Financial Gauges

BR: Financial Gauge Analysis for the September 2009 Quarter

2009-11-22T20:21:00.000-08:00

In a previous article, we examined Broadridge Financial's (NYSE: BR) Income Statement for the first quarter of fiscal 2010 and compared the entries on each line to our "look-ahead" estimates. Earnings in this period, which ended 30 September 2009, fell from $0.25 per share to $0.19.

Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated a set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.

Broadridge Financial Solutions provides investor communication, securities processing, and clearing services to financial companies. Some background information about Broadridge and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Broadridge's latest quarterly results produced the following changes to the gauge scores:

Cash Management: 15 of 25 (down from 19 in June)
Growth: 5 of 25 (down from 6)
Profitability: 16 of 25 (up from 15)
Value: 2 of 25 (down from 10)

Overall: 35 of 100 (down from 51)

Broadridge's relatively short existence as an independent entity, plus the ongoing turmoil in the financial industry, has caused its scores to vary more from quarter to quarter than most other companies. Automatic Data Processing, Inc. (NASDAQ: ADP) spun off Broadridge on 30 March 2007.

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management	Sep 2009	Jun 2009	Sep 2008
Current Ratio	1.4	1.4	1.2
LTD/Equity	37.4%	35.7%	42.1%
Debt/CFO (years)	1.1	1.1	2.0
Inventory/CGS (days)	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (days)	53.8	67.6	57.0
Working Capital/Invested Capital	71.7%	82.6%	55.2%
Cash Conversion Cycle Time (days)	36.1	48.5	38.4
Gauge Score (0 to 25)	15	19	15

Over the last 12 months, Broadridge has strengthened its Balance Sheet by, for example, increasing Working Capital -- the difference between Current Assets and Current Liabilities -- from $462.8 million to $551.6 million. This improvement is reflected in Current Ratio and the Working Capital ratio.

Long-term Debt, at $324 million, has not changed over the last year. However, retained earnings have lifted Shareholders Equity by $98.5 million (a 12.8 percent increase).

Debt can now be covered with just over one year's Cash Flow from Operations.

Days of Sales Outstanding and the Cash Conversion Cycle Time, which are related measures of Cash efficiency, have also improved compared to last year. More progress lowering these figures would help the gauge score.

Growth	Sep 2009	Jun 2009	Sep 2008
Revenue growth (1)	-4.2%	-2.6%	3.7%
Revenue/Assets	64.9%	76.6%	71.1%
Operating Profit growth (2)	5.0%	8.7%	8.5%
CFO growth (1, 3)	3.3%	-16.0%	-13.2%
Net Income growth (1)	11.6%	16.2%	-6.3%
Gauge Score (0 to 25)	5	6	1

1. Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
2. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters. Broadridge was part of ADP during some of this period.
3. Cash Flow from Operations excludes securities clearing activities.

Trailing-year Revenue growth has been negative for the last two quarters, and even more so than we expected. Broadridge blamed the Revenue decline in the September quarter on decreased distribution activities in the Investor Communication Solutions business, the loss of some clients, price concessions to retain other clients, and unfavorable foreign currency exchanges.

Despite the contraction on the top line of the Income Statement, reduced expenses and a tax benefit enabled Broadridge to increase bottom-line Net Income by a healthy (for this market) 11.6 percent.

Cash Flow had been lagging, but this important measure is now showing positive, if admittedly modest, growth on a trailing-year basis.

Profitability	Sep 2009	Jun 2009	Sep 2008
Operating Expenses/Revenue	83.9%	83.7%	84.7%
ROIC	27.7%	27.1%	20.9%
Free Cash Flow/Invested Capital	32.4%	30.6%	24.8%
Accrual Ratio	0.1%	1.1%	-0.8%
Gauge Score (0 to 25)	16	15	11

Operating expenses as a percentage of Revenue have been stable.

The ROIC and FCF/IC ratios are impressive and have kept the Profitability score high.

Good Cash Flow in the September quarter brought the Accrual Ratio down. We consider more Cash Flow backing up Net Income, if sustained, to be a sign of improved Earnings Quality.

Value	Sep 2009	Jun 2009	Sep 2008
P/E	13.2	10.5	11.4
P/E vs. S&P 500 P/E	0.6	0.5	0.6
PEG	2.7	1.2	1.3
Price/Revenue	1.3	1.1	1.0
Enterprise Value/Cash Flow (EV/CFO)	9.5	7.6	8.1
Gauge Score (0 to 25)	2	10	12

All figures in this table are calculated using the share price on the last day of the listed calendar month. Depending on how the company defines its fiscal year, this date may differ from the end of the fiscal quarter.

Broadridge's share price increased a remarkable 21 percent in the September quarter, from $16.58 to $20.10. Over the previous 12 months, the increase was more than 30 percent.

Since the rate of increase in earnings did not match the price rise, the multiples have expanded and Value score has come down.

Overall	Sep 2009	Jun 2009	Sep 2008
Gauge Score (0 to 100)	35	52	46

The Cash Management and Profitability scores remain favorable, but Growth has been weak, and the surging share price really hurt the Value gauge. Although, trailing-year Revenue growth has recently been negative, Broadridge recently hiked its estimate for fiscal year Revenue growth to a range between plus 6 and plus 8 percent.

Greater confidence in the overall financial services industry could explain part of the share price rise, but news emanating from Broadridge is probably also boosting the shares. Broadridge decided earlier this year to double its annual dividend, which is a tangible expression of management's confidence in the company. In addition, Broadridge recently signed a seven-year agreement to provide "customer communications services" to Morgan Stanley Smith Barney.

Furthermore, Broadridge agreed to sell "clearing client contracts" to Penson Worldwide (NASDAQ: PNSN) and a related company. Broadridge indicates that this will free up cash that had to be set aside as regulatory capital to meet securities clearing requirements.

More recently, Broadridge was listed as the top Brokerage Services Outsourcing Provider for the second consecutive year in the Black Book of Outsourcing.

Full disclosure: Long BR at time of writing.

PRGN: Income Statement Analysis for the September 2009 Quarter

2009-11-21T20:33:00.000-08:00

Paragon Shipping, Inc., (NASDAQ: PRGN) earned $0.40 per share in the third quarter of 2009, down from $0.69 in the same quarter of last year. The steepness of the earnings-per-share decline was more due to the 64-percent increase in the weighted average number of diluted shares, after two equity offerings, than the 4.9-percent decrease in Net Income.

This post reviews each row of the Income Statement for the quarter in the earnings announcement. We also consulted the separately issued Management's Discussion and Analysis of Financial Condition and Results.

We did not issue a "look-ahead" estimate in advance of the earnings release.

In a second article, we will report Paragon's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Headquartered in Greece and operating since December 2006, Paragon owns and charters ships that carry dry bulk cargoes. Chairman and CEO Michael Bodouroglou also controls the company, Allseas Marine S.A., that Paragon pays to manage its fleet.

Please click here to see a full-sized, normalized depiction of the actual results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Revenue (after commissions totaling 5.0 percent) in the September 2009 quarter was 8.1 percent less than in the third quarter of 2008. The average daily revenue per vessel (time charter equivalent) fell 13.8 percent on an unadjusted basis and 11.1 percent after adjustments. The latter figure excludes non-cash "amortization of below market acquired time charters."

Paragon operated 12 vessels during the September 2009 quarter, up from an average of 11.6 vessels during the same period in 2008.

The income statement has separate entries for Voyage expenses, Vessel operating expenses, and Dry-docking expenses. Paragon's MD&A defines how the company accounts for these and other expenses. For our convenience, we add the three values and label the result the Cost of Goods Sold. CGS was 12.5 percent of Revenue in the third quarter, which translates into a Gross Margin, as we define it, of 87.5 percent. The Gross Margin was 82.7 percent in the same period last year.

The nearly 5-percent improvement in Gross Margin was largely due to reductions in Voyage expenses and Dry-docking expenses of about 90 and 98 percent, respectively.

Depreciation expenses were just slightly less than last year, but these non-cash costs increased from 20.3 to 22.1 percent of Revenue.

We group Management fees and General and administrative expenses into the Sales, General, and Administrative (SG&A) category, which includes share-based compensation. In the third quarter, this expense category increased 1.3 percent. As a percentage of Revenue, these expenses edged up from 5.3 to 5.8 percent.

In the June quarter, Paragon recorded an asset impairment charge of $6 million on the Handymax bulk carrier MV Blue Seas. This vessel will be sold for $17.55 million (less a 3 percent commission) later this year. An additional impairment charge of nearly $655 thousand was recorded in the September quarter.

Besides the sale of the MV Blue Seas, no other event occurred that required Paragon to recognize lower vessel valuations. However, investors should understand that assets can have market values that are very different from the carrying values listed on a Balance Sheet. See this indication of lower valuations, relative to last year, for various types of bulk carriers and tankers.

When loans to Paragon are secured by its vessels, lower market values for these vessels can cause the company to default on the terms of its loan agreements. Nervous bankers can then demand that the company repay the loan or raise cash elsewhere. This would explain the two recent equity offerings.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, fell 6.9 percent to $22 million. The decline was the result of lower Revenues and the impairment charge, offset to some extent by lower costs.

Other expenses of $4.1 million were mainly interest and finance costs and a loss on interest rate swaps. The swaps are intended to reduce Paragon's exposure to interest rate fluctuations.

Paragon paid no income taxes.

The bottom-line figure for Net Income was $18.0 million ($0.40 per share), compared to $18.9 million ($0.69 per share).

Paragon has raised cash in 2009 through two equity offerings, the second of which was completed on 2 October. The number of shares outstanding increased from about 27 million shares on 31 December 2008 to more than 48 million on 2 October 2009.

Full disclosure: Long PRGN at time of writing.

ADP: Financial Gauge Analysis for the September 2009 Quarter

2009-11-18T21:12:00.000-08:00

In a previous article, we examined Automatic Data Processing's (NASDAQ: ADP) Income Statement for the first quarter of fiscal 2010 and compared the figures on each line to our "look-ahead" estimates. Earnings in this period, which ended 30 September 2009, rose from $0.54 to $0.56 per share.

Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated our usual set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.

Automatic Data Processing is one of the largest firms providing payroll and other personnel-related information technology services. Some background information about ADP and the business environment in which it is currently operating can be found in the look-ahead.

In summary, ADP's latest quarterly results produced the following changes to the gauge scores:

Cash Management: 11 of 25 (up from 10 in June)
Growth: 5 of 25 (down from 6)
Profitability: 17 of 25 (up from 15)
Value: 13 of 25 (down from 18)

Overall: 52 of 100 (down from 58)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash Management	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Current Ratio (1)	1.9	1.6	1.4	1.7
LTD/Equity	0.7%	0.8%	0.8%	1.1%
Debt/CFO (years)	0.0	0.5	0.7	0.1
Inventory/CGS (days)	N/A	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	41.3	43.0	39.7	49.2
Working Capital/Invested Capital (1)	40.1%	40.0%	39.6%	42.2%
Cash Conversion Cycle Time (days)	32.4	31.6	30.9	34.9
Gauge Score (0 to 25)	11	10	19	14

^{1. Excludes Funds held for clients and Client funds obligations.}

This AAA company has $1.6 billion in Cash and Short-term investments and minimal long-term debt. ADP's Working Capital -- the difference between Current Assets and Current Liabilities, but excluding client funds and obligations -- is also about $1.6 billion.

ADP lowered its short-term debt liabilities considerably by satisfying a $730 million "obligation under commercial paper borrowing."

The Cash Management metrics are nearly all improved relative to their respective five-year averages.

Growth	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Revenue growth	-2.0%	1.0%	11.6%	3.9%
Revenue/Assets (1)	96.8%	99.6%	101.5%	90.2%
Operating Profit growth	15.0%	14.5%	8.0%	7.8%
CFO growth	-25.7%	-11.8%	34.6%	7.3%
Net Income growth	11.3%	14.4%	15.1%	14.8%
Gauge Score (0 to 25)	5	6	19	9

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
1. Assets excludes Funds held for clients.

Revenue was lower in the last four quarters than in the four previous quarters for the first time in several years. Growing unemployment can't be good for sales at a company providing payroll services. Downward pressure on Revenue has also come, for obvious reasons, from ADP's unit servicing auto dealers and from changes in foreign exchange rates.

Revenue is not only down on an absolute basis, it also lower as a percent of Assets.

Under these circumstances, the trailing-year Net Income and Operating Profit growth rates look quite good. Recall, however, that a large tax benefit in the June 2009 quarter boosted the bottom line considerably in that period.

Cash Flow from Operations fell a surprisingly steep 39 percent in the September 2009 quarter, which exacerbated the trailing-year decline. The 10-Q explains that a $104 million increase in pension plan contributions cut deeply into the latest quarter's Cash Flow. In addition, higher income taxes also hurt the cash flow comparison.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Operating Expenses/Revenue	79.2%	79.4%	80.2%	80.2%
ROIC	34.4%	34.7%	33.4%	27.5%
Free Cash Flow/Invested Capital	34.0%	38.1%	50.0%	36.4%
Accrual Ratio	-7.5%	0.1%	8.2%	-0.9%
Gauge Score (0 to 25)	17	15	15	15

Operating Expenses have been stable, perhaps slightly decreasing, when assessed on a trailing four quarters basis.

The high ROIC is comforting, although we should remember it received a boost in the June quarter from a one-time tax benefit.

The big decrease in the Accrual Ratio, which can signal improved earnings quality, may be anomalous because of special benefits and charges. We will keep an eye on it in future quarters.

Value	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
P/E	14.8	13.4	18.1	19.6
P/E vs. S&P 500 P/E	0.7	0.7	1.0	1.2
PEG	1.0	0.9	2.3	2.4
Price/Revenue	2.3	2.0	2.4	3.0
Enterprise Value/Cash Flow (EV/CFO)	12.9	10.4	10.8	14.2
Gauge Score (0 to 25)	13	18	13	7

The price of ADP shares increased 10.9 percent in the September quarter, from $35.44 to $39.30. This helped lower the Value gauge, relative to its June reading. The drop in Cash Flow, however, made the biggest difference.

Overall	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Gauge Score (0 to 100)	52	58	62	45

In summary, ADP's Growth has weakened (no surprise) considerably in the last year. However, the Cash Management and Profitability scores have remained a stabilizing force. The recent five-point decline in the Value gauge did, however, have a negative effect on the Overall gauge.

Excluding the $120 million tax benefit in the June 2009 quarter would reduce the Overall score another 6 points, to 46.

Full disclosure: Long ADP at time of writing.

HD: Income Statement Analysis for the October 2009 Quarter

2009-11-17T23:11:00.000-08:00

The Home Depot, Inc. (NYSE: HD) earned $0.41 per share in the third quarter of fiscal 2009, which ended 1 November 2009, down from $0.45 in the same quarter of last year.

This post examines the Income Statement for the quarter in the earnings announcement and compares the entries on each line to our "look-ahead" estimates. Our target for Home Depot's Net Income in the latest quarter was $0.39 per share, $0.02 less than the reported amount.

In a second article, we will report Home Depot's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Home Depot is the largest retailer of do-it-yourself merchandise, which includes building materials, home improvement supplies, and lawn and garden products. Some background information about Home Depot and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Revenue was 8.0 percent lower than in the third quarter of 2008. We had estimated that Revenue would fall 8.4 percent, so Net Sales were marginally better than we expected. Our estimate was derived from the company's prior guidance for the fiscal year and normal seasonal patterns.

Same-store sales in the third quarter fell 6.9 percent relative to the same period of last year. It's interesting that the number of customer transactions was almost the same as last year, but the average sale ("ticket") per transaction fell 7 percent.

The Cost of Goods Sold (CGS) was 66 percent of Revenue in the quarter, which translates into a Gross Margin of 34 percent. The margin surpassed our estimate of 33.5 percent and last year's actual margin of 33.7 percent.

Depreciation and Amortization expenses were $7 million (2 percent) less than our target, which assumed a figure similar to that in the three previous quarters.

Sales, General, and Administrative expenses were just 1 percent more than we had estimated. The expenses totaled 23.7 percent of Revenue, whereas we expected 23.5 percent.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was only 4.5 percent less than last year. We estimated that Operating Income would fall almost 10 percent. The actual result exceeded the projected value primarily because Revenue and Gross Margin were both better than expected.

In the Non-Operating area, the net interest expense came within a whisker of the $165 million we anticipated.

The effective income tax rate was 37.3 percent, somewhat more burdensome than the forecast of 36 percent.

Overall, Net Income was down 8.9 percent. Our estimate was too low by 4.5 percent.

In summary, Home Depot's results for the third quarter were down relative to last year but moderately better than expected. Revenue did not fall as much as we had estimated, and the Gross Margin was 50 basis points higher than our target. SG&A and interest expenses were very close to our target values.

Earnings per share could have been a penny higher if the effective tax rate had not edged up.

Full disclosure: Long HD at time of writing.

EIX: Income Statement Analysis for the September 2009 Quarter

2009-11-15T18:25:00.000-08:00

Edison International (NYSE: EIX) earned $1.22 per share in the third quarter of 2009, down from $1.34 in the same quarter of last year.

On a non-GAAP ("pro forma," "ex-items," or, Edison's preferred term, "Core") basis, earnings fell from $1.46 to $1.09 per share. The $45 million difference between GAAP and Core Net Income in the latest quarter was mostly due to "the non-cash accounting benefit from the final regulatory approval to transfer [SCE's] Mountainview power plant to utility rate base."

This post examines the Income Statement for the quarter in the earnings announcement and the more detailed 10-Q and compares the entries on each line to our "look-ahead" estimates. Our target for Edison's Net Income in the latest quarter was $1.19 per share.

In a second article, we will report Edison's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Edison International, the parent of Southern California Edison and Edison Mission Group, is one of the largest investor-owned, regulated electric utilities in the U.S. Some background information about Edison International and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Revenue was 14.7 percent less than the restated value for last year's third quarter. Our Revenue estimate was too low, but only by 1.7 percent.

Electric utility revenue fell 11.6 percent because the weaker economy and milder weather reduced customer demand for power. Compliance with regulatory mechanisms also resulted in higher Revenue deferrals.

We group Edison's reported fuel, purchased power, other operation and maintenance costs and give the combination the Cost of Goods Sold designation. CGS in the third quarter was 69.1 percent of Revenue, which translates into a Gross Margin of 30.9 percent. The margin was 30.1 percent in last year's third quarter.

Our target for the Gross Margin in the recent quarter was 30 percent, so Edison exceeded our expectations by 0.9 percent. Lower energy prices, especially for natural gas, reduced Edison's costs for fuel and purchased power.

We had assumed that expenses for Depreciation, Decommissioning, and Amortization would be similar to the $345 million average in the first two quarters of 2009. The actual value was $20 million more. Edison attributed the rise to increased capital expenditures and software amortization.

We had also thought the Mountainview accounting gain would be recorded as an operating item, but Edison surprised us by treating the gain as non-operating income. The third quarter of 2009 was free of the "special" non-recurring operating income and expenses that can complicate its Income Statement.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 20 percent less than last year. We had projected a decline of 19 percent.

Edison's various non-operating income and expense items did not cut into Operating Income as much as we had expected, partially because this category included the Mountainview gain. As a result, pretax income exceeded our expectations by 8.2 percent.

The income tax rate of 34.3 percent was slightly more than our 34 percent estimate. The amount of Net income attributable to non-controlling interests was almost $20 million more than our estimate.

Rolling it all up, Net Income was 8 percent less than last year, and 3 percent ($0.03) more than we had forecast.

Full disclosure: Long EIX at time of writing.

COP: Financial Gauge Analysis (Updated) for the September 2009 Quarter

2009-11-14T17:23:00.000-08:00

We previously posted ConocoPhillips's (NYSE: COP) preliminary financial gauge scores for the third quarter of 2009. To obtain those results, the financial statements in Conoco's latest earnings announcement were used to calculate Cash Management, Growth, Profitability and Value metrics.

Conoco later filed a more detailed 10-Q report, which included an updated Balance Sheet, and we have now revised the metrics and scores to take advantage of the latest information.

The net effect of the changes was to trim one point each from the Cash Management and Overall gauge scores:

Cash Management: 8 of 25 (down from 10 in June) -- initial estimate was 9
Growth: 0 of 25 (unchanged)
Profitability: 5 of 25 (down from 6)
Value: 4 of 25 (down from 8)

Overall: 18 of 100 (down from 27) -- initial estimate was 19

For the record, current and historical figures for the financial metrics that determine the gauge scores are listed below. Numbers that changed from the preliminary analysis are highlighted. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Current Ratio	0.9	1.0	1.0	0.9
LTD/Equity	45.0%	49.1%	23.4%	30.9%
Debt/CFO (years)	2.9	2.0	0.8	1.2
Inventory/CGS (days)	N/A	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	35.7	33.3	22.5	24.4
Working Capital/Invested Capital	-2.6%	0.0%	-1.0%	-1.5%
Cash Conversion Cycle Time (days)	1.4	-1.2	-0.2	0.7
Gauge Score (0 to 25)	8	10	12	11

Because a Balance Sheet for 30 September 2009 was not available prior to the release of the 10-Q, the preliminary analysis assumed no change to Assets and Liabilities since June. Not surprisingly, the actual data included numerous small and a few not-so-small changes.

For example, Long-Term Debt was trimmed from $28.9 billion in June to a little under $27.7 billion in September. In addition, activity during the third quarter increased Shareholders' Equity from $58.9 billion to $61.5 billion. As a result of these two changes, Long-Term Debt to Equity fell during the quarter from 49.1 percent to 45.0 percent.

The positive effect of lower debt leverage was partially offset by Working Capital changing from nil to negative $2.4 billion, which is about 2.6 percent of Invested Capital. The gauge lost one point to 8, from the initial estimate of 9.

Growth	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Revenue growth	-39.4%	-19.7%	41.3%	2.6%
Revenue/Assets	89.5%	106.2%	139.1%	130.3%
Operating Profit growth	-13.0%	-5.7%	20.2%	0.5%
CFO growth	-60.3%	-39.5%	13.7%	1.1%
Net Income growth	N/A	N/A	77.9%	93.8%
Gauge Score (0 to 25)	0	0	22	13

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The $2.35 billion increase in Total Assets during the third quarter was enough to lower the Revenue-to-Assets ratio from 90.2 percent to 89.5 percent. This trivial change had no effect on the gauge score.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Operating Expenses/Revenue	93.4%	91.0%	88.3%	88.9%
ROIC	5.8%	9.7%	14.8%	13.4%
Free Cash Flow/Invested Capital	-6.1%	-2.8%	10.9%	5.4%
Accrual Ratio	-15.6%	-15.2%	3.4%	1.8%
Gauge Score (0 to 25)	5	6	9	9

The changes to the Balance Sheet during the third quarter resulted in minor revisions to several Profitability metrics. The score did not change.

Value	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
P/E	N/A	N/A	5.8	8.1
P/E vs. S&P 500 P/E	N/A	N/A	0.3	0.5
PEG	N/A	N/A	0.3	0.8
Price/Revenue	0.4	0.3	0.4	0.5
Enterprise Value/Cash Flow (EV/CFO)	9.3	6.1	5.0	6.9
Gauge Score (0 to 25)	4	8	15	6

The updated Balance Sheet led to a small change in Enterprise Value and, therefore, the EV-to-Cash Flow ratio. The change was not significant enough to change the gauge score.

Overall	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Gauge Score (0 to 100)	18	27	54	35

Originally estimated at 19, the one-point reduction in Cash Management gauge was carried through to the Overall gauge score.

Full disclosure: Long COP at time of writing

WMT: Income Statement Analysis for the October 2009 Quarter

2009-11-12T20:38:00.000-08:00

Wal-Mart Stores (NYSE: WMT) earned $0.84 per share in the third quarter of fiscal 2010, which ended on 31 October 2009, up from $0.80 in the same quarter of last year.

This post examines Walmart's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates. Our target for Net Income in the latest quarter was $0.83 per share, $0.01 less than the reported amount. Fewer shares outstanding caused the difference.

In a second article, we will report Walmart's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Number 2 on the Fortune 500 list of America's largest corporations, Wal-Mart sold over $400 billion of merchandise last year in its discount stores. Some background information about Wal-Mart Stores and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Revenue (Net sales and some other income) in the recent quarter was 1.1 percent more than in the same quarter of 2008. Changes in currency exchange rates from last year trimmed about 2.6 percent from the reported figure for Net Sales.

Our estimate for Total Revenue, which was derived from the seasonal pattern, was only off by 0.2 percent.

Sales at the company's eponymous U.S. stores increased 1.2 percent, relative to last year's third quarter. Same-store sales slipped 0.5 percent, which at least one observer found disappointing. The situation was more complicated with respect to international stores, where reported Revenue rose 1.6 percent but increased 12.1 percent on a constant currency basis. Sam's Club sales slipped 0.7 percent.

The Cost of Goods Sold (CGS) was 74.2 percent of Revenue, which translates into a Gross Margin of 25.8 percent. The margin was 25.1 percent (restated) in the October 2008 quarter. Walmart beat our margin estimate of 25.0 percent by 80 basis points.

Sales, General, and Administrative (SG&A) expenses in the quarter were 20.1 percent of Revenue, up from 19.8 percent (restated) last year. We had estimated these expenses would fall to 19.4 percent of Revenue.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 5.7 percent more than last year. Our estimate was too low, but by only 0.7 percent. Slightly better-than-expected Revenue and Gross Margin was offset by greater-than-expected expenses.

By increasing 4 percent, the net Interest expense happened to match our target exactly.

The Income Tax Rate was 34.3 percent, which was a tad higher than the predicted 34.0 percent. Income attributable to noncontrolling interests and a loss from discontinued operations were also very close to our estimates.

Net Income attributable to Walmart was 3.2 percent more than in the October 2008 quarter. It met our forecast almost exactly. EPS fell short of our prediction by $0.01 because fewer shares were outstanding than we had estimated.

In summary, Walmart's Revenue, Operating Income, and Net Income all increased in the third quarter of 2009, when compared to the same quarter of last year. The reported figures were close to our estimates, which says more about the predictability of this behemoth than our analytical skills.

Revenue and Gross Margin were slightly better than we expected, but SG&A costs were a little higher. The only real surprise to us was the decline in shares outstanding, which threw our EPS estimate off by a penny. From the conference call transcript at Seeking Alpha, we learned Walmart

"repurchased approximately $2.4 billion of our stock during the quarter, which represents about 46.8 million shares."

Full disclosure: Long WMT at time of writing.

INTC: Financial Gauge Analysis (Updated) for the September 2009 Quarter

2009-11-11T08:09:00.000-08:00

We previously posted Intel Corporation's (NASDAQ: INTC) preliminary financial gauge scores for the third quarter of 2009. To obtain those results, the financial statements in Intel's latest earnings announcement were used to calculate Cash Management, Growth, Profitability and Value metrics.

Intel later filed a more detailed 10-Q report, which included an updated Cash Flow statement. We have now adjusted the metrics and scores to take advantage of the latest information.

The net effect of the changes was to trim two points each, compared to the preliminary estimates, from the Profitability and Overall gauge scores:

Cash Management: 13 of 25 (unchanged from June)
Growth: 1 of 25 (up from 0)
Profitability: 9 of 25 (down from 10) -- initial estimate was 11
Value: 0 of 25 (down from 3)

Overall: 22 of 100 (down from 27) -- initial estimate was 24

Cash Management	Sep 2009	Jun 2009	Sep 2008	5-yr Avg
Current Ratio	2.5	2.6	2.1	2.5
LTD/Equity	5.6%	3.0%	4.9%	4.1%
Debt/CFO (years)	0.2	0.1	0.2	0.2
Inventory/CGS (days)	68.5	69.6	72.9	74.1
Finished Goods/Inventory	41.0%	43.2%	40.8%	37.4%
Days of Sales Outstanding (days)	26.5	23.5	25.8	29.7
Working Capital/Invested Capital	40.6%	39.8%	39.1%	43.4%
Cash Conversion Cycle Time (days)	40.5	44.7	47.4	55.9
Gauge Score (0 to 25)	13	13	13	11

Growth	Sep 2009	Jun 2009	Sep 2008	5-yr Avg
Revenue growth	-18.2%	-15.9%	7.4%	-3.1%
Revenue/Assets	63.2%	66.3%	75.8%	74.0%
Operating Profit growth	7.5%	4.8%	9.7%	-3.8%
CFO growth	-20.7%	-29.4%	8.2%	-2.2%
Net Income growth	-68.3%	-65.1%	18.1%	-14.2%
Gauge Score (0 to 25)	1	0	10	8

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Cash Flow from Operations was quite a bit better in the third quarter than we had estimated. However, a change from a 26 percent (estimated) to a 21 percent (actual) decline in Cash Flow is not going to add points to a gauge measuring Growth.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-yr Avg
Operating Expenses/Revenue	79.6%	78.7%	72.2%	75.9%
ROIC	15.6%	15.9%	26.2%	23.3%
Free Cash Flow/Invested Capital	18.0%	13.6%	28.4%	10.8%
Accrual Ratio	-1.7%	-4.1%	0.6%	7.6%
Gauge Score (0 to 25)	9	10	22	12

As mentioned above, Cash Flow from Operations was greater than we had estimated. This increased the Free Cash Flow to 18.0 percent and would have had a positive effect on the gauge score.

However, even more cash was used for Investing activities than we had thought. This raised the Accrual Ratio (not good) from -5.1 percent to -1.7 percent, a significant increase. Because the negative effects of the higher Accrual Ratio outweighed the positive benefits of the improved Free Cash Flow, the gauge score ended up two points lower than the 11 points we had initially estimated.

Value	Sep 2009	Jun 2009	Sep 2008	5-yr Avg
P/E	47.4	37.4	14.5	20.5
P/E vs. S&P 500 P/E	2.1	1.9	0.8	1.2
PEG	6.3	7.7	1.5	2.3
Price/Revenue	3.4	2.8	2.7	3.4
Enterprise Value/Cash Flow (EV/CFO)	9.6	8.5	7.4	19.1
Gauge Score (0 to 25)	0	3	15	9

The ratio of Intel's Price/Earnings ratio to the market multiple increased as a result of updates to S&P 500 index data.

We had estimated EV/CFO at 10.3, but better CFO lowered the ratio to 9.6. The difference wasn't enough to add any points to the score.

Overall	Sep 2009	Jun 2009	Sep 2008	5-yr Avg
Gauge Score (0 to 100)	22	27	66	41

A two-point reduction in the Overall score is not especially significant.

The low score might be surprising given Intel's generally commendable third-quarter results. However, the gauges are constructed to respond negatively when the latest four quarters compare unfavorably to previous periods. The current trailing year includes the end of 2008 and the beginning of 2009 when the worldwide economy seized up, Intel's results suffered, the company was fined $1.447 billion by the European Commission for antitrust violations, and Intel wrote off $1 billion of its investment in Clearwire Corp. (NASDAQ: CLWR).

Lacking new shocks, year-to-year comparisons should soon become more favorable. Investors appear to have been bidding up Intel shares in anticipation of a more positive results. Intel's share price rose from as low as $12 earlier this year to about $20 at the end of the third quarter.

Full disclosure: Long INTC at time of writing.

TDW: Financial Gauge Analysis for the September 2009 Quarter

2009-11-10T20:17:00.000-08:00

In a previous article, we examined Tidewater's (NYSE: TDW) Income Statement for the September quarter and compared the figures to our "look-ahead" estimates. Earnings in this period, the second quarter of fiscal 2010, rose from $1.85 to $1.90 per share. Earnings would have been $0.66 lower, or a disappointing $1.24, without the benefit of a $34.4 million favorable resolution to tax litigation.

Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated a set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.

Tidewater owns the world's largest fleet of vessels serving the global offshore energy industry. Some background information about Tidewater and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Tidewater's latest quarterly results produced the following changes to the gauge scores:

Cash Management: 14 of 25 (unchanged from June)
Growth: 4 of 25 (down from 6)
Profitability: 9 of 25 (unchanged)
Value: 17 of 25 (down from 21)

Overall: 51 of 100 (down from 59)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify the figures and calculate any other metrics they find meaningful. The SEC's web site is great source of data.

Cash Management	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Current Ratio	2.8	3.1	2.8	3.5
LTD/Equity	11.6%	13.2%	14.7%	17.3%
Debt/CFO (years)	0.6	0.6	0.6	1.0
Inventory/CGS (days)	N/A	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	92.3	88.4	86.8	87.1
Working Capital/Invested Capital	18.5%	21.3%	16.0%	19.9%
Cash Conversion Cycle Time (days)	81.0	75.0	71.7	61.4
Gauge Score (0 to 25)	14	14	12	13

The strength of Tidewater's Balance Sheet is evident from the ratios above and is helping the company pay to modernize its fleet. It also provides a cushion to help the company overcome weak periods in the cyclic energy industry and challenges such as those in Venezuela.

The 10-Q indicates that Tidewater had $554 million of outstanding obligations for 38 vessels under construction as of 30 September 2009 and scheduled for delivery at various times through July 2012. The company's Current Assets exceed Current Liabilities by $439 million.

The increase in Days of Sales Outstanding seems related to $44.8 million in outstanding receivables related to the seizure of Tidewater vessels in Venezuela.

Growth	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Revenue growth	-0.5%	5.6%	10.5%	15.6%
Revenue/Assets	43.5%	46.0%	47.5%	43.3%
Operating Profit growth	11.6%	21.1%	58.6%	45.6%
CFO growth	7.1%	10.1%	5.7%	33.3%
Net Income growth	4.1%	6.0%	0.0%	32.1%
Gauge Score (0 to 25)	4	6	5	15

Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Reduced offshore activity, especially in the U.S. but not exclusively so, trimmed Tidewater's Revenue growth. The loss of business in Venezuela didn't help.

Recent earnings and cash flow growth rates would be more robust if we ignored (but were not) the $48.6 million charge related to the seizures in Venezuela.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Operating Expenses/Revenue	69.4%	67.8%	70.8%	71.4%
ROIC	16.0%	16.6%	15.5%	14.1%
Free Cash Flow/Invested Capital	3.1%	3.2%	3.2%	5.0%
Accrual Ratio	4.8%	5.4%	8.5%	3.5%
Gauge Score (0 to 25)	9	9	5	10

With Revenue down in the latest quarter, the Operating expense ratio rose a little. However, it remained slightly below last year's figure.

ROIC also lost a little ground recently, but it seems to be holding up well.

Free Cash Flow is under pressure because of high capital expenditures associated with the fleet expansion and modernization.

Value	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
P/E	6.6	6.0	8.0	10.6
P/E vs. S&P 500 P/E	0.2	0.3	0.4	0.6
PEG	0.6	0.3	0.1	0.2
Price/Revenue	1.8	1.6	2.1	2.6
Enterprise Value/Cash Flow (EV/CFO)	4.9	4.3	6.5	8.1
Gauge Score (0 to 25)	17	21	15	14

The figures in the table above are based on the $47.09 share price on 30 September, which is our standard practice. The shares had increased 9.8 percent during the September quarter and 15 percent during the June quarter; however, much of the rise was wiped away during October. The share price is now back up to $45.

Overall	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Gauge Score (0 to 100)	51	59	42	50

The Growth and Value gauges dropped by small amounts in the September quarter, and the Cash Management and Profitability score were unchanged. The Value gauge was reacting in a contrary manner to an earlier share price rise

Tidewater is coping with the reduced demand for energy services, an industry-wide phenomenon. Cost cutting has helped.

Management might face some tough questions about whether to scale back the fleet modernization if demand doesn't quickly resume its earlier upward trajectory. Continued weakness, as manifested in lower utilization and day rates, could curb the company's cash flows and reduce the value of older vessels the company might want to sell.

Full disclosure: Long TDW at time of writing.

NVDA: Income Statement Analysis for the October 2009 Quarter

2009-11-09T20:14:00.000-08:00

NVIDIA (NASDAQ: NVDA) earned $0.19 per share in the third quarter of fiscal 2010, which ended on 25 October 2009, up from $0.11 in the same quarter of last year.

On a non-GAAP ("pro forma" or "ex-items") basis, earnings fell from $0.20 to $0.19 per share. The net difference between GAAP and non-GAAP Net Income in the latest quarter was only $2.75 million. However, this small figure masks a couple of substantial items that nearly canceled each other.

This post examines the Income Statement for the quarter in the earnings announcement, and it compares the entries on each line to our "look-ahead" estimates. Our target for NVIDIA's Net Income in the latest quarter was only $0.05 per share.

Commentary published by the Chief Financial Officer helped us interpret NVIDIA's results.

In a second article, we will report NVIDIA's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

NVIDIA Corporation designs powerful Graphics Processing Units that rapidly perform the intensive calculations required to produce hyper-realistic images for computers and video games. Some background information about NVIDIA and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Revenue might only have been 0.6 percent more than in the third quarter of last year, but it was a surprising 16 percent greater than in the immediately preceding (i.e., July 2009) quarter. Heeding the guidance that NVIDIA provided last August, we had assumed third quarter Revenue would be only 6 percent higher than Revenue in the second quarter.

The business segment that sells Graphics Processing Units for use in desktop and portable personal computers contributed more than half of NVIDIA's Revenue in the October 2009 quarter. Revenue from both types of GPUs surged 25 percent quarter-on-quarter, and Revenue only from GPUs for notebook computers soared an amazing 41 percent sequentially.

Supply constraints limited the Revenue growth rates from being even higher.

The Cost of Goods Sold (i.e., Cost of Revenue) was 56.6 percent of Revenue in the quarter, which translates into a Gross Margin of 43.4 percent. The Gross Margin significantly exceeded the upper end of the 36-to-38 percent range NVIDIA predicted in their guidance after the July quarter. We had assumed the margin would be in the middle of the range.

NVIDIA attributed margin improvements to:

Significantly higher unit sales of GPUs;
Improved 55nm yields as well as other manufacturing cost reductions; and
More favorable product mix, particularly within our discreet GPU business.

Research and Development expenses were slightly less than our $200 million estimate. R&D expenses were down about 6.6 percent from last year's third quarter.

Sales, General, and Administrative expenses were also lower than last year, but they were $6 million above our estimate. We could have better allocated operating expenses across the various categories.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 90 percent greater than last year. As mentioned above, the Gross Margin was higher and expenses were lower this year.

NVIDIA's Operating Income exceeded our much-too-conservative target by more than 300 percent.

Non-operating interest and other income was not especially substantial.

Despite a hefty $110 million pretax profit in the recent quarter, NVIDIA must have saved up credits from earlier periods to limit the current income tax rate to a mere 2.4 percent. This resulted in Net Income of $108 million ($0.19/share) in the quarter, easily beating last year's $0.11 per share and our estimate of $0.05.

In conclusion, NVIDIA has now had three consecutive quarters of Revenue growth and Gross Margin expansion. In the first two of these quarters -- April and July -- NVIDIA recorded special charges that led to large losses on the bottom line. The October quarter, on the other hand, had far better-than-expected operating performance, no special charges, and barely any income taxes. NVIDIA must now keep product momentum intact, resolve supply constraints, and avoid the pratfalls that in earlier times hurt the company's reputation and pocketbook.

Full disclosure: Long NVDA at time of writing.