PEP: Look Ahead to December 2008 Quarterly Results

The GCFR Overall Gauge of PepsiCo (NYSE: PEP) fell from 46 to 30 of the 100 possible points in the third quarter, which consisted of the 12 weeks ending 6 September 2008. Our original and updated analysis reports explained this result in some detail.

All of the gauges were down in the third quarter, even the contrary Value measure. Revenue growth decelerated, and the Gross Margin was lower than expected. In addition, Sales, General, and Administrative expenses were substantially above projections, possibly because of $176 million "mark-to-market losses on commodity hedges" in the quarter. Net Income was 10 percent less than in the September 2007 quarter.

Disappointing third-quarter results, along with macroeconomic factors, caused PepsiCo shares to drop significantly in October. PepsiCo responded with a program to cut 3300 jobs and close 6 plants. This plan, under the banner "Productivity for Growth," will lead to pretax charges in the fourth quarter between $550 and $600 million.

View the full PEP chart at Wikinvest

To look ahead, we've modeled PepsiCo's Income Statement for the super-sized, 16-week December 2008 quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce on, or about, 5 February 2009. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

PepsiCo, Inc., (NYSE: PEP) is a leading global purveyor of beverages and snacks. The company is well regarded for good management, steady growth, significant international exposure, and the defensive characteristics of the food industry. While famously locked in a battle with Coca-Cola (NYSE: KO) for the soft-drink market, PepsiCo's snack food business diversifies the company. The Frito-Lay North America division takes in more Revenue, and it contributes more to Operating Profit, than the PepsiCo Americas Beverages unit.

During the third quarter, PepsiCo and Pepsi Bottling Group, Inc. (NYSE: PBG) closed on their joint acquisition of 81 percent of Lebedyansky, a Russian juice company, for $1.5 billion. The purchase was announced in March 2008. PepsiCo owns 75 percent of this stake. Both companies have offered, in accordance with Russian law, to buy the remaining shares of Lebedyansky. PepsiCo's Cash Flow Statement includes $297 million of cash restricted for use in future acquisitions, which "primarily relates" to the Lebedyansky deal.


PepsiCo's press release announcing third-quarter earnings included the following update to the company's outlook for the year:

The company expects that the recent surge in the U.S. dollar will likely have an adverse impact on fourth-quarter earnings. At current rates, the incremental impact would be about $0.04-$0.05 per share. As a result, the company would expect to report full-year core 2008 earnings per share in the range of $3.67 — $3.68 (excluding any commodity mark-to-market impact and Productivity for Growth costs), versus our prior EPS guidance of $3.72. The company expects full-year 2008 performance of 3 percent to 5 percent volume growth and low-double-digit net revenue growth (including acquisitions and foreign exchange). The company has revised its 2008 guidance with respect to cash provided by operating activities to be approximately $7.3 billion and capital spending to be approximately $2.5 billion, excluding Productivity for Growth costs.

Due to the unpredictability of future changes in commodity prices, the company is not able to provide guidance on 2008 projected EPS including the impact of mark-to-market gains/losses on commodity hedges.

[emphasis added]

To establish a fourth-quarter Revenue target, we will interpret "low-double-digit" growth as 12 percent. In the full year of 2007, Revenue was $39.5 billion. Therefore, we expect annual Revenue in 2008 to be $39.5 billion * 1.12 = $44.2 billion. In 2008's first three fiscal quarters (a total 36 weeks), Revenue equaled $30.5 billion. This leaves $13.7 billion for the long fourth quarter.

PepsiCo's Gross Margin has averaged 53.4 percent in the last four quarters, with a slight downward bias. We estimate it will be 53.3 percent in the current quarter. In other words, we're projecting the Cost of Goods Sold to be (1 - 0.533) * $13.7 billion = $6.4 billion.

SG&A expenses average around 36 percent of Revenue, but the ratio tends to be a few points higher in the fourth quarter. For the current period, 39 percent is probably a better estimate. Therefore, our assumption for these costs is 0.39 * $13.7 billion = $5.3 billion.

We'll assume a $18 million charge for amortization of intangible assets. This estimate is based on the prior charges scaled for the longer quarter.

These assumptions would lead to Operating Income, as we define it, of $1.9 billion. This would be a 12.1 percent increase over the equivalent figure in the year-earlier quarter. Note that this estimate for Operating Income does not include Productivity for Growth, nor mark-to-market commodity hedge costs -- see below for more detail.

In 2008, Bottler equity income has been down about 6 percent from 2007. Assuming a similar result in the fourth quarter, we will set a $90 million target for Bottler equity income.

A $55 million charge for net Interest Expense seems reasonable given recent history. This would result in pre-tax income of $2.0 billion.

We're using 27 percent for the fourth-quarter income tax rate, which is consistent with the company's full-year guidance. This rate would result in an a tax provision of $530 million. The rate can be volatile from quarter to quarter.

Rolling up these figures, we're looking for Net Income of $1.44 billion ($0.91/share). The absolute and per-share figures are 14.2 and 18.2 percent, respectively, more than in the December 2007 quarter.

Neither restructuring nor commodity "mark-to-market" costs were included in the preceding discussion. With respect to the former, PepsiCo provided the following guidance:

As a result of the [Productivity for Growth] program, the company expects to incur a pre-tax charge of approximately $550 million — $600 million in the fourth quarter of 2008, comprised of: approximately $275 million of severance and other employee-related costs; approximately $200 million for asset impairments (substantially all non-cash) resulting from plant closures and related actions; and approximately $100 million for other costs. The company expects that approximately $325 million — $375 million of this charge will result in cash expenditures during the fourth quarter of 2008 and into 2009. The company currently expects to complete the productivity program during the first quarter of 2009.

The table below includes a speculative column that includes our interpretation of this guidance regarding restructuring costs. Since PepsiCo can't predict the "mark-to-market" costs, we know it would be fruitless for us to try.

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)		December 2008 (predicted, 1)	December 2008 (predicted, 2)	December 2007 (actual)
Revenue		13,689	13,689	12,346
Op expenses
	CGS	(6,393)	(6,393)	(5,784)
	SG&A	(5,614)	(5,339)	(4,811)
	Amortization, etc.	(318)	(18)	(21)
Operating Income		1,365	1,940	1,730
Other income
	Equity income	90	90	95
	Interest, etc.	(55)	(55)	(28)
Pretax income		1,400	1,975	1,797
Income tax		(378)	(533)	(535)
Net Income		1,022	1,441	1,262
		$0.64/sh	$0.91/sh	$0.77/sh
Shares outstanding		1,590	1,590	1,645

(1) Includes a speculative distribution of "Productivity for Growth" costs; does not include commodity hedge mark-to-market cost.

(2) Includes neither "Productivity for Growth" costs, nor commodity hedge mark-to-market costs. This column is the one discussed in the narrative.

TDW: Look Ahead to December 2008 Quarterly Results

The GCFR Overall Gauge of Tidewater (NYSE: TDW) rose from 26 to 34 of the 100 possible points in the
September 2008 quarter, which was the second of fiscal 2009.  Our analysis report explained this result in some detail.

The increase was mostly due to the Value gauge's improving score, from 6 to 15 of the 25 possible points.  This contrary indicator tends to move in the opposite direction of the share price.  It strengthened when Tidewater's share price fell from $65.03 to $55.36 during the September quarter.  Since the shares kept going down in October and November, the gauge will probably increase again in the current quarter.

The Growth and Profitability gauges, at 3 and 2 points, respectively, have been quite weak for a few quarters.  A significant challenge for Tidewater has been the increase in Operating Expenses, such as Crew and repair/maintenance costs.  In addition, Free Cash Flow is negatively affected by the high capital expenditures associated with the fleet expansion and modernization.

View the full TDW chart at Wikinvest

To look ahead, we've modeled Tidewater's Income Statement for the December 2008 quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce on, or about, 2 February 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.


Tidewater Inc. (NYSE: TDW) "owns 438 vessels, the world’s largest fleet of vessels serving the global offshore energy industry."  Headquartered in New Orleans, the company has grown far beyond the Gulf of Mexico.  International operations contributed 84 percent of Tidewater's Revenue in fiscal 2008.  To continue this growth, Tidewater is substantially expanding and modernizing its fleet with annual investments between $300 million and $500 million.

The current global economic slump, and prospects for worse, has already reduced demand and, therefore, prices for crude oil and natural gas.  If it hasn't already, the lower prices will eventually lead to diminished offshore production and less need for supporting maritime services.  Tidewater might have to accept lower lease rates, move vessels to more active locations, or even take vessels out of service.  The need for maintenance has also recently been a drag on the vessel utilization rate.

In bnet.com, David Phillips (a/k/a the 10-Q Detective, which we highly recommended to all GCFR readers) asks whether Tidewater would be able to find alternative funding sources to meet its capital commitments if Cash Flow from Operations falls short of the company's expectations because of low lease rates for Tidewater's vessels.

Despite large capital expenditures, management was optimistic enough to raise the dividend by 67 percent.  In addition, Tidewater authorized $200 million in share repurchases.


Tidewater provides neither Revenue, nor Income, guidance.  However, cost expectations for the December quarter were discussed during the 27 October conference call with financial analysts.  The transcript from this call is available at SeekingAlpha.com.

Revenue is dependent on the number and types of vessels Tidewater own, the average vessel utilization, and lease charges (typically expressed in dollars per day).  The utilization rate has recently been negatively affected by maintenance, moving vessels between operating locations, and new vessels entering the fleet.

Based on extrapolations, which should be viewed skeptically given the discontinuities in the general economy and the energy industry, our working estimate for Revenue in the December 2008 quarter is $343 million.  This figure is 9 percent greater than Revenue in the December 2007 quarter, and the year-over-year Revenue growth rate would be about 10 percent.


Management's guidance for the vessel operating margin is 50 to 52 percent.  Their estimate for Vessel Operating Costs is $172 to $178 million.  If we take the midpoint of Vessel Operating Costs ($175 million) and add $6 million for Cost of Other Marine Revenues, we get our Cost of Goods Sold estimate of $181 million.  This is 52.8 percent of our $343 million Revenue estimate, equating to a Gross Margin, as we define it, of 47.2 percent.

Depreciation has been about 9 percent of Revenue in the couple of quarters.  Given our estimate, this would equate to 0.09 * $343 million = $31 million for the December 2008 quarter. 

SG&A expenses have been about 10 percent of Revenue.  We, therefore, expect a $34.3 million SG&A expense in the December quarter.

If our estimates hold true, Tidewater will attain an Operating Income, as we define it, of $97 million.  This would be a 4.9 percent decline from Operating Income in the year-earlier quarter.

Tidewater management didn't estimate gains on asset sales, so we will use the recent average of about $5 million.  Similarly, we assume Net Interest income will be $5 million.  These figures would lift pre-tax income to $107 million.

Management raised its guidance for the effective income tax rate from 17 to 18 percent.  This would lead to Net Income of $87 million ($1.75 per share depending how many additional shares the company has repurchased).  On an absolute basis, this is 2.2 percent below the amount earned in the December 2007 quarter.  However, on a per-share basis, Net Income would increase by 6 percent.

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)		December 2008 (predicted)	December 2007 (actual)
Revenue		343	314
Op expenses
	CGS(1)	(181)	(150)
	Depreciation	(31)	(31)
	SG&A	(34)	(31)
Operating Income		97	102
Other income
	Asset sales (2)	5	1
	Interest, etc.	5	6
Pretax income		107	108
Income tax		(19)	(18)
Net Income		87	89
		$1.75/sh	$1.66/sh
Shares outstanding		50.0	53.8

<sub>1. CGS=Vessel operating costs + Costs of other marine revenues
2. Tidewater considers gains on asset sales to be an operating item.</sub>

COP: Look Ahead to December 2008 Quarterly Results

The GCFR Overall Gauge of ConocoPhillips (NYSE: COP) surged to 50 of the 100 possible points -- not a bad score -- in the third quarter of 2008.  Our analysis report explained this result in some detail.

High energy prices earlier in this year contributed mightily to Conoco's top and bottom lines, pushing our Growth gauge over the 20-point threshold in the second and third quarters.  Revenue in the September 2008 quarter exceeded the value in the year-earlier period by 52 percent!  Energy prices peaked early in the third quarter and have, as every automobile owner knows, fallen steeply since.  

View the full Light Crude Deliv 12/08 chart at Wikinvest

ConocoPhillips shares followed oil prices up and then down.  During the third quarter, the share price fell from $94.39 to $73.25.  Our contrarian Value gauge, which had earlier signaled that the share price was too high, strengthened when the shares began to fall.  The Value gauge, which tends to move in the opposite direction of the share price, rose a remarkable 12 points, from 1 to 13 points on a 25-point scale, in the third quarter.

View the full COP chart at Wikinvest

To look ahead, we've modeled ConocoPhillips's Income Statement for the December 2008 quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce on, or about, 22 January 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.


ConocoPhillips is the seventh-largest Major Integrated Oil & Gas company by market capitalization.  Holding the fifth spot on the Fortune 500 list, Conoco's heft was achieved with mergers and acquisitions.  Most notably, Conoco, Inc., and Phillips Petroleum combined in August 2002.  In March 2006, ConocoPhillips purchased Burlington Resources, which had extensive natural gas operations in North America, for $33.9 billion.

Berkshire Hathaway, Inc. (NYSE: BRK.A), run by super-investor Warren Buffett, and its affiliates owned about 84 million shares of ConocoPhillips on 30 September 2008.  The company's stake increased from 17.5 million shares on 31 March 2008. 

Troubles with the Venezuelan government last year led ConocoPhillips to record "a complete impairment of its entire interest in its oil projects in Venezuela of approximately $4.5 billion, before- and after-tax."

ConocoPhillips owned 20 percent of LUKOIL (OTC: LUKOY), which is responsible for more than 18 percent of Russia's oil production, on 30 September 2008.  Lukoil ADRs declined from $98.75 on 30 June 2008 to $59.75 on 30 September to $38.80 on 31 October 2008.

View the full LUKOY chart at Wikinvest

The third-quarter earnings announcement indicated that the company expects the output of its Exploration and Production segment to be higher in the fourth quarter than the third quarter.  With respect to the Refining and Marketing "downstream" segment, Conoco noted that the "crude oil capacity utilization rate is expected to be in the mid-90-percent range."


Conoco's Revenue depends on factors such as, but not limited to, how much oil and gas the company produces, the prices at which it can sell this output, how much crude oil its refineries can process, and the difference between the price of crude and refined products.  As we've seen, geopolitical and natural forces can have a significant effect on productivity and prices.

We don't have the specialized expertise to deal with all these factors.  To come up with an, um, crude estimate of fourth quarter Revenue, we're simply to going to use the price of oil.  During the third quarter, the price of a barrel of Light Sweet Crude oil declined from about $140 to $105, for an average price of roughly $122.50.  During the fourth quarter to date, the average price is closer to $80, but dropping almost daily.

This suggests to us the Conoco's fourth-quarter Revenue may be 35 to 40 percent lower than the third quarter's Revenue of $70 billion.  We will use a round-number estimate of $44 billion.

ConocoPhillips' average Gross Margin is around 25 to 30 percent, but it has been in the lower part of this range recently.   Our estimate for the fourth quarter is 26 percent.  In other words, we're guessing the Cost of Goods Sold [i.e., purchased crude oil, natural gas and products + Production and operating expenses] will be (1 - 0.26) * $44.0 billion or $32.6 billion.

We'll also assume, based on historic data, a Depreciation expense of 4.5 percent of Revenue, or $2.0 billion.  Similarly, we'll estimate SG&A expenses at 11 percent of Revenue, or $4.8 billion.  We will then add $400 million for Exploration expense per company guidance and $200 million for non-recurring operating charges.

These figures would result in an Operating Income of $4.0 billion, down 32 percent from the December 2007 quarter.

We then need to consider non-operating income and expenses, such as equity in the earnings of affiliates, minority interests, and interest.  Considering past results, we will set our expectation for net non-operating income at $1.25 billion.  This pushes our estimate of pre-tax income to $5.3 billion

ConocoPhillips' effective income tax rate is quite variable from quarter to quarter.  A rate of 44.0 percent would lead to provision for income taxes of $2.3 billion.  This should be close if there aren't too many special tax matters in the quarter.

Our estimate for Net Income is, therefore, $3.0 billion ($1.97 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)		December 2008 (estimated)	December 2007 (actual)
Revenue (1)		44,000	52,685
Operating expenses
	CGS (2)	(32,560)	(38,046)
	Depreciation	(1,980)	(2,206)
	Exploration	(396)	(268)
	SG&A (3)	(4,840)	(5,942)
	Other	(200)	(254)
Operating Income		4,024	5,969
Other income
	Equity income (4)	1,232	1,316
	Interest, etc. (5)	19	39
Pretax income		5,276	7,324
Income tax		(2,321)	(2,953)
Net Income		2,954	4,371
		$1.97/sh	$2.71/sh
Shares outstanding		1,500	1,612

1. Revenue = Sales and other operating revenues.
2. CGS = Purchased crude oil, natural gas and products + Production and operating expenses
3. SG&A = SG&A expenses + Taxes other than income taxes
4. Equity income = Equity in earnings of affiliates - Minority interests
5. Interest, etc. = Other income - Interest and debt expense

MSFT: Look Ahead to December 2008 Quarterly Results

The GCFR Overall gauge of Microsoft registered 57 of the 100 possible points -- down just 4 points -- in the September 2008 quarter. The full evaluation that led to this score was explained fully in this analysis report.

The Growth and Profitability gauges weakened in the September period, which was the first quarter of the company's fiscal 2009, but the Value gauge remained a robust 18 of 25 possible points.

Net Income in the quarter almost exactly matched our expectations, and it was 2.0 percent more than in the year-earlier quarter.


To look ahead, we've modeled Microsoft's Income Statement for the December 2008 quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that Microsoft will announce on, or about, 22 January 2009. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.


Microsoft Corp. (NASDAQ: MSFT), best known for operating system and application software, also sells video game consoles, music players, and computer peripherals. In recent years, Microsoft has increased its role in the online advertising business, in direct competition with Google Inc. (NASDAQ: GOOG).

Earlier this year, Microsoft offered $40+ billion to acquire Yahoo! Inc. (NASDAQ: YHOO). However, the bid was withdrawn when Yahoo's management resisted. A recent decision by Yahoo! co-founder Jerry Yang to step down as CEO did not reawaken Microsoft's interest, according to CEO Steve Ballmer.

Last month, Microsoft joined the elite ranks of non-financial entities with AAA bond ratings, which is the highest S&P grade. After Microsoft's board authorized as much as $6 billion worth of debt, the company established a program allowing issuance of $2 billion of short-term commercial paper. Microsoft also opened a $2 billion revolving credit facility.

Microsoft also initiated a new $40 billion share repurchase program, and the company increased its quarterly dividend by 18 percent.

View the full MSFT chart at Wikinvest

Management guidance for the December 2008 quarter was included in the press release reporting September's results.

The company forecast Revenue between $17.3 billion to $17.8 billion. We will focus on the mid-point, $17.55 billion, which would be 7.23 percent higher than Revenue in the December 2007 quarter. On a year-over-year basis (i.e., trailing four quarters compared to the four previous quarters), Microsoft's Revenue growth would be 8.6 percent if sales match the guidance.

Microsoft typically achieves a Gross Margin of 80 percent, give or take a few percentage points. Our expectation for the December quarter is a Gross Margin of 81 percent. This ratio translates into a Cost of Goods Sold of (1 - 0.81) * $17.55 billion, or $3.34 billion.

R&D expenses have been averaging around 14 percent of Revenue, but have edged up recently. For the December quarter, we will assume 14.5 percent of Revenue, or 0.145* $17.55 billion = $2.55 billion.

SG&A expenses can fluctuate fairly significantly from quarter to quarter. Our target is 30 percent of Revenue, which is the average over the last four quarters. Therefore, we are looking for SG&A expenses of 0.30 * $17.55 billion = $5.27 billion.

These estimates yield an estimated Operating Income of $6.4 billion, at the high end of the $6.1 billion to $6.4 billion range indicated in Microsoft's guidance. This figure is 1.2 percent below Operating Income in the December 2007 quarter.

We will assume Investment and interest income of $250 million. This would lead to Pre-Tax Income of $6.66 billion.

We'll also assume an income tax rate of 29 percent, which leads to a Net Income value of $4.73 billion ($0.52/share). This is consistent with the company's guidance. Net income was $4.71 billion ($0.50/share) in 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)		December 2008 (predicted)	December 2007 (actual)
Revenue		17,550	16,367
Op expenses
	CGS	(3,335)	(3,543)
	R&D	(2,545)	(1,885)
	SG&A	(5,265)	(4,458)
	Other	0	0
Operating Income		6,406	6,481
Other income
	Investments	0	0
	Interest, etc.	250	339
Pretax income		6,656	6,820
Income tax		(1,930)	(2,113)
Net Income		4,726	4,707
		$0.52/sh	$0.50/sh
Shares outstanding		9,100	9,503

CSCO: Financial Analysis through October 2008 (Updated)

We previously posted an analysis of Cisco System's press release announcing results for the three months that ended on 25 October 2008, which was the first quarter of the company's fiscal 2009.

The company later submitted a more complete 10-Q, which we reviewed to determine if the analysis needed updating.

Cisco Systems, Inc. (NASDAQ: CSCO), the proud plumber of the Internet, has a commanding position in the market for enterprise networking products and services, such as routers.

The additional data in the 10-Q did not change any gauge scores from our initial evaluation, nor did the formal report materially affect our earlier evaluation of Cisco's Income Statement for the first fiscal quarter.

• Cash Management: 17 of 25 (up from 16 in July)
  
• Growth: 2 of 25 (down from 7)
• Profitability: 14 of 25 (down from 16)
• Value: 20 of 25 (up from 16)
  

• Overall: 64 of 100 (up from 61)

The contrarian Value gauge score tends to move in the opposite direction of the share price. The score increase shown above can be attributed to the shares falling from $21.99 on 31 July to $17.77 on 31 October.  Per GCFR standard practice, the Value gauge score is computed with the share price at, or near, the end of the subject quarter.

Cisco shares continued to drop after the quarter ended, reaching about $14.50, before recovering to $15.17 on 21 November. As can be seen in the table below, the additional decline in the price per share added 3 more points to the Value gauge score.

Value	21 November 2008	31 October 2008	31 July 2008	31 October 2007	5-year median
P/E	11.3	13.2	16.5	26.4	23.0
P/E to S&P 500 average P/E	80%	94%	91%	152%	134%
Price/Revenue	2.2	2.6	3.4	5.8	5.0
Enterprise Value/Cash Flow (EV/CFO)	6.0	7.4	9.4	17.5	15.1
Gauge Score (0 to 25)	23	20	16	0	11

View the full CSCO chart at Wikinvest

Although the 10-Q didn't change the GCFR gauges, the filing still provided a much interesting information.

For example, both of Cisco's acquisitions during the quarter have technology that directly benefits end users. As mentioned above, we normally think of Cisco has an expert in the invisible (but vital) network plumbing.

We continued to be intrigued by Cisco's purchase of Nuova Systems, Inc., which developed technologies for enterprise data centers. Cisco first bought approximately 80 percent of Nuova in August 2006. Earlier this year, Cisco exercised an option to purchase the remaining 20 or so percent. The selling shareholders, which included several former Cisco execs, will receive up to three payments, to be made between fiscal years 2010 and 2012, with the amounts determined by an undisclosed formula.

Cisco originally indicated that the potential payout for the remaining interests in Nuova would be between $10 and $578 million. The latest 10-Q states that Cisco has recorded total compensation charges of $296 million for these payments. The amount can be adjusted as high as $678 million, $100 million more than the amount first cited. Since Nuova had 76 employees in August 2006, the total charge to Cisco will be between $3.9 and $8.9 million per Nuova employee.

ADP: Financial Analysis through September 2008 (Updated)

We previously posted an analysis of ADP's earnings announcement for the three months that ended on 30 September 2008, which was the first quarter of the company's fiscal 2009.  Our evaluation was incomplete because the press release did not include a Cash Flow Statement and the Balance Sheet was condensed.

Since ADP has now filed a 10-Q with the SEC, we are able to update the analysis to incorporate the data that hadn't previously been disclosed.

Automatic Data Processing, Inc. (NYSE: ADP) is a top provider of payroll and other personnel-related information technology services.  It competes with firms such as Paychex, Inc. (NASDAQ:PAYX).  ADP is one of a mere handful of U.S. companies with a AAA bond rating, and it is an S&P 500 Dividend Aristocrat.  The company is also known for the monthly ADP National Employment Report on non-farm private employment, and  Last year, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (NYSE: BR).

With the additional data in the 10-Q, our gauges now display the following scores.

• Cash Management: 17 of 25 (up from 8 in June)
  
• Growth: 20 of 25 (unchanged)
  
• Profitability: 13 of 25 (unchanged)
  
• Value: 16 of 25 (unchanged) -- see below for the effect of the recent share price drop
  

• Overall: 61 of 100 (up from 55)
  

The 10-Q didn't change our evaluation of the latest quarter's Income Statement, including the comparison with our previously communicated expectations.

Please note that the scores for the June quarter are slightly different from those originally published because of algorithm adjustments.

ADP's decision to move the net increase in Client Fund Obligations from the Investing to the Financing section of the Cash Flow Statement causes us some difficulty.  This arcane but big-dollar change -- $3.5 billion in the last fiscal year -- significantly alters the Net Cash Used in Investing Activities.  We use this figure to compute the Accrual Ratio, which is an indicator of Earnings Quality and Profitability.  For consistency with historical data, we adjusted the newly reported Cash Flow figures to comply the older classification.

Cash Management	30 September 2008	30 June 2008	30 September 2007
Current Ratio	1.4	1.7	1.6
LTD/Equity	0.8%	1.0%	0.9%
Debt/CFO	0.7 yrs	0.0 yrs	0.0 yrs
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	39.7 days	43.2 days	48.5 days
Working Capital/Market Capitalization	5.7%	6.2%	4.5%
Cash Conversion Cycle Time (CCCT)	30.9 days	31.4 days	35.1 days
Gauge Score (0 to 25)	17	8	13

Debt is managed well by this AAA company, but a couple of our liquidity metrics were skewed by overnight commercial paper borrowing of $1.4 billion that extended past the quarter's end.

The Inventory metrics aren't applicable to this Services company.  Increases we had seen a few quarters ago in Days of Sales Outstanding have been reversed, which indicates more efficient cash management.

Growth	30 September 2008	30 June 2008	30 September 2007
Revenue growth	11.6%	12.5%	13.2%
Revenue/Assets	102%	107%	90%
CFO growth	34.6%	36.5%	-10.8%
Net Income growth	15.1%	13.8%	16.0%
Gauge Score (0 to 25)	20	20	17

Growth rates are trailing four quarters compared to four previous quarters.

Given current economic conditions, it isn't surprising that ADP's Revenue growth has slowed slightly.  (The company forecasts much slower Revenue growth in future quarters.)  CFO growth was almost as robust as we initially estimated.  Net income for the trailing four quarters benefited from a decrease in the effective income tax rate from 37.0 to 35.9 percent.

Profitability	30 September 2008	30 June 2008	30 September 2007
Operating Expenses/Revenue	80.2%	80.3%	80.4%
ROIC	34.1%	31.1%	28.7%
FCF/Equity	34.6%	31.1%	22.8%
Accrual Ratio	+8.0%	+3.0%	-6.0%
Gauge Score (0 to 25)	13	13	13

Operating Expenses have been extremely stable when assessed on a trailing four quarters basis.  The high ROIC is also comforting.  However, the increasing Accrual Ratio suggests lower earnings quality.  While we've tried to guard against it, it's also possible though that the Accrual Ratio increase is an artifact of changes to the accounting of client fund obligations.

Value	21 November 2008	30 September 2008	30 June 2008	30 September 2007
P/E	15.1	18.3	18.7	23.6
P/E to S&P 500 average P/E	90%	109%	102%	138%
Price/Revenue	2.0	2.4	2.5	3.1
Enterprise Value/Cash Flow (EV/CFO)	8.8	10.8	11.4	16.4
Gauge Score (0 to 25)	21	16	16	5

The contrarian Value gauge, which is the largest contributor to Overall score, moves in the opposite direction of the share price.

Per GCFR standard practice, the Value gauge score is computed with the share price at the end of the subject quarter.  In this case, ADP shares closed at $42.75 on 30 September 2008.  The price per share subsequently fell almost to $30, before closing at $35.25 on 21 November.  As can be seen in the table above, the price drop increases the Value gauge score from 16 to 21 points.

View the full ADP chart at Wikinvest

The valuation ratios can be compared with other companies in the Business Software and Services industry.

Overall	21 November 2008	30 September 2008	30 June 2008	30 September 2007
Gauge Score (0 to 100)	72	61	55	42

The current Overall gauge score is very good and it suggests ADP shares hold significant value.