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			GAAP
		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%

US Big Technology Corps 1Q 2013 GAAP Pretax Income Down 6%.....US Congress Responds By Fleeing DC

There were 40 US Technology Corps, which have filed their calendar 1Q 2013 earnings with the SEC by April 25, 2013, and which had Pretax Income of more than $100 mil in either the 1Q 2013 or the 1Q 2012.

These 40 US Technology Corps generated US Generally Accepted Accepted Accounting Principles (GAAP) Total Pretax Income in the 1Q 2013 of $48,197 mil, which was down 6% from the $51,286 mil earned in the 1Q 2012.

On the other hand, these same 40 US Technology Corps generated GAAP Total After-tax Net Income which was up 1% in the 1Q 2013 as compared with the 1Q 2012.

So, what's up with the 7% positive earnings spread from the down 6% Pretax Income in the 1Q 2013 to the up 1% After-tax Net Income in the 1Q 2013?

Well, it's all about the effective income tax rate.

In total, these 40 US Technology Corps slashed their effective income tax rates on a book basis from 22.1% of Pretax Income in the 1Q 2012 to only 16.2% in the 1Q 2013.

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

But having the key US Technology Sector generating a total decline of 6% in Pretax earnings in the 1Q 2013 is just horrible for the US economy.  And it's also terrible for US job creation in this critical US sector.

So, how does the US Congress react to this horrible 1Q 2013 quarter for the critical US Technology Sector?  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 to spur the US economy and US job creation of the Obama Administration.

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 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 and US economic growth?  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, GDP growth drops dramatically.

And now that it has been proven that this economic study is clearly erroneous, how does the US Congress react to the complete collapse of the intellectual foundation of their immediate 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 Big Technology Corps, but by nearly all Big Corps in all sectors?  By continuing to twiddle its thumbs and doing nothing.

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 Representative 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 40 Big US Technology Corps:

			1Q 2013				1Q 2012			GAAP
		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
US Big Technology
Apple	12,905	3,358	26.0%		15,532	3,910	25.2%		(2,627)	(2,075)
Microsoft	7,603	1,548	20.4%		6,363	1,255	19.7%		1,240	947
Google	3,611	287	7.9%		3,545	655	18.5%		66	434
IBM	3,606	574	15.9%		3,836	769	20.0%		(230)	(35)
Oracle	3,090	586	19.0%		3,148	650	20.6%		(58)	6
Cisco Systems	2,780	(363)	-13.1%		2,749	567	20.6%		31	961
Intel	2,433	398	16.4%		3,814	1,076	28.2%		(1,381)	(703)
Qualcomm	2,136	273	12.8%		1,734	296	17.1%		402	425
Hewlett Packard	1,573	341	21.7%		1,821	353	19.4%		(248)	(236)
Accenture	1,181	(6)	-0.5%		899	184	20.5%		282	472
Ebay	809	132	16.3%		684	114	16.7%		125	107
EMC	691	76	11.0%		817	191	23.4%		(126)	(11)
Dell	660	130	19.7%		907	143	15.8%		(247)	(234)
Western Digital	406	15	3.7%		538	55	10.2%		(132)	(92)
Texas Instruments	374	12	3.2%		362	97	26.8%		12	97
Xerox	352	52	14.8%		353	77	21.8%		(1)	24
Yahoo	344	56	16.3%		421	30	7.1%		(77)	(103)
Thermo Fisher Scientific	343	2	0.6%		311	30	9.6%		32	60
Sandisk	234	68	29.1%		167	52	31.1%		67	51
Paychex	226	82	36.3%		212	77	36.3%		14	9
Motorola Solutions	205	13	6.3%		244	85	34.8%		(39)	33
Agilent Technologies	195	16	8.2%		256	26	10.2%		(61)	(51)
Broadcom	193	2	1.0%		43	(45)	-104.7%		150	103
KLA Tencor	192	26	13.5%		274	69	25.2%		(82)	(39)
Nvidia	186	12	6.5%		125	9	7.2%		61	58
Check Point Software	186	38	20.4%		183	40	21.9%		3	5
NetApp	176	18	10.2%		147	27	18.4%		29	38
VMWare	164	(9)	-5.5%		224	32	14.3%		(60)	(19)
Cerner	160	50	31.3%		130	41	31.5%		30	21
Maxim Integrated Products	152	23	15.1%		112	89	79.5%		40	106
Analog Devices	150	19	12.7%		180	41	22.8%		(30)	(8)
Xilinx	138	8	5.8%		140	18	12.9%		(2)	8
SAIC	128	(58)	-45.3%		(139)	22	-15.8%		267	347
Linear Technology	127	16	12.6%		129	31	24.0%		(2)	13
Jabil Circuit	119	31	26.1%		122	24	19.7%		(3)	(10)
Altera	117	(3)	-2.6%		118	2	1.7%		(1)	4
Intuit	87	16	18.4%		183	62	33.9%		(96)	(50)
Adobe Systems	83	18	21.7%		270	85	31.5%		(187)	(120)
Amazon.com	64	(18)	-28.1%		173	43	24.9%		(109)	(48)
Applied Materials	18	(16)	-88.9%		159	42	26.4%		(141)	(83)
Total all 40	48,197	7,823	16.2%		51,286	11,324	22.1%		(3,089)	412
Total Pretax Income % Decrease	-6.02%
Total After-tax Combined Net Income % Increase	1.03%
= Positive Income Tax Earnings Spread	7.05%

Big 4 US Defense Contractor Corps 1Q 2013 EPS up 9%, While US Government Employees Pay and Key US Government Programs Are Both Sharply Cut

The Big 4 US Defense Contractors generated Total Generally Accepted Accounting Principles (GAAP) Net Income in the 1Q 2013 which was up 5.6% over the 1Q 2012.

And these Big 4 US Defense Contrators had their total Earning Per Share (EPS) in the 1Q 2013 increase by an even more robust 8.6% over the 1Q 2012.  Further, all 4 of these Big US Defense Contractors had their 1Q 2013 Earnings Per Share grow over the 1Q 2012.  And EPS is what drives stock prices and is also what drives the predominant compensation of these companies' top executives.

The same positive economic effect didn't happen to US Government Employees.  In fact, just the opposite, with their earnings sharply curtailed across the board by incompetent US Congress Sequester action.

Further, there are so many critical US Government Non-Defense programs which have been cut dramatically by the Sequester.

Just where is the fairness here, where the Big 4 US Defense Contractors generate very robust earnings growth under the Sequester, while at the same time so many US citizens and key US programs suffer severely under the Sequester?

What the US Congress has done here will go down in US history as one of the craziest initiatives ever enacted.....and so harmful to the country.

Below here is the GAAP Earnings and EPS for the 1Q 2013 and the 1Q 2012 for each of these Big 4 US Defense Contractors:

			GAAP	GAAP
	1Q	1Q	Net	Net
	2013	2012	Income	Income
	GAAP	GAAP	Increase	Increase	EPS
	Net	Net	(Decrease)	(Decrease)	Increase
	Income	Income	Amount	%	%
	mils of $s	mils of $s	mils of $s
Big 4 US Defense Contractors
Lockheed Martin	761	668	93	13.9%	14.8%
General Dynamics	571	564	7	1.2%	3.2%
Raytheon	490	450	40	8.9%	12.0%
Northrop Grumman	489	506	(17)	-3.4%	3.6%
Total all 4	2,311	2,188	123	5.6%	8.6%

ExxonMobil 1Q 2013 Earnings: What's With EPS up 6% and Pretax Income Down 8%?

ExxonMobil just reported its 1Q 2013 earnings.  Its Earnings Per Share were up 6.0% over the 1Q 2012.  But its Pretax Income of $16,038 mil in the 1Q 2013 was down 8.4% from the $17,515 mil earned in the 1Q 2012.

So, just what in the world is up with the 14.4% positive earnings spread between the down 8.4% Pretax Income and the up 6.0% EPS?

Well, it's all about financial engineering.

First, ExxonMobil slashed its effective income tax rate on a book basis from 44.1% of Pretax Income in the 1Q 2012 to only 39.1% of Pretax Income in the 1Q 2013.

And second, due to its massive common stock buyback program, ExxonMobil added on 5.5% to its EPS growth in the 1Q 2013, taking it from a 0.5% growth on an after tax earnings basis to a 6.0% growth on an EPS basis.

ExxonMobil's accounting and finance team earned its pay in the 1Q 2013.

US Big National/Regional Banks 1Q 2013 Earnings Up 16%

Other than the two huge Banks included in the Big 8 US Financials, which I covered in a very recent earlier post, I found 14 additional US National/Regional Banks, which file with the SEC, which have already reported their 1Q 2013 earnings, and which generated Adjusted Net Income of $100 mil or more in either the 1Q 2013 or the 1Q 2012.

These 14 US Big National/Regional Banks had their Total Core Adjusted After-tax Net Income in the 1Q 2013 increase by a very solid 16% from the 1Q 2012, more than triple the total earnings increase of the Big 8 US Financial Corps.

Core Adjusted After-tax Net Income excludes Special, Unusual Items which are significant in amount relative to Reported Net Income.. 

The clear stick out winner here was Capital One Financial, whose Net Interest Income increased from $3,414 mil in the 1Q 2012 to $4,570 mil in the 1Q 2013, mainly due to its acquisition of HSBC US Credit Card Loans.

Regions Financial also had an exceptional earnings increase in the 1Q 2013, although it was mainly driven by a much lower Loan Loss Provision. 

Of these 14 Banks, 12 of them had their 1Q 2013 earnings increase over the 1Q 2012, as did Wells Fargo and US Bancorp, both included in the Big 8 US Financial Corps in an earlier post.

This 16% total earnings growth in the 1Q 2013 over the 1Q 2012, was a deceleration of the exceptional total earnings growth of these same Banks in the 4Q 2012 over the 4Q 2011.

Below here is the Core Adjusted Net Income of these 14 US Big National/Regional Banks for the 1Q 2013 and for the 1Q 2012:

			Adjusted	Adjusted
	1Q	1Q	Net	Net
	2013	2012	Income	Income
	Adjusted	Adjusted	Increase	Increase
	Net	Net	(Decrease)	(Decrease)
	Income	Income	Amount	%
	mils of $s	mils of $s	mils of $s
US Big National/Regional Banks
Capital One Financial (VA)	1,144	911	233	26%
PNC Financial (PA)	938	860	78	9%
Bank NY Mellon (NY)	588	619	(31)	-5%
BB&T (NC)	491	431	60	14%
State Street Corp (MA)	443	410	33	8%
Fifth Third Bancorp (OH)	391	338	53	16%
SunTrust Banks (GA)	340	245	95	39%
Regions Financial (AL)	325	185	140	76%
M&T Bank (NY)	255	188	67	36%
KeyCorp (OH)	196	195	1	1%
Northern Trust (IL)	162	160	2	1%
Huntington Bancshares (OH)	152	153	(1)	-1%
Comerica (TX)	132	129	3	2%
First Republic Bancorp (CA)	105	68	37	54%
Total all 14	5,662	4,892	770	16%

Big Eight US Financial Corps 1Q 2013 Adjusted Earnings Up 5%

What many people consider to be the US Big 8 Financial Corps generated Total Adjusted Net Income to Common Shareholders of $24.0 bil in the 1Q 2013, which was an increase of 5% over the 1Q 2012.  However, this 5% total earnings growth was a substantial deceleration from the superlative total earnings growth experienced by these same companies in the 4Q 2012 over the 4Q 2011.

The main driver of this 5% total earnings growth in the 1Q 2013 was Wells Fargo, which experienced a 23% earnings growth.  However, on a Pretax/PreProvision For Loan Loss basis, Wells Fargo's 23% reported earnings growth drops dramatically to only 2%.

Bank of America's 1Q 2012 Adjusted Earnings below are before its large Debit Valuation Loss Adjustment on it Trading Liabilities, its large Fair Value Adjustment on its Structured Liabilities, and its large Gains on Debt and Trust-Preferred Repurchases.  I estimated the related Income Tax effect on these large items.

I have to wonder about the fairness of the recent US Government action which lets these Big Financial companies buy back so many of their common shares with no strings attached.  This is clearly an economic benefit for only the 1%, not for the entire country.  Haven't these Big Financial Corps already gotten enough largesse from the US Government, even though they first wrecked the US economy on a long-term basis and even while they continue to clever-by-half soak their customers, the 99%, in so many ways, and also do nothing to stimulate the US economy?

Below here are the 1Q 2013 and 1Q 2012 Adjusted Earnings for each of these US Big 8 Financial Corps:

			Adjusted	Adjusted
	1Q	1Q	Net	Net
	2013	2012	Income	Income
	Adjusted	Adjusted	Increase	Increase
	Net	Net	(Decrease)	(Decrease)
	Income	Income	Amount	%
	mils of $s	mils of $s	mils of $s
US Big 8 Financial
JPMorgan Chase	6,117	6,402	(285)	-4%
Wells Fargo	4,931	4,022	909	23%
Citigroup	4,073	3,428	645	19%
Bank of America	2,250	2,588	(338)	-13%
Goldman Sachs	2,188	2,074	114	5%
General Electric Capital	1,927	1,772	155	9%
US Bancorp	1,358	1,285	73	6%
Morgan Stanley	1,177	1,343	(166)	-12%
Total all 8	24,021	22,914	1,107	5%