Automatic Data Processing, Inc. (ADP) is a top provider to corporations of payroll and other personnel-related information technology services. ADP, which is one of a mere handful of U.S. companies with a AAA bond rating, publishes the monthly ADP National Employment Report (SM) on non-farm private employment. Last year, ADP divested its Brokerage Services Group business, which became Broadridge Financial Solutions (BR).
After the December quarter, we calculated an Overall Gauge score for ADP of 53 (restated), out of 100 possible points. This was the best score we had calculated for the company since September 2003. The Cash Management, Growth, and Profitability gauges all registered good results, and the Value gauge was OK at 8, out of 25 possible, points. However, we noted that the Broadridge spin-off and other changes could have skewed the calculations.
Now, with the available data from the March 2008 quarter, our gauges display the following scores:
- Cash Management: 16 of 25 (unchanged from December)
- Growth: 16 of 25 (down from 18)
- Profitability: 10 of 25 (down from 16)
- Value: 11 of 25 (up from 8)
- Overall: 50 of 100 (up from 53)
These scores are tentative because they were computed without needed Balance Sheet and Cash Flow data.
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations.
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) | | March 2008 (actual) | March 2008 (predicted) | March 2007 (actual, restated) |
| Revenue (1) | | 2427 | 2400 | 2171 |
| Operating expenses | | | | |
| | CGS (2) | (1034) | (1056) | (891) |
| | Depreciation (3) | (59) | (65) | (54) |
| | R&D (4) | (132) | (144) | (122) |
| | SG&A | (585) | (648) | (550) |
| | Other | 0 | 0 | (0) |
| Operating Income | | 618 | 487 | 554 |
| Other income | | | | |
| | Investments | 0 | 0 | 0 |
| | Interest, etc. | 18 | 15 | 17 |
| Pretax income | | 636 | 502 | 571 |
| Income tax | | (232) | (186) | (211) |
| Net Income from continuing operations | | 404 $0.77/sh | 316 $0.60/sh | 360 $0.64/sh |
| Income from discontinued operations (5) | 10 | 0 | 29 | |
| Shares used in per-share calculations | 523 | 530 | 559 |
2. Operating expenses
3. Depreciation and amortization.
4. System development and programming
5. Net of tax
We had expected Revenue to be 9.6 percent more than in the year-earlier period, and the actual increase was 11.8 percent. Year-over-year Revenue Growth is 13.3 percent, compared to the 12.5 percent guidance.
The Gross Margin of 57.4 percent in the March quarter was much better than our 56 percent expectation. The realized margin translates into a Cost of Goods Sold (CGS) -- what ADP calls "Operating Expenses" -- of 42.6 percent of Revenue.
Depreciation was 2.4 percent of Revenue, a little less than our 2.7 percent forecast. Research and Development (R&D) expenses ("Systems Development and Programming Costs") were 5.4 percent of Revenue, also less than our prediction of 6.0 percent. Most noteworthy was Sales, General, and Administrative (SG&A) expenses at only 24.1 percent of Revenue, substantially under our 27 percent estimate.
Because expenses were so much less that we anticipated, Operating Income surpassed our forecast by a terrific 26.9 percent. Operating Income in the quarter was 11.4 percent greater than the amount attained in March 2007.
Non-operating income was $3 million above our target value. The Income Tax Rate in the recent quarter was only 36.5 percent, compared to the predicted 37.0 percent.
Net Income from continuing operations blew away our prediction by 27.8 percent. Net Income exceeded the level attained a year ago by 12.2 percent. The growth rate was even higher, about 20 percent, on a per-share basis because the company repurchased enough of its stock to reduce the number of shares outstanding, on a diluted basis, by 6.4 percent.
Cash Management. This gauge didn't change from 16 points in December. However, the recent score is suspect because we had to substitute estimates for missing Balance Sheet data.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.8 | 1.8 | 2.3 |
| LTD/Equity | 1.0% | 0.7% | 0.7% |
| Debt/CFO | 0.0 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) | 42.3 days | 51.6 days | 51.9 days |
| Working Capital/Market Capitalization | 6.9% | 5.7% | 8.5% |
| Cash Conversion Cycle Time (CCCT) | 32.2 days | 38.2 days | 36.7 days |
Debt is a non-factor for this AAA company, and cash management efficiency has improved when judged by DSO and CCCT.
Growth. This gauge decreased from 18 points in December to 16 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 13.3% | 13.5% | 3.8% |
| Revenue/Assets | 97% | 101% | 85% |
| CFO growth | N/A | -0.8% | -23.3% |
| Net Income growth | 16.6% | 17.7% | 0.2% |
The Growth metrics have improved dramatically relative to last year's value, but there might have been some deceleration in the last quarter. We anxiously await the Cash Flow statement to see whether it fit the pattern. Net income for the trailing four quarters benefited from a decrease in the effective income tax rate from 37.7 to 36.0 percent.
Profitability. This gauge decreased from 16 points in December to 10 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 80.1% | 80.3% | 81.2% |
| ROIC | 28.1% | 26.9% | 24.9% |
| FCF/Equity | N/A | 23.5% | 21.0% |
| Accrual Ratio | N/A | -10.7% | -20.0% |
Operating expenses edged down by more than a percentage point in the last year, leading to higher returns. We don't have the Cash Flow data needed to compute two of key Profitability metrics.
Value. ADP's stock price slipped from $44.53 to $42.39 during the first quarter of the year -- it has since recovered a portion of the decline. The Value gauge, based on the quarter-end closing price, moved up from 8 to 11 points.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 19.6 | 21.8 | 27.9 |
| P/E to S&P 500 average P/E | 119% | 122% | 176% |
| Price/Revenue | 2.6 | 2.8 | 3.6 |
| Enterprise Value/Cash Flow (EV/CFO) | 16.5 | 16.0 | 16.8 |
ADP shares have become less expensive by several metrics, but we can't call them cheap.
If it holds up once we get the 10-Q data, 50 out of 100 possible points for the Overall gauge is a few points less than last quarter. However, it is a relatively good score for ADP. We do have to note that some of the out-performance was due to a lower effective tax rate.
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