Third-quarter Earnings Research Articles

Are firms more concerned about analysts’ earnings forecasts after the split-share structure reform? Evidence from China

PurposeThis study aims to examine whether Chinese firms increase their concerns about analysts’ earnings forecasts following the split-share structure reform (SSR) in 2005, which removed trading restrictions on approximately 70% of the shares of listed firms.Design/methodology/approachUsing data from 2002 to 2019, the authors empirically test the association between meeting or beating analysts’ earnings expectations and the implementation of SSR.FindingsThe authors find that firms are more inclined to meet analysts’ earnings expectations after the introduction of SSR. Further analysis shows that firms guide analysts to walk their forecasts down by manipulating third-quarter earnings, suggesting enhanced value relevance between analysts’ forecasts and third-quarter earnings management in the postreform period.Practical implicationsThe findings reveal an undesirable side effect of SSR and suggest that policymakers and regulators should consider and carefully manage the complex relationships between firms and analysts.Originality/valueIn contrast to prior studies that predominantly focus on the positive effects of the reform, this study reveals the side effects of SSR and provides new evidence on the mechanisms of meeting or beating analysts’ earnings expectations.

China’s challenge in drug services

WuXi AppTec has had a great year so far. The Shanghai-based company, perhaps the world’s largest contract research and manufacturing firm serving the drug industry, recently reported a 72% increase in sales for the first three quarters of 2022, to just over $4 billion. Sales in its largest business, WuXi Chemistry, more than doubled. The performance at Asymchem and Porton Pharma Solutions, two other publicly traded drug services providers in China, has been similarly robust this year. And WuXi’s third-quarter earnings report predicts that the firm “will maintain strong growth regardless of the environment.” That environment is changing, and tension between China and the West is casting a shadow on Chinese companies like WuXi. In September, Asymchem’s planned acquisition of Snapdragon Chemistry, a Massachusetts-based specialist in flow chemistry, fell through after a review by the Committee on Foreign Investment in the United States, an arm of the US Treasury Department

Smithfield Foods: Activists and Acquisitions

This research-based case uses the circumstances surrounding Virginia-based Smithfield Foods' (Smithfield's) buyout offers from multiple foreign firms to examine the political and cultural constraints of a regionally rooted global firm in pursuing its strategic objectives. Smithfield's senior leadership receives offers from three firms, ShuangHui International (ShuangHui), JBS S.A. (JBS), and Charoen Pokphand Foods (CPF), based in China, Brazil, and Thailand, respectively, to acquire all of Smithfield's outstanding assets and liabilities. Smithfield's history was one of aggressive growth through acquisition, skirting government regulations, and truculence with respect to labor and environmental activists. However, as revenues plateaued, the firm faced increasing investor pressure to either trim costs or sell off portions of the company to improve shareholder value. Though the company's operations crossed continents, its identity and brand were tied to southeastern Virginia. Would it be best for the company or its shareholders to sell? If so, to whom? What risks would the firm face, politically and culturally, if it decided to do so? Because of its many details, the instructor teaching this case can approach the content from a number of strategic or leadership perspectives. Excerpt UVA-S-0308 Apr. 1, 2019 Smithfield Foods: Activists and Acquisitions C. Larry Pope, CEO of Smithfield Foods (Smithfield), and Joseph W. Luter III, chairman of Smithfield's board of directors, were in Williamsburg, Virginia, for a meeting with the company's board of directors on April 21, 2013. Joining Pope, Luter, and the board were advisers from Barclays Investment Bank and representatives from the international law firm of Simpson Thacher & Bartlett. Their purpose that day was to map the future direction of the company, then the largest pork production, processing, and packaging firm in the United States. Despite its size, Smithfield was anchored to a regional history and community. The company was founded in and had continued to operate out of the town of Smithfield, Virginia, since 1936. Although its population was less than 8,000, the town's name had been synonymous with cured hams in the South as early as the 1870s. Remarkably, among the possible futures to be discussed that day, none was more urgent than the question of whether Smithfield would continue to operate as a publicly traded US company or become a subsidiary of China-based meat processing firm ShuangHui International (ShuangHui), Brazil-based JBS S.A. (JBS), or Thailand-based Charoen Pokphand Foods (CPF). The events leading Smithfield to this decision had begun in early March, after the company released its third-quarter earnings. Continental Grains Company (Continental), one of Smithfield's largest institutional investors, had issued a letter on March 7 accusing the company's leadership of acting against shareholder interests by not splitting up the firm and selling its unprofitable fresh-pork division to another meat firm, while spinning off its more profitable meat packaging and international meats divisions. The letter noted the company's stock had declined 26% over the last seven years, paid no cash dividends, and had no clear strategy for growth. In contrast, Continental noted that Smithfield's competitors, Tyson's and Hormel's, stock returns were 70% and 131%, respectively, with $ 429 million and $ 729 million paid out in cash dividends during the same period. Pope and

Chemical sales bounce back

The latest batch of chemical companies to report third-quarter earnings upholds the thesis that the economy is recovering from the downturn brought on by COVID-19 lockdowns. Chemours reports that its third-quarter sales fell 11.3% compared with the year-earlier period but rose 12.8% from the second quarter. The company had higher titanium dioxide pigment sales for architectural coatings and more demand for refrigerants for automobiles. Eastman Chemical’s sales dropped 8.7% compared with last year’s third quarter but increased 10.3% versus the second. “With demand having improved throughout the third quarter and into October, we entered the fourth quarter with solid momentum,” Eastman CEO Mark Costa says in a statement. LyondellBasell Industries saw sales drop by 22.3% year over year but increase 22.2% from the prior quarter. Polyethylene demand, which has been strong even during the pandemic because of the need for consumer packaging, has been a plus for the company. Similarly,

Chemical companies enjoy third-quarter earnings bounce

Chemical companies enjoy third-quarter earnings bounce

Bridging the gap between management and finance: entrepreneurial orientation and idiosyncratic risk

PurposeManagement theorists suggest that entrepreneurially oriented firms manifest higher risk levels than more conservative companies, but executives of such firms and their consultants argue that the opposite is true. The purpose of this paper is to explore this issue and examine the relationship between entrepreneurial orientation and idiosyncratic risk of firms.Design/methodology/approachContent analysis is applied to the 2018 third-quarter earnings call transcripts for 992 companies to measure five factors attributed to entrepreneurially oriented firms: autonomy, competitive aggressiveness, innovation, proactiveness and risk-taking, and their relationship to firm-level idiosyncratic risk. Multivariate regression analysis is used to examine the effect of these factors on measures of idiosyncratic risk obtained from the Wharton Research database Service's Beta Suite.FindingsResults show that firms whose executives frequently use terms related to risk-taking tend to manifest higher levels of idiosyncratic risk, but those firms whose executives stress innovation-related terms tend to have lower levels of idiosyncratic risk. The degree to which executives use words related to the three other entrepreneurial orientation factors show no associations with idiosyncratic risk.Practical implicationsThe results might suggest to managers which of the individual components of entrepreneurial orientation, if adopted, are likely to affect firm-specific risk and in what way.Originality/valueThis paper is the first to attempt to bridge the gap between the management concept of entrepreneurial orientation and the financial concept of idiosyncratic risk by studying the possible relationship between the two. The research also uses the novel methodology of applying content analysis to earnings call transcripts, which is uncommon in finance research.

Comments: Shale Enters a New Phase

Editor's column US crude oil production will reach a record level of 12.29 million B/D in 2019, increasing faster than expected both this year and in 2020, according to the latest US Energy Information Administration (EIA) forecast. Output will rise to 13.29 million B/D next year. Similarly, the International Energy Agency predicted last month that US shale oil production will continue to reshape world energy markets, with the US accounting for 85% of the increase in global oil production to 2030. US output will rise to 19 million B/D over the next decade, wresting additional market share from OPEC producers and Russia, according to the agency’s annual World Energy Outlook. But while shale will continue to affect global markets, some believe this predicted rate of growth may be optimistic. There are already signs that producers are curtailing spending and production in the major shale basins as they are under increasing pressure to focus more on capital discipline and returns rather than production growth. In contrast to the EIA and IEA, consultancy IHS Markit sees much slower growth in US shale next year, just a 440,000 B/D increase, with output flat in 2021. “Going from nearly 2 million B/D annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said Raoul LeBlanc, IHS Markit vice president for North American unconventionals. “This is a dramatic shift after several years where annual growth of more than 1 million B/D was the norm.” IHS Markit predicts prices for West Texas Intermediate (WTI) crude to hover in the $50/bbl range and that capital spending will drop by 10% this year, 12% in 2021, and 8% in 2022, from $102 billion in 2019 to $83 billion in 2022. Prices need to be about $65/bbl for producers to be able to both increase production significantly while also satisfying shareholder expectations, it said. In the meantime, producers are focusing more on completing wells than drilling new ones, which is a more economical way of boosting output. There were 7,740 drilled but uncompleted wells in the seven major US shale regions at the end of September, according to the EIA, compared with 8,800 in January. After years of producing all out, pushing US oil and natural gas production to record levels, shale producers are pulling back. Although output has skyrocketed, particularly in places such as the Permian Basin, financial results have not. Mergers and bankruptcy filings are common, and investors have become reluctant to lend capital. Natural gas companies in particular are hurting, and they are promising more capital discipline and lower production going forward. During third-quarter earnings calls, Chesapeake Energy, EQT, Callon Petroleum, Cimarex, and Diamondback Energy all signaled flat to lower spending and production. Chesapeake’s CEO had to re assure investors of the company’s financial health a week after the company said in a third-quarter earnings filing that it had “substantial doubt” of its ability to continue as a going concern. “I don’t think OPEC has to worry that much more about US•shale growth long term,” Pioneer Natural Resources Scott Sheffield told investors last month.

E&P Notes (December 2019)

E&P Notes (December 2019)

Cracks show in third-quarter earnings

Cracks show in third-quarter earnings

Smithfield Foods: Activists and Acquisitions

This research-based case uses the circumstances surrounding Virginia-based Smithfield Foods' (Smithfield's) buyout offers from multiple foreign firms to examine the political and cultural constraints of a regionally rooted global firm in pursuing its strategic objectives. Smithfield's senior leadership receives offers from three firms, ShuangHui International (ShuangHui), JBS S.A. (JBS), and Charoen Pokphand Foods (CPF), based in China, Brazil, and Thailand, respectively, to acquire all of Smithfield's outstanding assets and liabilities. Smithfield's history was one of aggressive growth through acquisition, skirting government regulations, and truculence with respect to labor and environmental activists. However, as revenues plateaued, the firm faced increasing investor pressure to either trim costs or sell off portions of the company to improve shareholder value. Though the company's operations crossed continents, its identity and brand were tied to southeastern Virginia. Would it be best for the company or its shareholders to sell? If so, to whom? What risks would the firm face, politically and culturally, if it decided to do so? Because of its many details, the instructor teaching this case can approach the content from a number of strategic or leadership perspectives. Excerpt UVA-S-0308 Apr. 1, 2019 Smithfield Foods: Activists and Acquisitions C. Larry Pope, CEO of Smithfield Foods (Smithfield), and Joseph W. Luter III, chairman of Smithfield's board of directors, were in Williamsburg, Virginia, for a meeting with the company's board of directors on April 21, 2013. Joining Pope, Luter, and the board were advisers from Barclays Investment Bank and representatives from the international law firm of Simpson Thacher & Bartlett. Their purpose that day was to map the future direction of the company, then the largest pork production, processing, and packaging firm in the United States. Despite its size, Smithfield was anchored to a regional history and community. The company was founded in and had continued to operate out of the town of Smithfield, Virginia, since 1936. Although its population was less than 8,000, the town's name had been synonymous with cured hams in the South as early as the 1870s. Remarkably, among the possible futures to be discussed that day, none was more urgent than the question of whether Smithfield would continue to operate as a publicly traded US company or become a subsidiary of China-based meat processing firm ShuangHui International (ShuangHui), Brazil-based JBS S.A. (JBS), or Thailand-based Charoen Pokphand Foods (CPF). The events leading Smithfield to this decision had begun in early March, after the company released its third-quarter earnings. Continental Grains Company (Continental), one of Smithfield's largest institutional investors, had issued a letter on March 7 accusing the company's leadership of acting against shareholder interests by not splitting up the firm and selling its unprofitable fresh-pork division to another meat firm, while spinning off its more profitable meat packaging and international meats divisions. The letter noted the company's stock had declined 26% over the last seven years, paid no cash dividends, and had no clear strategy for growth. In contrast, Continental noted that Smithfield's competitors, Tyson's and Hormel's, stock returns were 70% and 131%, respectively, with $ 429 million and $ 729 million paid out in cash dividends during the same period. Pope and

Comments: Signs of Recovery

Editor's column After 3 tough years of cost cuts and downsizing, the oil industry is seeing signs of new life in a lower-price environment. Companies are hiring again, salaries have rebounded, and large producers are posting profits. The oil and gas industry is finally hiring and may begin to face worker shortages in some areas. Since oil prices crashed in 2014, more than 440,000 jobs in the industry have been cut worldwide. But next year, almost 90% of employers expect that staffing levels will either stabilize or increase in 2018, according to a survey by NES Global Talent and oilandgasjobsearch.com. Almost 60% of employers expect to recruit significantly over the next year. Of the companies that are hiring, 23% expect to increase their workforce by 5%, 19% plan to increase staffing by between 5 and 10%; and 17% expect to increase hiring by more than 10%. Almost half of employers expect salaries to rise. SPE’s annual industry salary survey also paints a brighter picture. Industry professionals reported average total compensation of $194,649 this year, a $9,000 increase from 2016 although still down from 2014 and earlier. Compared with 2016, mean base pay, other compensation, and total compensation all rose in 2017. Oil prices have finally crossed the $50/bbl threshold, with Brent over $60/bbl in mid-November. Rising prices, along with sharp cost cutting, are leading to operator profits. The supermajors—including ExxonMobil, Total, Chevron, Shell, and BP—all posted healthy third-quarter earnings and solid year-over-year improvement in cash flow and profits. In delivering their earnings, both BP and Shell said they would remain profitable even if oil prices dipped into the high-$40/bbl range. The large service companies, such as Schlumberger, Baker Hughes, and Halliburton, were more circumspect in their outlooks but see a foundation laid for better days ahead. OPEC also sees positive days ahead in its latest forecast. It predicts that global oil demand in 2018 will grow and that non-OPEC production will not increase as fast as previously thought. Along with its production cuts, that will continue to reduce excess oil in storage. OPEC, Russia, and a handful of other producers agreed to cut output by 1.8 million B/D, and compliance with the agreement has been stellar. OPEC’s report concedes that it did not kill off North American shale when it flooded the market with oil 3 years ago, and that shale will continue to see strong supply growth. A new International Energy Agency reports confirms OPEC’s conclusion on shale’s staying power. The IEA said the supply surge in shale output will lead to the largest gains in the history of the industry. By 2025, the US will match Saudi Arabia in oil production and surpass the former Soviet Union in gas output, according to its World Energy Outlook. The US oil industry “weathered the turbulent period of lower oil prices since 2014 with remarkable fortitude,” according to the report.

Lilly mulls animal health sale

Eli Lilly & Co. is mulling the future of its Elanco animal health unit, which is on track to have sales this year of roughly $3 billion. Stock analysts think the unit, which could be spun off, sold, or kept by Lilly, is worth between $12 billion and $15 billion. Lilly will decide the unit’s fate by mid-2018. The animal health business played a critical role in buttressing Lilly’s bottom line during a rocky few years of patent losses on many of its best-selling pharmaceutical products. But the unit has recently faced challenges at a time when the human health business is improving. In the third quarter, new medicines accounted for nearly all Lilly’s revenue growth. In a call with analysts to discuss Lilly’s third-quarter earnings, Lilly’s CEO, David Ricks, acknowledged that investors have for years questioned whether the animal health unit should stand alone. He said the timing is

Comments: The Supply/Demand Balance

Editor's column Layoffs have slowed, some companies posted profits in the third quarter, and there is even talk of a coming oil shortage that would cause oil prices to spike. But there is generally no consensus on what the oil market has in store over the next 1–2 years. At a recent industry gathering in London, Saudi Arabia’s Energy Minister Khalid al-Falih said the market was recovering from its severe 2-year decline, with global supply and demand becoming rebalanced, which will raise oil prices. “We are now at the end of a considerable downturn,” he said. But whether OPEC can reach, or keep, a production agreement is unclear. Although North American unconventional output has been unprecedented over the past few years, OPEC’s course of action over the next year “will define whether the industry will experience a slow and smooth recovery to a sustainable price equilibrium, or a period of underinvestment leading to a volatile and high oil price,” says consultancy Wood Mackenzie. “Even if the recent provisional deal produces minimal results, OPEC Gulf countries will ultimately need to cut production if operators expect prices to recover in the next 3 years.” Third-quarter company earnings were mixed, with some service companies and operators finally posting profits after severely cutting costs. Shell and BP reported third-quarter profits after shedding jobs and slashing expenses, rebounding from 2 years of losses. Both companies said they believe supply and demand are coming back into balance and expressed cautious optimism about 2017. But profits at -ExxonMobil, Chevron, Statoil, and other majors were not as positive. Halliburton finally turned the corner on profitability in the quarter but other service companies such as -Schlumberger did not. Many oil executives are warning that the lack of investment caused by the downturn will lead to a severe oil supply shortfall in just a few years and, with it, a sharp price increase. That also may suggest that they believe that the oil price recovery will be so gradual that it will not spur any rapid rise in upstream spending. But although upstream investment has fallen sharply, a supply shortage is not necessarily imminent. Much of the upstream spending that has been curtailed, says Amy Myers Jaffe, an energy expert and executive director for energy and sustainability at the University of California at Davis, was from high-cost, frontier projects such as the Arctic. With budgets tight, spending may be directed instead to surer plays such as the Permian Basin in west Texas, with a focus on existing fields, which will lead to first oil production more quickly. Investment continues to flood into the Permian, and the US Geological Survey last month upgraded its reserve estimates for the Wolfcamp shale in the Midland Basin portion of the Permian. If OPEC continues to worry about losing market share and operators become more disciplined in their upstream spending, the shortfall may not materialize.

EUROPEAN FIRMS TEST THE BOTTOM

ALTHOUGH THIRD-QUARTER sales and earnings numbers don’t always support the claim, European chemical company executives contend that the worst is behind them in the economic crisis that has plagued their industry for the past 12 months. The heads of Bayer and BASF, Europe’s two largest publicly traded chemical makers, both spoke with guarded optimism in announcing third-quarter earnings last week. Bayer Chairman Werner Wenning was particularly upbeat, stating that his company finally increased underlying earnings compared with the year-ago quarter. “We are very pleased to have reversed the earnings trend despite the fact that many industries are still suffering from the economic crisis,” Wenning said. Bayer’s earnings before interest, taxes, depreciation, amortization, and special items were up 0.4%, although its net earnings were still down by just more than 10%. Stock analysts were impressed by Bayer’s Material-Science division, which reported earnings just short of prior-year results. Ulrich Huwald, an ...

CHEMICAL EARNINGS JUMP

CHEMICAL FIRMS are reporting much-improved third-quarter earnings compared with the same period in 2005;10 of the 11 firms that have published their results show double-digit or better growth. The largest earnings growth generally came at the smaller companies. Of the five firms with less than $1 billion in quarterly sales, earnings growth ranged from 25.4% at Cytec Industries to 130.8% at Albemarle. Increases in earnings at the six larger companies were between 8.8% at PPG Industries and 35.7% at DuPont. Albemarle posted a triple-digit improvement in earnings from continuing operations, excluding significant one-time items, of $60.7 million, on a 20% increase in sales to $608 million. All three of our segments saw continued revenue growth and improved profitability, with both catalysts and polymer additives achieving segment income margins above our 15% corporate goal, says CEO Mark C. Rohr. The second-largest quarterly earnings increase came at Hercules, although it also was the only company in the ...

OMG warns on third-quarter earnings

OMG warns on third-quarter earnings

EARNINGS ARE STILL FALLING

A NUMBER OF CHEMICAL companies have reported third-quarter earnings, and fortunate is the firm whose earnings decline from the same period last year is limited to just a single digit. DuPont, the largest company to have reported by C&EN press time, says its earnings from operations fell 76%, excluding unusual items, to $128 million as sales fell 12% to $5.65 billion. DuPont Chairman and CEO Charles O. Holliday Jr. says, Clearly, we are experiencing one of the most challenging business environments the company has faced in decades. DuPont's big decline aside, a couple of those fortunate firms are reporting results. Air Products & Chemicals saw earnings decline just 5% to $133 million as sales fell 6% to $1.36 billion. Continued weakness in the global electronics market and in U.S. manufacturing was the primary cause of the earnings decline. Chairman, President, and CEO John P.Jones III says, In this challenging environment, ...

Chemical Sales Up, Earnings Mixed In Third Quarter

As expected, higher raw materials costs are taking their toll on third-quarter earnings at major chemical companies. Despite rising prices for most chemical products and increased sales at many companies, earnings declined compared with the same quarter in 1999 for eight of the 15 largest U.S. chemical producers. However, at companies where earnings did increase, the results were often very good. For instance, Eastman Chemical had the largest percentage increase. Earnings from continuing operations, excluding significant unusual items, rose 184% to $77.8 million on a 17% increase in sales to $1.39 billion. Earnest W. Deavenport Jr., the company's chairman and chief executive officer, credited Eastman's ongoing emphasis on cost reductions and increased selling prices for their positive impact on third-quarter earnings. But better markets also played a role, with operating income for the chemical sector up 50% and almost tripling for polymers as the polyethylene terephthalate business improved. IMC Global r...

Industry Self-Help

This week in New York City, the chemical industry's top executives will gather at the venerable Plaza Hotel to celebrate Vince Calarco receiving the Chemical Industry Medal of the American Section of the Society of Chemical Industry. It is a well-deserved honor for Calarco, the Crompton chairman, president, and chief executive officer, and the industry leader who has been exceptionally active in furthering the chemical industry's aspirations, goals, and public image (see page 35). The SCI dinner usually has a festive air. But in the past few years, the angst among attendees has been palpable, and I don't expect this week's dinner to be any different. In fact, I expect to talk with a fair number of somewhat grouchy CEOs. Who can blame them for feeling grumpy? Third-quarter earnings are not looking good, and a number of companies have already issued earnings warnings (see page 9). This has further depressed stock prices, which were not ...

The 1993 Tax Rate Increase and Deferred Tax Adjustments: A Test of Functional Fixation

This paper uses a sample of 158 deferred tax adjustments resulting from the Omnibus Budget Reconciliation Act of 1993 (OBRA) to explore the magnitude and nature of analysts' and investors' functional fixation on reported accounting numbers. The 1993 OBRA, passed on August 10 of 1993, included a provision that raised the corporate tax rate from 34% to 35%. GAAP requires companies to adjust their deferred tax assets and liabilities to recognize the income effects of tax changes in the period of the tax change (SFAS No. 109 [1992]). In this case, the effects of the tax rate increase on deferred taxes would be included in the income tax expense component of 1993 third-quarter earnings.1