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 excess 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.

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.

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.

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 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.

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.

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.

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.

How Low Can Rates Go?

With companies holding record amounts of cash, banks may be reporting record earnings as the Commonwealth Bank of Australia estimates that about one quarter of bank deposits worldwide are earning negative interest rates. Switzerland and Denmark lead the pack, with savings account rates of negative .75 percent. Previously, zero percent was seen as the lower bound for savings rates, but some analysts argue that the new lower bound is considerably lower than negative .75 percent.

Inventory Shortage Costs

What is the optimal days' sales in inventory? It depends! Too much in inventory will result in large opportunity costs. In other words, a company has cash tied up in inventory that costs the company money and does not earn a return. However, too little inventory can be problematic as the company can experience shortage costs. In this article, the costs of inventory shortages are explained. For example, although just-in-time delivery is popular, it does create problems in supply chain management. Not only does a company need to monitor its suppliers to ensure they will be able to meet obligations, but a company must also monitor the supplier of the company's supplier. A disruption at any point in the supply chain can result in an inventory shortage. So, how much does an supply chain disruption affect a company's value? One study indicates that supply chain disruption can reduce a company's value by up to 7 percent.

U.S. Corporate Overseas Cash Grows

U.S. corporate cash balances held overseas have reached $2.1 trillion, a 600 percent increase over the past 12 years. In comparison, the domestic U.S. corporate cash balance is $1.9 trillion. The major reason for the growth in international cash balances is the U.S. tax policy that taxes repatriated profits at the difference between the local tax rate already paid and the U.S. corporate tax rate, which is one of the highest in the world. Repatriating overseas cash does not necessarily mean the cash will be used for investment. One study indicates during the 2004 tax holiday, every dollar repatriated generated an $0.80 dividend payment and $0.15 share repurchase. While politicians may decry the lost corporate tax revenue that arises with a repatriation tax holiday, personal income taxes balloon with the increased dividends and share repurchases. 

Corporate Cash Balances Rise

At the end of 2013, nonfinancial U.S. corporations held $1.64 trillion in cash, a 12 percent increase from 2012. Apple's cash hoard reached $158.8 billion, or about 9.7 percent of all corporate cash assets. Additionally, U.S. based multinationals have $1.95 trillion outside of the country. Much of the increase in international cash balances was driven by Microsoft, Apple, and IBM.

Japanese Yen Holdings

Much has been made of U.S. corporate cash balance, which reached $1.925 trillion in December 2013. However, Japanese companies have a larger cash balance at 224 trillion yen ($2.15 trillion). The large cash holdings by Japanese companies is attributed to a 15-year deflationary period. Prime Minister Shinzo Abe is encouraging companies to raise wages faster than the cost of living to help end deflation in Japan.

The Check Is Not In The Mail

According to the 2013 AFP Electronic Payments Survey, about seven percent more companies are using electronic payments for business-to-business (B2B) payments than were using electronic payments four years ago. Overall, about 50 percent of companies use electronic payments of some sort for B2B payments. Surprisingly, more companies with sales under $1 billion use electronic payments than companies with sales over $1 billion. The increase in the number of electronic payment users may not reduce overall float since the electronic payment may be made later than it would be with a check, but "The check is in the mail." may no longer be a viable excuse for late payments.

Cash Balances Increase

The cash held by U.S. corporations has increased to record $1.79 trillion. Even with the increase, companies have been using cash to pay back shareholders. Companies paid a fourth-quarter dividend record of $79.83 billion and repurchased $99.15 billion in stock. One interesting fact is that even though U.S. corporate cash holdings are at a record, it only represents 11 percent of GDP, up from 10 percent of GDP in 2000. In contrast, European companies cash holdings typically represent to 14 to 20 percent of the corporation's home country GDP. Overall, 44 percent of finance executives expect cash balances to increase even further in the next six months.

Does Apple Really Have $121 Billion In Cash?

At the end of September, Apple reported a cash balance of $121.25 billion. But does Apple really have a savings account with that balance? Yes and no. While Apple's worldwide cash balance is $121.25 billion, the company only has $38.65 billion in the U.S. For the 600 U.S. multinationals that report cash balances held overseas, about 60 percent of the cash is overseas. Johnson and Johnson reported a cash balance of $24.5 billion, but the company holds essentially no cash in the U.S. The reason companies have not repatriated overseas earnings is that these funds would be subject to a 35 percent tax rate. The effect is to reduce a company's liquidity and ability to pay dividends or repurchase shares. For example, Emerson Electric recently borrowed money in order to pay dividends, repurchase shares, and make debt payments and pension contributions in spite of the fact that the company reported a cash balance of $2 billion.

Microsoft Wins Treasury Award

Microsoft has more than $1 billion in cash flowing through the company each day, so working capital management is a very important task. Recently, the company was awarded the Alexander Hamilton award by Treasury and Risk. Microsoft's working capital team worked on ways to improve cash forecasting. The team was able to reduce forecasting variances by 50 to 70 percent each month, resulting in a drop of over $200 million in the cash balances of subsidiaries.

Cash They Can't Spend

Companies seem to have a lot of cash on hand recently. For example, Google has about $44 billion in cash and short-term investments and Apple has about $28 billion on its balance sheet. But the tech giant with perhaps the biggest cash horde is Microsoft, with about $63 billion in cash on its balance sheet. So why doesn't Microsoft spend some of this cash? One reason is that of the $63 billion in cash, $54 billion is held by the company's overseas subsidiaries. In order to spend this cash, Microsoft would need to repatriate it, resulting in taxes being paid on the overseas profits.