CSCO: Income Statement Analysis for the July 2009 Quarter

Cisco Systems (NASDAQ: CSCO) earned $0.19 per share in the three months that ended on 25 July 2009, down from $0.33 in the same quarter of last year.  The May-to-July period is the fourth quarter of Cisco's fiscal year.

On a non-GAAP ("pro forma" or "ex-items") basis, Cisco's earnings per share slid from $0.40 to $0.31.  The difference between GAAP and non-GAAP Net Income was $758 million in the latest quarter!

This post examines the GAAP-compliant Income Statement for the quarter and compares it to our "look-ahead" estimates, which were published on 7 July.  Our target for Cisco's Net Income in the latest quarter was $0.25 per share.

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

Our principal sources were the earnings announcement and the presentation material used during the post-announcement conference call with analysts.  Some background information about Cisco Systems and the business environment in which it is currently operating can be found in the look-ahead.

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

Revenue was 17.6 percent less than in the July 2008 quarter.  This performance was certainly consistent with the 18-percent decline that we expected from the guidance issued by Cisco when presenting the results of the April quarter.

Revenue from the sale of routers was down 27 percent in the quarter.  Revenue from switches and advanced technologies fell about 20 percent.

Fiscal 2009 Revenue was 8.7 percent less than in the preceding year.  This rate of contraction was the worst for Cisco since the 15 percent drop in fiscal 2002, which included the 9-11 terrorist attack.

The Cost of Goods Sold was 36.0 percent of Revenue, which translates into a Gross Margin of 64.0 percent.  The margin was down from 64.3 percent in the year-earlier quarter.  We had expected a 63-percent margin, based on Cisco's guidance that the Gross Margin would be between 63 and 64 percent.

The non-GAAP Gross Margin in the latest quarter was over 65 percent.

Research and Development spending was 15 percent of Revenue, whereas we expected 14 percent.

Sales, General, and Administrative expenses were a hefty 29.3 percent of Revenue, much more than our 26 percent target.

Other operating expenses (amortization of purchased intangible assets and in-process R&D) were about $100 million more than our prediction.  Our estimate was computed by taking the average value for these charges in the last 10 quarters, and discarding the highest and lowest values.

Operating Income was 42 percent less than last year's value, and it was 20 percent less than our prediction.  Higher-than-expected SG&A and other operating expenses were the main reasons Operating Income fell so far short  of our estimate.

Interest and Other Income was more than double our target, which was taken without alteration from Cisco's guidance.  This item was still less than half the comparable value in the June 2008 quarter.

The Income Tax Rate was 29.5 percent, instead of the predicted 22 percent.  A decision by the U.S. Court of Appeals for the Ninth Circuit in a case dealing with the tax treatment of share-based compensation expenses, led to tax adjustments that pushed up Cisco's tax rate.  The higher rate shaved almost $0.02 from earnings per share.

Net Income was 46 percent less than last year's value, and it missed our prediction by 26 percent.


In summary, Revenue fell sharply but no more than expected. Although the Cost of Goods Sold was a little less than we predicted, other GAAP costs were dramatically higher.  Cisco would claim that many recurring non-GAAP costs were cut.

To add a little salt to the wound, a court case in which Cisco was not a direct party led to tax changes that further depressed earnings.

More positively, Chairman and CEO CEO John Chambers stated,

"We saw a number of positive signs this quarter in the economy and in our business, especially comparing our sequential quarter-over-quarter order trends. If we continue to see these positive order trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occurred in our business in Q4."

Full disclosure: Long CSCO at time of writing.

PG: Income Statement Analysis for the June 2009 Quarter

Procter & Gamble (NYSE: PG) earned $0.80 per diluted share in the quarter that ended 30 June 2009, down from $0.92 last year ($0.90 excluding income from discontinued operations).  This period was the fourth quarter of P&G's fiscal year.

The average estimate for P&G earnings in the recent quarter was $0.78.

This post, which is our first on P&G, takes a peek at the company's latest Income Statement. 

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


P&G sells well-known consumer products, including brands, according to the company's web site, such as Pampers, Tide, Ariel, Always, Pantene, Bounty, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay.  Based in Cincinnati, the company traces its roots back to 1837.



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





It's worth noting that the results for the June 2008 quarter were restated to reflect last year's sale of the Folgers coffee business to J.M. Smucker (NYSE: SJM).

P&G's Revenue in the June quarter was 10.6 percent less than last year, but it was up 1.3 percent from the March 2009 period.  The company indicated that much of the Revenue decline, 9 percent, could be attributed to the stronger U.S. dollar, which diminishes the reported value of non-U.S. sales.  Product price increases and volume declines essentially canceled each other out, with respect to Revenue.

Revenue in the four quarters of fiscal 2009 slipped 3.3 percent compared to fiscal 2008.

The Cost of Goods Sold was 49.7 percent of Revenue in the quarter, which translates into a Gross Marginof 50.3 percent, up almost a full percentage point from 49.4 percent in June 2008.  The negative "impact of higher commodity costs moderated versus prior quarters."

Sales, General, and Administrative (SG&A) expenses decreased from 31.5 percent of Revenue last year to 31.2 percent. P&G was able to reduce its marketing costs.

Operating Income was down 4.4 percent from last year's June quarter.  Costs reductions prevented the hefty Revenue decline from having a greater negative effect on earnings

Interest and other non-operating items in the quarter summed to a net expense of $289 million, which matched the expense last year.

The 24.8-percent effective income tax rate was more burdensome than the unusually low 14.4 percent in last year's June quarter.  The rate in 2008 benefited from "significant adjustments to tax reserves."


Given all of the above, Net Income fell by 18.1 percent. Diluted earnings per share decreased by 13.5 percent, as fewer shares outstanding softened the decline.



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

TDW: Financial Gauge Analysis for the June 2009 Quarter

In an earlier post, we examined Tidewater's (NYSE: TDW) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Earnings in this period, the first quarter of fiscal 2010, fell from $1.64 to $0.86 per share.  Earnings were about $1.80 per share excluding a charge related to the seizure of Tidewater vessels in Venezuela.

We have since mined the financial statements in Tidewater's 10-Q to update the metrics we use to assess Cash Management, Growth, Profitability and Value.  This post reports on these metrics and the Financial Gauge scores.


In summary, Tidewater's latest GCFR gauge scores are as follows:

• Cash Management: 14 of 25 (down from 17 in March)
• Growth: 6 of 25 (down from 11)
  
• Profitability: 9 of 25 (up from 7)
  
• Value: 21 of 25 (down from 25)

• Overall: 59 of 100 (down from 67)
  

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

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Current Ratio	3.1	3.1	2.7	3.5
LTD/Equity	13.2%	13.4%	15.3%	18.1%
Debt/CFO (years)	0.6	0.6	0.7	1.1
Inventory/CGS (days)	N/A	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	88.4	83.6	85.6	87.1
Working Capital/Invested Capital	21.3%	18.8%	17.3%	19.3%
Cash Conversion Cycle Time (days)	75.0	56.7	64.1	61.2
Gauge Score (0 to 25)	14	17	12	13

Tidewater's strong Balance Sheet, which is evident from the first few ratios above, should help the company modernize its fleet.  It also provides a cushion to help the company overcome weak periods in the cyclic energy industry and challenges such as those in Venezuela.  Tidewater will need to spend another $572 million to fulfill commitments on 45 new vessels, as part of a $965 million program.  These vessels will be delivered in stages through July 2012.

Growth	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Revenue growth	5.6%	9.5%	12.4%	18.0%
Revenue/Assets	46.0%	47.7%	47.4%	42.8%
Operating Profit growth	21.1%	27.9%	69.1%	55.9%
CFO growth	10.1%	7.5%	0.5%	40.3%
Net Income growth	6.0%	16.7%	-7.2%	57.1%
Gauge Score (0 to 25)	6	11	5	15

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


Reduced offshore activity, especially in the U.S., trimmed Tidewater's Revenue growth.

The earnings and cash flow growth rates after the June 2009 quarter would be more robust (and the Growth score would be 4 points higher) if we ignored the $50 million charge.

Profitability	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Operating Expenses/Revenue	67.8%	68.5%	70.7%	71.9%
ROIC	16.6%	17.0%	16.0%	13.6%
Free Cash Flow/Invested Capital	3.2%	2.5%	4.4%	5.2%
Accrual Ratio	5.4%	10.2%	6.7%	3.2%
Gauge Score (0 to 25)	9	7	5	10

It's good to see the decrease in Operating Expenses, and the ROIC has held up well.  However, Free Cash Flow has suffered, in part because of high capital expenditures associated with the fleet expansion and modernization.

Value	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
P/E	6.0	4.7	9.7	12.7
P/E vs. S&P 500 P/E	0.3	0.3	0.5	0.8
PEG	0.3	0.2	0.1	0.2
Price/Revenue	1.6	1.4	2.6	2.7
Enterprise Value/Cash Flow (EV/CFO)	4.3	3.7	7.6	8.8
Gauge Score (0 to 25)	21	25	10	13

Tidewater's share price increased 15.5 percent during the June quarter, from $37.13 to $42.87.  This rise, combined with the hit to earnings in the latest quarter, put an end to Tidewater's perfect 25-point Value gauge score.

Nevertheless, the valuation ratios above are still very attractive. The valuation ratios can easily be compared with other companies in the Shipping industry.
 

Overall	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Gauge Score (0 to 100)	59	67	35	49

Tidewater is coping with the reduced demand for energy services, an industry-wide phenomenon.  Cost cutting has helped, but the asset expropriation that led to an operating charge of almost $50 million was the dominant feature of the June quarter and had the greatest effect on the gauge scores.

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

In July 2009, Tidewater and its lenders amended the company's revolving credit facility, increasing the amount to $450.0 million and extending the maturity date to July 2012.




Full disclosure: Long TDW at time of writing.

WPI: Financial Gauge Analysis for the June 2009 Quarter

In an earlier post, we examined Watson Pharmaceuticals' (NYSE: WPI) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Second-quarter earnings fell from $0.51 to $0.46 per share, primarily because of the costs to launch the RAPAFLO® and Gelnique products and to acquire Arrow Group.


We have since mined Watson's financial statements in its 10-Q to update the metrics we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.

In summary, Watson's latest GCFR gauge scores are as follows:

• Cash Management: 12 of 25 (up from 10 in March)
  
• Growth: 11 of 25 (unchanged)
  
• Profitability: 10 of 25 down from 11)
  
• Value: 8 of 25 (down from 10)

• Overall: 39 of 100 (down from 43)
  

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

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Current Ratio	1.4	1.4	2.9	3.7
LTD/Equity	6.7%	11.6%	41.8%	35.5%
Debt/CFO (years)	2.1	2.1	2.1	2.0
Inventory/CGS (days)	117.0	120.4	130.6	124.7
Finished Goods/Inventory	59.2%	62.4%	67.7%	57.1%
Days of Sales Outstanding (days)	45.3	44.4	44.2	50.6
Working Capital/Invested Capital	20.3%	17.1%	32.6%	39.5%
Cash Conversion Cycle Time (days)	67.2	70.4	67.8	86.0
Gauge Score (0 to 25)	12	10	13	13

We noted after the first quarter that Watson's total debt had not changed significantly, but much more debt was due within one year.  Looming debt payments increases Current Liabilities, depresses the Current Ratio, and reduces Working Capital. 

We guessed incorrectly that Watson would refinance the debt before the end of the second quarter.   However, the Balance Sheet for 30 June 2009 shows $726 million in short-term debt and $150 million in Long-term Debt, which is an unusual ratio. The liquidity situation is made more complicated by the "expectation that the Company will redeem the outstanding amount of the [convertible contingent senior debentures] CODES for cash within the next 12 months"

The downward trend in Inventory is encouraging.  The company might have been building up inventories for products they just recently made available for sale.

Growth	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Revenue growth	6.5%	5.1%	5.8%	13.8%
Revenue/Assets	71.7%	71.6%	70.8%	64.0%
Operating Profit growth	37.9%	34.6%	16.5%	19.7%
CFO growth	4.4%	3.4%	-16.9%	11.9%
Net Income growth	24.8%	48.0%	N/A	21.7%
Gauge Score (0 to 25)	11	11	4	10

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


Revenue picked up in the latest quarter.  Net Income, hurt by some one-time factors, still shows a potent growth rate.  Cash Flow from Operations, however, still appears tepid.

Profitability	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Operating Expenses/Revenue	86.7%	86.2%	87.7%	87.5%
ROIC	9.2%	9.4%	7.3%	7.2%
Free Cash Flow/Invested Capital	14.1%	14.3%	12.6%	14.7%
Accrual Ratio	-2.1%	-2.4%	-4.4%	-0.7%
Gauge Score (0 to 25)	10	11	12	9

Operating expenses as a percentage of Revenue were reduced a full percentage point over the last year, and the results are seen in the improved return on invested capital.  The rise in the Accrual Ratio, relative to its value 12-months ago, suggests some degradation to Earnings Quality.  To be specific, it indicates that less of the company's Net Income is due to Cash Flow from Operations; therefore, more is due to changes in non-operational Balance Sheet accruals.

Value	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
P/E	17.4	15.5	17.4	23.2
P/E vs. S&P 500 P/E	0.8	0.8	0.9	1.3
PEG	0.5	0.4	1.1	1.5
Price/Revenue	1.5	1.4	1.3	1.7
Enterprise Value/Cash Flow (EV/CFO)	10.3	9.5	9.5	9.0
Gauge Score (0 to 25)	8	10	14	10

Shares of Watson Pharmaceuticals increased 8.3 percent during the second quarter, from $31.11 to $33.69.  This rise put some pressure on the contrarian Value gauge, especially since earnings fell.

Overall	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Gauge Score (0 to 100)	39	43	49	40

The gauge scores basically held steady in the second quarter.  They would increase after a successful debt refinancing, the winding down of some non-recurring costs, and the realization of higher cash flows from the new products now emerging from the development pipeline.




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

BP: Financial Gauge Analysis for the June 2009 Quarter

In an earlier post, we examined BP's (NYSE: BP and LON:BP) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Second-quarter earnings fell from $2.98 per ADR to $1.39.

We have since mined BP's financial statements to update the metrics we use to assess Cash Management, Growth, Profitability and Value.  This post reports on these metrics and the Financial Gauge scores.

BP prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union.  Reports prior to 2006 complied with UK Generally Accepted Accounting Principles. 


In summary, BP's latest GCFR gauge scores are as follows:

• Cash Management: 10 of 25 (down from 12 in March)
  
• Growth: 3 of 25 (down from 8)
  
• Profitability: 5 of 25 (down from 7)
  
• Value: 10 of 25 (down from 19)
  

• Overall: 31 of 100 (down from 51)
  

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

Cash Management	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Current Ratio	1.1	1.0	1.1	1.0
LTD/Equity	25.2%	21.3%	12.9%	15.1%
Debt/CFO (years)	1.1	1.1	1.1	0.9
Inventory/CGS (days)	N/A	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A	N/A
Days of Sales Outstanding (days)	53.2	39.8	46.4	53.5
Working Capital/Invested Capital	3.3%	-2.4%	5.2%	1.7%
Cash Conversion Cycle Time (days)	19.1	12.7	23.0	13.2
Gauge Score (0 to 25)	10	12	9	8

BP's Long-Term Debt has increased 79 percent in the last year, from $13.6 billion to $24.2 billion.  During this period, Shareholder's Equity fell from $105 billion to $96 billion.  About 40 percent of the proceeds from the long-term securities, about $4.6 billion, was used to reduce short-term obligations, so the increase in total debt was softened.

After some good progress at paring Accounts Receivable as a percentage of Revenue (i.e., Days of Sales Outstanding), the value shot back up again in the latest quarter.  However, this increase says more about the Revenue decline than the management of Receivables.  In any event, the rise also pushed up the Cash Conversion Cycle Time, which suggest less efficiency at cash management.

We're pleased to see the return of a positive value for Working Capital.

Growth	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Revenue growth	-23.3%	3.2%	31.9%	10.0%
Revenue/Assets	103.1%	134.8%	137.5%	120.5%
Operating Profit growth	-3.0%	3.4%	17.3%	3.0%
CFO growth	16.1%	18.6%	16.9%	9.1%
Net Income growth	-51.4%	-27.1%	15.6%	-0.1%
Gauge Score (0 to 25)	3	8	23	10

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


The huge drops in Revenue and Net Income have nearly the wiped out the Growth gauge, but the rise in Cash Flow from Operations is an unexpected gem.

Profitability	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Operating Expenses/Revenue	94.1%	92.2%	89.4%	90.0%
ROIC	7.0%	12.0%	18.1%	15.9%
Free Cash Flow/Invested Capital	7.3%	8.1%	7.7%	10.8%
Accrual Ratio	0.6%	3.0%	5.6%	2.0%
Gauge Score (0 to 25)	5	7	10	9

Weaker operating margins have cut into the Return on Invested Capital.  As we saw with the Growth gauge, the metrics based on Cash Flow are holding up better.  This is also manifested in the lower Accrual Ratio, which suggest improving Earnings Quality.

Value	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
P/E	12.9	7.6	8.6	10.1
P/E vs. S&P 500 P/E	0.6	0.4	0.5	0.6
PEG	N/A	2.2	0.5	1.1
Price/Revenue	0.6	0.4	0.6	0.8
Enterprise Value/Cash Flow (EV/CFO)	5.4	4.7	8.7	8.4
Gauge Score (0 to 25)	10	19	13	9

BP's ADR price increased 19 percent in the second quarter, from $40.10 to $47.68.  Since Revenue and earnings tumbled during this period, we should not be surprised to see the Value gauge's compression.

Nevertheless, some of BP's valuation ratios remain attractive. They can easily be compared with other companies in the Major Integrated Oil & Gas industry.

Overall	Jun 2009	Mar 2009	Jun 2008	5-Yr Avg
Gauge Score (0 to 100)	31	51	49	36

With the fall in energy prices, each gauge of BP's performance has declined, and the result in reflected in the weak Overall score.

The positive case for BP is that the second quarter's results were not as bad as expected, production was up, and the quarterly Gross Margin had increased.  Cash Flow from Operations is holding up relatively well.  However, the gauges will remain weak until the positive factors translate into higher operating earnings or the shares trade lower.



Full disclosure:  Long BP at time of writing

ADP: Income Statement Analysis for the June 2009 Quarter

Automatic Data Processing (NASDAQ: ADP) earned $0.70 per share in the three months that ended on 30 June 2009, up from $0.45 in the same quarter of last year.  The April-to-June period is the fourth quarter of ADP's fiscal year.

Earnings in the recent quarter benefited from tax settlements that led to a one-time $120 million reduction in income taxes.  If this tax benefit had not been realized, earnings per share would have been $0.46.

This post examines the Income Statement for the quarter and compares it to our "look-ahead" estimates.  Our target for ADP's Net Income in the latest quarter was $0.47 per share.

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

Our principal sources were the earnings announcement and the conference call transcript at SeekingAlpha.  Some background information about Automatic Data Processing and the business environment in which it is currently operating can be found in the look-ahead.

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

Revenue was 4.5 percent less than in June 2008 quarter and 2.0 percent less than our estimate.  ADP reported: 

"Revenue growth was negatively impacted by continued severe economic conditions and about 4 percentage points from unfavorable foreign exchange rates"

Fiscal 2009 Revenue was 1.0 percent more than in fiscal 2008.  This tepid growth rate was at the bottom end of the 1-to-2 percent range forecast by ADP in May.

Revenue from ADP's Employer Services business segment, which is (by far) the company's largest operation, was essentially flat in the June quarter.  Revenue from the business supporting automotive dealers was down, but (only?) by 9 percent.

The Cost of Goods Sold -- what ADP calls "Operating Expenses" -- was 47.8 percent of Revenue, which translates into a Gross Margin of 52.2 percent.  The margin was down from 55.0 percent in the year-earlier quarter, and it was also less profitable than the 54.0 percent we predicted.

Depreciation and amortization expenses were unchanged from last year, and the current value was just $1 million more than our $60 million estimate.

Research and Development expenses ("Systems Development and Programming Costs") were 10 percent lower than last year's value, but 6 percent greater than our estimate.  The R&D expense was 6.0 percent of Revenue, a little more than our 5.6 percent estimate.

Sales, General, and Administrative expenses were 17 percent less than in the June 2008 quarter and 8.4 percent less than our estimate.  As a percentage of Revenue, SG and A costs fell from 31.6 percent last year to 27.4 percent.

Although Revenue was lower than in last year's second quarter, Operating Income increased by 6 percent as a result of ADP's cost-cutting successes.  Our estimate for Operating Income was 5 percent too high, mostly because our Revenue and Gross Margin predictions were overly optimistic.

Other income less interest expense was $7 million more than we anticipated.  In the June 2008 quarter, ADP recorded a $16 million gain on the sale of a building.

As mentioned above, the provision for income taxes in the June 2009 quarter was $120 million less burdensome, $13.6 million instead of $133.6 million, because of the favorable settlement of certain tax matters.  This benefit resulted in an effective Income Tax Rate of only 3.8 percent.  The tax rate would have been 37 percent (our assumption was 36 percent) if the benefit had not been realized.

The tax benefit allowed Net Income to soar 51 percent (56 percent on a per-share basis) beyond last year's amount.  If the tax benefit is excluded, Net Income in the quarter would have been almost exactly the same as last year and just $4 million ($0.01 per share) below our prediction.



Full disclosure: Long ADP at time of writing.