financial statements and render that information back. In so doing all of these things, it's a very facile and easy way to get to the hard stuff in the financial statements. It's amazing what you can find in there. These companies, they tell you everything.

MATT: You have some of the key features here up on the screen. What do you think is most cool or you're most proud of there? What should people know about?

PRANAV: Each one of these things is unique. They kind of feed off one another. Picking one is really hard. If I had to pick one I’d probably pick the disclosure queries because that's where all of the hidden stuff is, but no longer because you can search so quickly. You've always heard analysts talk about the juicy nuggets of the details the company puts out are all in the footnotes. The disclosure queries are a fast way of getting to that information very succinctly and cleanly. You can do that across peers, so that sort of leads to the other stuff. You can ask very detailed questions of the data and get answers back in a relatively short order. I'd say the combination of the disclosure and the peer comparison is really where Calcbench distinguishes itself. We've been able to use a lot of those techniques, the computerization techniques that we apply with and to disclosures and peer comparisons, into our analysis of earnings releases alongside the company in detail stuff that we've been doing pretty much since day one.

MATT: So let's pivot back to Jason Voss and his three points about financial analysis. The first one that he raised was about connecting numbers and narratives. Here, the example we wanted to use was Kraft Heinz. I'll do the back story and then Pranav I’ll let you walk through the analysis.

As most people listening probably know, Kraft Heinz today is the result of a giant merger that closed in 2015 between HJ Heinz Company and Kraft Foods. At the end of 2017, goodwill for that entire conglomerate was $44.8 billion worldwide. The value of the intangible assets was $59.45 billion. Here we have our picture of some of those assets, the intangibles, up on your screen: Kraft and Heinz and Oscar Mayer and a few other brand labels. That's what we had, and then suddenly, blammo, earlier in February we had this gigantic goodwill impairment of, I should say an overall impairment, of $15.4 billion. That was split between a goodwill write-down and intangible assets write-down, which you do not see too often. The company had specifically cited, as you can see, slowdowns in the U.S. and Canada businesses for the write-down of goodwill. Then, also, writing down the intangibles because of the Kraft and Oscar Mayer trademarks because apparently we are all eating healthier foods and we don't like processed foods. My question: this write down dropped on everybody's lap in February of 2019; is there some way somebody looking at those operating segments before the trouble signs, before the impairment happened, could they have seen the trouble signs and perhaps anticipated that this goodwill issue, this write-down issue, might be forthcoming? Pranav, walk us through the rest of the story here. Take it away.

PRANAV: We talked earlier about the power of the footnotes that are available to users. Calcbench specifically does, we take the user through the footnote experience by allowing them to simply read a footnote directly by isolating that particular section of the document and simply read. Or you can actually lift data directly out of that footnote and put it into a tabular format or in Excel or whatever you want. You can just analyze the data. The operating and geographic segment footnote is particularly useful for this exercise. What you see in front of you here is the Kraft Heinz geographic data from 2015, 2016, and 2017 10-Ks with the revenue segment or the revenue piece for the geographic segments of the U.S. and Canada. You kind of piece that together and say Kraft Heinz generated $12 to $20 billion range in the last several years with respect these two geographies. You may ask yourself, what is it that we can tell from this? You now know, given what you see in front of you, the levels of sales generated from those two geographies. You also can look up the history of both Kraft and Heinz very quickly, piece it together, and then come back and say, look, this is what the combined company would have done had it been combined. Obviously it's a conjecture, but had it been combined back in 2012. That's what you see on this slide here. That is that the U.S. revenue and the Canadian revenue for Kraft North America, which is at the top, was in the range of $17 to $18 billion in 2014. Actually, in that period. So $17 to $18 billion, let's just call it $18 billion for round numbers sake, obviously you could add it yourself. The lower table is the Heinz data. So you see North America there from 2014 at $4.25. You say, okay, well that's about $22, $22 and a half, maybe somewhere in that range, $22 billion. Remember what we said before in the previous slide? We're talking about $20.5 billion, which is our third bullet point right here. You're talking about a reduction in sales of about a $1.5B from 2014 to 2017. Now we've pieced that together, we did that exercise in preparation for this webinar, it took us literally, what, two minutes to do it?

MATT: Yes.

PRANAV: So it took longer for me to explain it in this webinar than it did to actually pull up that data. I think that's fair. That's the power of XBRL, Calcbench, and footnotes working for you.

MATT: I think it's interesting, it backs up Jason's broad thesis that if you listen to what the managers are saying, "we're going to merge, everything's going to be great, there'll be synergies all over the place." Then, if you actually look at the numbers, well hold up guys. Your North America sales, which is the biggest market in the whole world, has gone down by 10% or so in the last three years. What did we think was gonna happen? You wind up with some sort of impairment because something's got to give. So here we are.

PRANAV: Right. Even if the sales were flat, you'd expect the "synergies" to unlock. You'd hope that you'd get higher sales out of something. That's just not happening. The result is what we see or what we saw last week.

MATT: For everybody listening, we should note at the time we are recording this masterclass webinar Kraft has not yet filed its 2018 annual numbers. They did file, after their impairment announcement, they filed another, not timely, warning that they're going to be late. We don't know when we will see those numbers. We don't know what they’ll look like, but meanwhile here we are.

Now let's move on to Jason's second point about looking at comparisons across time. He talked a lot about operating cash flow from one quarter to the next. Not just cumulative, but what was the actual cash flow in a specific period. We just pulled up this example here of operating cash flow period by period for 2018 from some of the Dow Jones industrials. Walk us through what we're looking at here and where it comes from.

PRANAV: This is something that we as analysts, both Alex and I and especially Alex, struggled with when we were doing this kind of work. Jason mentioned it, he struggled with the same thing. When you have a cash flow statement, the cash flow statement measures a cumulative period in time. At the end of quarter one, you've got your data for a particular quarter. At the end of the second reporting period, quarter two, whether that's fiscal or calendar what-have-you, you've got six months of data in there. If you wanted to say, for example, what are the cash flow from operations for the second quarter? You actually would have to go to the second quarter cash flow from operations, pull that up, pull up a first quarter cash flow from operations number, and then subtract the two yourself. If you wanted to do it for the third quarter, you'd have to do the same thing for the quarter three statement along with the quarter two statement. What we do at Calcbench is we actually let you pick the operating cash flows and metrics on our multi company page. Then, just push a little button for quarterly and all of a sudden you've got all of that stuff right in front of you. What you see there, that 2258 number for MMM is actually their cash flow from operations for the fourth quarter of 2018. That number is not actually reported anywhere. You would have to get the full year operating cash flow, get the operating cash flow cumulative through the end of the third quarter. Which is actually not on the screen you see in front of you. Subtract the two and then you'd get your 2258 number. What you can see is the operating cash flow from American Express in the fourth quarter of 2018 is actually negative. They report a quite high operating cash flow for the full year, $8.93 billion, but in the fourth quarter it looks like something went amiss. You can dig into that, I'm sure there's a good reason for it. You can dig into that yourself and start asking a second-level question very quickly.

MATT: Then Jason's third point about the footnotes, I know that footnotes are near and dear to all of us at Calcbench. We pulled out these two footnotes from Chipotle about leasing costs. I know that there is a new leasing standard that went into effect on January 1st of this year where you are going to have to start listing your operating lease costs on the balance sheet as of when you adopt it. You had to adopt it starting in 2019, but not necessarily on December 31st of 2018. We have these footnotes here, walk us through what we're reading now.

PRANAV: You're absolutely right, Calcbench loves the footnotes. These pieces of the financial statements are near and dear to our hearts. The goodwill and intangibles that you mentioned before are all captured in the footnotes. The leases are something we've actually written about and we've all spoken about for a while now. If someone's interested in getting details on our leases, you can go to the Calcbench research page and download our lease report that we did last summer that shows you what we expected or what we expect will go onto the balance sheet from operating leases for companies in 2019 and towards the end of 2018.

Chipotle is a particularly interesting case because their reported total liabilities on their 2017 balance sheet was somewhere in the $700 or $800 dollar neighborhood. If you read the footnotes, you would see that their lease payments, as you see you directly in front of you, are almost $4 billion. That dwarfs the number reported on the balance sheet for liabilities. As we understood it, what they were gonna have to do is to take those lease payments, discount them, and then take the right to use asset number discounted and put it directly on the balance sheet as an asset. Then, offset that asset with a with a liability of roughly the same amount. Therefore, what was going to happen is Chipotle’s assets would go up by some discounted number that was quite significant - well over$2 billion, maybe between $2 and $3 billion. They have a liability that was about the same. Their shareholders equity or book value wasn't going to move much. The individual assets and liabilities are going to be impacted because of this lease disclosure. What we found when we went to go look at the Chipotle year-end 2018 balance sheet was that the actual total liabilities didn't change very much. Kind of scratched our heads, said, "hey, what's going on?" Then, your figure two comes directly into play there. I'm happy to have you read it and tell me what you see there.

MATT: What I see is that they expect to record all of these costs and the changes and rights of use assets and whatnot. In the last part, the last few words there that are highlighted in blue are the key - "As of January 1st, 2019." Yes, they say that we don't expect the material impact on our consolidated statement of income or of cash flows, that's true. To my reading of it, you're omitting the fact that within 24 hours between December 31st and January 1st you are going to have a radical change to how your balance sheet looks. Just kind of whistling that into the footnotes and hoping that nobody notices until the next 10-Q or 10-K gets filed. When you look at it again it'll look very different. It'll only look very different because they quietly disclosed within one minute. We're gonna flip a switch and suddenly these off balance sheet liabilities and assets pile onto the balance sheet all at once.

PRANAV: I couldn't have said it better myself. That's basically what happens. The balance sheet’s going to grow a lot in the next reporting period. They knew this. This was something that they are probably one of the largest leasers out there with respect to their assets prior to it. They're no different than other large retailing outlets that rely a lot on foot traffic, etc. to get their business. They just simply have a lot of storefronts. There's nothing wrong with that, it's just the accounting standard is going to hit these companies disproportionately. It's not just Chipotle, there are other companies. Potbelly is gonna be hit very hard with this. There are others, as well. However, the reason this one came up is because, relative to their existing balance sheet, these lease liabilities are quite large. Whereas, you might have a company like AT&T that has a lot of leases. Their balance sheet is so big that they can absorb a large leasing liability. While their numbers will change, they won't change as dramatically as a firm like Chipotle.

MATT: That's all the time we have for this webinar. You covered a lot of ground for us. Thank you very much for your time, we appreciate it.

PRANAV: Alright, Matt.

MATT: Again, everyone, that was Pranav Ghai, co-founder and CEO of Calcbench walking us through some of the ways that Calcbench can help you with your financial analysis needs. We were also joined earlier in the program by Jason Voss, an investment analyst and strategist. He was giving his views on three practices that investors might use to sharpen their financial statement analysis. If you have any further questions, Pranav and the rest of the gang at Calcbench would be happy to hear from you. Drop them a line at

That's all for this webinar. I've been your host, Matt Kelly, editor of Radical Compliance. Thank you for listening and have a good day.

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