Financial Gauges

WPI: Income Statement Analysis for the September 2009 Quarter

2009-11-07T07:56:00.000-08:00

Watson Pharmaceuticals, Inc. (NYSE: WPI) earned $0.54 per share in the third quarter of 2009, down from $0.60 in the same quarter of last year. [Note: our per-share numbers are slightly different than the official results because we don't adjust for interest expenses on convertible contingent senior debentures (CODES).]

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 Watson's Net Income in the latest quarter was $0.56 per share.

In a second article, we will report Watson'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.

Watson Pharmaceuticals develops, manufactures, and sells generic and, to a lesser extent, branded pharmaceutical products. Some background information about Watson 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.

Watson's Revenue was 3.3 percent more than in the year-earlier quarter. Our estimate proved to be 3.5 percent too high.

Revenue was $2.01 billion during the first nine months of 2009. To reach the company's $2.7 billion guidance for the year, another $700 million will be needed in the fourth quarter. Revenue has been close to $670 million in each of the first three quarters, so $700 million would be a modest improvement.

New products are already having a positive effect on Revenue. Thanks to recently launched generic drugs, the Generic business segment brought in 9.4 percent more Revenue in the September 2009 quarter than the September 2008 quarter. Brand segment Revenue rose a less robust, but healthy, 6.3 percent.

The weak area was the Distribution segment, where Revenue fell 11.4 percent. This segment distributes products other than those made by Watson itself.

The Cost of Goods Sold was 53.4 percent of Revenue, which translates into a Gross Margin of 46.6 percent. This is the highest quarterly Gross Margin achieved by Watson since 2005, and it was significantly more profitable than last year's 39.7 percent.

Watson handily surpassed our estimate of 42 percent for the Gross Margin.

The Gross Margin for generic drugs soared from 41.6 percent to 48.7 percent. The company credited its Global Supply Chain Initiative for lowering costs. The Gross Margin for Branded pharmaceuticals did even better, surging from 71.5 percent to 81.6 percent. At the Distribution segment, the Gross Margin slipped from 15.7 percent to 14.9 percent.

The charge for Depreciation and Amortization in the quarter matched our $22 million target. Now 75 percent through the year, management's guidance to expect an $88 million Amortization expense in 2009 appears to have been accurate.

Research and Development expenses were $8 million more than our $44 million target. Biostudy costs increased for generic drugs, and clinical spending rose for branded pharmaceuticals. With the higher third-quarter amount, the reported figures for the first nine months of 2009 have become consistent with the company's forecast that R&D expenses would be between $180 million and $190 million in 2009.

Sales, General, and Administrative costs were $5 million more than the $115 million value we estimated. Watson reported that they incurred additional costs when launching the RAPAFLO® (silodosin) and Gelnique (oxybutynin chloride) products.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 30.9 percent greater than the amount attained in last year's September quarter. Our prediction for Operating Income was 6.5 percent too low. The better-than-expected Gross Margin more than compensated for the weaker-than-expected Revenue and some higher-than-expected expenses.

Non-Operating items were more substantial than normal, and their net effect was to bring pretax income under our estimated value -- erasing the better-than-expected operating results. Non-operating results were hurt by a loss on the early extinguishment of debt, greater interest expenses, and much lower "other income."

Our target for the Income Tax Rate was 37 percent, and the actual rate was 38.4 percent. The rate was lifted by non-deductible acquisition costs and foreign asset impairment.

Net Income was 11.3 percent less than the result of the year-earlier quarter, and it was 6 percent less than our prediction. The shortfall was, to a large extent, the result of the higher non-operating expenses.

In summary, Revenue in the third quarter did not rise as much as we expected, but a much lower Cost of Goods Sold (and, thus, higher Gross Margin) led to stellar Operating results. The story concerning Non-operating items, such as debt expenses, was much less favorable and hurt the bottom line.

Full disclosure: No position in WPI at the time of writing.

ADP: Income Statement Analysis for the September 2009 Quarter

2009-11-05T20:45:00.000-08:00

Automatic Data Processing (NASDAQ: ADP) earned $0.56 per share in the first quarter of fiscal 2010, which ended 30 September 2009, up from $0.54 in the same quarter of last year.

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 ADP's Net Income in the latest quarter was $0.49 per share, which ADP beat by $0.07.

In a second article, we will report ADP'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.

ADP is one of the largest firms providing payroll and other personnel-related information technology services. Some background information about Automatic Data Processing 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 3.6 percent less than in the September 2008 quarter, and about half the decline was attributable to unfavorable foreign exchange rates. Since we estimated Revenue would decline 8.3 percent, ADP exceeded our expectations. Our target was derived from the company's Revenue guidance for all of fiscal 2010.

Revenue from ADP's Employer Services business segment, which is (by far) the company's largest operation, was down 2.6 percent in the September quarter. U.S. Traditional Payroll and Payroll Tax Filing services were especially weak, which might not be surprising given that the unemployment rate has increased significantly over the last year.

Revenue from the business supporting automotive dealers was also lower, but (only?) by 4.1 percent. ADP recorded a $7 million asset impairment charge in response to GM's plan to close all Saturn dealerships.

The Cost of Goods Sold -- what ADP calls "Operating Expenses" -- was 47.9 percent of Revenue, which translates into a Gross Margin of 52.1 percent. The margin was slightly better than last year's 52.0 percent, but it was less profitable than the 53.5 percent we predicted based on fiscal 2009's results.

Depreciation and amortization expenses matched our $60 million estimate, which was essentially the same as last year's amount.

Research and Development expenses ("Systems Development and Programming Costs") also matched our expectation.

Sales, General, and Administrative expenses were 6.5 percent less than last year and 6.1 percent less than our $525 million estimate.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, fell a mere 0.3 percent compared to last year's September quarter. Our estimate for Operating Income was 13.7 percent too low, mostly because our Revenue prediction was too low and our SG&A expense estimate was too high.

Other income less interest expense was $11 million more than we anticipated.

The provision for income taxes in the September 2009 quarter corresponded to an effective Income Tax Rate of 36.5 percent, compared to 37 percent last year. We estimated the tax rate would be 36.0 percent.

Net Income for the quarter rose 2.6 percent (4.7 percent on a per-share basis) above last year's amount. Because of the better-than-expected operating performance, Net Income surpassed our estimate by 17 percent (14 percent on a per-share basis).

ADP concluded its presentation by noting:

"Near-term growth under pressure from difficult economic landscape; however, now more positive on fiscal 2010 full year outlook as it appears the U.S. economy is at the bottom of the downturn"

and claiming:

"ADP is well positioned to leverage the inevitable recovery in the economy."

Full disclosure: Long ADP at time of writing.

CSCO: Income Statement Analysis for the October 2009 Quarter

2009-11-04T21:01:00.000-08:00

Cisco Systems (NASDAQ: CSCO) earned $0.30 per share in the first quarter of fiscal 2010, which ended 24 October 2009, down from $0.37 in the same quarter of last year.

On a non-GAAP (i.e., "pro forma" or "ex-items") basis, Cisco's earnings per share slid from $0.42 to $0.36. The main differences between GAAP and non-GAAP Net Income involved share-based compensation and amortization of acquisition-related intangible assets.

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 Cisco's GAAP Net Income in the latest quarter was $0.28 per share ($0.02 less than actual earnings).

In a second article, we will report Cisco'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.

Cisco Systems, the proud plumber of the Internet, has a dominant position in the market for enterprise networking products and services, such as routers. Some background information about Cisco 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 12.7 percent less than in the October 2008 quarter. While this is a substantial decrease, Revenue exceeded the 15-to-17-percent decline that Cisco estimated in early August when providing guidance for the October quarter.

Our estimate that Revenue would drop 15.8 percent was based on the company's guidance, which proved too pessimistic.

Revenue from the sale of routers was down 17 percent in the quarter. Revenue from switches fell about 21 percent.

Japan, which contributed only 4.4 percent of Cisco's total Revenue, was the only "geography" in which Revenue increased.

The Cost of Goods Sold was 34.7 percent of Revenue, which translates into a Gross Margin of 65.3 percent. The margin was up from 64.7 percent in the year-earlier quarter, and it substantially more profitable than our 63.5-percent margin.

The quarter ending January 2006 was the last time the GAAP Gross Margin was over 65 percent.

The non-GAAP Gross Margin was 66.3 percent.

Research and Development spending was 13.6 percent of Revenue, whereas we expected 13.8 percent.

Sales, General, and Administrative expenses were 27.0 percent of Revenue, much more than our 24.7 percent target.

Other operating expenses (amortization of purchased intangible assets and in-process R&D) were $27 million less than our $132 million prediction. Our estimate was computed by taking the average value for these charges in the last 10 quarters, and discarding the highest and lowest values.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 14.4 percent less than last year's value. Our prediction for Operating Income was 3.8 percent too low. Greater-than-expected Revenue and Gross Margin outweighed higher-than-expected SG&A expenses.

Interest and Other Income was $90 million more than our $25 million target, which was taken without alteration from Cisco's guidance. Other income was $123 million in the October 2008 quarter.

The Income Tax Rate was 20.2 percent, instead of the predicted 22 percent.

Net Income was 18.8 percent less than last year's value, but it beat our prediction by 10.8 percent. Better-than-expected nonoperating income and a lower tax rate added to the good Operating results.

The adoption of two accounting standards involving Revenue recognition added $0.005 to earnings per share.

In summary, Revenue in the October 2009 quarter was considerably less than in the October 2008 quarter, but the decline wasn't nearly as steep as expected. The Cost of Goods Sold came close to matching our estimate, but this value was much less than we expected as a percentage of Revenue. As a result, the Gross Margin soared beyond our target. Other operating expenses were more than expected, but the difference wasn't enough to prevent Net Income from besting our estimate by $0.02 per share.

The earnings release included the following announcement:

Cisco also announced that on November 4, 2009 its board of directors authorized up to $10 billion in additional repurchases of its common stock. Cisco’s board had previously authorized up to $62 billion in stock repurchases. There is no fixed termination date for the repurchase program. The remaining authorized amount for stock repurchases under this program, including the additional authorization, is approximately $13.1 billion.

Full disclosure: Long CSCO at time of writing.

BR: Income Statement Analysis for the September 2009 Quarter

2009-11-03T01:46:00.000-08:00

Broadridge Financial (NYSE: BR) earned $0.19 per share in the first quarter of fiscal 2010, which ended 30 September 2009, down from $0.25 in the same quarter of last year.

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 Broadridge's Net Income in the latest quarter was $0.22 per share.

In a second article, we will report Broadridge'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.

Broadridge Financial Solutions, Inc., provides investor communication, securities processing, and clearing services to financial companies. Some background information about Broadridge Financial 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 in the September 2009 quarter was 3.1 percent less than in the year-earlier period. We expected Revenue to fall only 0.5 percent. Our estimate was based on the company's guidance for the fiscal year (4 to 8 percent growth) and a seasonality factor that accounts for the uneven distribution of Revenue over the year.

Broadridge blamed the Revenue decline 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.

On a more positive note, new business activities brought in higher fees, and there were more Revenue-producing "events" such as mutual fund proxies.

Cost of Net Revenues -- we call it Cost of Goods Sold -- was 77.6 percent of Revenue. This translates into a Gross Margin of 22.4 percent, down from 23.2 percent last year. We had expected the margin to be 23.5 percent in the latest quarter.

The lower-than-expected margin may be due to the loss of high-margin customer services and to price concessions.

Sales, General, and Administrative expenses were 12.3 percent of Revenue in the quarter, up from 12.0 percent in the year-earlier quarter. Our target for the SG&A expenses was 11.5 percent of Revenue, so actual costs were more than we expected.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 12.5 percent less than the amount attained in last year's September quarter. We were overly optimistic in expecting a 7.0 percent gain. Revenue was less than our estimate, the Gross Margin was lower than expected, and SG&A expenses were more than we forecast.

Other, non-operating items such as interest and foreign exchange summed to a $3.8 million net expense in the September quarter, a little better than we expected.

The Income Tax Rate was 37.6 percent in the quarter, slightly less burdensome than the 38 percent we expected.

At the bottom line, Net Income was 25.8 percent below its value in the September 2008 period. We had projected a decrease of 9.4 percent.

The earnings announcement repeatedly mentions that the results of the September quarter were consistent with expectations. We had forecast better numbers, from top to bottom, based on our interpretation of the guidance for the fiscal year and historical trends.

Along with the earnings news, Broadridge announced it agreed to sell "clearing client contracts" to Penson Worldwide (NASDAQ: PNSN) and a related company. As part of this arrangement, Broadridge to will provide specified securities processing and other services to Penson. Broadridge reported that this transaction is a part of the company's "strategy to exit the securities clearing business."

In addition, Broadridge announced it had reached a new seven-year agreement to provide "customer communications services" to Morgan Stanley Smith Barney. This firm combines the wealth management businesses of Morgan Stanley with those of Citi Smith Barney.

Full disclosure: Long BR at time of writing.

PG: Financial Gauge Analysis for the September 2009 Quarter

2009-11-02T20:26:00.000-08:00

In a previous article, we examined Procter & Gamble's (NYSE: PG) Income Statement for the September 2009 quarter and compared the figures on each line to our "look-ahead" estimates. Earnings in this first quarter of fiscal 2010 increased from $1.03 to $1.06 per share.

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.

Some background information about Procter & Gamble and the business environment in which it is currently operating can be found in the beginning of our look-ahead. Based in Cincinnati, P&G sells well-known consumer products, including Pampers, Tide, Ariel, Always, Pantene, Bounty, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay.

In summary, P&G's latest quarterly results has produced the following changes to the gauge scores:

Cash Management: 8 of 25 (up from 5 in June)
Growth: 3 of 25 (up from 1)
Profitability: 8 of 25 (up from 6)
Value: 16 of 25 (down from 20)

Overall: 43 of 100 (down from 44)

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	0.9	0.7	0.7	0.9
LTD/Equity	33.5%	32.7%	28.4%	43.8%
Debt/CFO (years)	2.2	2.5	2.6	2.8
Inventory/CGS (days)	77.0	71.9	73.8	69.0
Finished Goods/Inventory	66.6%	67.6%	66.0%	66.5%
Days of Sales Outstanding (days)	31.5	29.3	32.0	30.2
Working Capital/Invested Capital	-4.3%	-9.4%	-13.2%	-5.5%
Cash Conversion Cycle Time (days)	49.6	38.8	57.0	52.8
Gauge Score (0 to 25)	8	5	2	4

P&G's Current Assets have been less than Current Liabilities, as seen in the Current Ratio below 1.0 and the negative Working Capital, for several years. This is still the case, but the difference between Current Assets and Liabilities improved to a more normal level in the latest quarter.

Current Liabilities are higher than what would normally be expected because of P&G's practice of having a substantial amount of its debt due in less than one year. Short-term debt, mostly likely commercial paper, has ranged between $12 billion and $22 billion since December 2006. In the September 2009 quarter, P&G took the positive step of cutting short-term debt from $16.3 billion to $13.0 billion.

Total Debt, including both short- and long-maturity paper, would now require 2.2 years of present Cash Flow from Operations to redeem. This is a nice reduction from recent quarters.

The increase in Inventory to Cost of Goods Sold appears due to anomalous Inventory spike one year ago, which gets included in the averages.

Growth	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Revenue growth	-6.8%	-4.1%	7.0%	8.1%
Revenue/Assets	55.4%	56.3%	58.7%	67.5%
Operating Profit growth	6.8%	9.6%	19.0%	13.6%
CFO growth	5.3%	-0.6%	11.2%	17.4%
Net Income growth	-7.3%	-5.6%	11.9%	18.1%
Gauge Score (0 to 25)	3	1	13	9

1. 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 worldwide recession, the once-stronger U.S. dollar, and divestitures (Folgers to Smucker plus pharmaceuticals to Warner Chilcott) weakened P&G's Revenues. Product price increases (+2 percent) and volume declines (-3 percent) essentially canceled each other out in the last couple of quarters.

These factors have also cut into Cash Flow growth and Net Income growth.

A relatively good September quarter stemmed the declines and allowed the Growth gauge to pick up a couple of points. The nascent rebound still has a way to go.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Operating Expenses/Revenue	79.3%	79.7%	79.8%	80.1%
ROIC	12.1%	11.9%	12.7%	14.6%
Free Cash Flow/Invested Capital	13.2%	11.8%	12.1%	14.1%
Accrual Ratio	-0.2%	0.6%	-0.2%	-0.2%
Gauge Score (0 to 25)	8	6	9	8

Operating Expenses as a percentage of Revenue are trending lower on a trailing four quarters basis.

We may be seeing a modest, but encouraging, rebound in ROIC and (especially) FCF/IC.

The decrease in the Accrual Ratio is actually a positive development, signaling better earnings quality.

Value	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
P/E	13.4	11.8	18.3	19.9
P/E vs. S&P 500 P/E	0.5	0.5	1.0	1.2
PEG	2.0	1.2	1.0	1.1
Price/Revenue	2.3	2.0	2.7	2.7
Enterprise Value/Cash Flow (EV/CFO)	13.1	12.8	17.1	17.9
Gauge Score (0 to 25)	16	20	7	6

The price of P&G shares increased 13.3 percent, from $51.10 to $57.92, in the September quarter. This increase came on top of an 8.5 percent price rise in the June 2009 quarter.

These gains have put some pressure on the Value gauge, although the shares do not (with the exception of PEG) appear to be expensive compared to this company's norms.

Overall	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Gauge Score (0 to 100)	43	44	29	27

The Cash Management, Growth, and Profitability gauges each inched up, but these modest increases were balanced by a 4-point drop (hardly earthshaking) in the contrarian, but double-weighted Value gauge. P&G's results from the September quarter showed signs (e.g., much better-than-expected Gross Margin) of progress, and we would consider the shares appealing on pull back that would allow the Value gauge to regain a few of the points it recently shed.

Full disclosure: No position in PG at time of writing.

COP: Financial Gauge Analysis for the September 2009 Quarter

2009-11-01T12:22:00.000-08:00

In a previous article, we examined ConocoPhillips's (NYSE: COP) Income Statement for the third quarter of 2009 and compared the figures on each line to our "look-ahead" estimates. Earnings in the September quarter fell from $3.40 to $1.00 per share.

Using the financial statements in the earnings announcement, we have now updated a set of Cash Management, Growth, Profitability and Value metrics. Because Conoco's press release did not include a Balance Sheet, to compute preliminary gauge scores we assumed the company's various Assets and Liabilities had not changed since June.

We will adjust the metrics and the scores after ConocoPhillips files a 10-Q with the SEC.

Some background information about ConocoPhillips and the business environment in which it is currently operating can be found in the beginning of our look-ahead.

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

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

Overall: 19 of 100 (down from 27)

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	1.0	1.0	1.0	1.0
LTD/Equity	49.1%	49.1%	23.4%	31.1%
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	0.0%	0.0%	-1.0%	-1.3%
Cash Conversion Cycle Time (days)	1.0	-1.2	-0.2	0.7
Gauge Score (0 to 25)	9	10	12	11

The Cash Management metrics are the ones most dependent on the Balance Sheet, so we will defer their review until the 10-Q is made available.

Readers interested in the Debt to Equity ratio are reminded Conoco increased its long-term debt from $22 billion to $27 billion in the fourth quarter of 2008. At about the same time, intangible asset impairment charges totaling $35 billion eliminated about 40 percent of Shareholders' Equity.

Growth	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Revenue growth	-39.4%	-19.7%	41.3%	2.6%
Revenue/Assets	90.2%	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 plunge in Revenue is, of course, the result of the big drop in energy prices since the middle of 2008. The recent partial recovery in crude oil prices (much more than natural gas) has improved sequential quarter-to-quarter Revenue comparisons, but trailing year figures are dismal.

Cash Flow has also fallen precipitously, and GAAP Net Income growth is N/A because the company experienced a huge loss in 2008 because of the impairment charges cited above.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Operating Expenses/Revenue	93.4%	91.0%	88.3%	88.9%
ROIC	5.9%	9.7%	14.8%	13.4%
Free Cash Flow/Invested Capital	-6.2%	-2.8%	10.9%	5.4%
Accrual Ratio	-15.8%	-15.2%	3.4%	1.8%
Gauge Score (0 to 25)	5	6	9	9

With weak margins, the Operating Expense ratio has risen noticeably.

Return on Invested Capital and the Free Cash Flow return have fallen for the same reasons.

The much lower Accrual Ratio would ordinarily be interpreted as a signal of higher quality earnings. However, it is due to last year's non-cash charges, which hit Net Income but not Cash Flow.

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)	9.2	6.1	5.0	6.9
Gauge Score (0 to 25)	4	8	15	6

ConocoPhillips shares appreciated by 7.4 percent for the second consecutive quarter. In the July-to-September period, the rise was from $42.06 to $45.16.

Since GAAP earnings were hugely negative in the fourth quarter of 2008, there are "N/A" entries in the table above for the metrics based on the trailing-year Price/Earnings ratio.

If we back out $35 billion in fourth-quarter 2008 charges, the P/E multiple on a trailing-year basis would be about 10.7. Earnings would still be lower than in the prior four quarters, so the PEG ratio would remain N/A.

Overall	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Gauge Score (0 to 100)	19	27	54	35

Conoco's gauge scores, which will be revised when the 10-Q is filed, continue to fall. The decline reflects the effects of lower energy prices and refining margins on the company's Revenue, Earnings, and Cash Flows, while the share price was rebounding.

Comparisons with prior periods are made more difficult by Conoco's decision in 2008 to mark down the value of its intangible assets and investments by approximately $35 billion (about 19 percent of total assets.)

On 7 October, Conoco announced an increase in its dividend (welcome but questionable), reduced capital expenditures, and intent to sell about $10 billion in "non-strategic" assets (assets now total around $150 billion, down from $190 billion in June 2008). During the conference call on 28 October, Chairman and CEO Jim Mulva indicated that the proceeds from asset disposals will be used to reduce debt. A 9 percent ownership interest in Syncrude is one of the assets on the block.

Full disclosure: Long COP at time of writing

TDW: Income Statement Analysis for the September 2009 Quarter

2009-10-31T07:43:00.000-07:00

Tidewater (NYSE: TDW) earned $1.90 per share in the second quarter of fiscal 2010, which ended 30 September 2009, up from $1.85 in the same quarter of last year. The recent quarter included a $34.4 million favorable resolution to tax litigation; earnings would have been $0.66 less, or a disappointing $1.24, without the tax benefit.

This post examines the Income Statement in the earnings announcement and the accompanying 10-Q and compares the entries for the quarter to our "look-ahead" estimates. Our target for Tidewater's Net Income in the latest quarter was $1.56 per share.

In a second article, we will report Tidewater'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.
Some background information about Tidewater 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 in the September quarter was 14.8 percent less than in the year-earlier period. We expected a decline of only 7.7 percent.

The Revenue drop was most extreme, 43 percent, for vessels based in the U.S. Fortunately, domestic operations are now a relatively minor part of Tidewater's business and were responsible for less than 8 percent of the quarter's total Revenue. Revenue from vessels operating outside the U.S. (the vast majority) also declined, but by a less severe 10.7 percent.

More than 70 percent of the Revenue decline can be attributed to the "Towing-supply/supply" class of vessel.

The utilization rate for the international fleet was 71.3 percent, down from 75.8 percent last year. The rate for U.S. vessels fell to 37.7 percent from 61.4 percent.

The average Revenue per Vessel per Day was up 1.8 percent, which confirms that newer higher-yield vessels were more in demand than the older "traditional" vessels.

Of the various costs and expenses reported by Tidewater, we group "Vessel operating costs" and "Costs of other marine revenues" and call the combination Cost of Goods Sold. In the September quarter, CGS was 53.6 percent of Revenue. Therefore, the company achieved a Gross Margin of 46.4 percent, well below our 48.1-percent estimate.

The Gross Margin was less lucrative in only one of the last 16 quarters. In the September 2008 quarter, the Gross Margin was a much more profitable at 49.1 percent.

Tidewater responded to the lower vessel utilization rate by trimming operating costs a substantial 10 percent, but the amount of cost cutting didn't match the drop in Revenue. The Crew cost component of Vessel Operating Costs was down the most.

Depreciation expenses were about $750,000 less than our $33 million estimate. The actual expense was 10.9 percent of Revenue, whereas we expected 10.3 percent.

Sales, General, and Administrative expenses were $2.7 million more than our projection of $35 million. This expense category included a $3.6 million loss to settle an obligation of a supplemental retirement plan.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, decreased by 36 percent, when compared to the September 2008 quarter. Operating Income was also 22 percent less than our prediction. Our estimate proved to be too high because Revenue and Gross Margin were lower than we expected and SG&A expenses were higher.

Income from Asset Sales, which Tidewater treats as an operating item, was less than $1 million below our $6 million estimate. As best we can determine, Tidewater sold 5 anchor handling towing supply vessels, 3 platform supply vessels, one crewboat, and two offshore tugs during the latest quarter.

Miscellaneous non-operating income was about $2.6 million less than the $6 million value we predicted. Foreign exchange losses hurt the results.

Now we get to the most noteworthy item in the quarterly results. The IRS chose not to appeal a court ruling in Tidewater's favor "concerning the IRS disallowance of the company’s tax deduction for foreign sales corporation commissions for fiscal years 1999 and 2000." Tidewater recorded a $34.3 million benefit to reverse "previously recorded liabilities for uncertain tax positions and interest income on the judgment."

Net Income, including the tax benefit, was 2.3 percent more than in the September 2008 quarter. However, excluding the benefit, earnings would have been down about 33 percent. Earnings on this basis were approximately 20 percent below our $80 million target.

In summary, Tidewater's Revenue in the second quarter of fiscal 2010 was approximately 7.5 percent less than we anticipated. Vessel demand dipped, especially, but not exclusively, in the U.S., leading to a fall in utilization rates. Lower utilization also cut into the Gross Margin, although the company did its usual good job in keeping costs under control. A loss to settle a retirement plan obligation was an exception.

The $34 million one-time tax benefit pushed Net Income from an amount that would have been disappointing to one than was surprisingly robust.

Full disclosure: Long TDW at time of writing.

PG: Income Statement Analysis for the September 2009 Quarter

2009-10-29T19:45:00.000-07:00

Procter & Gamble (NYSE: PG) surpassed expectations by earning $1.06 per diluted share in the three months that ended 30 September 2009, which was the first quarter of fiscal 2010. Net income was $1.03 per share in the same quarter last year.

This post examines the Income Statement in the earnings announcement and the accompanying 10-Q, and it compares the entries on each line to our "look-ahead" estimates.

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

Some background information about P&G and the business environment in which it is currently operating can be found in the beginning of the look-ahead. Based in Cincinnati, P&G sells well-known consumer products, including Pampers, Tide, Ariel, Always, Pantene, Bounty, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay.

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.

The results for the September 2008 quarter were restated to reflect last year's sale of the Folgers coffee business to J.M. Smucker (NYSE: SJM) and P&G's more recent agreement to sell pharmaceutical operations to Warner Chilcott (NASDAQ: WCRX).

P&G's Revenue was 5.6 percent less than the restated value for Revenue in the September 2008 quarter. The $19.8 billion figure matched our estimate almost exactly, but the percentage change was lower because of the restatements.

The company attributed essentially all of the Revenue decline to the stronger U.S. dollar, which diminished the reported value of non-U.S. sales by about 7 percent. Product price increases (+2 percent) and volume declines (-3 percent) essentially canceled each other out.

Of the company's various product lines, Revenue from Health Care products fell the least percent and Revenue from "Grooming" products declined by the greatest percent.

The Cost of Goods Sold was 47.4 percent of Revenue in the quarter, which translates into a Gross Margin of 52.6 percent. The margin was almost three points higher than the (restated) 49.7 percent in September 2008. "Price increases, lower commodity costs and manufacturing cost savings" were responsible for the margin expansion.

Sales, General, and Administrative (SG&A) expenses increased from 28.8 percent (restated) of Revenue last year to 30.1 percent. We expected 30.0 percent. Changes in foreign currency exchange rates were blamed for the increase. From the 10-Q:

The higher foreign exchange costs result primarily from our operations in Venezuela. Because of currency restrictions in Venezuela, payments for certain imported goods and services need to be satisfied by exchanging Bolivares Fuertes for U.S. dollars through a parallel exchange mechanism rather than at the more favorable official exchange rate. A reduction in the availability of foreign currency at the official exchange rate resulted in increased costs for exchange transactions executed using the parallel mechanism.

Operating Income, which is the difference between Revenue and the operating expenses identified above, increased 1.4 percent, when compared to the September 2008 quarter. We had expected Operating Income to decline. P&G's actual results surpassed our forecast because the Gross Margin was more profitable.

Interest and other non-operating items in the quarter summed to a net expense of $264 million, which was much worse than we expected. The company did not realize the gains on the sales of various brands that it had in prior periods.

The 27.7-percent effective income tax rate wasn't much different from last year's 28 percent rate. But, we thought it would be closer to 25 percent, which had been the case in more recent periods.

Excluding discontinued operations, Net Income fell from $3.1 billion to $3.0 billion. This result exceeded our estimate by 2.4 percent. With income from discontinued ops, which we didn't estimate, Net Income merely slipped from $3.35 billion to $3.31 billion. With fewer shares outstanding, earnings per share increased from $1.03 to $1.06.

In summary, Revenue merely matched expectations, but P&G achieved a much better-than-expected Gross Margin. Income from discontinued operations were also a pleasant surprise. The good results outweighed higher-than-expected non-operating expenses and income taxes.

As a result, Net Income surged ahead of our target value by $0.10 per share.

Full disclosure: No position in PG at time of writing.

COP: Income Statement Analysis for the September 2009 Quarter

2009-10-28T20:30:00.000-07:00

ConocoPhillips (NYSE: COP) earned $1.00 per share during the third quarter of 2009, down sharply from $3.40 in the same period of 2008. The latest results surpassed the expectations of many analysts, but we were disappointed. Our target for Conoco's Net Income in the latest quarter was $1.17 per share.

Since the shares fell almost 3 percent in value after the results were released, other investors must also have thought Conoco's earnings would be higher.

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. We've also garnered some insights from the conference call transcript made available by Seeking Alpha.

In a second article, we will report Conoco'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.

Some background information about ConocoPhillips 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 42.6 percent less than in the September 2008 quarter, but it was 13 percent greater than in the June 2009 quarter. After considering energy prices and refining margins, we estimated that quarterly Revenue would be 41 percent less than in last year's third quarter.

Production in the quarter, including Conoco's share of LUKOIL (OTC: LUKOY), averaged 2.215 million barrel-of-oil equivalents. This was 2.1 percent more than daily production of 2.170 million BOE in the same quarter of last year. For the first three quarters of 2009, production rose 4.1 percent compared to the same period in 2008. Therefore, production growth in the third quarter was weaker than in the first half of the year.

Conoco indicated that production in the most recent quarter was adversely affected by problems at the Ekofisk field in Norway.

Of the various costs and expenses reported by Conoco, we group "Purchased crude oil, natural gas and products" and "Production and operating expenses" and call the combination Cost of Goods Sold. In the September quarter, CGS was 76 percent of Revenue. Therefore, the company achieved a Gross Margin of 24 percent, exactly as we had estimated.

Refining margins remained weak.

Depreciation (including Depletion and Amortization) was 3 percent less than our $2.4 billion estimate. The reported figure was 5.8 percent of Revenue.

Exploration costs in the third quarter were 54 percent more than our $250 million estimate. Costs due to dry holes, lease impairments, and "other" were all up substantially relative to the first two quarters of the year.

We lump non-income taxes together with Sales, General, and Administrative expenses. In the September quarter, the combination accounted for 11.5 percent of Revenue, compared to our estimate of 11.0 percent.

Other operating expenses (i.e., impairments, accretion on discounted liabilities, and foreign currency changes), in the aggregate, were $135 million, compared to our $200 million placeholder. This was the first quarter in the last year in which foreign currency changes were not substantial.

Operating Income, which is the difference between Revenue and the operating expenses identified above, decreased by 74.4 percent, when compared to the September 2008 quarter. It certainly wasn't a surprise to see Operating Income dive, but we thought this figure would be about 15 percent higher. Lower-than-expected Revenue, higher exploration costs, and more burdensome non-income taxes costs caused Operating Income to fall below our target value for the quarter.

Equity in the earnings of affiliates was 12.8 percent more than our $900 million estimate. Other income and interest expenses were also about 10 percent more than our estimate of $200 million.

The 48.4-percent effective income tax rate was much more than our 44 percent prediction.

Net Income of $1.5 billion ($1.00 per share) was 71 percent less than last year's $5.2 billion ($3.40 per share). Net Income was also 15 percent less than our $1.76 billion ($1.17 per share) estimate.

In summary, the effects of the historic decline in energy prices (abating recently), resulting from lower global oil consumption, continued in the third quarter. Conoco's Revenue fell 42.6 percent and was 2 percent below our estimate. The Gross Margin was on target, but higher operating expenses in some categories meant that Operating Income was also worse than we expected.

Conoco's share of earnings of affiliates was higher than our forecast, but income taxes were more burdensome. Net income was much weaker than last year, and it was also below our targets.

Chief Financial Officer Sig Cornelius remarked during the conference call:

"we have begun to see some positive signs with respect to improvement in the global economy and corresponding energy demand, while there are still some challenges for North American natural gas marketing and refining, the picture today looks more encouraging than earlier in the year."

Natural gas prices remain low because of the economic conditions and new supply.

Full disclosure: Long COP at time of writing

BP: Financial Gauge Analysis through the September 2009 Quarter

2009-10-28T06:54:00.000-07:00

In a previous article, we examined BP's (NYSE: BP and LON:BP) Income Statement for the September quarter and compared the figures on each line to our "look-ahead" estimates. Earnings in the third quarter fell from $2.58 per ADR to $1.69.

Using the financial statements in BP's earnings announcement, 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.

Some background information about BP and the business environment in which it is currently operating can be found in the beginning of our look-ahead. BP prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union. Reports prior to 2006 complied with UK Generally Accepted Accounting Principles.

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

Cash Management: 6 of 25 (down from 10 in June)
Growth: 0 of 25 (down from 3)
Profitability: 4 of 25 (down from 5)
Value: 4 of 25 (down from 10)

Overall: 16 of 100 (down from 31)

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	1.1	1.1	1.0
LTD/Equity	27.0%	25.2%	13.3%	15.5%
Debt/CFO (years)	1.4	1.1	0.8	0.9
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)	54.0	53.2	37.8	53.6
Working Capital/Invested Capital	6.6%	3.3%	3.9%	2.1%
Cash Conversion Cycle Time (days)	20.8	19.1	16.6	13.6
Gauge Score (0 to 25)	6	10	15	9

BP has been converting short-term paper (i.e., Current Finance Debt) into long-term obligations (i.e., Non-current Finance Debt). In the last 4 quarters, short-term debt was sliced from $14.3 billion to $9.5 billion, long-term debt increased 93 percent from $14.0 billion to $27.1 billion. However, total debt rose during the last year from $28.3 billion to $36.6 billion.

Some of the additional debt appears to have been used to shore up Working Capital.

During this period, Shareholder's Equity fell about 5 percent, from $105.7 billion to $100.2 billion.

Accounts Receivables was not reduced as much, proportionately, as Revenue. As a result, the Days of Sales Outstanding has returned to the high levels of several years ago. This increase has also pushed up the Cash Conversion Cycle time, which indicates less efficiency at cash management

Growth	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Revenue growth	-39.5%	-23.3%	42.4%	4.5%
Revenue/Assets	93.5%	103.1%	157.6%	123.0%
Operating Profit growth	-3.3%	-3.0%	16.7%	-4.4%
CFO growth	-29.2%	16.1%	44.8%	5.9%
Net Income growth	-70.1%	-51.4%	43.4%	-4.3%
Gauge Score (0 to 25)	0	3	25	10

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 huge drops in trailing-year Revenue, Net Income, and Cash Flow have wiped out the Growth gauge. These declines were all magnified by the rise and fall in the price of oil from one year to the next.

Revenue as a percentage of Assets has also buckled under the pressure.

Profitability	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Operating Expenses/Revenue	94.8%	94.1%	89.1%	90.3%
ROIC	5.3%	7.0%	20.5%	15.4%
Free Cash Flow/Invested Capital	4.1%	7.3%	11.9%	10.5%
Accrual Ratio	1.0%	0.6%	5.6%	2.1%
Gauge Score (0 to 25)	4	5	12	9

Each dollar of shrinking Revenue is now supporting a greater proportion of the company's fixed Operating Expenses.

The resulting inefficiencies and the weak refining margins have cut into the Return on Invested Capital.

The lower Free Cash Flow figures show why BP has decided to trim Capital Spending.

Value	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
P/E	18.8	12.9	5.4	10.3
P/E vs. S&P 500 P/E	0.7	0.6	0.3	0.6
PEG	N/A	N/A	0.3	1.1
Price/Revenue	0.7	0.6	0.4	0.8
Enterprise Value/Cash Flow (EV/CFO)	7.5	5.4	4.9	8.0
Gauge Score (0 to 25)	4	10	25	9

BP's ADR price increased 11.6 percent in the third quarter, from $47.68 to $53.23. Since Revenue and earnings tumbled during this period of share price rises, the Value gauge had a stern reaction.

Nevertheless, the Price-to-Revenue and Enterprise Value-to-Cash Flow ratios are not unattractive compared to historical results.

Overall	Sep 2009	Jun 2009	Sep 2008	5-Yr Avg
Gauge Score (0 to 100)	16	31	77	36

For the second quarter in a row, BP's results were not as bad as expected and production increased.

Nevertheless, the cumulative weakness of the last four quarters led to another decline in all gauge scores. The recent rise in BP's share price, which shows that investors anticipate better times to come, weighed on the contrarian Value gauge and steepened the fall in the Overall gauge.

However, we suspect the scores will start to rise in the fourth quarter. Comparisons with past periods are going to become more favorable, and the increasing price of crude oil should lead to higher Revenue and profits.

Full disclosure: Long BP at time of writing