EIX: Financial Analysis through June 2007

We have analyzed Edison International's (EIX) financial results, as reported to the SEC on Form 10-Q, for the quarter that ended on 30 June 2007. This post reports on our evaluation.

Edison is the parent of Southern California Edison and other companies that generate or distribute electricity or that provide financing for these activities. Edison, which traces its roots back to 1886, is one of the largest investor-owned utilities in the U.S.

In the late 1990s, the State of California deregulated the electric industry, which, due to loopholes and questionable practices, led to the famous power crisis in the early years of this decade. Edison managed to skirt bankruptcy during the debacle, and its stock price has recovered dramatically from a low point in 2002 under $8.00.

When we analyzed Edison after the March quarter, the Overall score was a fair to weak 26 points. Of the four individual gauges that fed into this composite result, Profitability was the strongest at 12 points. Value was weakest at 3 points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

Now, with the available data from the June 2007 quarter, our gauges display the following scores:

• Cash Management: 7 of 25
• Growth: 6 of 25
• Profitability: 12 of 25
• Value: 2 of 25
  

• Overall: 25 of 100
  

Before we examine the factors that affected each gauge, let's review the latest quarterly Income Statement. We did not issue any earnings predictions for June quarter.

($M)		June 2007 (actual)	June 2006 (actual)
Revenue (1)		3047	3001
Op expenses
	CGS (2)	(2266)	(2082)
	Depreciation (3)	(313)	(339)
	Other (4)	33	10
Operating Income		501	590
Other income
	Investments (5)	(26)	(24)
	Asset sales	0	1
	Interest, etc. (6)	(384)	(299)
Pretax income		91	268
Income tax		(0)	(95)
Net Income		91	173
Discontinued ops		2	4
		$0.28/sh	$0.52/sh

<sup>1. Total operating revenue.
2. Fuel + Purchased Power + Other Operation and Maintenance + Property and Other Taxes.
3. Depreciation, Decommissioning, and Amortization.
4. Provision for Regulatory Adjustment Clauses + Miscellaneous.
5. Equity in Income from Partnerships, etc., + Minority Interests
6. Interest and Dividend Income + Other Nonoperating Income - Interest Expense - Other Nonoperating Deductions - Dividends on Preferred Securities</sup>

Revenue was 1.5 percent greater than in the year-earlier quarter. Cost of Goods Sold (CGS) was 74.4 percent of Revenue, compared to 69.4 percent in June 2006 and a five-year median value close to 67 percent. Depreciation expenses were 10.3 percent of Revenue, a full point less than the year-earlier value.

The net effect of the slightly higher Revenue and much greater CGS was Operating Income 15.1 percent below the amount attained one year ago.

The increase in non-operating expenses can be attributed to a $241 million charge for the early extinguishment of debt, almost $100 million more than the year-earlier figure.

It's interesting that the company didn't see the need to make any provisions for income taxes in the most recent quarter. Note 4 to the financial statements explains why in mind-numbing detail. Even with the advantage of a zero Income Tax Rate, the higher costs led to a 47 percent drop in Net Income.


Cash Management. This gauge increased from 4 points in March to 7 points now.

The measures that helped the gauge were:

• Debt/CFO = 2.6 years, compared to 4.2 years 12 months ago
• Cash Conversion Cycle Time (CCCT) = 12.6 days, down from 13.9 days, for this measure of efficiency.
  

The measures that hurt the gauge were:

• Current Ratio =1.2; weaker than we like, but near the historic norm
• LTD/Equity = 102%; highly leveraged, but decreasing
• Days of Sales Outstanding (DSO) = 30.6 days, greater than the 29.7-day level one year earlier
• Working Capital/Market Capitalization = 2.5 percent, down from 5.4 percent
  

Growth. This gauge decreased from 10 points in March to 6 points now.

The measures that helped the gauge were:

• CFO growth = 55 percent, up from 6.7 percent in a year
• Net Income growth = 5.2 percent, up from 3.4 percent in a year
  

Net income growth benefited from a change in the effective income tax rate from 32.5 to 30.6 percent

The measures that hurt the gauge were:

• Revenue growth = 2.6 percent, down from 18 percent in a year
• Revenue/Assets = 34.7 percent, down from 35.6 percent in a year

Profitability. This gauge maintained the 12 points reached in March.

These measures all contributed positively to the gauge score:

• ROIC = 12.8 percent, up from 10.5 percent in a year
• FCF/Equity = 12.3 percent, up from 2.1 percent in a year
• Operating Expenses/Revenue = 74.9 percent, down from 79.6 percent in a year
  
• Accrual Ratio = 0.1 percent, down from 2.6 percent in a year
  

The decreasing Accrual Ratio tells us that more of the company's Net Income is due to CFO, and, therefore, less is due to changes in non-operational Balance Sheet accruals.

Value. Edison's stock price rose over the course of the quarter from $49.13 to $56.12. The Value gauge, based on the latter price, dropped to 2 points, compared to 3 points three months ago.

The measures that helped the gauge were:

• Enterprise Value/Cash Flow = 7.0, down from an median value of 8.4

The measures that hurt the gauge were:

• P/E = 16.1, up from a median value of 12.9
• P/E to S&P 500 average P/E = 2 percent discount, compared to a more typical discount of about 20 percent
  
• Price/Revenue ratio = 1.4, higher than the median value of 1.1
  

The average P/E for the Electric Utilities industry is currently a more expensive 19.5. The average Price/Revenue for the industry is currently 1.8.

Now at a disappointing 25 out of 100 possible points, the Overall gauge has been rather static for the last couple of years. It is now exhibiting a negative reaction to a stock price that has been increasing faster than company earnings.

WPI: Financial Analysis through June 2007 (Updated)

Watson Pharmaceuticals' (WPI) preliminary financial results for the second quarter included a highly condensed Balance Sheet. A more complete version was provided later in the 10-Q the company filed with the SEC. The additional information gave us insight into Watson's inventory, current liabilities, and stockholder's equity.

We used the 10-Q to update our earlier analysis of the results. The gauge scores didn't change appreciably, but some of the individual metrics that propel the gauges were altered by minor amounts. The full revised analysis report is provided below for completeness.


Watson develops, manufactures, and sells generic and, to a lesser extent, branded pharmaceutical products. In November 2006, Watson completed an all-cash, $1.9 billion acquisition of Andrx Corporation. [More than a quarter of this cost was later expensed as "in-process R&D."] Andrx made and distributed generic drugs, often controlled-release versions. Watson had been expanding beyond generic drugs into higher-margin branded pharmaceuticals. However, the Andrx acquisition reversed this strategy and generics became responsible for over 75 percent of revenues.

Investors collectively realized this year that many branded pharmaceutical products will soon lose their patent protection. When they did, stocks of generic drug manufacturers become a lot more attractive.

When we analyzed Watson after the March quarter, the Overall score was an encouraging 48 points. Of the four individual gauges that fed into this composite result, Growth and Profitability were strongest at 16 points each. Cash Management was weakest at 7 points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

Now, with the available data from the June 2007 quarter, our gauges display the following scores:

• Cash Management: 9 of 25
• Growth: 17 of 25
• Profitability: 17 of 25
• Value: 7 of 25
  

• Overall: 45 of 100

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations.

($ M)		June 2007 (actual)	June 2007 (predicted)	June 2006 (actual)
Revenue		603	650	510
Op expenses
	CGS	(360)	(419)	(331)
	Depreciation	(44)	(46)	(41)
	R&D	(36)	(39)	(311)
	SG&A	(97)	(104)	(71)
	Other	0	0	(67)
Operating Income		66	42	(30)
Other income
	Investments	0	0	0
	Interest, etc.	(8)	(5)	5
Pretax income		57	37	(25)
Income tax		21	14	(10)
Net Income		36	23	(15)
		0.31/share	0.20/sh	(0.15)/sh

Revenue was 7.2 percent below our estimate. We're still puzzled why revenue in the March 2007 was so great, $672 million, which led to us aiming too high in the recent quarter. We expected Revenue in the June quarter to be an acquisition-fueled 27.5 percent more than in the year-earlier quarter, and the actual increase was a still-healthy 18.2 percent. (Forecasts after a major acquisition are especially challenging.)

Watson made excellent progress increasing their Gross Margin. We thought the Cost of Goods Sold (CGS) would be 64.5 percent of Revenue, and the actual value was 59.7 percent. Depreciation was 7.3 percent of revenue, compared to our 7.0 percent estimate. Research and Development (R&D) expenses were 6.0 percent of Revenue, exactly matching our estimate. Similarly, Sales, General, and Administrative (SG&A) expenses were 16.1 percent of Revenue, compared to our forecast of 16 percent.

Although we significantly underestimated revenue, Watson's progress on the cost side of the equation was so much better than we expected that it led to Operating Income 57 percent above the forecast value.

Non-operating expenses were a small $3 million greater than expected. The Income Tax Rate matched our 37 percent prediction. Net Income, driven by operating income, also exceeded our prediction by about 57 percent.


Cash Management. This gauge increased from 7 points in March to 9 points now.

The measures that helped the gauge were:

• Current Ratio =2.4; a sign of strength
• Days of Sales Outstanding (DSO) = 51 days, much less than the 65-day level one year earlier
• Cash Conversion Cycle Time (CCCT) = 80 days, down from 87 days, for this measure of efficiency
• LTD/Equity = 55 percent, up from 27 percent last year in wake of the Andrx deal, but already down from last quarter's 63 percent
  

The measures that hurt the gauge were:

• Working Capital/Market Capitalization = 13 percent, down from 40 percent
• Debt/CFO = 2.1 years, compared to 2.5 and 1.7 years 3 and 12 months ago, respectively
  
• Inventory/CGS = 109 days, compared to 102 and 110 days 3 and 12 months ago, respectively
  

Growth. This gauge increased from 16 points in March to 17 points now.

The measures that helped the gauge were:

• Revenue growth = 34 percent yr/yr, up from 6 percent in a year
• Revenue/Assets = 67 percent, up from 55 percent in a year; it's not surprising that more high-volume generic drugs in the product mix would have this positive effect on sales efficiency
• CFO growth = 38 percent yr/yr, up from -12 percent in a year
  

The measures that hurt the gauge were:

• Net Income growth was N/A because the enormous $500 million charge at the end of 2006 for in-process R&D drops net income for the trailing four quarters into negative territory.
  

Profitability. Coincidentally, this gauge also increased from 16 points in March to 17 points now.

The measures that helped the gauge were:

• FCF/Equity = 23.4 percent, up from 13.3 percent in a year
• Accrual Ratio = -23 percent, down from -7 percent in a year. Although negative values for this ratio are good, we're not used to value that this much negative. We need to explore this.
• ROIC = 9.2 percent, mediocre but up from 5.7 percent in a year
  

The measures that hurt the gauge were:

• Operating Expenses/Revenue = 91 percent, up from 89 percent in a year. This is also a consequence of the more lower-margin generic drugs in the product mix.
  

Value. Watson's stock price rose over the course of the quarter from $26.43 to $32.53. The Value gauge, based on the latter price, dropped to 7 points, compared to 10 points three months ago (and 11 points twelve months ago).

The measures that helped the gauge were:

• Enterprise Value/Cash Flow = 9.9, down from a median of 11.4
• Price/Revenue ratio = 1.6, lower than its median of 2.3
  

The measures that hurt the gauge were:

• P/E = N/A (the median P/E is around 27)
  
• P/E to S&P 500 average P/E = N/A (the median is 48 percent premium)
  

The average P/E for the Biotechnology and Drugs industry is 28. The average Price/Revenue for the industry is 8.

This was a very good quarter for Watson, primarily because it jacked up the Gross Margin. In addition, the measures of operating efficiency improved nicely. The gauge scores show these improvements, with the exception of Value. The negative trailing-year Net Income caused by the $500 million charge related to the Andrx deal throws the Value gauge out of whack.

However, what if, for the sake of the argument, the $500 million charge magically disappeared from Watson's financial history? The P/E ratio would be an expensive 34, and it would not help the Value gauge all that much. Watson is doing much better, but we still need to make sure we don't overpay for growth.

KG: Financial Analysis through June 2007 (Updated)

The preliminary financial results reported by King Pharmaceuticals' (KG) for the quarter that ended on 30 June 2007 did not include complete inventory and cash flow data. For the analysis we reported previously, we had to make certain estimates. The 10-Q report subsequently filed by the company with the SEC included the missing data, and we have updated our analysis accordingly.

The net effect of the additional information was to increase Free Cash Flow (FCF) by about $6 million for the quarter to $138 million.

The 10-Q also restated King's Balance Sheet for December 2006 to reflect the recent sale of the company's manufacturing operations in Rochester, Michigan.

For completeness, our entire analysis is provided below. It repeats information from the earlier analysis.


King Pharmaceuticals sells brand-name prescription pharmaceuticals, most notably Altace®. This ACE inhibitor, which is used to treat patients with cardiovascular risks, accounts for about 1/3 of King's net sales.

King experienced some difficulties in the early years of this decade, including Medicaid overcharge allegations, inventory management challenges, and a proposed merger with Mylan Labs that fell apart after Carl Icahn raised objections. King stock plunged 84 percent from $46.05 per share in July 2001 to $7.55 in April 2005, before rebounding to about $20. King has dealt with these problems. But, it now faces a challenge that could be more difficult to surmount: the looming loss of patent protection on Altace and other key products.

When we analyzed King after the March quarter, the Overall score was an excellent 59 points. Of the four individual gauges that fed into this composite result, Cash Management was the strongest at 19 points. Profitability and Value were weakest at 13 points each. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

Now, with the available data from the June 2007 quarter, our gauges display the following scores:

• Cash Management: 13 of 25
• Growth: 12 of 25
• Profitability: 14 of 25
• Value: 12 of 25
  

• Overall: 52 of 100
  

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations.

($ M)		June 2007 (actual)	June 2007 (predicted)	June 2006 (actual)
Revenue		543	535	500
Op expenses
	CGS (1)	(126)	(123)	(107)
	Depreciation (2)	(40)	(37)	(39)
	R&D	(37)	(37)	(35)
	SG&A (3)	(173)	(187)	(154)
	Other (4)	(78)	(20)	(0)
Operating Income		88	130	165
Other income
	Investments	0	0	0
	Interest, etc.	7	7	5
Pretax income		95	137	170
Income tax		(30)	(45)	(59)
Net Income		65	92	111
		$0.27/sh	0.37/sh	0.46/sh

<sup>1. Includes contract termination cost of $3.845 million.
2. Includes $1.5 million for "accelerated depreciation"
3. Includes co-promotion, legal, and professional fees.
4. Mostly asset impairment charges; also in-process R&D upon acquisition, restructuring charges</sup>


Revenue was 1.5 percent above our estimate. We expected Revenue to be 7 percent greater than in the year-earlier quarter, and the actual increase was 8.6 percent. In addition, we thought the Cost of Goods Sold (CGS) would be 23 percent of Revenue, and the actual value was 23.2 percent.

Depreciation was 7.4 percent of Revenue, compared to our estimate of 7 percent. Research and Development (R&D) expenses were 6.8 percent of Revenue, a shade less than our 7 percent estimate. Sales, General, and Administrative (SG&A) expenses were 31.9 percent of Revenue, compared to our forecast of 35 percent.

What threw the quarter out of kilter was a $74.8 million asset impairment charge. The charge resulted from a decision to sell a manufacturing plant and to drop development of a new product formulation.

The net effect was Operating Income 32 percent below the forecast value.

The Income Tax Rate was 31.6 percent, instead of the predicted 33 percent. As a result, Net Income fell below our prediction by 29 percent.


Cash Management. This gauge decreased from 19 points in March to 17 points now.

The measures that helped the gauge were:

• LTD/Equity = 16.1%; manageable, down from 18.6 percent a year ago
• Inventory/CGS = 156 days, compared to 177 and 214 days 3 and 12 months ago, respectively
• Cash Conversion Cycle Time (CCCT) = 144 days, down from 188 days, for this measure of efficiency
• Debt/CFO = 0.7 years, compared to 0.7 and 1.1 years 3 and 12 months ago, respectively
• Working Capital/Market Capitalization = 20 percent, up from 18 percent
  

The measures that hurt the gauge were:

• Days of Sales Outstanding (DSO) = 46 days, greater than the 43-day level one year earlier
• Current Ratio = 3.6; too much of a good thing, it was 2.3 in June 2006
• Finished Goods/Inventory =30.7 percent; it was 28.3 and 31.2 percent 3 and 12 months ago, respectively.
  

Growth. This gauge decreased from 16 points in March to 12 points now.

The measures that helped the gauge were:

• CFO growth = 47 percent, up from -34 percent in a year
• Net Income growth = 62 percent, down from 91 percent in a year
• Revenue/Assets = 61.1 percent, up from 60.5 percent in a year
  

Net income benefited from a change in the income tax rate from 34.7 to 31.4 percent.

The measures that hurt the gauge were:

• Revenue growth = 7 percent, down from 23 percent in a year
  

Profitability. This gauge increased from 13 points in March to 14 points now.

The measures that helped the gauge were:

• FCF/Equity = 20.1 percent, up from 14.9 percent in a year
• Accrual Ratio = -5.8 percent, down from -4.1 percent in a year
• ROIC = 13.9 percent, down from 16.5 percent in a year
  

The decreasing Accrual Ratio tells us that more of the company's Net Income is due to CFO, and, therefore, less is due to changes in non-operational Balance Sheet accruals.

The measures that hurt the gauge were:

• Operating Expenses/Revenue = 72.1 percent, up from 66.7 percent in a year
  

The increase in operating expenses was the result of a decrease in Gross Margin and an increase in special charges.

Value. King's stock price rose over the course of the quarter from $19.67 to $20.46. The Value gauge, based on the latter price, decreased to 12 points from 13 points three months ago.

The measures that helped the gauge were:

• P/E = 16.3, about half its median value
  
• P/E to S&P 500 average P/E = 2 percent discount, much lower than its five-year median of a 60 percent premium
  

The measures that hurt the gauge were:

• Price/Revenue ratio = 2.4, a little higher than its median of 2.2
• Enterprise Value/Cash Flow = 8.2, just a little below its median value of 8.3

The average P/E for the Biotechnology and Drugs industry is 28. The average Price/Revenue for the industry is 8.

Now at 52 out of 100 possible points, the Overall gauge has been strong for eight of the last nine quarters. To some extent, the strength reflects a rebound from very tough conditions in previous years. We would feel much better about King if special operating charges weren't such a regular occurrence. We also have to worry now about patent expirations.

MSFT: Financial Analysis through June 2007

We have analyzed Microsoft's (MSFT) financial results for the fiscal year and quarter that ended on 30 June 2007, as reported in a Form 10-K filed with the SEC. The more complete data in the 10-K did not change the results of the analysis performed on the preliminary financial results reported in a press release.

Microsoft sells operating systems, server applications, business solutions, video game consoles, music players, and computer peripherals. The company also provides online information services.

On 30 January 2007, after several delays, Microsoft launched the consumer version of the Vista operating system. First quarter revenues surged 32 percent over sales in the period ending March 2006. Quarterly net income increased an impressive 65 percent, although the increase was a tepid 3 percent when assessed on a year-over-year basis.

Microsoft shares, after years of stagnant performance, moved up nicely in anticipation of the Vista release and in response to a massive stock buyback. The shares retreated somewhat after Steve Ballmer threw cold water on the most optimistic expectations, and the company was ordered to pay $1.5 billion to Alcatel-Lucent (later overturned) for infringing on digital music technology. However, the shares were subsequently carried back up toward their January highs when the overall market rallied. Use of Vista will expand if for no other reason that manufacturers will install it on new computers; however, consumers have reported reasons to wait for changes.

More recently, when the company announced that the second-quarter results would include a $1 billion charge to repair faulty Xbox games, the shares fell a minuscule $0.02.

When we analyzed Microsoft after the first quarter, the Overall score was a very good 51 points. Of the four individual gauges that fed into this composite result, Growth was the strongest at 18 points. Cash Management and Value were weakest at 11 points each. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

Now, with the available data from the June 2007 quarter, our gauges display the following scores:

• Cash Management: 7 of 25
• Growth: 22 of 25
• Profitability: 15 of 25
• Value: 8 of 25

• Overall: 46 of 100

Before we examine each gauge, let's compare the latest Income Statement to our expectations.

($M)		2Q-2007 (actual*)	2Q-2007 (predicted)	2Q-2006 (actual)
Revenue		13371	13300	11804
Op expenses
	CGS	(2180)	(2394)	(2130)
	R&D	(1948)	(1862)	(1861)
	SG&A	(4197)	(3990)	(3932)
	Other	0	0	0
Operating Income		5046	5054	3881
Other income
	Investments	0	0	0
	Interest, etc.	295	400	377
Pretax income		5341	5454	4258
Income tax		(1557)	(1691)	(1430)
Net Income		3784	3763	2828
		0.39/sh	0.38/sh	0.28/sh

* To make the 2Q-2007 actual results comparable with our prediction, we backed out the charges for Xbox repairs. This decreases CGS by $1057 million and increases Income tax by $308 million. It's possible that the charges should be distributed differently.


Revenue was near the upper end of the range predicted by the company. We thought the Cost of Goods Sold (CGS) would be 18 percent of Revenue, and the actual value was 16.3 percent (if we backed out the Xbox charges correctly). Research and Development (R&D) expenses were 14.6 percent of Revenue, a shade more than our 14 percent estimate. Sales, General, and Administrative (SG&A) expenses were 31.4 percent of Revenue percent, 1.4 percent greater than our forecast.

The higher R&D and SG&A expenses were canceled out by the lower CGS, which resulted in Operating Income almost exactly at the forecast value.

Non-operating income was $105 million less than expected. However, the Income Tax Rate was only 29 percent instead of the predicted 31 percent. By coincidence, these differences also canceled each other out. This led to a Net Income that just slightly exceeded our prediction.


Cash Management. This gauge decreased from 11 points in March to 7 points.

The measures that helped the gauge were:

• Debt/CFO = 0
• LTD/Equity = 0%
• Current Ratio =1.7 (down from 2.2 last year, and much high levels before that, since large amounts of cash -- $27 billion in FY2006 -- have been spent repurchasing common stock)

The measures that hurt the gauge were:

• Accounts Receivable/Revenue =74 days, up from 68 days
• Working Capital/Market Capitalization = 5.8 percent, down from 11 percent (lowered by stock repurchases, see above)
• Cash Conversion Cycle Time = 9.6 days, up from 9.4 days

Growth. This gauge increased from 18 points in March to 22 points.

All relevant measures helped the gauge:

• Revenue growth = 15 percent, up from 11 percent
• Revenue/Assets = 81 percent, up from 64 percent (buyback aided)
• Net Income growth = 12 percent, up from 3 percent
• CFO growth =24 percent, up from -13 percent

Profitability. This gauge increased from 14 points in March to 15 points.

The measures that helped the gauge were:

• ROIC = 52 percent (!), up from 34 percent
• FCF/Equity = 50 percent, up from 32 percent
• Accrual Ratio = -2.3 percent, down from -0.3 percent

The decreasing Accrual Ratio tells us that more of the company's Net Income is due to Cash Flow from Operations (CFO), and, therefore, less is due to changes in non-operational Balance Sheet accruals.

The measures that hurt the gauge were:

• Operating Expenses/Revenue = 64 percent, up from 63 percent

The increase in operating expenses was basically the result of a decrease (as a result of the Xbox charge) in Gross Margin. Other expenses were lower.

Value. Microsoft's stock price rose over the course of the quarter from $27.87 to $29.47. The Value gauge, based on the latter price, dropped to 9 points, compared to 11 points three months ago (and 18 points twelve months ago).

• Enterprise Value/Cash Flow = 14.7, down from a 15.8 median
• P/E = 20, down from a median value over 24
• P/E to S&P 500 average P/E = 22.7 percent premium, less than half the historic premium (in days of yore)
• Price/Revenue ratio = 5.6, down from a median value of 6.8.

The average P/E for the Software and Programming industry is a more expensive 28. The average Price/Revenue for the industry is 5.9.

Now at a 46 out of 100 possible points, the Overall gauge is down a little from March. The score is good, not great.

BUD: Financial Analysis through June 2007 (Updated)

We have updated our analysis of Anheuser-Busch's (BUD) financial results for the quarter that ended on 30 June 2007 to address the financial statements reported to the SEC on Form 10-Q. Our initial evaluation was based on the data reported in a press release.

The gauge scores previously calculated didn't change as a result of the new information. As it turned out, the only data in the 10-Q relevant to our analysis that wasn't available previously was the inventory composition. The following table is extracted for Note 7 to the financial statements.

The company’s inventories were comprised of the following as of June 30, 2007 and December 31, 2006 (in millions).

	June 30, 2007		Dec. 31, 2006
Raw Materials	$295.3		$385.6
Work-in-Process	120.1		110.8
Finished Goods	284.2		198.5
Total Inventories	$699.6		$694.9

For our purposes, Finished Goods/Inventory is the metric of interest. The ratio, which contributes to our Cash Management gauge, was 40.6 percent in June 2007, a rather substantial increase from 28.6 percent in December 2006. In March 2007, midway between these two periods, finished goods were 35.5 percent of total inventories.

In general, we do not like to see unusual increases in the Finished Goods ratio because the rise could be an early warning sign that sales were below expectations. It can be an omen, in the worst cases, of vendor returns of unsold product and write downs of inventory no longer marketable.

For BUD, we should take into account that beer sales zoom in the summer. The company undoubtedly wants to have enough product ready for sale when potential consumers are hot, thirsty, and milling around barbecues. Perhaps this situation, coupled with a July 4 holiday weekend, justifies a spike in finished goods at the end of June. Let's look at the historical results to see if this true.

Date	Finished Goods / Inventory (%)	Increase from previous quarter
June 2007	41	+5
June 2006	N/A	N/A
June 2005	32	-1
June 2004	35	+1
June 2003	42	+1
June 2002	40	+4
June 2001	35	0
June 2000	31	0

We see that an increase in the Finished Goods/Inventory ratio from March to June is not automatic. The seasonal pattern does not, in and of itself, explain the surge in finished goods. It's also apparent that the recent 41 percent ratio isn't unprecedented, but it is definitely at the upper end of the range for BUD in June.

Therefore, our concern about the inventory composition isn't abated by the historical record. It's unfortunate BUD didn't provide inventory composition data last summer. We'd like to have another recent data point.

Readers might want to check out BUD's discussion of inventory during a recent conference call with financial analysts. The finished goods composition was not specifically addressed because the figures were not yet available.