Inventory Spikes

During 2021, much of the talk concerning inventory surrounded shortages due to a variety of factors. In response, many companies increased production and orders to combat supply chain disruptions and increased consumer demand coming out of COVID-19 lockdowns. Now, it appears that companies have overshot demand as inventories have surged. For example, inventories for global manufacturing companies reached a record $1.87 trillion. As a result, inventory turnover for manufacturers increased to 81.1 days. And retailers are no different: Inventory for Macy's, Target, Walmart and other large retailers has increased from 17 to 45 percent compared to last year. This increased inventory is a boon for off-price retailers like Ross and TJ Maxx, which have a larger supply from big retailers offloading inventory. For many corporations, the excess inventory will likely negatively impact the bottom line. 

Working Capital Hit

The COVID-19 economic downturn affected many areas of business, including working capital management. A recent survey by the Hackett Group highlights some of the effects. For example, for the largest 1,000 publicly traded U.S. companies, the receivables period increased 1.5 days, the payables period increased 4.4 days, and the inventory period increased 4 days. The interview with Craig Bailey of the Hackett Group is an interesting read as to how the economic turmoil affected business.

Real-Time Payments

Many of you are probably familiar with near instantaneous money transfers using Venmo or Paypal. And while we discussed next-day ACH transactions in the textbook, in 2017, an interbank payment system was unveiled, the real-time payment (RTP) network. While only 130 banks out of the more than 9,600 financial institutions in the U.S. have adopted the system, these adopting banks cover 60 percent of demand deposit checking and savings accounts. Several challenges have prevented the adoption of the RTP system. For example, businesses do not seem to be concerned about speeding up payments by one day, especially in the current low interest rate environment. The biggest hurdle appears to be infrastructure, but expect this hurdle to be reduced when Jack Henry & Associates and Fiserv come online later this year. But the RTP system does provide other perks, including 24/7/365 access, instant confirmation, and settlement finality, meaning the sending bank can't revoke or recall a payment. 

Corporate Cash Holdings Increase And Decrease

In a recent survey by the Association for Financial Professionals, 40 percent of companies increased cash holdings in the first quarter of the year, but 34 percent of companies reduced cash holdings. The 34 percent decrease in cash holdings is the largest in the survey history dating back to January 2011. Compared with the same period last year, 22 percent of companies have lower cash balances, while 43 percent have large cash balances. What these numbers indicate is uncertain. It could be that the reduction in cash balances is due to cash flow problems, or companies could feel more confident in the future and reducing excess cash.

GE Kicks Factoring

General Electric is serious about reducing the company's use of factoring. In 2018, the company factored about one-half of its receivables, but it expects eliminate all factoring in the near future. In 2016, the company even went so far as to sell receivables up to 5 years ahead of sales in order to increase the then current cash flow. A consequence of eliminating factoring is is that it will reduce cash flows this year. In fact, GE expects cash flows for 2021 to take a hit of $3.5 to $4 billion, but it will also reduce the interest paid on factoring. The elimination of factoring is also a signal that GE management is confident of future cash flows.  

Supply Chain Issues

Increasing demand for products in the U.S. has resulted in supply chain problems for many companies. For example, shipping from one Chinese manufacturer, which was 30 days a year and a half ago, is now three months and shipping costs have increased 50 percent. U.S. ports are a major bottleneck and ships can sit offshore for weeks at a time. Overall, global delivery times are the second longest on record. Shortages are the most severe for semiconductors, as demand increased when workers bought electronics to create home offices. In fact, the German Association of the Automotive Industry announced that only 240,000 passenger cars were made in February, about half of the November output. The reason given was the shortage of semiconductors.

Granting Credit

As with many other decisions in corporate finance, the decision to grant credit is industry specific. A recent survey indicates that the median company grants credit to about 30 percent of its customers. The 25th percentile company grants credit to 20 percent of its customers and the 75th percentile company grants credit to 50 percent of its customers. Car dealers grant credit about 83 percent of the time, while health care companies grant credit only 30 percent of the time. As with most decisions, remember the decision to grant credit is an NPV decision.

Cash Balances Increase

The old expression "cash is king" is often followed by corporate treasurers, especially when the economic outlook is uncertain. In the 2019 Cash Management Survey, 42 percent of companies increased cash balances, while only 22 percent reduced cash. Additionally, 62 percent of companies are net investors, with only 38 percent are net borrowers, another indication of a fight to cash. One significant issue found in the survey was that more companies experienced a decrease in operating cash flow during 2019 compared to 2018, an indication of why corporate treasurers are becoming more conservative.

Corning Wins Cash Gold

Corning recently won the Gold Award in liquidity management from Treasury & Risk. In 2015, the company announced its Capital Allocation Framework, designed to reduce its $5.5 billion in cash by one-half. The company generates one-third of its revenue in Asia, which is where much of the cash was tied up. Thanks to the formation of the Shanghai Free Trade Zone, Corning was able to pool its cash, allowing for more flexibility in cash management. Better cash management practices have allowed Corning to reduce its cash balance to about $1.2 billion as of June 2019.

2018 Working Capital Survey

The Hackett Group has released the 2018 US Working Capital Survey. Overall, working capital management has improved, with the cash conversion cycle dropping to 33.8 days, a 4 percent improvement. Day's payable has increased from 53.5 days in 2016 to 56.7 days in 2017, while days' payables outstanding increased from 37.8 days to 39.5 days. The inventory period also increased slightly, from 50.7 days to 51 days.

2018 Alexander Hamilton Awards

The 2018 Alexander Hamilton Awards from Treasury & Risk have been announced. The gold award went to Herc Rentals, which set up a treasury group to sales for a billion-dollar company less than six months after its divestiture from Hertz. The silver award went to Avery Dennison which centralized its European treasury functions, resulting in significant savings, and improved foreign exchange processes. Finally, OpenText was awarded the bronze award for streamlining its treasury and setting up processes for the integration of future acquisitions.

Commercial Paper Issuance Falls

In March 2016, an average of 95 AA-rated companies issued commercial paper per day. On March 29, 2017, only six such companies issued commercial paper. The reason behind the dramatic decline in commercial paper issuance is regulations enacted by the SEC to reduce risk in money market mutual funds. Historically, all money market funds had a net asset value (NAV) per share of $1. If the NAV dropped below $1, it was known as "breaking the buck" and had only occurred a limited number of times. In 2008, the Reserve Primary Fund became the largest money market fund to break the buck. In an attempt to reduce risk, the SEC changed the rules for institutional money market funds that means the NAV of these funds will not be pegged at $1. The result was a flight from institutional money market funds, reducing the availability of these funds as customers of commercial paper. This has made it more difficult for companies to raise short-term debt.

Corporate Overseas Cash Grows

The cash held by foreign subsidiaries of U.S. companies has reached a record $2.5 trillion. Microsoft and GE both hold more than $100 billion overseas, while Apple and Pfizer have $91.5 billion and about $80 billion, respectively. Overseas cash now tops cash held domestically, which reached $1.94 trillion. Of course, much of the reason for the foreign cash holdings is the U.S tax system, which taxes repatriated earnings at 35 percent, the highest corporate tax rate in the world. Although various tax breaks on the repatriation of cash have been floated, naysayers argue that the last repatriation tax break in 2004 resulted in little investment. Rather, repatriated cash was used for dividends and stock buybacks. We should point out that a repatriation tax break would actually be a boon to the IRS. Consider, if the repatriation tax rate were lowered to 15 percent, companies would only get $.85 for every dollar repatriated. Assuming a 35 percent personal tax rate, investor would only receive about $.55 in dividends after tax per dollar repatriated, an effective tax rate of about 45 percent.

2016 Working Capital Survey

CFO just published the 2016 working capital survey by REL Consulting. The 1,000 large U.S. companies included in the survey had about $1 trillion in excess working capital based on companies in the survey matching the top quartile performers. Overall, the cash conversion cycle increased by 2.5 days, although much of this was driven by the oil & gas sector. If this sector was excluded, the cash conversion cycle actually fell by .1 day.

The best performer in the cash conversion cycle was Murphy Oil a negative 463 days due to a payables period of 600 days! Some of the other top performers in the cash conversion cycle were Noble Energy (negative 295 days), ITC (negative 282 days), Anadarko Petroleum (negative 245 days), and Apple (negative 66 days). On the other end of the performance scale, some of the longest cash conversion cycles were at United Therapeutics (794 days), Zoetis (344 days),  Eli Lilly (277 days), and KLA-Tencor (246 days).

Companies Plan To Decrease Cash

In the second quarter of 2015, S&P non-financial firms held $1.4 trillion in cash. And the percentage of companies that increased cash and short-term investments was expected to increase in the fourth quarter of 2015. However, a recent survey indicates that more companies are expected to decrease cash in the first quarter of 2016 than companies that increase cash balances. Overall, Treasurers appear to be doing very little with cash, waiting to see what happens in October when the SEC's new money market rules take effect.

2016 CFO Goals

A recent survey by Proviti asked CFOs about top priorities for 2016. At the top of the list was margin and earnings performance. Next on the list was cybersecurity risks, strategic planning, periodic forecasting, and budgeting. Executives are also seeking more precision in cash forecasting, an often overlooked area. From a student's point of view, the list of priorities can indicate areas in which they could hopefully make an immediate contribution to their employer.

Negative U.S. Interest Rates?

Back in March, we posted about negative interest rates in Europe. And while recent speculation has centered on the Federal Reserve increasing interest rates, at least one member of the Fed has pushed for negative interest rates. Narayana Kocherlakota, president of the Minneapolis Fed, has advocated for the Federal Reserve implementing negative interest rates in the U.S. Although Kocherlakota is a non-voting member of the Fed, he has been joined by other Fed officials arguing for negative interest rates. An extra mattress for your savings account is looking more appealing.

Apple's Cash Hoard Grows

Apple's cash balance, which has been enormous by any measure, topped $200 billion for the first time. Cash held internationally has reached 89 percent, or about $180 billion, of Apple's cash. Apple has been reluctant to repatriate the money back to the U.S. as it would be forced to pay the full 35 percent corporate tax rate on the repatriated money. In an effort to pay investors, Apple has issued $50 billion in debt in various currencies around the world.

2015 Working Capital Survey

CFO just published the 2015 working capital survey by REL Consulting. The 967 large U.S. companies included in the survey had $1.0541 trillion in excess working capital. However, low interest rates appear to have led to a level of apathy in working capital management as very little improvement has been seen in the past year. Overall, the companies in the survey have increased total debt by 62 percent since 2007, and the cash balance at these same companies reached $932 billion, a 74 percent increase since 2007. Even with cheap debt, days' sales outstanding increased by one day, from 37.4 days to 36.4 days, although much of this was a one-time improvement in the gas and oil industry.

The best performer in the cash conversion cycle was Anadarko Petroleum with a negative 346 days due to a paypables period of 397 days! Some of the other top performers in the cash conversion cycle were Deere (negative 29 days), Southwest Air (negative 17 days), Intuit (negative 81 days), and SunEdison (negative 52 days). On the other end of the performance scale, some of the longest cash conversion cycles were at Toll Brothers (770 days), Boeing (202 days). FLIR systems (207 days), and Tiffany (494 days).

Overseas Cash Continues To Grow

Eight of the largest U.S. tech companies increased overseas cash balances by $69 billion last year. In fact, overseas cash held by U.S. firms grew to $2.10 trillion during 2014, up 8 percent from 2013. The high U.S. tax rate is the reason for the cash holdings, although several companies took a tax hit in 2014 to repatriate earnings. For example, Duke Energy repatriated $2.7 billion in foreign earnings, but paid $373 million in taxes to do so. GE still has the largest offshore cash balance, at an astounding $119 billion.