EIX: Look Ahead to June 2008 Results

When we analyzed Edison International's first-quarter financial statements, the GCFR Overall gauge score was a dreadful 5 of the 100 possible points. Net Income and Cash Flow from Operations in the most recent four quarters were down by double digit percentages from the previous four quarters. A 55 percent increase in purchased power cut deeply into the Gross Margin, which fell from 42.2 percent of Revenue in the March 2007 quarter to 35.1 percent in the first quarter of 2008.

It should be noted that company-defined "core earnings" were greater in the March 2008 quarter than the March 2007 quarter. Core earnings, which exclude certain items and discontinued operations, are a useful measure. However, GCFR sticks to the SEC -mandated GAAP results.

Edison International (EIX) 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 electric utilities in the U.S.

Edison is scheduled to report its second quarter results on 7 August 2008. In anticipation of this report, we've modeled the company's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

The company's announcement of its first-quarter results included the following guidance for the remainder of 2008:

The current outlook for Edison International 2008 core earnings is around the high end of its guidance range of $3.61 - $4.01 per share.

We were relieved to see in the conference call presentation material that Edison is not expecting any deviations between core and GAAP results for 2008. Core earnings for 2007 are $0.36 per share (about 10 percent) less than GAAP earnings for this period, thus making it that much easier for the current year to surpass last year's core results.

Year-over-year Revenue growth was 4 percent through March 2008, but the first quarter's Revenue was closer to 6 percent more than in the year-earlier quarter. One might expect that high energy prices will boost both Revenue and Operating Expenses. Therefore, for the second quarter, we believe $3.26 billion is a reasonable target. This figure would lift year-over-year Revenue growth to 5 percent, and it is almost 7 percent greater than Revenue in the June 2007 quarter.

Of Edison's various Operating Costs, we group Fuel, Purchased Power, Other Operation and Maintenance, and Property and Other Taxes as Cost of Goods Sold (CGS). Gross Margin in the difference between Revenue and CGS, and we usually express it as a percentage of Revenue. History shows that Edison's Gross Margin can be anywhere between 15 and 50 percent of Revenue in a quarter. However, if we just look at the last 12 quarters, and exclude the highest and lowest values, the average Gross Margin is 30 percent. If this margin is achieved in the second quarter, and our Revenue estimate proves accurate, the CGS will equal (1 - 0.30) * $3.26 billion = $2.28 billion.

Expenses for Depreciation, Decommissioning, and Amortization usually total around 10 percent of Revenue, give or take a percentage point. Given our Revenue estimate, we would expect these expenses to equal 0.1 * $3.26 billion = 326 million in the second quarter.

Other Operating Expense includes "Net Provisions for Regulatory Adjustment Clauses." This item, which fluctuates substantially, is income in some quarters and an expense in others. The particular value can have a significant impact on quarterly results, but there is no obvious connection between the value and the company's operating performance. The average "Net Provisions" over the last three years, ignoring the highest and lowest value, is a $54 million charge. This is what we will assume for the second quarter.

These figures would result in Operating Income of $597 million, compared to $501 million in the year-earlier quarter, a 19 percent gain.

We group the various Non-operating income and expense items into three categories. The first category is Investment gains and losses. For Edison, we group Equity in Income from Partnerships, etc., and Minority Interests in the Investment category. Historical data suggest that a $20 million charge is a reasonable assumption. The second Non-operating category is gains on asset sales, which is not typically a material item for Edison. The final category is for interest expenses and a plethora of other items. In recent quarters, these items have resulted in a net expense of about $175 million.

The June 2007 quarter included a $241 million charge for the early extinguishment of debt.

These figures would result in pre-tax income of $402 million. if we assume an effective tax rate of 33 percent, Net Income in the quarter would be $269 million (about $0.82 per share), more than three times the result of the year-earlier quarter.

Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		June 2008 (predicted)	June 2007 (actual)
Revenue (1)		3257	3047
Op expenses
	CGS (2)	(2280)	(2266)
	Depreciation (3)	(326)	(313)
	Other (4)	(54)	(33)
Operating Income		597	501
Other income
	Investments (5)	(20)	(26)
	Asset sales	0	0
	Interest, etc. (6)	(175)	(384)
Pretax income		402	91
Income tax		(133)	(0)
Net Income		269	91
Discontinued ops		0	2
		$0.82/sh	$0.28/sh
Shares outstanding		330	330

<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 Non-operating Income - Interest Expense - Other Non-operating Deductions - Dividends on Preferred Securities</sup>

CSCO: Look Ahead to July 2008 Results

Our analysis of Cisco's April 2008 quarter, the third of the fiscal year, resulted in an Overall Gauge score of 46 of the 100 possible points, just about matching the score after the January quarter. Both Revenue and Net Income grew at decelerating rates, although earnings benefited to some extent from a decline in the effective income tax rate. More positively, the Return on Invested Capital and the ratio of Free Cash Flow to Stockholders' Equity both remained at lofty levels.

Cisco Systems, Inc. (CSCO), the proud plumber of the Internet, has a commanding position in the market for enterprise networking products and services, such as routers. The latest leg down in equity markets have brought Cisco shares near the $23 lows seen in both February and April.

After the U.S. markets close on 5 August 2008, Cisco will report its results for the quarter and fiscal year that will end on 31 July 2008. In anticipation of this report, we've modeled the company's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

Cisco's guidance refers to the non-GAAP results that accompany the required GAAP results provided each quarter. This complicates our analysis because GCFR only examines the GAAP figures. The differences between the two sets of results can be significant: Cisco told investors to expect GAAP earnings to be $0.04 to $0.06 less per share (roughly $300 million) than non-GAAP earnings.

When discussing April's results during the quarterly conference call with analysts, Cisco management restated the company's long-term objective of growth between 12 and 17 percent. However, for the July quarter, as a consequence of softness in some U.S. and European markets, management expects, with all the usual caveats, "revenue growth of approximately 9% to 10% year-over-year." [The GCFR definition of "year-over-year" is "the last four quarters compared to the four previous quarters." We learned the hard way a few quarters ago that Cisco uses an alternative definition of "this quarter compared to the year-earlier quarter."]

Applying a 9.5 percent growth factor to Cisco's $9.43 billion Revenue in the July 2007 quarter, yields a $10.3 billion Revenue target for the July 2008 quarter.

Management's guidance for Gross Margin is 65.0 percent. We're more comfortable, given the company's performance in recent quarters, setting the target at a more conservative 64.5 percent. Therefore, our forecast for Cost of Goods Sold (CGS) is 35.5 percent of $10.3 billion, which is $3.7 billion.

Cisco stated that they expect the quarter's Operating Expenses to be between 36 and 37 percent of Revenue. On Cisco's Income Statement, Operating Expenses include Research and Development (R&D) and Sales, General, and Administrative (SG&A) costs, but not CGS. Based on past results, we expect R&D expenses will be 13.0 percent of Revenue. This would equate to $1.3 billion, given the $10.3 billion Revenue estimate. Similarly, we expect SG&A expenses to be 26 percent of Revenue, which would be about $2.7 billion.

Our R&D and SG&A estimates sum to 39 percent of Revenue, a signficant 2 to 2.5 points above the guidance. This may be one place we're seeing a difference between GAAP and non-GAAP results, or the company may have made more progress controlling costs than we have recognized.

Cisco always reports various other operating changes, including payroll tax on stock options, amortization of deferred compensation, amortization of purchased intangible assets, and the mysterious in-process research and development. In each of the last three quarters, these other charges totaled about $120 million. We assume the July figure will be somewhat higher, say $140 million, because fiscal fourth quarters seem to attract extra expenses.

These figures would result in Operating Income of $2.5 billion, compared to $2.3 billion in the year-earlier quarter, for an increase of 8.3 percent.

Cisco indicated that Interest and other income would be $140 million in the July quarter. The equivalent figure in the year-earlier quarter was substantially higher at $228 million. The gulf between these two values will make the current quarter look less favorable. The $140 million figure might be a little conservative, so we will round it up to $150 million. Pre-tax income would, therefore, be about $2.6 billion.

Management forecasts a 24 percent rate for income taxes, which we have no reason to doubt. As a result, provisions for income taxes are estimated at $635 million.

Therefore, we're looking to see Net Income in the quarter of $2.0 billion (about $0.33 per share), a modest 4.1 percent above the results of the year-earlier quarter.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		July 2008 (predicted)	July 2007 (actual)
Revenue		10329	9433
Op expenses
	CGS	(3667)	(3365)
	R&D	(1343)	(1178)
	SG&A	(2686)	(2404)
	Other	(140)	(183)
Operating Income		2494	2303
Other income
	Investments	0	0
	Interest, etc.	150	228
Pretax income		2644	2531
Income tax		(635)	(601)
Net Income		2009	1930
		$0.33/sh	$0.31/sh
Shares outstanding		6030	6275

KG: Look Ahead to June 2008 Results

We previously analyzed King Pharmaceuticals preliminary financial statements for 2008's first quarter, but we overlooked, until recently, the more complete 10-Q report for this period. The additional data in the 10-Q bumped up our Overall Gauge score to an outstanding (but misleading, see below) 74 points. Our initial estimate had been 69 of the 100 possible points.

King Pharmaceuticals, Inc. (KG) sells various brand-name prescription pharmaceutical products. The company experienced a substantial setback last year when the U.S. Court of Appeals invalidated King's patent for Altace® (Ramipril). This ACE inhibitor, used to treat patients with cardiovascular risks, had accounted for roughly 1/3 of King's net sales. As a result of the Court's action, King incurred asset impairment charges (covering intangible assets and inventory) totaling $250 million.

The situation with King illustrates a substantial limitation of the GCFR methodology: misleading scores are a risk when the subject company's business model changes materially and abruptly. The potential for error increases as the historical data that drives the scores becomes less relevant.

The Altace patent invalidation qualifies as a major change for King, and the company's shares dropped immediately on this news. At about $10 each now, King shares sell for less than 1/2 of their 52-week high and less than 1/4 of their all-time high. However, it will take time for the full effects of the patent invalidation to be reflected in the company's earnings and cash flow. (King, as explained on the Orange Book Blog, tried unsuccessfully to delay the availability of generic ramipril from sources other than Cobalt Laboratories.) This situation -- a bargain-basement share price and still-respectable earnings -- makes King look like an exceptional value to our number-crunching gauges.

On 7 August 2008, King is scheduled to announce its results for the nearly concluded second quarter. In anticipation of this report, we've modeled the company's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

This guidance was updated during King's conference call with financial analysts in May 2008.

Management's only guidance with respect to Revenue was to note that Altace sales will "significantly decrease" during the rest of 2008. In the first quarter, Revenue was 16 percent below that in the year-earlier period. With this as our only guide, we have assumed that Revenue in the current quarter will be 25 percent less than the June 2007's $543 million. This would be $407 million.

King's Gross Margin had once been a Microsoftian 80 percent, or nearly so. High margins such as this are not unusual for specialty drug manufacturers. Management indicated that the margin would slip to approximately 75 percent of Revenue in 2008. If we apply this ratio to our second quarter Revenue estimate, Cost of Goods Sold (CGS) would be (1 - 0.75) * $407 million = $102 million.

The company was very clear that it expects quarterly expenses for Depreciation and Amortization to be about $31 million. This figure is 7.6 percent of our Revenue estimate, which is consistent with historical results.

The company indicated that Research and Development expenses in 2008 will grow to about $180 million, from nearly $150 million in 2007. If we subtract the first quarter's $29 million from the expected total for the year, and split the result evenly over the three remaining quarters, we get an R&D estimate for the quarter of $50 million. This is 12.3 percent of our Revenue estimate, which is much higher than 7 percent ratio more typical at King.

King stated that Sales, General, and Administrative expenses would drop in 2008 by $75 to $90 million as a result of restructuring decisions. We assume this refers to a smaller sales force and a lower marketing budget. SG&A was about $700 million in 2007. If we subtract $75 million from this figure, then subtract the first quarter's $130 million, and divide by three, we get an $165 million SG&A estimate for the second and subsequent quarters of 2008.

King often takes special, purportedly non-recurring, operating charges that can determine whether quarterly earnings meet expectations -- for analysts that track GAAP earnings, not the "ex-items" figures that get so much attention. In the last 10 quarters, the average charge was about $70 million. However, we're going to assume no special charges in the second quarter.

The estimates above would lead to an Operating Income for the quarter of $59 million, compared to $88 million in the June 2007 quarter.

Net Non-Operating Income or Expense has been about $10 million in the last few quarters.

If the Income Tax Rate matches the first quarter's 34 percent, Net Income would be $46 million ($0.19 per share). This figure was $65 million ($0.27 per share) in June 2007.

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		June 2008 (predicted)	June 2007 (actual)
Revenue		407	543
Op expenses
	CGS	(102)	(126)
	Depreciation	(31)	(49)
	R&D	(50)	(37)
	SG&A	(165)	(173)
	Other	(0)	(78)
Operating Income		59	88
Other income
	Investments	0	0
	Interest, etc.	10	7
Pretax income		69	95
Income tax		(24)	(30)
Net Income		46	65
		$0.19/sh	$0.27/sh
Shares outstanding		245	245

WPI: Look Ahead to June 2008 Results

When we analyzed the first-quarter finances of Watson Pharmaceuticals, the Overall Gauge score decreased to 47 of 100 possible points. The score was a more robust 56 points three months earlier. Revenue was 6.6 percent less than in the year-earlier quarter, perhaps because of the termination of a product distribution agreement.

One of our concerns was that the company held 127 days of Inventory, as measured by the Cost of Goods Sold, up from 122 days in December 2007 and 102 days in March 2007. Seventy percent of the Inventory was Finished Goods, a slight increase from three months earlier and up significantly from 62.2 percent 12 months ago. Expanding Inventory can signal that the company's products are selling slower than expected. An alternative explanation, one with more positive implications, is that the company might be getting ready to launch a new product.

Watson Pharmaceuticals, Inc. (WPI) develops, manufactures, and sells generic and, to a lesser extent, branded pharmaceutical products. Watson had been expanding beyond generic drugs into higher-margin branded products. However, Watson's acquisition of Andrx in late 2006 reversed this strategy, and generics are now responsible for three times as much Revenue as branded products. Watson's management may have deliberately increased their generic drug exposure to take advantage of the large number of branded pharmaceutical products that have, or will soon, lose their patent protection.

The Andrx acquisition, for $1.9 billion in cash, distorted year-to-year comparisons throughout 2007. However, this big purchase is now fading into the rear-view mirror, and we should be able to get a better handle on Watson's finances.

On 31 July 2008, Watson is scheduled to announce its results for the nearly concluded second quarter. In anticipation of this report, we've modeled the company's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

Watson's announcement of its first-quarter results included an update of company management's outlook for 2008.

For the top-line, management estimated that Revenue in 2008 would be approximately $2.5 billion, which would represent zero growth over 2007. Revenue was about $627 million -- remarkably close to 25 percent of the expect annual total -- in both 2007's fourth quarter and 2008's first quarter. We will, to use a rounder number, assume Revenue in the second quarter will increase ever so slightly to $630 million.

The company didn't provide a forecast for Gross Margin. We will assume the margin will match its 40.5-percent average over the previous four quarters. Therefore, our estimate for the Cost of Goods Sold in the second quarter is (1 - 0.405) * $630 million, which equals $375 million.

Watson stated that 2008's Amortization expense is expected to be $80 million. In the first quarter, this expense was right on track at $20.2 million. We will look for another $20 million in the second quarter.

The company forecast Research and Development expenses for 2008 at $160 million. (Previous guidance was $160 to $170 million.) The first-quarter value was slightly below the trend line at $38 million. We will look for $40 million of R&D in the first quarter.

Watson also predicted this year's Sales, General, and Administrative expenses to be between $420 to $440 million. The first-quarter expense was on track at $107 million. We will set the second quarter target for SG&A at $110 million.

These estimates would result in an Operating Income of $85 million, up 29 percent from $66 million in the June 2007 quarter.

Watson's non-operating income and expenses are typically minor. Lacking specific guidance, we'll assume a $4 million net expense. This would lead to Income before Taxes of $81 million.

With a 37 percent Income Tax Rate, Net Income will be $51 million ($0.44/share) for the quarter. This is consistent with Watson's guidance for GAAP earnings in 2008 to be between $1.70 to $1.80 ($0.02 above previous guidance on both sides) per diluted share. Our estimate is 40 percent above Net Income in 2007's second quarter.

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		June 2008 (predicted)	June 2007 (actual)
Revenue		630	603
Op expenses
	CGS	(375)	(360)
	Depreciation	(20)	(44)
	R&D	(40)	(36)
	SG&A	(110)	(97)
	Other	(0)	(0)
Operating Income		85	66
Other income
	Investments	0	0
	Interest, etc.	(4)	(8)
Pretax income		81	57
Income tax		(30)	(21)
Net Income		51	36
		$0.44/sh	$0.31/sh
Shares outstanding		117.4	117.1

NT: Look Ahead to June 2008 Results

When we analyzed Nortel's financial statements for the first quarter of 2008, our Overall Gauge rose to 37, of 100 possible, from 32 points three months earlier. However, we felt that the increase might have overstated the company's financial condition. Reductions in Assets and Market Value -- the latter caused by a plunging stock price -- had perversely improved some of the ratios we use to track growth and profitability.

First quarter Operating Income was a mere $16 million. It was dragged down by miscellaneous operating expenses that include amortization of intangible assets and charges related to workforce reductions, consolidation of real estate, other restructuring actions, and litigation.

Nortel Networks Corp. (NT) is the Canadian-based supplier of products and services to telecom carriers, other networking enterprises, and businesses. Nortel has defied the worst-case predictions and managed to stay in business and even independent, unlike fellow fallen telecom Lucent Technologies. Losses have been the norm at Nortel for most of this decade, resulting in an unfathomable accumulated deficit (i.e., negative retained earnings) of $36.7 billion (U.S.).

Tougher times also revealed shortfalls in the company's internal financial controls, resulting in numerous restatements, and, sadly, allegations of misdeeds. Just recently, the RCMP charged a former Nortel CEO and two other executives with fraud for errors for errors in the company's financial statements.

The restatements complicate any financial analysis of Nortel.

On 31 July 2008, Nortel is scheduled to announce its results for the second quarter. In anticipation of this report, we've modeled Nortel's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

Nortel recently re-affirmed its outlook for 2008. The company expects:

•	Revenue to grow in the low single digits compared to 2007
•	Gross Margin to be about the business model target of 43 percent of revenue
•	Operating Margin as a percentage of revenue to increase by about 300 basis points compared to 2007

With this guidance in mind, we expect Nortel's Revenue to be about $2.8 billion in the June 2008 quarter. While this figure is a seemingly too high 9 percent more than Revenue in the June 2007 quarter, it is essentially the same as Revenue in the March 2008 quarter. It equates to a 1 percent year-over-year (i.e., trailing four quarters) growth rate.

The company's Gross Margin target is consistent with historical results, although a percentage point more optimistic than we would have assumed if left to our own devices. Given Nortel's Gross Margin guidance and our Revenue estimate, our prediction for Cost of Goods Sold is (1 - 0.43) * $2.8 billion = $1.6 billion.

Research and Development expenses have, in recent quarters, been trimmed a couple of percentage points to about 15.5 percent of Revenue. We would, therefore, expect R&D to be 0.155 * $2.8 billion = $434 million in the second quarter.

Similarly, historical trends suggest that a good estimate for Sales, General, and Administrative expenses is about 22.5 percent of Revenue. In the June 2008 period, our SG&A prediction turns out to be 0.225 * $2.8 billion = $630 million.

Nortel's quarterly results usually include other operating expenses such as Amortization of intangibles, In-process R&D, and Special charges. The average over the previous eight quarters for these miscellaneous expenses has been $60 million. We will use this figure as our target for the June 2008 quarter.

Rolling up the estimates described above would lead to Operating Income, as we define it, of $80 million in the quarter. This would certainly be a nice improvement over the $50 million loss in the year-earlier quarter.

Gains and losses from Non-operating activities (minority interests, equity in associated companies, asset sales, an interest expense) are extremely volatile at Nortel from quarter to quarter. If we take two-year average values for these figures, but throw out the high and low values, the aggregate expected non-operating loss is $38 million.

This would bring pre-tax income down to $42 million.

Nortel's quarterly effective income tax rate defies prediction from historical results. There have been many quarters where the amount of income tax far exceeds the amount of income. Oddly enough, there have also been quarters where the company had negative provisions for income taxes despite a positive income value. Admitting our inability to make sense of Nortel's tax situation, we have arbitrarily assumed a 40 percent tax rate for the second quarter.

This would yield Net Income of $25 million ($0.05 per share).

Please note that the table format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		June 2008 (predicted)	June 2007 (actual)
Revenue (1)		2800	2562
Operating expenses
	CGS	(1596)	(1510)
	R&D	(434)	(423)
	SG&A	(630)	(595)
	Other (2)	(60)	(84)
Operating Income		80	(50)
Other income
	Investments (3)	(30)	(10)
	Asset sales	8	10
	Interest, etc. (4)	(16)	24
Pretax income		42	(26)
Income tax		(17)	(11)
Net Income		25	(37)
		$0.05/sh	$(0.08)/sh
Shares outstanding		498	440

<sup>1. Total revenues includes products and services.
2. Amortization of intangible assets + Special charges + In-process R&D
3. Minority interests + Equity in net income of associated companies. Both figures are net of tax.
4. Other income - Interest expense</sup>

ADP: Look Ahead to June 2008 Results

Our earlier analysis of ADP's 10-Q financial statements for the quarter ending in March 2008, which was the third quarter of ADP's fiscal year, determined that the GCFR Overall gauge score had risen to 56 points. The score had been 52, of 100 possible, points after the December 2007 quarter.

The latest Overall gauge reading was ADP's highest score in more than 4 years. All four individual gauges displayed double-digit scores on a scale of 0 to 25.

Automatic Data Processing, Inc. (ADP) is a top provider to corporations of payroll and other personnel-related information technology services. ADP, which is one of a mere handful of U.S. companies with a AAA bond rating, publishes the monthly ADP National Employment Report (SM) on non-farm private employment. Last year, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (BR).

Despite the improved score, we did have some concerns. For one thing, the Broadridge spin-off and other other restructuring actions might have skewed the results. In addition, ADP revised the way it accounts for funds held for clients and client fund obligations. This seemingly arcane reclassification involves big numbers -- $6.2 billion for the nine months ending March 2007 -- and makes some elements of new Cash Flow Statements incomparable with historic results. We observed that Net Income rose, in part, due to a reduction in the income tax rate. And, we need to keep an eye on the tepid growth in Cash Flow from Operations.

On 31 July 2008, ADP is scheduled to announce its results for the fourth quarter of the company's fiscal year. In anticipation of this report, we've modeled ADP's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

ADP management, in its report on the third fiscal quarter, reiterated a forecast for 12 to 13 percent Revenue growth during the fiscal year. Applying the midpoint of this growth rate to last year's Revenue of $7.8 billion establishes $8.8 billion as the target for the current fiscal year. Revenue in the first nine months of the fiscal year was $6.6 billion, which indicates the company expects sales to equal about $2.2 billion in the June quarter.

The Gross Margin in the last four sequential quarters has averaged 55.7 percent. If we assume ADP will attain this same margin in the June quarter, the Cost of Goods Sold (CGS) -- what ADP calls "Operating Expenses" -- will total (1 - 0.557) * $2.2 billion = $975 million.

Depreciation and amortization expenses have been about 2.7 percent of Revenue in the last year. Given our Revenue estimate, it seems reasonable to expect these expenses to equal about $60 million in June quarter.

Our estimate for Research and Development (R&D) expenses ("Systems Development and Programming Costs") is 6.1 percent of Revenue. This would equate to $134 million

Sales, General, and Administrative (SG&A) expenses average 27 percent of Revenue. However, the ratio was closer to 32 percent in the last two fiscal fourth quarters. If we assume 30 percent for the latest quarter, our target for these expenses becomes 0.3 * $2.2 billion = $660 million.

Rolling up the figures identified above, our estimate for Operating Income, as we define it, in the quarter is $370 million. This is 28 percent above the $290 million of Operating Income in the year-earlier quarter.

For net non-operating income (i.e., other income less interest expense), $15 million would seem to be a reasonable estimate based on recent data.

If the Income Tax Rate is 36.5 percent, Net Income from continuing operations will be $246 million ($0.47 per share).

ADP management expressed confidence that they would achieve "the high end of our earnings per share growth forecast of 18% to 21% in diluted earnings per share from continuing operations, up from $1.80 in fiscal 2007, which excludes the net one-time gain recorded in the first quarter of fiscal 2007.”

In other words, management told investors to expect earnings between, and towards the upper end of, $2.12 to $2.18 per share. If 530 million is the average number of diluted shares for the fiscal year, then the Net Income guidance for the year must be $1.124 to $1.155 billion. Net Income from continuing operations for the first three quarters was $936 million, which leaves $188 to $219 million for the fourth quarter.

Our $246 million estimate for Net Income exceeds our interpretation of management's guidance by at least $27 million ($0.05 per share).

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)		June 2008 (predicted)	June 2007 (actual)
Revenue (1)		2200	2000
Operating expenses
	CGS (2)	(975)	(876)
	Depreciation (3)	(59)	(55)
	R&D (4)	(134)	(130)
	SG&A	(660)	(649)
	Other	0	(0)
Operating Income		372	290
Other income
	Investments	0	0
	Interest, etc.	15	18
Pretax income		387	307
Income tax		(141)	(114)
Net Income from continuing operations		246 $0.47/sh	194 $0.35/sh
Income from discontinued operations (5)			1
Shares used in per-share calculations		520	552

<sup>1. Total revenues includes interest on funds held for clients and Professional Employer Organization revenues.
2. Operating expenses
3. Depreciation and amortization.
4. System development and programming
5. Net of tax</sup>

BP: Look Ahead to June 2008 Results

The GCFR Overall Gauge score of BP shot up to 47 points after we analyzed this oil giant's first-quarter financial statements. This score was a mere 17, out of 100 possible, points the previous quarter. High energy prices led to impressive Revenue growth, in spite of flat production levels and compressed refining margins. (While the positive effects of high oil prices on energy companies are well known, the negative effects can be seen in the decision by Exxon Mobil (XOM) to exit the retail market.) Nevertheless, enough of the powerful Revenue surge reached the bottom line to yield strong Net Income growth.

BP p.l.c. (BP), the former British Petroleum, is the Oil and Gas Refiner and Marketer with, by far, the most sales and the largest market capitalization. BP became a behemoth, in part, by acquiring Amoco and Arco. As a result of these purchases and other investments, BP became the operator of 13 oil fields and four pipelines on Alaska's North Slope.

The last few years have been, to say the least, trying ones for BP. The company has faced tragedies, maintenance problems, market manipulation allegations, and (now, especially) disputes with its Russian partners. BP may have been distracted for a time by a leadership change expedited by ignominious events.

On 29 July 2008, BP will announce its second quarter results. In anticipation of this report, we've modeled BP's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

BP management explained its strategy to the financial community in February 2008.

Quarterly Revenue (i.e., Sales and Other Operating Revenues) stalled for a couple of years, but it resumed an upward trend in 2007's fourth quarter. Revenue in the March 2008 quarter was 43 percent higher than in the first quarter of 2007. While surging oil prices suggests continued growth at a zippy pace, we're going to be a little more modest in our expectations. Revenue of $91 billion in the quarter might only be 3.7 percent above first-quarter sales, but this figure is nearly 27 percent more than Revenue in the second quarter of 2007.

The Gross Margin has been between 17 and 20 percent recently. We expect BP to achieve a 19 percent margin in the second quarter. In other words, we expect the Cost of Goods Sold (CGS) -- which we define to be Purchases, plus Production and Manufacturing Expenses, plus Production and Similar Taxes -- to be 81 percent of Revenue. Given our $91 billion Revenue estimate, CGS should be about $73.7 billion.

Depreciation expenses have been between 3 and 4 percent of Revenue. With sales surging, we should see a ratio in the second quarter towards the lower end of this range. If we assume 3.2 percent, these expenses (including Depletion and Amortization) could total $2.9 billion.

Exploration costs have been between $200 and $300 million per quarter recently. We've selected $300 million as the target of the second quarter.

Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, have averaged a little more than 5 percent of Revenue recently. This ratio has been between 4.5 and 7.0 percent. We expect it to be 4.75 percent of Revenue in the second quarter, which leads to our SG&A estimate of $4.3 billion.

BP typically reports other special operating charges, such as asset impairments. These charges can be minor or massive, with an average value over the last 10 quarters of $380 million. We will assume a $400 million charge in the second quarter.

Rolling up all the estimates above would result in Operating Income, as we define it, of $9.4 billion. This figure is 11.9 percent greater than Operating Income in the second quarter of 2007.

BP also reports substantial income (or, occasionally, losses) from investments and asset sales. Interest income tends to be less significant. We've used historical averages to set targets for the various types of income, which we classify as non-operating. The total is $1.8 billion, which brings our estimate for pre-tax income to $11.1 billion.

If the income tax rate is 34 percent, Net Income will be about $7.3 billion ($2.33/ADR). This is about the same as the June 2007 quarter, which benefited from an extra-large $1.3 billion in gains on asset sales.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)		June 2008 (predicted)	June 2007 (actual)
Revenue (1)		91,000	71,872
Op expenses
	CGS (2)	(73,710)	(57,086)
	Depreciation (3)	(2,912)	(2,535)
	Exploration	(300)	(155)
	SG&A (4)	(4,323)	(3,565)
	Other (5)	(400)	(172)
Operating Income		9,355	8,359
Other income
	Investments (6)	1,000	1,083
	Asset sales (7)	734	1,309
	Interest, etc. (8)	240	(27)
Pretax income		11,113	10,724
Income tax		(3,778)	(3,283)
Net Income		7,334	7,441
		$2.33/ADS	$2.33/ADS
Shares outstanding		3,150	3,198

<sup>1. Sales and other operating revenues
2. Purchases + Production and manufacturing expenses + Production and similar taxes
3. Depreciation, depletion and amortization
4. Distribution and administration expenses
5. Impairment and losses on sale of businesses and fixed assets + Fair value (gain) loss on embedded derivatives
6. Earnings from jointly controlled entities + Earnings from associates
7. Gain on sale of businesses and fixed assets
8. Interest and other revenues - Finance costs + Other finance income</sup>