ADP, which is one of a mere handful of U.S. companies with a AAA bond rating, is a top provider of payroll and other personnel-related IT services to corporate customers. It also publishes the monthly ADP National Employment Report(SM) that reports changes in total non-farm private employment.
ADP has been restructuring. It spun off its Brokerage Services Group business on 30 March 30 2007. The divested company was renamed Broadridge Financial Solutions, and it now trades publicly under the ticker symbol BR. On 6 July 2007, ADP sold an airline ticket-clearing business based in Spain, which had annual revenues of about $75 million. The company also changed the way it accounts for Depreciation and Amortization expenses; this change led to restatements of Costs of Revenue and Sales, General, and Administrative (SG&A) expenses.
As a result of these corporate changes, we didn't publish an analysis of ADP after the June quarter. We were doubtful we had the data needed to make a fair comparison of the company's current performance with its historical norms. We knew that ADP's past financial statements needed to be modified, but we weren't sure how significant the changes would be. Our concerns were recently eased, at least partially, because ADP has now made two years of updated Income Statements available on its web site. We would have preferred more data, but the new data gave us some consistent figures with which we could work.
Employing the available data from the September 2007 quarter, our gauges display the following scores:
- Cash Management: 16 of 25
- Growth: 18 of 25
- Profitability: 15 of 25
- Value: 5 of 25
- Overall: 45 of 100
Keep in mind that these scores were computed without the benefit of complete balance sheet and cash flow information.
Before we examine the factors that affected each gauge, let's review the latest quarterly Income Statement.
| ($ M) | | September 2007 (actual) | September 2006 (actual) |
| Revenue (1) | | 1992 | 1755 |
| Op expenses | | | |
| | CGS (2) | (908) | (804) |
| | Depreciation (3) | (59) | (50) |
| | R&D (4) | (124) | (114) |
| | SG&A | (534) | (493) |
| | Other | 0 | (0) |
| Operating Income | | 366 | 295 |
| Other income | | | |
| | Investments | 0 | 0 |
| | Interest, etc. | 15 | 55 |
| Pretax income | | 382 | 349 |
| Income tax | | (141) | (130) |
| Net Income | | 240 | 219 |
| | | $0.45/sh | 0.39/sh |
| Discontinued operations | | 57 | 38 |
2. Operating expenses
3. Depreciation and amortization.
4. System development and programming
ADP's Revenue in the recent quarter was 13.5 percent greater than in the year-earlier period. The Cost of Goods Sold (CGS) was 45.6 percent of Revenue, just a tad below the 45.8 percent in September 2006. Depreciation expenses were 3 percent of Revenue, up a little from the year-earlier value of 2.9 percent. Research and Development (R&D) expenses were 6.2 percent of Revenue, compared to 6.5 percent in September 2006. Sales, General, and Administrative (SG&A) expenses were 26.8 percent of Revenue; SG&A expenses were a significantly greater 28.1 percent of Revenue one year ago.
The net effect of the higher Revenue and good cost control was Operating Income a substantial 24.3 percent above the amount attained in September 2006.
Non-operating income was $40 million less in the recent quarter than the year-earlier quarter. The difference was the result of a one-time $38.6 million gain in the earlier quarter on the sale of an investment.
The Income Tax Rate in the recent quarter was 37.0 percent, compared to 37.2 percent. Net Income from continuing operations exceeded the level attained a year ago by 9.8 percent. Overall Net Income surpassed the year-earlier figure by 15.6 percent.
Cash Management. This gauge now reads 16 points, but this value is suspect because of the missing Balance Sheet detail. It will almost certainly come down when complete data becomes available.
- Current Ratio =1.6; down from 1.9 in June 2007 and 1.8 in Sept 2006
- LTD/Equity = <1>
- Debt/CFO = nil
- Days of Sales Outstanding (DSO) = N/A days, compared to 42 days in June and 58 days in Sept 2006
- Working Capital/Market Capitalization = N/A percent, compared to 7.5 percent one year ago.
- Cash Conversion Cycle Time (CCCT) = N/A days, compared to 36.7 days, for this measure of efficiency.
Growth. This gauge now reads 18 points.
The following measures all helped the gauge:
- Revenue growth = 13.8 percent year-over-year, making up for last year's -9 percent
- Revenue/Assets = 96.9 percent, up dramatically from 73.5 percent in a year; sales efficiency is improving
- Net Income growth = 17.4 percent year-over-year, up from -9.2 percent.
Net income benefited from a change in the income tax rate from 38 to 37 percent
By our estimate, Cash Flow from Operations might have declined a little. But we don't have the data to be sure.
- CFO growth = N/A percent year-over-year, compared to 0.3 percent
Profitability. This gauge now reads 15 points.
The measures that helped the gauge were:
- ROIC = 28.7 percent, up from 18.1 percent in a year
- FCF/Equity = 26.1 percent, up from 22.9 percent in a year
- Operating Expenses/Revenue = 80.4 percent, down from last year's 81.4 percent.
- Accrual Ratio = -3.2 percent, up from -4.7 percent in a year.
Value. ADP's stock price fell from $48.47 to $45.93 over the course of the quarter -- it has since rebounded. The Value gauge, based on the latter price, is at 5 points.
The measures that helped the gauge were:
- Enterprise Value/Cash Flow = 15.5, essentially unchanged from September 2006
- P/E = 23.6, down from a 5-year median of 26.5
- P/E to S&P 500 average P/E = 46 percent premium, a little less than the five-year median
- Price/Revenue ratio = 3.1, compared to a five-year median of 3.3.
The average P/E for the Business Services industry is currently 23.5. The average Price/Revenue for the industry is currently 2.6.
If it holds up, 45 out of 100 possible points for the Overall gauge would be the best score for ADP in four years. The stock price rallied nicely after that earlier event.
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