The coronavirus pandemic tested the financial mettle of public companies, forcing even healthy ones to manage cash amid slumping sales, social-distancing expenditures, and disrupted supply chains. Financial officers deployed their full array of tools to navigate the crisis, conserving cash for survival, expanding credit lines as a precaution and, in some cases, building an arsenal for hunting bargains amid the downturn.
A review of diverse public companies shows that CFOs used similar means — nearly all issued debt amid the pandemic — to very different ends. Hard-hit companies such as Macy’s issued debt to ensure liquidity, while Netflix took advantage of low rates to issue more debt as soaring subscriptions and a halt to production unexpectedly turned it cash-flow positive. Paychex and Caterpillar said they were stockpiling in part to prepare for potential acquisitions.
Nike suspended share buybacks after issuing debt, but others such as Apple signaled bullishness by continuing to return money to shareholders and announcing a stock split to make it easier for individual traders to buy.
Executives at Caterpillar, Macy’s, and Southwest Airlines cut their own compensation before chopping deeper into the ranks to aid their recovery. Paychex heralded the employees who quickly switched to working from home to help hundreds of thousands of businesses apply for government payroll support, but said declining revenues would force layoffs. Southwest Airlines offered pilots and other essential employees voluntary furloughs with benefits and partial pay to keep them aboard until travel recuperates. Netflix donated $130 million to keep its creative workers afloat until productions can resume filming.
Stay-at-home orders cratered demand for petroleum and created new work for CPAs trying to measure the declining value of underground crude. ExxonMobil warned it might impair by up to 20% the December value of its proved reserves.
Wells Fargo took steps that helped the banking company avoid appearing to profit from the pandemic, suspending home foreclosures, waiving fees, deferring loan payments, and pledging to donate $400 million in fees it earned from processing Payroll Protection Program (PPP) loans to help support businesses. Many companies, however, plan to use pandemic losses to claim tax breaks. They are preparing to take advantage of recent changes to the net operating loss (NOL) rules that allow companies to carry back NOLs incurred in 2018, 2019, and 2020 five years. Those rules also suspend the 80% taxable income limitation on NOLs for 2020.
Following are excerpts from recent filings that highlight the financial decisions executives and CPAs are taking to help their companies navigate the pandemic:
Apple’s sales rise and stock splits
Apple reported a rise in sales in all regions, despite shuttering its retail stores, due to higher demand for services, iPads, and Mac products.
The Cupertino, Calif., company bought back $151 billion in shares on June 27 before quarter end, more than half of its $225 billion in buybacks authorized on April 30, after the extent of the pandemic became clear. The company reiterated its intent to increase its quarterly dividend each year above the current 82 cents per share.
On July 30, the company announced the four-for-one stock split that happened in late August.
Caterpillar cuts comp to conserve cash
Caterpillar’s senior executives suspended their short-term incentive compensation and those of other employees, saving about $430 million in the first six months of 2020 over the like 2019 period. Capital expenditures were $28 million lower in the period than the $492 million for first six months of 2019.
In the first half of 2020, Caterpillar raised $2 billion in cash by issuing $800 million of 10-year bonds at 2.6% and $1.2 billion of 30-year bonds at 3.25%. It took on $3.9 billion more in short-term credit, and “registered for $4.1 billion in commercial paper support programs now available in the United States and Canada,” according to its second-quarter filing. In July, its financing arm, Cat Financial, issued $1 billion of three-year 0.65% medium-term notes and $500 million of 18-month floating rate medium-term notes.
The Deerfield, Ill., equipment maker retains its goal of returning to shareholders “substantially all free cash flow” from its largest division, while maintaining its mid-A (credit) rating. Caterpillar suspended share buybacks after repurchasing $1.13 billion of common stock through June 30, but the board in June voted to keep paying quarterly dividends.
So what else will CAT do with its cash? “We intend to … fund targeted investments that drive long-term profitable growth focused in the areas of expanded offerings and services, including acquisitions,” the company said in its 10-Q filing.
ExxonMobil faces massive asset impairment
Executives at the Irving, Texas, company are weighing major asset impairments as the crash in demand from stay-at-home orders compounded the steep price drop due to global overproduction.
“Depending on the outcome of … the Corporation’s strategic plans or longer-term price views, a significant portion of the Corporation’s long-lived assets could be at risk for impairment,” ExxonMobil warned in its Aug. 5 10-Q filing. “It is possible that reductions to proved reserves could amount to approximately 20% of the Corporation’s 22.4 billion oil-equivalent barrels reported at year-end 2019.”
It planned to slash expected 2020 capital and exploration expenditures by $10 billion to $23 billion.
Exxon issued $23.2 billion in debt and continued to fund dividends of $7.4 billion in first six months. “To provide increased liquidity and flexibility, the Corporation increased cash and cash equivalents by $1.1 billion to $12.6 billion during the second quarter of 2020,” it said in the 10-Q.
Macy’s uses everything it can to stay afloat
The pandemic has devastated the iconic department chain and sponsor of New York City’s annual Thanksgiving Day parade. Even before the pandemic, Macy’s was battling a series of retail plagues: competition from online sellers, big box stores, and discount fashion chains; declining demand for office attire from casual workplaces and gig workers; and mild winters that depressed demand for new coats.
With its stores shuttered for months, Macy’s wrote off $300 million of mostly warm-weather fashion in the quarter ended May 2. It took $3.2 billion in noncash impairment charges to its Macy’s and Bluemercury brands and the carrying value of certain store locations, according to its 10-Q filing. Macy’s deferred rent payments for many stores, treating the rent deferrals as accrued liabilities.
To increase liquidity, Macy’s fully drew on its $1.5 billion credit facility, suspended its quarterly dividend beginning in the second quarter of 2020, and rescinded set-asides for share buybacks. The company reported completing nearly $4.5 billion of financing activities in June.
To “reduce its cash expenditures during this uncertain time,” the company's board of directors and CEO received no compensation “from the beginning of the COVID-19 crisis through June 30, 2020.” Macy’s also furloughed most employees. “Certain executives not impacted by the furlough took a temporary reduction of their pay,” according to the filing for the quarter ended May 2, which was filed two months late after the SEC granted it an extension.
In June, the New York-based retailer announced it would lay off 3,900 corporate and management employees and reduce other staffing until sales recover. It expects $180 million in pretax restructuring charges.
Like most companies surveyed, Macy’s plans to use the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, to defer employer Social Security payments and to carry back net operating losses five years, to years when the 35% top corporate tax rate was in effect, before the 2017 law known as the Tax Cuts and Jobs Act, P.L. 115-97, lowered the corporate rate to 21%.
Netflix raises debt as shares soar
People stuck at home during the pandemic gave thanks for Netflix, and it’s thanks to the pandemic that the streaming pioneer at last turned cash-flow positive. But the company doesn’t expect that to last beyond this year. “Due to the pause in production from the pandemic combined with higher-than-forecast paid net adds [additions to its subscriber total] year to date, we now expect free cash flow for the full year 2020 to be breakeven to positive, compared with our prior expectation for -$1 billion or better,” according to Netflix’s second-quarter Letter to Shareholders issued July 16. Next year, it expects to be back to a negative cash flow, but less than “our peak deficit level of -$3.3 billion in 2019.”
With investors flocking to stocks for the largest U.S. tech companies, the company in April raised $1 billion of debt “at a blended rate of -3.3% across both U.S. dollar and Euro tranches,” to end the quarter with more than $7 billion of cash and equivalents.
The Los Gatos, Calif., company set aside $100 million in March to help “the hardest hit workers on our productions, where Netflix has the greatest responsibility” with a “bridge until government safety nets kick in.” It also donated $30 million in “emergency relief to out-of-work crew and cast across the broader TV and film industry in countries where we have a large production base.”
Nike races to finish its digital transition
After store closures and capacity limits cut sales by more than one-third, Nike accelerated its shift to online sales and marketing, part of what it calls its “Consumer Direct Offense.” To “drive sustainable growth and profitability,” the company planned a layoff that would result in a $200 million to $250 million charge, according to its 10-K report covering the year ending May 31.
The company expanded liquidity in its fourth quarter, issuing $6 billion in senior unsecured notes, suspending share buybacks and entering into a new $2 billion committed credit facility.
Under this facility, “if our long-term debt ratings were to decline, only the interest rate would increase” but “would not trigger acceleration of maturity” of existing or future borrowings, the company said in its annual report. To obtain the facility, Nike agreed to “limits on our disposal of assets and the amount of debt secured by liens we may incur.”
“As physical retail reopens, NIKE's strong digital trends continue, a testament to the strength of our brand and the investments we've made to elevate digital consumer experiences,” said CFO Matt Friend.
Paychex announces headcount reduction
Paychex, which processes payroll for one in 12 U.S. private sector employees, strives to be integral to its clients’ success. Amid the pandemic, its payroll, benefits, and tax withholding volumes shrank, as its clients closed, reduced staff, and halted hiring.
CEO Martin Mucci saluted employees who helped clients apply for federal loans with murky and shifting guidelines. They also devised a tool to calculate the amount of loans that could be forgiven.
Paychex also partnered with three companies to direct clients to more than $100 million worth of PPP loans from banks other than their main one.
“One particular bright spot is client retention,” Mucci said. “I credit the dedication of our … teams, who have worked tirelessly … for us while providing the products and service … to support our clients and their CPAs during a time of great concern for their businesses, in fact, many times their business survival.”
But on the same call, CFO Efrain Rivera announced the company was “accelerating a range of cost savings initiatives … [including] headcount optimization” and speeding up its long-term plan “to reduce our geographic footprint.” Rivera anticipates $40 million in one-time costs.
Southwest Airlines awaits bluer skies
The Dallas-based airline, whose management is often dissected in business school case studies, managed to retain an investment-grade rating by all three rating agencies, according to its August 2020 Investor Update.
As the pandemic slashed operating revenues up to 75%, the company in July burned through $17 million per day — less than it had expected.
The company managed this by moving swiftly after the shutdown, “aggressively evaluating all capital spending, discretionary spending, and nonessential costs…; reducing the Company’s published flight schedule; placing a significant number of aircraft in storage; implementing voluntary time-off programs for Employees; suspending all hiring and noncontract salary increases; reducing named executive officer salaries and Board of Director cash retainer fees by 20%; and modifying vendor and supplier payment terms,” according to the July 27 quarterly filing.
Southwest bought out more than 4,200 employees with severance, insurance, and commensurate flight benefits and offered “extended emergency time off” to pilots and certain other contract employees who “get paid a portion of their wages and continue to receive all associated benefits, as well as accrue service credit for all benefits,” the company said in the filing.
Its investment-grade rating — and early start before the pandemic hit — helped Southwest raise $18.7 billion in 2020, “including $13.2 billion in debt issuances and sale-leaseback transactions, $2.2 billion through a common stock offering, and $3.3 billion of [Payroll Support Program] proceeds,” according to the 8-K.
In July, the company signed a nonbinding letter of intent with the U.S. Treasury on a $2.8 billion secured loan, but “as a result of the significant actions taken … to bolster liquidity and its belief that it can secure additional financing at favorable terms, if needed, the Company has since decided not to participate in the secured loan program,” according to the August filing.
The company determined that it did not need to impair its long-lived assets or goodwill. “Based on the facts and circumstances in existence as of June 30, 2020, the fair values more likely than not exceeded book values of both its reporting unit and its indefinite-lived intangible assets and therefore, no quantitative test was required,” the filing stated.
Southwest recorded an income tax benefit at a higher effective tax rate in the first six months of 2020 than the year-ago period, which “reflects the anticipated benefit of carrying back full year 2020 projected net losses to claim tax refunds against previous cash taxes paid relating to tax years 2015 through 2019,” according to a 10-Q filed July 27.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page.
— Sara Silver is a freelance writer based in New York City. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate editor, at Chris.Baysden@aicpa-cima.com.