dust collecting: panning for competitive intelligence nuggets in company financial data

Copyright © 2015 Richter & Company LLC. All Rights Reserved.

Panning for CI Nuggets in Company Financial Data

Dust Collecting

05/03/2023

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Brandon ConroyExecutive ConsultantRichter & Company, LLC


Synopsis• Collecting intelligence on competitors can be daunting, and a significant

drain on time, money, and other resources

• Publicly available financial documentation contains a tremendous amount of valuable information such as company strategies, goals, performance metrics, investments, and even weaknesses and vulnerabilities

• Many seasoned professionals simply don’t know where to look

• This session provides some guidelines for how to sift through the pebbles to find the nuggets of CI gold in your competitors’ financial data

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Copyright © 2015 Richter & Company LLC. All Rights Reserved.05/03/2023

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Anyone can start…… a few can’t stop

GOAL: Make a fortuneGOAL: Have a good time

Realistic expectations are mandatory!

What Does Success Look Like?


• What is the basis for the intelligence requirement?– What decisions or actions will hinge on the results?

• Identify what information is needed to assist those decisions/actions– These are your Key Intelligence Topics (KITs)

• Develop collection plan based on the above– Identify likely sources of information– Identify available resources– Establish boundaries and deadlines and stick to them

• Analysis approach and process– Identify the methodologies and tools that will be used

• Communicating results– Who must receive the results, and when are they needed?– How will results be provided?

Effective Planning Yields Effective Results

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Two Very Different Mindsets• Financial analysis defined as…

– The process of collecting, evaluating, and interpreting a company’s financial data in order to formulate an assessment of the company as an investment target

– Identifies areas of growth that may yield good returns

– Identifies areas of risk that that may lead to losses

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Investor analysts study companies to determine whether to invest in them; Competitive intelligence analysts study companies to determine how to beat them

• Financial analysis requires…– Earnings Per Share (EPS)– Return on Assets (ROA)– Return On Equity (ROE)– Mergers & Acquisitions– Profit margins, and changes in margin– Assets and long-term debt

Inve

stor

sC

I Ana

lyst

s • Financial analysis defined as…– The process of collecting,

evaluating, and interpreting a company’s financial data in order to assess them as a competitor and beat them

– Identifies areas of strength that must be countered or undermined

– Identifies areas of weakness that can be exploited

• Financial analysis requires…– Changes in IR&D spending– Changes in cash flow– Return on sales (RoS)– G&A expenses as a % of sales– Wording in the annual report / 10-K– Specific programs won/lost and

issues surrounding them– Management changes– Facility closures/modification– Mergers & acquisitions

Copyright © 2015 Richter & Company LLC. All Rights Reserved. 6

Key Financial Terminology?

Term Synonyms MeaningSales • Revenue

• Bookings• The total volume of dollars customers agree

to pay for products & services• NOTE: Typically recorded when earned, not

when received

Profit • Income from operations

• Operating earnings

• Operating income

• EBITA• EBITDA

• Total revenue, minus the costs incurred in generating that revenue, excluding costs associated with interest, taxation, depreciation and amortization

• NOTE: Operating income reflects a dollar amount only and does not indicate a true measure of performance

Margin • Operating Margin• Profit margins• Return-on-Sales

• Profit expressed as a percentage of sales• NOTE: Margin is a good measure of

performance

Net Income

• Earnings• Net earnings

• Amount of income adjusted to account for interest, taxes, depreciation and amortizationSelling, General & Administrative (SG&A) expenses: Costs associated with

generating and operating a business• Includes Bid & Proposal (B&P), R&D, BD, corporate allocated expenses, etc.

Organic: Revenue growth (or lack thereof) that excludes all impact from mergers and/or acquisitions (M&A activity)

• Exclusively from sales of goods and services, and is therefore a better measure of the company’s effectiveness

Cash• Cash, in its simplest form, is money

received from customers• Cash Flow is the movement of

money into or out of a company• Free Cash Flow (FCF) is the amount

of cash remaining after investments in property, facilities, and equipment

Sources of Cash:• Customer Payments• Asset Liquidation• Stock Sales• Customer Advance Payments

Uses of Cash:• Employees and Suppliers• Accounts Receivable• Capital Equipment/ Leasehold

Improvements• Indirect Expenses• Investments (IR&D)• Repayment of debt• Shareholder Dividends• Mergers & Acquisitions • Inventory

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14 glasses sold:• Sales = 14 x 25¢ = $3.50

• Profit = [Sales] - [Cost] = $3.50 - $2.00 = $1.50

• Margin = ≈ 0.43 or 43%

10 glasses sold:• Sales = 10 x 25¢ = $2.50

• Profit = [Sales] - [Cost] = $2.50 - $1.00 = $1.50

• Margin = = 0.6 or 60%

• Cost: $1.00 for lemonade mix (makes 10 glasses)

• Price: Sell lemonade for 25¢ per glass

Profit ($1.50)

Sales ($2.50)

Profit ($1.50)

Sales ($3.50) Had to buy more mix

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Simplified Example: Lemonade Stand


Sources: Quarterly and Annually

The bulk of useful financial data can be found in two places:1. Quarterly earnings report, webcast, and supporting documents

– Typically includes press release, 10-Q filing, and sometimes detailed financial statements and/or presentation charts

– Transcript of webcast contains valuable insights – particularly the Q&A session

2. SEC Filings:– Annual reports (SEC form 10-K) typically contain income statements, cash flow

statements, and balance sheets, as well as a host of “risk factors”• NOTE: many companies publish an Annual Report for shareholders separate from their

10-K, with much of the same information plus graphics and narratives– Proxy Statements (form DEF 14-A) contains information about the Board of Directors, Board

compensation, and Executive compensation

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NOTE: Free transcripts of company earnings calls can be found atSeekingAlpha.com, typically less than 12 hours after the webcast

NOTE: SEC Filings can be found either on the company website under “investor relations,” or the SEC’s free Electronic Data-Gathering, Analysis, and Retrieval (EDGAR) system

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http://www.seekingalpha.com/

http://www.sec.gov/edgar.shtml


Other Useful Sources• Company annual Investor Conferences

– High-level performance and strategic direction of company– Typically found on company website

• Investor community sponsored conferences– High-level performance and strategic direction of company– Investment firms like Morgan Stanley, Barklays Capital, Credit Suisse, etc.

• Wall Street Financial analyst reports– Assessment of professional investors and analysts– Obtained through fee-based service (e.g. Thompson Business, etc.)

• Third party company analysis– Consolidated data-based reporting and analysis on company– Available only to seat-holders

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A Note about Private Companies• Companies that are publicly traded are required to disclose their

financials to the SEC• In contrast, financial data on private companies (i.e. companies not

publicly traded) is typically NOT readily available, unless the company chooses to make it available

• But there is hope!– Some private companies that are considering an IPO (e.g., BAH and SAIC

before they went public) will file a form called an S-1, similar to an annual report

– Even if private companies do not publish financial data, there are still many other sources of publicly available information that can be used in competitive intelligence (e.g., FPDS, Glassdoor.com, opensecrets.org, sba.gov, linkedin.com, etc.)

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EXAMPLE: Segment Growth ReportingFrom Leidos’ 2Q15 press release

• National Security Solutions – Revenues for the quarter decreased $46M, or 5% YoY

• Due to contract activities associated with Overseas Contingency Operations (OCO) contracts• OCO declines, the remaining revenue for NSS increased slightly

– Operating income margin for the quarter was 8.4%, consistent with prior year• Reductions in indirect costs and improved program performance offsetting the impact of

revenue declines• Health and Engineering

– Revenues for the quarter decreased $2M, or 1% YoY• Higher sales volume in engineering business offset by revenue decreases in health and

security products businesses– Operating loss for the quarter was $7M compared to operating loss of

$482M for the prior year• Impacted by $29M loss on Plainfield Renewable Energy facility• Reduced revenue from a business that typically generates higher margins• Somewhat offset by a reduction in indirect expenses• YoY comparison distorted by prior year’s impairment charges of $510M

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Income Statement (a.k.a. Earnings Statement)

• Summary of the company's revenues & expenses, and the resulting profit from operations

• Recorded on an accrual basis (meaning when transactions occur, not when cash is exchanged)

• Often includes useful metrics such as SG&A, B&P, and R&D expenses

• NOTE: Some companies divide this into a statement of operations and a statement of income

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• Records the amounts of cash and cash equivalents entering and leaving a company in a given period (quarter or year)

• Recorded on an actual cash basis, i.e. when cash is exchanged

• Shows how well the company is able to pay for its operations and future growth

• Gives insight into how a company’s operations are running, where its money is coming from, and how it is being spent

Cash Flow Statement

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Balance Sheet

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• Provides information about the company’s assets, liabilities, and owners' equity (normally on the last day of a fiscal period)

• Assets are economic resources that are expected to provide future service to the organization

• Liabilities are obligations to employees, vendors, and debt-holders

• Equity is the ownership interest of the company’s owners

Copyright © 2015 Richter & Company LLC. All Rights Reserved. 1505/03/2023

Company Total Assets

Mickey Mouse 308,028$

Donald Duck 10,653$

Goofy 34,385$

Pluto 4,835$

Daisy Duck 101,396$

Minnie Mouse 39,848$

Clarabelle 9,425$

Winnie the Pooh 25,266$

Figaro 1,400$

Tinkerbell 235,790$

Total Liabilities

220,924$

7,298$

22,865$

2,994$

74,227$

36,866$

7,331$

18,518$

1,035$

225,031$

Total Equity (Assets - Liabilities)

87,104$

3,355$

11,520$

1,840$

27,169$

2,982$

2,094$

6,748$

365$

10,759$

Total Equity (Assets - Liabilities)

87,104$

3,355$

11,520$

1,840$

27,169$

2,982$

2,094$

6,748$

365$

10,759$

Equity as % of Annual Sales

66%

26%

37%

37%

24%

7%

36%

28%

10%

8%

#1

Real World ExampleCompetitive Financial Comparison


Financial Data

What to look for…

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What to Look For• Strategy statements

– In executive comments, listen carefully for discussion of “growth markets” or “investments,” which indicate they see opportunities for growth and are acting accordingly

• Business mix– Most financial statements provide a

breakdown of overall revenue or profit figures into various business units

– Often will break down into commercial and federal business, domestic and international

• Significant programs– By regulation, companies must

disclose in their 10-K if there is a program worth more than 10% of annual sales

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• Risk statements– Usually found in form 10-K – sometimes

reveal performance problems or disputes

– Can be used in ghosting, or as negative past performance references

• Executive Compensation– In the Proxy Statements, determine the

metrics by which executive bonuses are decided

– These are a very reliable indication of the direction the company will go

• Stock Price– If investors are buying up shares of a

company, that gives the company more freedom to carry out its strategies

– Conversely, if the stock price is bad, it suggests the company may resort to less conventional/predictable behavior


Earnings Calls: What to Listen For• What was the overall mood/tone of the call?

– What is their market outlook? Do they anticipate tough times or big growth?• Strategy:

– What did company executives call out as areas they are focusing on?– What have they emphasized in the past, and how has it changed this quarter?– What did they say about mergers, acquisitions, or divestitures?

• Performance:– What were the financial results (e.g. revenue, earnings, margin, cash flow, etc.)?– Did the company meet expectations or disappoint?– Were there unexpected events/adjustments, and how did the company “spin”

them?– What programs or new awards or losses were called out?

• Q&A Session:– Pay attention! This is usually the most valuable part of the earnings call– Analysts question the execs, and the execs go off-script to answer– Remember, execs cannot lie or mislead shareholders, according to Sarbanes-

Oxley Act of 2002

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Listen carefully!

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“And then both IS and TS have a variety of [international] opportunities out there as well, whether we're talking about air defense systems or we're talking about sustainment opportunities or in some cases the cyber opportunities”

– Specific opportunities / pursuits

“those sectors today are reporting operating margin rates in the range of 9% to 10%.”

– Performance / standards

“And those portfolios of actions have moved us largely out of the low margin commoditized service businesses.” – Business Mix Strategy

“we've been a very active manager of our portfolio for many years now on both, I would say the products and the services sides of the company and I think that portfolio management has been working well for us.”

– Organizational Approach

Earnings Call Comments


Interpreting Financial Data

What it all means…

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Why “Year-over-Year”?• Year-over-year (YoY) means “this year compared to last year”• Compares a given quarter to the corresponding quarter of the preceding year

(e.g., 3Q15 and 3Q14)• Companies tend to follow a consistent annual pattern

– Yearly patterns are dependent on customer cycles (e.g., federal budget, seasonal shopping, etc.)

• A year-over-year shift is therefore more insightful and noteworthy than a consecutive quarterly shift

Q1 Q2 Q3 Q49.5

10.010.511.011.512.012.513.0

2011201220132014

LMT Quarterly Revenue(2011-2014)

$B

Q1 Q2 Q3 Q40.5

1.0

1.5

2.0

2.5

2011201220132014

Mattel® Quarterly Revenue (2011-2014)

$B

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Interpreting Revenue• Is revenue growing or shrinking YoY?

– What are the contributing factors?• New contract awards and task order awards (any large wins/losses?)• Increasing/decreasing volume from existing programs (any problems or notable successes?)

• How much of the revenue is organic vs. M&A-related?– Some companies disclose this openly – look for it– Has the company made recent acquisitions/divestitures?– Look at the press releases to see if the transaction amount was disclosed

So what???• Falling revenue suggests base erosion, indirect rate increase, and/or struggling to

win business• More motivated to win! May bid more aggressively, or increase SG&A to bid more• Perhaps a re-org or leadership change in the works, leading to instability• Maybe just cut losses and sell off a dying business?• Layoffs?

• A sudden drop in revenue could indicate an abnormal charge, or possibly a spike in the previous year’s quarter – LOOK FOR TRENDS

• Steadily increasing organic revenue suggests good growth, but can they deliver?05/03/2023


Interpreting Operating Income & Margins• Is operating income (profit) growing or shrinking?

– An increase in profits can stem from growing revenue, reduced costs, or both– Similarly, lower profits may indicate higher costs, shrinking revenue, or both

• How do operating margins compare with peers?• Are margins increasing or decreasing?

– Margins can rise due to either an increase in operating income, OR a decrease in sales• What causes margins to shift?

– Overhead cost adjustments (e.g., facility consolidation, SG&A reductions, etc.)– Business consolidation or realignment (spreading overhead over a larger base)– Improved performance, labor productivity (fixed price contracts only)– Portfolio shift between development and consulting/integration work– Program maturation (companies book smaller earnings % early in the program –

earnings increase as the contract nears completion)– Award feesSo what???

• Drops in margin make investors uneasy, which may lead companies to focus more on performance and less on bid price

• Comparatively low margins could indicate a problem, OR may be part of an aggressive short-term bidding strategy

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Interpreting M&A Activity• Companies pursue M&A activity for a number of reasons:

– Balance portfolio between core capabilities and strategic target markets– Obtain or expand footprint / workshare within a given customer or market– Enhance Pwin on one or more upcoming competitions– Add capabilities that are lacking internally– Add past performance references– Artificially manipulate revenue figures

• Since acquisitions require the use of cash, companies must justify large acquisitions to investors– Listen for mention of specific programs or targets they’re pursuing in

justification

So what???• Large acquisitions, as well as multiple acquisitions in a similar market segment,

indicate a company’s strategic emphasis on that area – which may also indicate the company will bid more aggressively

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FY11(July ‘10 – June ‘11) 2010 2011 Change

RF Comms. (38%)

Sales $2.1B $2.3B 10.7%

Income $0.7B $0.8B 11.3%

Margin 34.2% 34.4% 0.20 pts

Gov’t Comms. (30%)

Sales $1.7B $1.8B 1.7%

Income $0.2B $0.2B -0.2%

Margin 13.0% 12.8% -0.20 pts

Integrated NetworkSol’ns(33%)

Sales $1.5B $2.0B 33.7%

Income $0.09B $0.07B -17.7%

Margin 5.7% 3.5% -2.20 pts

FY10(July ‘09 – June ‘10) 2009 2010 Chang

e

RF Comms. (37%)

Sales $1.8B $2.1B 17.4%

Income $0.6B $0.7B 23.8%

Margin 32.5% 34.2% 1.76 pts

Gov’t Comms. (55%)

Sales $2.7B $2.7B -0.8%

Income $0.3B $0.3B 11.3%

Margin 11.2% 12.5% 1.36 pts

Broadcast Comms. (9%)

Sales $0.6B $0.5B -16.7%

Income -$0.2B -$0.03B 87.1%

Margin N/A N/A N/A NEW

Solution: Realignment!Problem: Operating Losses05/03/2023


• The crucial “So what?” question…– Demands relevance and significance

• What does this mean for me?• Why does this matter?• What difference does this make?

– Should be asked at the beginning, middle, and end of any competitor analysis effort – including competitor FINANCIAL analysis

– Should always have a view towards “What is my next move?”– Should always be focused on informing specific strategic and/or tactical

decisions, that will increase win probability• Remember, the only valuable intelligence is actionable intelligence –

news you can use – information that supports decisions

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SO WHAT?


Brandon ConroyExecutive [email protected]

Everedy Square6 North East Street, Suite 203Frederick, MD 21701301/845-7300

www.RichterAndCompany.com

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