Friday, April 26, 2013

Dow Industrial Corps 1Q 2013 GAAP Pretax Income Down 4%.....US Congress Responds By Fleeing DC

There are 30 Dow Industrial Corps.  Three of them (Pfizer, Merck and Walt Disney) haven't released their 1Q 2013 earnings yet.  Two of them (Bank of America and JPMorgan Chase) have many huge unusual items included in their GAAP earnings, including huge Debit Valuation Loss Adjustments, Fair Value Adjustments on Structured Liabilities, and many other huge gains and losses.  Since these huge unusual items make these two companies' GAAP Pretax Income and GAAP Income Tax Expense both not very meaningful, they are excluded below.

Thus, I am left with 25 Dow Industrial Corps which have released their calendar 1Q 2013 earnings.  These 25 Corps are the best of companies in so many different sectors, and thus should give a very good indication of just how the US economy is doing.

These 25 Dow Industrial Corps generated US Generally Accepted Accepted Accounting Principles (GAAP) Total Pretax Income in the 1Q 2013 of $93,974 mil, which was down 4.1% from the $98,013 mil earned in the 1Q 2012.  This 4.1% total earnings decline is not far off from the 6.0% total earnings decline for the 40 largest US Technology Corps which have already released their 1Q 2013 earnings, which I covered in a post earlier today.

On the other hand, these same 25 Dow Industrial Corps generated GAAP Total After-tax Net Income which was up 2.6% in the 1Q 2013 as compared with the 1Q 2012.  This compares with the 1.0% total after-tax earnings growth of the 40 largest US Technology Corps mentioned above.

So, what's up with the 6.7% positive earnings spread from the down 4.1% Pretax Income in the 1Q 2013 to the up 2.6% After-tax Net Income in the 1Q 2013 for these 25 stellar Dow Industrial Corps?  Well, it's the same thing that happened with the 7.0% positive earnings spread related to the 40 largest US Technology Corps mentioned above.

It's all about the effective income tax rate and financial engineering.

In total, these 25 Dow Industrial Corps slashed their effective income tax rates on a book basis from 31.2% of Pretax Income in the 1Q 2012 to only 26.3% in the 1Q 2013.

The accounting, income tax and finance staffs of these Dow Industrial Corps earned their pay in the 1Q 2013.

But having the broad-based, best of breed, Dow Industrial Corps generating a total decline of 4.1% in Pretax earnings in the 1Q 2013 is just horrible for the US economy.  And it's also terrible for US job creation.

So, how does the US Congress react to this horrible 1Q 2013 quarter for these exceptionally well run Dow Industrial Corps?  They flee Washington DC.

It is pretty clear that substantial fiscal stimulus to the US economy has been needed for quite some time.  So how has the US Congress responded?  Now granted the Obama Administration should have been bolder and more creative, but the US Congress has rejected nearly every recommendation made by the Obama Administration to spur the US economy and US job creation.

And so what has the US Congress done instead?  They passed an immediate severe austerity Sequester which substantially harms US economic growth and US job creation.....and also harms the Pretax Profits of these 25 Dow Industrial Corps and also of the 40 Largest US Technology Corps mentioned above.

And what is the intellectual foundation that the US Congress used to pass this immediate severe austerity Sequester, which results in a substantial reduction in US jobs, in US economic growth, and in Operating Profits of all Corporations?  An economic study by two Harvard professors which concludes that when the US debt level is 90% of US GDP, that as if by magic, US GDP growth drops dramatically.

And now that it has been recently proven that this economic study is clearly erroneous, how does the US Congress react to the complete collapse of the intellectual foundation of their severe austerity Sequester initiative?  By ignoring its collapse.

And how does the US Congress react to this massive continuing effective income tax rate decline, not just by Dow Industrial Corps and Big Technology Corps, but by nearly all Big Corps in all sectors?  By continuing to twiddle its thumbs and doing nothing.  And if there is such a huge Pretax Profit decline by Big Corps in the 1Q 2013, then it only makes sense that the same thing must be happening with smaller businesses.

Do you really think that US Big Corps, which control the majority of the US Congress, are going to permit the US Congress to pass tax legislation which prevents them from continuing to substantially bump up their reported after-tax earnings, which drives these companies' stock prices and also drives the predominate portion of the pay of the top executives of these companies?

And do you really think that good, effective tax reform will pass when the Democratic Chairman of the Senate Finance Committee is Max K Street Baucus, who is retiring?  Baucus should do the patriotic thing and step down immediately as head of the Senate Finance Committee.  If the Democrats in the US Senate would kill their incredibly unsound Seniority practice, and instead would initiate a Best and Brightest practice to be the Heads of its Committees, then Maria Cantwell would be the Chairwoman of the Senate Finance Committee.  But Ron Wyden is just a step back in ability from Cantwell, and having him chairing this critical committee would be a substantial improvement from where we are now.

Baucus, working closely mainly with US Senator Chuck Grassley, and with much help from US House of Representative Ways and Means Chairman Dave Camp, is the reason that all of these many massive tax loopholes have been granted to US Big Corps and to rich individuals over the years in the first place.

And US Big Corps are now demanding a pure territorial tax system which will let them reduce their effective income tax rates even more.  What kind of a country have we become where the US Big Corps and the rich continue to get all of this massive tax largesse while the rest of the country continues to suffer so much economically?

It's all driven by a US Congress, despite loudly proclaiming otherwise, continuing to legislate only for the 1%.

Anyway, below here is the GAAP Pretax Income, GAAP Income Tax Expense, and GAAP Effective Income Tax Rates on a book basis for both the calendar 1Q 2013 as well as the 1Q 2012 for each of these 25 Dow Industrial Corps:

1Q 2013

1Q 2012


1Q 2013 GAAP

1Q 2012 GAAP
GAAP Combined

1Q 2013 GAAP Effective
1Q 2012 GAAP Effective
Pretax Net

GAAP Income Income
GAAP Income Income
Income Income

Pretax Tax Tax
Pretax Tax Tax
Increase Increase

Income Expense Rate
Income Expense Rate
(Decrease) (Decrease)

mil $s mil $s

mil $s mil $s

mil $s mil $s
Dow Industrials

ExxonMobil 16,038 6,277 39.1%
17,515 7,716 44.1%
(1,477) (38)
Chevron 10,283 4,044 39.3%
12,069 5,570 46.2%
(1,786) (260)
Walmart 8,123 2,247 27.7%
7,872 2,434 30.9%
251 438
Microsoft 7,603 1,548 20.4%
6,363 1,255 19.7%
1,240 947
Verizon 5,719 864 15.1%
4,632 726 15.7%
1,087 949
AT&T 5,330 1,557 29.2%
5,517 1,865 33.8%
(187) 121
Johnson & Johnson 4,261 764 17.9%
5,045 1,135 22.5%
(784) (413)
General Electric 4,126 506 12.3%
3,934 665 16.9%
192 351
IBM 3,606 574 15.9%
3,836 769 20.0%
(230) (35)
Procter & Gamble 3,288 697 21.2%
3,187 754 23.7%
101 158
Cisco Systems 2,780 (363) -13.1%
2,749 567 20.6%
31 961
Intel 2,443 398 16.3%
3,814 1,076 28.2%
(1,371) (693)
Coca Cola 2,344 575 24.5%
2,725 658 24.1%
(381) (298)
United Health Group 1,961 721 36.8%
2,169 781 36.0%
(208) (148)
American Express 1,909 629 32.9%
1,773 517 29.2%
136 24
McDonald's 1,817 547 30.1%
1,848 581 31.4%
(31) 3
Dupont 1,774 387 21.8%
1,801 392 21.8%
(27) (22)
United Technologies 1,770 418 23.6%
1,584 320 20.2%
186 88
3M 1,617 470 29.1%
1,603 462 28.8%
14 6
Home Depot 1,590 569 35.8%
1,180 406 34.4%
410 247
Hewlett-Packard 1,573 341 21.7%
1,821 353 19.4%
(248) (236)
Boeing 1,438 332 23.1%
1,463 539 36.8%
(25) 182
Travelers 1,220 324 26.6%
1,077 271 25.2%
143 90
Caterpillar 1,127 246 21.8%
2,298 689 30.0%
(1,171) (728)
Alcoa 234 64 27.4%
138 39 28.3%
96 71

Total all 25 93,974 24,736 26.3%
98,013 30,540 31.2%
(4,039) 1,765

Total Pretax Income % Decrease -4.12%

Total After-tax Combined Net Income % Increase 2.62%

= Positive Income Tax Earnings Spread 6.74%