Analysis Changes for Early 2009

In this post, we describe several changes to how GCFR will analyze financial statements and calculate gauge scores. 

These changes are generally minor and are part of our continuing efforts to learn more from corporate financial statements.  Our goal is to identify the factors that will influence the subject company's performance in the future.



1.  We now track Return on Invested Capital, Working Capital/Market Capitalization, and Free Cash Flow/Shareholders' Equity.  The change will be to use Invested Capital as the denominator for each term.

There are many alternative definitions of Invested Capital.  We use the following simple equation.:

Invested Capital is Shareholders' Equity + Debt - Cash - Short-Term Investments

ROIC is, of course, unaffected by the change in denominator.  Working Capital to Invested Capital and Free Cash Flow to Invested Capital are new metrics for us.

We're making this change to facilitate comparisons between income-based ROIC and cash flow-based FCF-to-Invested Capital.


2.  We're going to give more attention to Operating Profit, which we define as Operating Income excluding the effect of special operating charges.  We will determine the average annual rate of change in Operating Profit over the four previous years for each company we follow.


3.  The PEG rate is back by popular request.  PEG is the Price/Earnings Ratio (Price per Share divided by Earnings per Share) divided by the Earnings Growth rate (expressed as a percent).  Instead of the growth in Net Income, we will use the average Operating Profit growth rate mentioned above.

4.  We've adjusted many of the weights to used to calculate the gauge scores.  Our objective is to increase the correlation between the scores and future share price gains.  In many cases, the weight changes will cause previously reported scores to vary up or down by minor amounts.

NVDA: Financial Analysis through January 2009 (Update)

We previously posted an analysis of NVIDIA's financial performance -- a significant loss -- during the three months that ended on 25 January 2009.  This period was the fourth quarter of the company's fiscal 2009.  The evaluation was limited because the press release did not include a Cash Flow Statement and the Balance Sheet omitted some details.  With relevant information not yet available, we had to make certain estimates about NVIDIA's finances to compute gauge scores.

NVIDIA (NASDAQ: NVDA) subsequently filed a 10-K for fiscal 2009 with the SEC.   We extracted previously undisclosed data from the 10-K and updated our analysis accordingly. 

This post reports on the update.


NVIDIA Corporation, based in Santa Clara, CA, builds a variety of specialized Graphics Processing Units.  These devices perform computationally intense tasks required to produce realistic images for video games and other applications.  NVIDIA, which had its initial public offering in 1999, sells to computer manufacturers such as Apple, Inc., (NASDAQ: AAPL). 

Early in 2008, before the worst effects of bursting real estate bubble were felt, NVIDIA purchased 25 acres of land and ten commercial buildings in Santa Clara for $195 million.

In the second quarter of fiscal 2009, NVIDIA recorded a $196 million charge to cover warranty, etc., costs resulting from faulty processors NVIDIA sold for use in notebook computers.  The problems were attributed to "a weak die/packaging material set."  (NVIDIA allocated the charge to Cost of Revenue, but we treat it as a special operating expense.)


It may be of greater long-term significance that the lines between NVIDIA's GPUs and general purpose microprocessors, such as those made by Intel Corporation (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD), are blurring.  Intel and NVIDIA appear to be squaring off for bloodier battles ahead.  Intel sued NVIDIA in February 2009 over the future applicability of an earlier license that "allowed nVidia to provide chipsets for Intel-based motherboards."  In addition, reports have circulated that NVIDIA might augment its product line with general purpose "x86" microprocessors made by Intel and AMD.


The additional data in the 10-K softened the fall in the gauge scores, relative to our initial projections.  The Cash Flow data wasn't as bad as we had estimated.  The complete and current set of scores is shown below:

• Cash Management: 12 of 25 (up from 11 in October)
  
• Growth: 0 of 25 (down from 1)
• Profitability: 4 of 25 (up from 3)
• Value: 13 of 25 (down from 25)
   
• Overall: 35 of 100 (down from 53)

The 10-K didn't change our evaluation of the latest quarter's Income Statement.  It will be sufficient to say here that Revenue was 46.4 percent less than in the immediately preceding October 2008 quarter, and it was 60 percent less than in the year-earlier January 2008 quarter.  The Net Loss for the quarter was $148 million (-$0.27/share).

http://sheet.zoho.com/public/ncarvin/nvda-income-statement?mode=htm

Cash Management	January 2009	3 months ago	12 months ago
Current Ratio	2.8	2.5	3.0
LTD/Equity	1.1%	0%	0%
Debt/CFO	0.1	0	0
Inventory/CGS	79.6 days	64.0 days	58.4 days
Finished Goods/Inventory	70.1%	63.3%	61.2%
Days of Sales Outstanding (DSO)	52.5 days	51.1 days	52.8 days
Working Capital/Market Capitalization	32.3%	29.8%	12.8%
Cash Conversion Cycle Time (CCCT)	74.0 days	56.0 days	48.7 days
Gauge Score (0 to 25)	12	11	10

NVIDIA has considerable liquidity.  The awful fourth quarter barely made a dent in the company's Cash and Short-Term Investments, which now total $1.26 billion.  Debt remains minimal.  The dramatic Inventory increase, especially the Finished Good component, demonstrates how much Sales were below the company's expectations.  The ratio of Working Capital to Market Capitalization is rather high, and it might eventually attract the attention of value investors.

Growth	January 2009	3 months ago	12 months ago
Revenue growth	-16.4%	9.9%	33.5%
Revenue/Assets	96.5%	116%	128%
CFO growth	-80.4%	-57.9%	122%
Net Income growth	N/A%	-46.8%	78.0%
Gauge Score (0 to 25)	0	1	13

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

As indicated by the zero score, contraction is a more accurate word than growth to describe the state of NVIDIA's business at the end of the year.

Profitability	January 2009	3 months ago	12 months ago
Operating Expenses/Revenue	95.6%	86.2%	79.6%
ROIC	N/A	28.5%	91.6%
FCF/Equity	-6.3%	3.4%	46.8%
Accrual Ratio	-2.1%	12.6%	7.7%
Gauge Score (0 to 25)	4	3	19

Expenses are up and investment returns are down.  The once-impressive ROIC figure has been erased. However, the lower Accrual Ratio points to there being Cash Flow from Operations to back up reported earnings.

Value	January 2009	3 months ago	12 months ago	5-year median
P/E	N/A	13.2	18.8	27.4
P/E to S&P 500 average P/E	N/A	88%	112%	166%
Price/Revenue	1.2	1.2	3.7	2.7
Enterprise Value/Cash Flow (EV/CFO)	12.2	7.0	10.4	16.8
Gauge Score (0 to 25)	13	25	12	N/A

NVIDIA's share price continued to fall in the November-January period, from $8.76 on 31 October 2008 to $7.95 on 31 January 2009. (We use the price on the month-end date nearest to quarter-end date to calculate the Value metrics.)  The share price was over $30 between August 2007 and December 2007 -- not that long ago!

NVIDIA's valuation ratios can be compared with other companies in the Specialized Semiconductor industry.

Overall	January 2009	3 months ago	12 months ago
Gauge Score (0 to 100)	35	53	56

Former high-flier NVIDIA has stumbled badly, and its investors have been punished severely.   A 46 percent drop in Revenue from one quarter to the next is shocking and far worse than expectations when the quarter began.  Sales of NVIDIA's chips practically came to a halt in the fourth quarter, as a result of economic, industry, and (perhaps) competitive factors.  

Even if the marketplace loosens up, NVIDIA will still have to overcome challenges related to the sale of defective products and the need to ensure its products remain top-notch despite short product cycles and formidable competitors.

INTC: Look Ahead to March 2009 Quarterly Results

2008 ended painfully for many firms, their employees, and shareholders, but the weak global economy hit Semiconductor companies especially hard.  The Semiconductor Industry Association (SIA) reported that sales of the items they track were 2.8 percent lower in 2008 than 2007.  This was the first yearly drop since 2001. 

Conditions were much worse at year's end.  The SIA noted, "Sales fell from $22.3 billion in December 2007 to $17.4 billion in December 2008, a decline of 22 percent."

To put it simply, financially strapped consumers and businesses were forced to spend less on products from tech titans such as Dell (NASDAQ: DELL) and Hewlett Packard (NYSE: HPQ).  These companies, as a result, placed far fewer orders for chips with Intel.


Intel Corporation (NASDAQ: INTC) manufactures integrated circuits for computers, servers, hand-held devices, and communication products.  The company's most significant competitor has long been Advanced Micro Devices (NYSE: AMD), but Intel is paying increasing attention to NVIDIA (NASDAQ: NVDA).  Intel sued NVIDIA in February 2009 over the future applicability of an earlier license that "allowed nVidia to provide chipsets for Intel-based motherboards."  In addition, reports have circulated that NVIDIA might augment its product line with general purpose "x86" microprocessors now made by Intel and AMD.
 

Intel's Revenue in the fourth quarter of 2008 was $8.23 billion, which was 23.2 percent less than in the December 2007 quarter.  In October 2008, Intel management forecast Revenue would be between $10.1 billion to $10.9 billion in the fourth quarter.  The huge shortfall is graphic illustration of how quickly business turned down.

To add to the misery, Intel recorded a $1.2 billion loss on equity investments in the fourth quarter.  The loss reflected the much reduced market value of an investment in Clearwire Corp. (NASDAQ: CLWR). 

As a result of weaker sales and various charges, Net Income dropped by 90 percent relative to the year-earlier period.

The dismal fourth quarter slashed the GCFR Overall Gauge measure of Intel from to 62 to 51 of the 100 possible points.  The Growth and Profitability gauges (no surprise) weakened the most.  The evaluation was explained fully in this analysis report and this update.  



To look ahead, we've now modeled the company's Income Statement for the first quarter of 2009.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that Intel will announce on 14 April 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management. 

In normal times, Intel makes our task easy by providing explicit guidance for most of the items on the Income Statement.  However, when announcing fourth-quarter results, the company chose not to provide formal Revenue guidance for the first quarter of 2009.  Strangely, Intel indicated that, "For internal purposes, the company is currently planning for revenue in the vicinity of $7 billion."

Revenue guidance was also omitted in the Business Outlook section of Intel's 10-K for 2008.

At this point, we only have industry data for January 2009 as a predictor of Intel's Revenue in the first quarter.  The SIA reported that "Worldwide sales of semiconductors were $15.3 billion in January, a decline of 28.6 percent compared to January 2008 sales of $21.5 billion."


On this rather shaky basis, we will assume that Intel's Revenue in the first quarter of 2009 will be 30 percent below their Revenue in the first quarter of 2008.  Since the year-earlier figure was $9.7 billion, our target for Revenue in the current quarter is $6.8 billion.  For what it's worth, our target is not terribly far off from Intel's so-called internal estimate.

Revenue uncertainty also makes it difficult to project the first quarter's Gross Margin because diminished sales lead to production inefficiencies.  Intel suggested in January that they expect a gross margin percentage in "the low 40s," which is far weaker than what Intel has historically attained.  If this expectation proves to be correct, the gross margin would be the worst for Intel since it was 37 percent in the fourth quarter of 1994.

Our Gross Margin target for the first quarter is 42.5 percent.  Given the Revenue estimate above, we expect a CGS equal to (1 - 0.425) * $6.8 billion = $3.9 billion.

The company indicated R&D and SG&A costs in the first quarter would total $2.5 billion.  It's not unreasonable, given the historical record, to assume that this figure will be split more or less equally between R&D and SG&A.  Not surprisingly, the operating costs as a percentage of Revenue (about 18.5 percent for each item) will be much higher than normal.


We will accept the company's rather substantial $160 million estimate for restructuring and asset impairments.

With these assumptions, we find that the estimated Operating Income for the quarter is a mere $218 million, down 90 percent from the March 2008 quarter.

Intel's guidance for equity investments, interest and other non-operating income is a net loss of $130 million.  We estimate a $230 million loss on equity investments and a $100 million gain on interest and other income.

The non-operating figures would drop Pre-tax Income to $88 million.  For the income tax rate, we have used Intel's estimate of 27 percent.  This rate would lead to a Provision for Income Taxes of $24 million. 

Therefore, it appears that Net Income in the first quarter will be $64 million ($0.01 per share).  In the first quarter of 2008, Net Income was $1.4 billion ($0.25 per share).


Please note that the presentation format we use for all analyses may differ in material respects from company-used formats and terminology.  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.

http://sheet.zoho.com/public/ncarvin/intc-income-statement-2009q1?mode=html

PRGN: No Announcement Yet of 2008-4Q Earnings

One of the companies we currently follow has still not announced its results for the fourth quarter of 2008. We are beginning to wonder if this delay signals a problem.

We have not found a formal indication of when Paragon Shipping, Inc., intends to make these results public.

Paragon Shipping (NASDAQ: PRGN) is a dry bulk cargo transporter officially registered in the Marshall Islands but with headquarters in Voula, Greece.

The plunge in the Baltic Dry Index of shipping rates indicates the extent to which the downturn in global trade has reduced shipping activity and put pressure on ship owners. Paragon generally leases its vessels on the basis of long-term charters. When the charters expire, Paragon will not get the same monthly rates it did when the economy was booming.

On 20 February 2008, Paragon announced its results for the three months and year ended 31 December 2007. On this basis, we expected to see an earnings report in late February 2009 for 2008's fourth quarter.


UPDATE: Paragon Shipping announced today that it will release financial results for the fourth quarter and full year ended 31 December 2008 after the close of U.S. financial markets on Wednesday, 18 March 2009.

NT: Financial Analysis through December 2008

On 2 March 2009, bankrupt Nortel Networks (TSE: NT) announced its results for the fourth quarter and full year of 2008.  The company simultaneously filed a 10-K report for the year with the SEC. 

This post provides the GCFR analysis of the financial statements.  These statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and are expressed in U.S. dollars.



Nortel Networks Corp. is the Toronto-based supplier of products and services to telecom carriers, other networking enterprises, and businesses.  Nortel succumbed to bankruptcy after experiencing losses for most of this decade, resulting in an unfathomable accumulated deficit (i.e., negative retained earnings) of $40 billion (U.S.).

Shortfalls in the company's internal financial controls were revealed over the years, resulting in numerous restatements and allegations of misdeeds.  The RCMP has charged a former Nortel CEO and two other executives with fraud for errors for errors in the company's financial statements.

Speculation has increased that the company's restructuring plan for emerging from bankruptcy will involve the sale of major business units.



We begin by comparing the latest quarterly Income Statement to the model we prepared prior to the creditor-protection filing.

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.

http://sheet.zoho.com/public/ncarvin/nt-income-statement?mode=html



Revenue was 14.9 percent less than in the December 2007 quarter.  However, it was only 1.0 percent below our target, which was based on the company's guidance to expect Revenue in all of 2008 to be 4 percent less than Revenue in 2007.  In actuality, annual Revenue dropped by 4.8 percent.

Nortel management reported that many of its customers, but especially those in North America, "responded to increasingly worsening macroeconomic and industry conditions and uncertainty by suspending, delaying and reducing their capital expenditures."

The Cost of Goods Sold was 59.6 percent of Revenue in the quarter, which translates into a Gross Margin of 40.4 percent.  We had expected a more profitable margin of 43.8 percent.  For the year, the Gross Margin was 41.1 percent, which compares unfavorably to management's guidance of 42 percent.

Research and Development (R&D) expenses in the quarter were 12.3 percent of Revenue, significantly less than our 14.5 percent estimate.  For the year, R&D expenses totaled 15.1 percent of Revenue.

Sales, General, and Administrative expenses were 17.2 percent of Revenue, much less than our 20 percent estimate for the quarter. 

Alas, less-than-projected R&D and SG&A costs was for naught.  A gargantuan, but non-cash, $1.237 billion operating charge for Goodwill Impairment made all other numbers seem small. 

The Goodwill Impairment charge sunk Operating Income to a $1 billion loss.  If special charges are ignored, Operating Income would have been almost $300 million.  Out estimate, on this basis, was $255 million.

Negative pre-tax income didn't preclude a $967 million provision for Income Taxes, which pushed the Net Loss over $2 billion. Nortel stated "The tax expense ... included an increase to the valuation allowance against the deferred tax assets due to the uncertainties resulting from the global economic downturn and the Company’s creditor protection proceedings."

In 2008 as a whole, Nortel's lost $2.6 billion before tax.  While most companies might have claimed a tax credit, Nortel's Provision for Income Taxes equaled $3.2 billion. 

Cash Management	December 2008	3 months prior	12 months prior
Current Ratio	1.5	1.5	1.4
LTD/Equity	N/A	N/A	138%
Debt/CFO	N/A	N/A	N/A
Inventory/CGS	104 days	110 days	115 days
Finished Goods/Inventory	48.8%	50.1%	40.0%
Days of Sales Outstanding (DSO)	83.0 days	75.2 days	89.5 days
Working Capital/Market Capitalization	46.9%	41.2%	19.7%
Cash Conversion Cycle Time (CCCT)	115 days	120 days	138 days
Gauge Score (0 to 25)	11	12	5

Neither Shareholder's Equity, nor Cash Flow from Operations, are available for debt payments because both are negative.

The decrease in the total Inventory is mildly positive, but the high proportion of Finished Goods indicates slowing sales.  In addition, the Inventory level is too high for an industry where frequent innovation necessitates short product cycle times. 

For Market Capitalization, we add the Market Value of the common shares to the company's long-term and maturing debt.  The former is essentially zero.  This explains the rise in the Working Capital/Market Capitalization ratio.

Growth	December 2008	3 months prior	12 months prior
Revenue growth	-4.8%	-1.6%	-4.1%
Revenue/Assets	81%	74%	61%
CFO growth	N/A	N/A	N/A
Net Income growth	N/A	N/A	N/A
Gauge Score (0 to 25)	0	0	0

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

The Cash Flow and Net Income growth rates are incalculable since the values were negative in the current and previous periods. 

Revenue is contracting, but write-downs have reduced the carrying value of Assets even more.

Profitability	December 2008	3 months prior	12 months prior
Operating Expenses/Revenue	94.6%	95.4%	96.3%
ROIC	N/A	N/A	2.9%
FCF/Equity	N/A	N/A	N/A
Accrual Ratio	-56%	-33%	-5.6%
Gauge Score (0 to 25)	7	7	9

When special charges are excluded, as in the Operating Expense ratio above, there are is shimmer of improving profitability. 

Value	December 2008	3 months prior	12 months prior
P/E	N/A	N/A	N/A
P/E to S&P 500 average P/E	N/A	N/A	N/A
Price/Revenue	N/A	0.1	0.7
Enterprise Value/Cash Flow (EV/CFO)	N/A	N/A	N/A
Gauge Score (0 to 25)	N/A	10	9

In bankruptcy, Nortel's shares have essentially no value.

KG: Financial Analysis through December 2008 (Update)

The press release announcing the results of King Pharmaceuticals (NYSE: KG) during the fourth quarter of 2008 did not include some detailed information, such as a Cash Flow statement.  When we analyzed the initial announcement and computed gauge scores, we estimated data that had not yet been disclosed.

The omissions from the press release were not unusual in any way.  Many companies report certain financial details only in their more formal SEC filings.

Just a few days after the earnings announcement, King filed the formal and more complete 10-K report for 2008.  We used the 10-K to update our analysis, and this post identifies the revisions.

The 10-K did not change our examination of the fourth-quarter Income Statement.

http://sheet.zoho.com/public/ncarvin/kg-income-statement?mode=html



King Pharmaceuticals, Inc. manufactures and sells various brand-name prescription pharmaceuticals.  Headquartered in Bristol, TN, King now focuses on specialty products for the neuroscience, hospital and acute care markets.  On 29 December 2008, King completed the $1.6 billion acquisition of Alpharma, Inc. (NYSE: ALO), and Alpharma became a wholly owned subsidiary.  A $600 million charge due to the purchase resulted in King reporting substantial net losses for the fourth quarter and full year.

In early 2009, the U.S. District Court for the Eastern District of New York invalidated two U.S. patents relating to SKELAXIN® (metaxalone).  Although King plans to appeal the Court's order, it is important to realize that this muscle relaxant is currently King's best selling branded pharmaceutical product.  SKELAXIN accounted for $446 million (28.5 percent) of King's sales in 2008.

Given the Alpharma acquisition and the SKELAXIN decision, it is not terribly surprising that King announced cost-cutting workforce reductions affecting about 22 percent of its employees.


Although the previously undisclosed data in the 10-K changed some of the financial metrics that determine the gauge scores , the scores reported in the original analysis report were unaffected.

• Cash Management: 3 of 25 (down from 13 in September)
  
• Growth: 0 of 25 (down from 8)
• Profitability: 12 of 25 (down from 20)
• Value: 5 of 25 (down from 22)
  

• Overall: 25 of 100 (down from 74)

Figures that were changed by the 10-K are shown in red text below:

Cash Management	December 2008	3 months prior	12 months prior
Current Ratio	1.7	5.3	4.0
LTD/Equity	44.2%	14.6%	15.9%
Debt/CFO	2.9 years	0.7 years	0.6 years
Inventory/CGS	173 days	109 days	109 days
Finished Goods/Inventory	68.4%	64.4%	55.6%
Days of Sales Outstanding (DSO)	50.0 days	45.2 days	38.4 days
Working Capital/Market Capitalization	16.6%	50.2%	47.1%
Cash Conversion Cycle Time	149.2 days	86.9 days	83.7 days
Gauge Score (0 to 25)	3	13	18

During the fourth quarter, King's holdings of Cash were cut by $290 million, Short-term debt and the currently due portion of Long-term Debt went from 0 to $444 million, and the rest of Long-term Debt increased from $400 million to $963 million.  These figures sum to $1.3 billion, so it is safe to say that the changes were, more or less, associated with the $1.55 billion spent to acquire Alpharma.

The acquisition, therefore, is the principal explanation for the big drop in the Current Ratio, the big increase in the Debt levels, and the reduced Working Capital.  However, the new numbers are not especially alarming, and we expect King is taking action to refinance a big chunk of short-term debt to long-term paper when market conditions allow. 

From 30 September to 31 December 2008, Inventory rose $92 million to $258 million.  The Finished Goods component of Inventory rose from $59 million to $177 million.  The 10-K does not provide a full explanation for these massive increases.  With respect to Inventory, the 10-K provides more information 2007's changes to the Altace inventory and the situation with the Flector ^® Patch product acquired with Alpharma.  Perhaps the company intentionally inflated its inventory in preparation for new product launches, but we are concerned in signals weaker sales ahead.

Growth	December 2008	3 months prior	12 months prior
Revenue growth	-26.8%	-17.3%	7.5%
Revenue/Assets	40.7%	50.8%	63.3%
CFO growth	-26.9%	0.0%	44.5%
Net Income growth	N/A	45.5%	-36.5%
Gauge Score (0 to 25)	0	8	4

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


With rapidly declining sales and decelerated Cash Flow, Growth isn't a big part of the current landscape at King.  Negative Net Income, as a result of special charges, makes growth rates for this measure irrelevant.

Profitability	December 2008	3 months prior	12 months prior
Operating Expenses/Revenue	114%	79.9%	89.4%
ROIC	N/A%	12.8%	10.8%
FCF/Equity	18.5%	20.7%	26.0%
Accrual Ratio	-15.7%	-27.1%	8.4%
Gauge Score (0 to 25)	12	20	11

Operating Expenses are distorted by the special charges.  If these are ignored in all time periods, Operating Expenses decreased from 73 percent of Revenue in 2007 to 72 percent in 2008.

Value	December 2008	3 months prior	12 months prior
P/E	N/A	9.1	13.7
P/E to S&P 500 average P/E	N/A	50.8%	76.8%
Price/Revenue	1.7	1.3	1.2
Enterprise Value/Cash Flow (EV/CFO)	6.2	2.4	2.3
Gauge Score (0 to 25)	5	22	23

King's stock price rose over the course of the quarter from $9.58 to $10.62.  The valuation ratios above can be compared with other Drug Manufacturers.

Overall	December 2008	3 months prior	12 months prior
Gauge Score (0 to 100)	25	74	66

The big news of the fourth quarter for King Pharmaceutical was the closing of its acquisition of Alpharma.  King used funds from its cash war chest and took on additional debt to pay the $1.5 billion price for this purchase.  (Was it worth it, given the forced Kadian divestiture?)

Almost 40 percent of the acquisition price was written off as an in-process R&D expense.

Over the longer term, the invalidation of two U.S. patents relating to SKELAXIN® (metaxalone) might prove to be more important.

INTC: Financial Analysis through December 2008 (Update)

The press release announcing Intel's earnings for the fourth quarter of 2008, which ended on 27 December, did not include a complete Cash Flow statement.  When we analyzed the data in the initial announcement and computed gauge scores, we had to estimate Cash Flow from Operations and Cash Used for Investment.


Intel (NASDAQ: INTC) subsequently filed a formal 10-K for 2008 with complete financial statements and footnotes.  We have updated our analysis to incorporate the latest information, and this post identifies the revisions.  The 10-K did not change our examination of the fourth-quarter Income Statement.


http://sheet.zoho.com/public/ncarvin/intc-income-statement-2?mode=html


A Semiconductor Industry titan, Intel Corporation manufactures integrated circuits for computers, servers, hand-held devices, and communication products.


The fourth quarter was brutal for the Intel in almost every respect.  Worldwide economic slowness took a big bite out of the sales of products that include semiconductors.  This performance was anticipated by the stock market which punished Intel shares long before sales fell precipitously.

As it turned out, our Cash Flow estimates were a little too pessimistic.  When we plugged in the actual Cash Flow data from the 10-K, the Overall Gauge rose from an initial calculation of 47 points to 50 points.  The full and up-to-date set of scores are listed here:

• Cash Management: 18 of 25 (up from 14 in September)
  
• Growth: 0 of 25 (down from 10)
• Profitability: 11 of 25 (down from 19)
• Value: 14 of 25 (down from 15)
  

• Overall: 50 of 100 (down from 63)

If we were to use Intel's current price per share of $12.41, instead of the year-end closing price of $14.66, the Value gauge would rise 6 points and the Overall gauge would increase 8 points to 58.


In the tables below, only metrics related to Cash Flow are different from those reported in our original analysis.

Cash Management	December 2008	3 months prior	12 months prior
Current Ratio	2.5	2.1	2.8
LTD/Equity	4.8%	4.9%	4.6%
Debt/CFO	0.2 years	0.2 years	0.2 years
Inventory/CGS	77.5 days	72.9 days	76.1 days
Finished Goods/Inventory	41.6%	40.8%	41.6%
Days of Sales Outstanding (DSO)	20.8 days	25.8 days	25.2 days
Working Capital/Market Capitalization	14.3%	10.4%	9.5%
Cash Conversion Cycle Time	47.7 days	47.4 days	53.1 days
Gauge Score (0 to 25)	18	14	15

Despite weak business conditions, Intel's Balance Sheet remains strong.  The only area is concern is the higher Inventory level, which isn't surprising given that sales were so much less than originally expected.  Debt is low, and working capital is high. 

Growth	December 2008	3 months prior	12 months prior
Revenue growth	-2.0%	7.4%	8.3%
Revenue/Assets	70.7%	75.8%	73.7%
CFO growth	-13.5%	8.2%	18.7%
Net Income growth	-24.1%	18.1%	38.3%
Gauge Score (0 to 25)	0	10	15

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

Revenue, Cash Flow, and Net Income all contracted. 

Profitability	December 2008	3 months prior	12 months prior
Operating Expenses/Revenue	76.2%	73.9%	78.6%
ROIC	21.1%	24.9%	21.2%
FCF/Equity	14.0%	20.9%	19.2%
Accrual Ratio	0.5%	0.6%	7.7%
Gauge Score (0 to 25)	11	19	14

Operating expenses increased substantially as a percentage of Revenue in the quarter, but they are still lower than they were one year ago.   Free Cash Flow dropped substantially, but not as much as we had initially feared.

Value	December 2008	3 months prior	12 months prior
P/E	15.6	14.5	22.9
P/E to S&P 500 average P/E	96%	81%	129%
Price/Revenue	2.2	2.7	4.2
Enterprise Value/Cash Flow (EV/CFO)	6.6	7.4	11.6
Gauge Score (0 to 25)	14	15	0

The gauge, which takes a contrary view of share prices, had risen sharply in the first three quarters of the year.  Although the share price continued to fall, the plunging earnings in the fourth quarter provided a counteracting negative force.

Intel's valuation ratios can be compared with other companies in the Semiconductor industry.

Overall	December 2008	3 months prior	12 months prior
Gauge Score (0 to 100)	50	63	34