US Technology Corps Crushed Again in the 3Q 2012 By Ineffective US Congress

I found 66 US Technology Corps, which file with the SEC, which have already reported their calendar September 2012 quarterly earnings, and which reported Pretax Income or Loss of at least $100 mil in either the 3Q 2012 or in the 3Q 2011.

These 66 US Technology Corps generated Total Pretax Income in the 3Q 2012 of $53.6 bil, an increase of a meager 1% from the 3Q 2011.  This was a significant deceleration from the 2Q 2012 earnings growth over the 2Q 2011 of 6%.  And this 2Q 2012 earnings growth of 6% was also a significant deceleration from the earnings growth in the 1Q 2012 of 15%.

But this huge earnings growth deceleration did not just happen in 2012.  It also happened, and to an even more substantial degree, in all of 2011.

But it gets worse.

Apple generated 24% Pretax Income growth in the 3Q 2012.  Thus without Apple, these remaining 65 US Technology companies experienced a Total Pretax Income decline of 4% in the 3Q 2012.
 

Apple dominates these US Technology companies.  Here’s the Pretax Income growth of Apple for the most recent seven quarters over the prior year’s quarter:

1Q 2011……+96%

2Q 2011…..+123%

3Q 2011…....+61%

4Q 2011….…119%

1Q 2012……+97%

2Q 2012……+24%

3Q 2012……+24%

Apple is truly a great company with great products.  However, it is mathematically impossible to continue growing its earnings like it did in the above shown five quarters from 1Q 2011 to 1Q 2012.  When the earnings numbers become so incredibly high, the earnings growth has to come down.  We saw this in company after company when the Tech Bubble burst in 2000.

So yeah, Apple was a major contributor to the earnings growth deceleration of these 66 Technology companies in the most recent two quarters.

So what is causing this massive earnings growth deceleration in the past seven quarters?

Well, certainly a very weak European economy, coupled with the weak Euro resulting in these profits getting translated into a stronger US dollar, is causing havoc on the earnings of US Technology companies which have a significant presence in Europe.

But there is a much more significant explanation for this earnings deterioration in 2011 and the first nine months of 2012.
  

I think this substantial earnings growth deterioration in the most recent seven quarters is due predominately to the switch from Moderate Democratic control to an Ultra Conservative, Uncompromising Republican control, particularly in the US House.

The US economy has stopped to a walk by the US House Republicans stopping, and the US Senate Republicans filibustering, nearly every Obama Administration economic initiative.  And the House Republicans abandoning the Grand Bargain Talks with the Obama Administration, the subsequent US Debt downgrade, and the unsuccessful Super Committee, all clearly showed that the US Congress could not get anything of substance done, and this severely harmed the US economy.

And the killing of the 100% first-year tax depreciation on equipment purchases in 2012 had a very harmful impact on US Technology and US Manufacturing companies.

The US economy is shouting out for bold, targeted, quick-hitting fiscal measures like the 100% first-year tax depreciation on equipment and computer software, highly accelerated first-year tax depreciation on buildings and building remodelings, and even lucrative investment tax credits on equipment, building, and computer software investments.
  

And measured foreign earnings repatriation at somewhat progressive discounted US federal income tax rates would also very markedly help.
  

But it only makes sense to put in some measures which allow all of the above very lucrative business tax incentives only if these companies also increase their US payroll counts sufficiently, which must be retained for a reasonable number of years or the tax benefits are recaptured.  This is wise legislation that benefits all of the country, not just the companies and their stockholders.
  

Frankly, US citizens are just sick and tired of the US Government continuing to legislate for massive tax benefits for businesses, with no directly linked US job creation strings attached.  And it's not just the Republicans that have legislated inappropriately like this......so have the majority of the Democrats.

Such unfair legislation has substantially expanded the gap between the wealthy and everyone else.

Businesses say they need these massive tax breaks to be competitive.  But the overwhelming majority of businesses have a singular goal.....profit maximization, which drives a higher stock price.  No matter what they say publicly, the majority of them couldn't care less about US unemployment and US underemployment.  And they view employees as a report line cost to the business.  Thus, if they can reduce this payroll and employee benefit cost, they can maximize their profits.

Given this very selfish business environment, it is the US Government's role to legislate after giving due consideration to this very unattractive US business environment for US job creation.

Thus, it is best for the US Government to legislate so that businesses can increase their profits, but also that US job creation happens at the same time.

Thus, the US Government must give extremely robust tax benefits only to US businesses that also create US jobs.

I suggest that bold, targeted, quick-hitting fiscal measures like the 100% first-year tax depreciation on equipment and computer software, highly accelerated first-year tax depreciation on buildings and building remodelings, lucrative investment tax credits on equipment, building, and computer software investments, and measured foreign earnings repatriation at somewhat progressive discounted US federal income tax rates would all meet this legislation benefiting the entire country test.....but only assuming that all of these extremely lucrative tax benefits are earned by businesses only if US full-time payroll counts are sufficiently increased, and last for a reasonable period of time, such as at least for several years, or else these very lucrative tax benefits get recaptured.

And the first-year tax depreciation measures would be particularly explosive in the short remaining time left in 2012 when combined with President Obama’s Business Tax Reform, which reduces business income tax rates starting in the following year.  Thus, I would announce right away that 100% first-year tax depreciation would apply to all capital expenditures made from some recent date forward, assuming it were to pass the US Congress in the upcoming lame duck session.

And of course as part of business tax reform, a permanent lucrative R&D tax credit should be enacted, and one particularly lucrative to smaller businesses.

But the key point here is that the US economy will not recover if the key US technology sector has only an earnings increase of 1%, and if the key US manufacturing sector has only an earnings increase of 2%.  And US job creation won't flow from such modest earnings growth.  The US Government must act to correct this serious problem.

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In deriving Ongoing, Core Pretax Income, I start with Pretax Income under Generally Accepted Accounting Principles (GAAP), and then exclude several clearly unusual very large items relative to Pretax Income, such as Long-term Asset Impairments, and Gains and Losses on both Debt Retirements and Asset Dispositions.

I use Pretax Income rather than After-tax Net Income, since so much of the change in effective income tax rates just happens due to financial engineering.

Below here is the Pretax Income (PTI) or Pretax Loss of each of these 66 US Technology companies for the 3Q 2012 and the 3Q 2011.

		Pretax	Pretax
	US	Income	Income	Increase	Increase
	State	(Loss)	(Loss)	(Decrease)	(Decrease)
	HQs	3Q 2012	3Q 2011	Amount	%
		mils $s	mils $s	mils $s
Technology
Apple	CA	10,893	8,791	2,102	24%
Remaining 65
Microsoft	WA	6,890	7,306	(416)	-6%
IBM	NY	5,074	5,027	47	1%
Intel	CA	3,921	4,892	(971)	-20%
Google	CA	3,148	3,360	(212)	-6%
Oracle	CA	2,702	2,471	231	9%
Cisco Systems	CA	2,662	2,239	423	19%
Hewlett Packard	CA	2,034	2,549	(515)	-20%
Qualcomm	CA	1,526	1,326	200	15%
Accenture	IL	946	935	11	1%
EMC	MA	844	813	31	4%
Texas Instruments	TX	843	780	63	8%
Dell	TX	838	1,091	(253)	-23%
Priceline	CT	731	612	119	19%
Ebay	CA	672	560	112	20%
Seagate Technology	CA	600	152	448	295%
Western Digital	CA	578	258	320	124%
Automatic Data Processing	NJ	466	456	10	2%
Facebook	CA	372	379	(7)	-2%
Cognizant Technology	NJ	364	288	76	26%
Applied Materials	CA	346	641	(295)	-46%
CA	NY	327	327	0	0%
Motorola Solutions	IL	324	238	86	36%
Xerox	CT	317	367	(50)	-14%
Thermo Fisher Scientific	MA	296	266	30	11%
Symantec	CA	273	249	24	10%
Adobe Systems	CA	263	257	6	2%
Broadcom	CA	261	329	(68)	-21%
CSC	VA	260	100	160	160%
Paychex	NY	240	231	9	4%
Agilent Technologies	CA	238	281	(43)	-15%
Activision Blizzard	CA	228	165	63	38%
Analog Devices	MA	209	275	(66)	-24%
Expedia	WA	204	202	2	1%
VMware	CA	195	183	12	7%
Check Point Software	CA	193	168	25	15%
Harris Corp	FL	188	192	(4)	-2%
Flextronics	CA	178	149	29	19%
KLA Tencor	CA	177	247	(70)	-28%
Altera	CA	177	205	(28)	-14%
SAIC	VA	173	182	(9)	-5%
Garmin Ltd	KS	169	160	9	6%
Roper Industries	FL	164	153	11	7%
Maxim Integrated Products	CA	160	168	(8)	-5%
Yahoo	CA	157	195	(38)	-19%
BMC Software	TX	156	132	24	18%
Cerner	MO	151	123	28	23%
Nvidia	CA	145	178	(33)	-19%
Linear Technology	CA	144	147	(3)	-2%
Teradata	OH	143	121	22	18%
Xilinx	CA	138	146	(8)	-5%
Verisk Analytics	NJ	137	117	20	17%
First Solar	AZ	135	223	(88)	-39%
Sandisk	CA	118	363	(245)	-67%
Jabil Circuit	FL	114	141	(27)	-19%
Amdocs	MO	114	99	15	15%
F5 Networks	WA	113	103	10	10%
Verisign	VA	102	84	18	21%
Marvell Technology	CA	96	197	(101)	-51%
Citrix Systems	FL	91	103	(12)	-12%
NetApp	CA	74	167	(93)	-56%
Juniper Networks	CA	70	138	(68)	-49%
Unisys	PA	51	117	(66)	-56%
Atmel	CA	28	107	(79)	-74%
Advanced Micro Devices	CA	(157)	92	(249)	-271%
Micron Technology	ID	(196)	(78)	(118)	-151%
Total all 65 but Apple		42,695	44,244	(1,549)	-4%
Total all 66 Including Apple		53,588	53,035	553	1%