Phillips 66 (NYSE:PSX)

The total income tax expense exhibited significant volatility between 2015 and 2019, characterized by a substantial shift from a tax expense position to a tax benefit position and back again. This variability is primarily driven by fluctuations in both current and deferred tax components, with the most pronounced anomaly occurring in 2017.

Total Income Tax Expense (Benefit)

The total tax burden fluctuated sharply over the five-year period. After starting at 1,764 million US$ in 2015, the expense decreased to 547 million US$ in 2016, before reversing into a tax benefit of 1,693 million US$ in 2017. The company returned to a tax expense position in 2018 at 1,572 million US$, followed by a reduction to 801 million US$ in 2019.

Current Tax Analysis

Current tax obligations showed inconsistent patterns, reflecting changes in taxable income. A peak of 1,320 million US$ was recorded in 2018, while the lowest point occurred in 2016, when a current tax benefit of 63 million US$ was realized. The transition from 2017 to 2018 saw the most aggressive increase, with current taxes rising from 196 million US$ to 1,320 million US$.

Deferred Tax Analysis

Deferred taxes served as the primary driver for the overall tax volatility, particularly in 2017. While deferred taxes remained relatively stable as expenses in 2015 (483 million US$) and 2016 (610 million US$), a massive deferred tax benefit of 1,889 million US$ was recorded in 2017. This specific event offset the current tax expense for that year, resulting in the overall net tax benefit. By 2018 and 2019, deferred taxes returned to modest expense levels of 252 million US$ and 182 million US$, respectively.

The effective income tax rate exhibited significant volatility between 2015 and 2019, primarily driven by a structural shift in federal tax legislation. While the rate followed a generally downward trajectory over the five-year period, a substantial anomaly occurred in 2017, leading to a temporary negative tax rate before stabilizing at a lower baseline in 2018 and 2019.

Federal Statutory Rate Transition

A permanent reduction in the federal statutory income tax rate is observed, shifting from 35.00% between 2015 and 2017 to 21.00% in 2018 and 2019. This reduction serves as the primary driver for the lower effective tax rates observed in the latter two years of the analysis.

Impact of the Tax Cuts and Jobs Act (TCJA)

The TCJA created a singular, massive distortion in 2017, contributing a negative 76.50% adjustment to the tax rate. This specific item resulted in a final effective income tax rate of -47.60% for that year, representing a significant one-time tax benefit. By 2018 and 2019, the impact of the TCJA normalized, contributing negligible adjustments of 0.50% and -1.00%, respectively.

Foreign Rate Differential and International Factors

Foreign rate differentials consistently exerted downward pressure on the effective tax rate throughout the period. This effect was most pronounced in 2016 and 2017, with reductions of 6.90% and 5.90%. However, this benefit diminished significantly by 2019, contributing only -0.70% to the overall rate.

Secondary Tax Adjustments

State income taxes provided a consistent positive offset, fluctuating between 0.60% and 2.50%. Other adjustments, such as noncontrolling interests and changes in valuation allowances, generally provided modest downward pressure, although the valuation allowance impact shifted to a positive 0.30% by 2019.

Effective Income Tax Rate Trend

Excluding the 2017 anomaly, the effective income tax rate before the TCJA impact showed a steady decline from 29.20% in 2015 to 20.20% in 2019. The final effective income tax rate stabilized at 19.20% by the end of 2019, reflecting the combined influence of the lower federal statutory rate and various international and domestic tax adjustments.

The net deferred tax position remained a liability throughout the analyzed period, with a fluctuating trend that peaked in 2016 at -6,651 million US$ before contracting significantly in 2017 and gradually increasing through 2019 to -5,505 million US$. This indicates a consistent long-term tax obligation, primarily driven by the magnitude of deferred tax liabilities relative to available assets.

Deferred Tax Assets (DTAs) and Valuation Allowances

Gross deferred tax assets experienced a notable decline from 1,369 million US$ in 2015 to a low of 579 million US$ in 2018, before recovering to 1,008 million US$ in 2019. This volatility is largely attributed to benefit plan accruals, which dropped from 751 million US$ in 2015 to 314 million US$ in 2017, and loss and credit carryforwards, which showed a steady downward trend from 227 million US$ in 2015 to 54 million US$ in 2019. Simultaneously, the valuation allowance decreased from -160 million US$ in 2015 to -22 million US$ in 2019, suggesting an increase in the probability that the recognized deferred tax assets will be realized.

Deferred Tax Liabilities (DTLs) Components

Deferred tax liabilities were dominated by properties, plants, equipment, and intangibles, which fluctuated from a high of -4,525 million US$ in 2016 to -2,942 million US$ in 2017, before rising again to -3,297 million US$ in 2019. Investments in joint ventures remained a significant liability driver, averaging approximately -2,100 million US$ over the period. Additionally, liabilities related to investments in subsidiaries showed a sharp increase from -236 million US$ in 2015 to -803 million US$ in 2016, remaining elevated through 2019 at -794 million US$.

Net Position Dynamics

The most significant shift in the tax profile occurred in 2017, where net deferred tax liabilities decreased by approximately 1,734 million US$ compared to 2016. This reduction was mirrored by a sharp decrease in both gross deferred tax assets and liabilities related to fixed assets. From 2017 to 2019, a gradual expansion of the net liability position was observed, moving from -4,917 million US$ to -5,505 million US$, driven by the resurgence of liabilities in PPE and subsidiaries.

The financial position regarding deferred taxes is characterized by a substantial and persistent imbalance between assets and liabilities. Throughout the period from 2015 to 2019, deferred tax liabilities remained several orders of magnitude higher than deferred tax assets, resulting in a significant net deferred tax liability position.

Deferred Tax Assets

A consistent downward trend is observed in the balance of deferred tax assets. The value decreased from 161 million US dollars in 2015 to 48 million US dollars by 2019. This represents a total reduction of approximately 70% over the five-year period, with the most notable declines occurring between 2015 and 2016, and again between 2017 and 2018.

Deferred Tax Liabilities

The trajectory of deferred tax liabilities exhibits higher volatility. The balance increased from 6,041 million US dollars in 2015 to a peak of 6,743 million US dollars in 2016. A sharp contraction followed in 2017, with the balance dropping to 5,008 million US dollars. From 2017 onward, a steady recovery is noted, with the liability rising to 5,553 million US dollars by the end of 2019.

Net Deferred Tax Exposure

The disparity between assets and liabilities indicates a heavy reliance on future taxable temporary differences. Because the assets decreased while the liabilities remained high, the net deferred tax liability expanded in relative terms, suggesting a long-term obligation to settle tax liabilities arising from current balance sheet differences.

The removal of deferred taxes results in a significant structural realignment of the balance sheet, primarily through the reduction of liabilities and a corresponding increase in stockholders' equity, while total assets remain largely unaffected.

Impact on Balance Sheet Liabilities

A substantial and consistent gap exists between reported and adjusted total liabilities. Throughout the period from 2015 to 2019, adjusted liabilities are consistently lower than reported values. In 2015, reported liabilities of 24,642 million USD were reduced to 18,601 million USD upon adjustment. This trend persists through 2019, where reported liabilities of 31,551 million USD were adjusted down to 25,998 million USD, indicating that deferred tax liabilities represent a significant portion of the company's total obligations.

Effect on Stockholders' Equity

The adjustment leads to a marked increase in stockholders' equity across all observed years. Adjusted equity consistently exceeds reported equity, with the most significant variances appearing in the earlier years of the analysis. For example, in 2016, reported equity of 22,390 million USD rose to an adjusted 29,041 million USD. By the end of 2019, adjusted stockholders' equity stood at 30,415 million USD, compared to a reported value of 24,910 million USD.

Asset Stability

Total assets exhibit minimal variance between reported and adjusted figures. From 2015 to 2019, the difference remains marginal, suggesting that the removal of deferred taxes is predominantly a liability-to-equity shift rather than one involving significant deferred tax assets.

Net Income Divergence

Adjusted net income shows varied correlations with reported net income. In 2016, adjusted net income was notably higher at 2,165 million USD compared to the reported ,155 million USD. Conversely, 2017 shows a sharp reversal where reported net income of 5,106 million USD significantly exceeded the adjusted figure of 3,217 million USD. By 2019, the figures converged more closely, with adjusted net income at 3,258 million USD against a reported 3,076 million USD.

An analysis of financial ratios from 2015 to 2019 indicates that the removal of deferred taxes significantly modifies the interpretation of financial leverage and equity returns, while having a negligible impact on operational asset efficiency.

Profitability and Asset Returns

The reported net profit margin demonstrated volatility, fluctuating from a low of 1.85% in 2016 to a peak of 5.02% in 2018. Adjusted net profit margins generally followed this trend, though a notable divergence occurred in 2017, where the adjusted margin was lower than the reported figure. Regarding the Return on Assets (ROA), adjusted values were higher than reported values in four out of the five years analyzed. This suggests that the exclusion of deferred tax liabilities reduces the denominator (total assets) more substantially than it affects the numerator (net income), thereby improving the adjusted ROA.

Asset Turnover and Financial Leverage

Reported and adjusted total asset turnover ratios are nearly identical across the entire period, confirming that deferred tax accounting does not materially alter the assessment of asset utilization. However, a significant disparity is observed in financial leverage. Adjusted leverage is consistently and materially lower than reported leverage, moving from 1.67 in 2015 to 1.93 in 2019, whereas reported leverage ranged from 2.10 to 2.36. This indicates that deferred tax liabilities contribute a substantial portion of the reported total liabilities, inflating the perceived financial risk.

Return on Equity (ROE)

Reported ROE exhibited high volatility, peaking at 22.70% in 2018. In most instances, the adjusted ROE was lower than the reported ROE, particularly in 2017 and 2018. This pattern suggests that the reported ROE is amplified by the leverage effect created by deferred tax liabilities; when these liabilities are removed, the resulting increase in the equity base leads to a reduction in the calculated return on equity.

The financial performance between 2015 and 2019 is characterized by significant volatility in both net income and profit margins. Profitability experienced a sharp decline in 2016 before recovering to a peak in 2018, followed by another contraction in 2019.

Adjusted Net Profit Margin Trends

The adjusted net profit margin fluctuated from 4.76% in 2015 to a low of 2.57% in 2016. A recovery trend followed, with the margin increasing to 3.14% in 2017 and reaching a period high of 5.25% in 2018, before declining to 3.04% by the end of 2019.

Net Income Divergence

Adjusted net income remained higher than reported net income in four of the five observed years. A significant divergence is observed in 2017, where reported net income of US$ 5,106 million substantially exceeded the adjusted net income of US$ 3,217 million, indicating a substantial positive non-recurring item or tax benefit impacting the reported results during that period.

Profitability Correlations

The reported and adjusted net profit margins generally move in tandem, reflecting the volatility of the underlying net income. The closest alignment between reported and adjusted margins occurred in 2018, while the most pronounced discrepancy appeared in 2017, where the reported net profit margin of 4.99% was significantly higher than the adjusted margin of 3.14%.

Total asset growth exhibits a consistent upward trajectory from 2015 through 2019. Reported total assets increased from US$ 48,580 million to US$ 58,720 million, reflecting a steady expansion of the asset base over the five-year period. The variance between reported and adjusted total assets remains minimal throughout this timeframe, indicating that the adjustments applied to the asset base do not materially alter the overall valuation of the company's resources.

Adjusted Total Asset Turnover Trends

The adjusted total asset turnover ratio demonstrated notable volatility. A significant contraction occurred in 2016, with the ratio falling from 2.04 to 1.63, indicating a decline in the efficiency of asset utilization relative to revenue generation. This was followed by a recovery phase, where the ratio improved to 1.89 in 2017 and reached a period peak of 2.05 in 2018. A subsequent decline to 1.83 was observed in 2019.

Comparative Analysis of Reported and Adjusted Ratios

A comparison between reported and adjusted asset turnover ratios reveals a near-perfect correlation. The values are identical in 2015, 2016, 2018, and 2019, with only a marginal difference of 0.01 observed in 2017. This confirms that the adjustments made to total assets had a negligible impact on the resulting efficiency metrics.

The convergence of the data suggests that while the company successfully expanded its asset base by approximately 21% between 2015 and 2019, the efficiency of these assets in generating revenue fluctuated. The inability to maintain the 2018 efficiency peak into 2019 occurred alongside the most significant single-year increase in total assets, suggesting that revenue growth may not have kept pace with the rapid asset expansion in the final year of the period.

The financial position between 2015 and 2019 is characterized by a steady expansion of the asset base and a gradual increase in financial leverage on both a reported and adjusted basis.

Asset Base Expansion

A consistent upward trend is observed in total assets. Reported total assets grew from 48,580 million USD in 2015 to 58,720 million USD in 2019. Adjusted total assets followed a nearly identical trajectory, rising from 48,419 million USD to 58,672 million USD over the same period, indicating that adjustments to the asset base had a negligible impact on overall valuation.

Equity Variance and Adjustments

There is a pronounced discrepancy between reported and adjusted stockholders' equity. Reported equity exhibited volatility, peaking at 25,085 million USD in 2017 before settling at 24,910 million USD in 2019. In contrast, adjusted stockholders' equity remained consistently higher and more stable, increasing from 28,980 million USD in 2015 to 30,415 million USD in 2019. This suggests that significant tax-related adjustments effectively increase the equity cushion when analyzed on an adjusted basis.

Financial Leverage Trends

Both leverage metrics increased over the five-year period, reflecting a higher proportion of assets funded by liabilities relative to equity. Reported financial leverage rose from 2.10 in 2015 to 2.36 in 2019. However, the adjusted financial leverage ratio remained significantly lower throughout the period, moving from 1.67 in 2015 to 1.93 in 2019. The persistent gap between these two ratios indicates that the adjusted view presents a more favorable solvency profile, reducing the perceived financial risk associated with the company's capital structure.

The financial performance between 2015 and 2019 is characterized by significant volatility in profitability and a persistent divergence between reported and adjusted financial metrics.

Net Income Trends

Reported net income exhibited substantial fluctuations, decreasing from 4,227 million US dollars in 2015 to a period low of 1,555 million US dollars in 2016, before peaking at 5,595 million US dollars in 2018. Adjusted net income generally followed this pattern but remained higher than reported figures in four of the five years analyzed. A notable anomaly occurred in 2017, where reported net income of 5,106 million US dollars significantly exceeded the adjusted net income of 3,217 million US dollars.

Equity Base Analysis

A consistent gap is observed between reported and adjusted stockholders' equity throughout the five-year period. Adjusted stockholders' equity remained relatively stable, ranging from a minimum of 28,980 million US dollars in 2015 to a maximum of 30,415 million US dollars in 2019. Reported equity was consistently lower, fluctuating between 22,390 million and 25,085 million US dollars, indicating that the adjustments applied to the equity base added approximately 5 to 7 billion US dollars to the valuation across the period.

Return on Equity (ROE) Performance

The Reported ROE demonstrated high volatility, with a sharp decline to 6.95% in 2016 followed by a peak of 22.70% in 2018. Adjusted ROE typically provided a more conservative view of performance; for instance, in 2017, the Adjusted ROE was 10.72% while the Reported ROE was 20.35%. This suggests that the impact of adjustments to both income and equity served to normalize the return metrics. By 2019, the Adjusted ROE declined to 10.71%, mirroring a general downward trend in reported returns from the 2018 peak.

The financial performance from 2015 through 2019 is characterized by significant volatility in net income and a steady expansion of the total asset base. While assets grew consistently, the return on those assets fluctuated sharply, reflecting an inconsistent relationship between earnings and the capital employed.

Net Income Volatility

Both reported and adjusted net income experienced substantial swings. A notable contraction occurred in 2016, where reported net income fell to 1,555 million USD from 4,227 million USD in 2015. A recovery followed, peaking in 2018 with reported net income reaching 5,595 million USD, before declining again to 3,076 million USD in 2019. The adjusted net income figures generally track this trend, though they diverge from reported figures in several periods, most notably in 2017, where adjusted net income was significantly lower than reported net income.

Asset Base Expansion

Total assets demonstrated a consistent upward trajectory over the five-year period. Reported total assets increased from 48,580 million USD in 2015 to 58,720 million USD in 2019. The minimal variance between reported and adjusted total assets suggests that the adjustments made to the balance sheet were negligible and did not materially impact the valuation of the asset base.

Return on Assets (ROA) Analysis

The Return on Assets exhibited significant instability, mirroring the volatility of net income. Reported ROA fluctuated from a low of 3.01% in 2016 to a peak of 10.30% in 2018. Adjusted ROA followed a similar pattern but showed distinct deviations. In 2015 and 2016, adjusted ROA was higher than reported ROA, whereas in 2017, reported ROA was substantially higher (9.39%) than adjusted ROA (5.93%). This divergence indicates that non-recurring items or tax adjustments had a variable impact on profitability metrics across the period.

Comparative Efficiency Trends

The peak efficiency in asset utilization was observed in 2018, where adjusted ROA reached its highest point of 10.78%. However, by 2019, there was a sharp decline to 5.55%, occurring simultaneously with the increase in total assets to their highest level in the period. This indicates that the growth in the asset base did not translate into proportional earnings growth in the final year of the analysis.