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).
Our earlier analysis of ADP's March 2008 quarter determined that the GCFR Overall gauge score had risen to 56 points, which was the highest score we had computed for ADP in more than 4 years. The Cash Management, Growth, and Profitability, and Value gauges displayed double-digit scores on a scale of 0 to 25. The Overall score had been 52, of 100 possible, points after the December 2007 quarter.
Now, with the available data from the June 2008 quarter, our gauges display the following scores:
- Cash Management: 8 of 25 (down from 13 in March)
- Growth: 20 of 25 (up from 18)
- Profitability: 15 of 25 (unchanged)
- Value: 15 of 25 (up from 13)
- Overall: 56 of 100 (unchanged)
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) | | June 2008 (actual) | June 2008 (predicted) | June 2007 (actual) |
| Revenue (1) | | 2207 | 2200 | 2000 |
| Operating expenses | | | | |
| | CGS (2) | (994) | (975) | (876) |
| | Depreciation (3) | (61) | (59) | (55) |
| | R&D (4) | (141) | (134) | (130) |
| | SG&A | (697) | (660) | (649) |
| | Other | (0) | 0 | (0) |
| Operating Income | | 315 | 372 | 290 |
| Other income | | | | |
| | Investments | 0 | 0 | 0 |
| | Interest, etc. | 40 | 15 | 18 |
| Pretax income | | 354 | 387 | 307 |
| Income tax | | (128) | (141) | (114) |
| Net Income from continuing operations | | 226 $0.435 | 246 $0.47/sh | 194 $0.35/sh |
| Income from discontinued operations (5) | 8 | - | 1 | |
| Shares used in per-share calculations | 520 | 520 | 552 |
2. Operating expenses
3. Depreciation and amortization.
4. System development and programming
5. Net of tax
Revenue in the quarter almost exactly matched our target, which was the mid-point of the guidance range identified in ADP's report on the third fiscal quarter. The actual number was 10.4 percent more than in the year-earlier period. Year-over-year Revenue Growth was 12.5 percent.
The Gross Margin of 55.0 percent in the June quarter was a little less than our 55.7 percent expectation. The realized margin translates into a Cost of Goods Sold (CGS) -- what ADP calls "Operating Expenses" -- of 45.0 percent of Revenue.
Depreciation was 2.7 percent of Revenue, which matched 2.7 percent forecast. Research and Development (R&D) expenses ("Systems Development and Programming Costs") were 6.4 percent of Revenue, which slightly exceeded our prediction of 6.1 percent.
More significantly, Sales, General, and Administrative (SG&A) expenses were 31.6 percent of Revenue. The amount by which these expenses surpassed our 30 percent estimate is wide enough to make us take notice.
Because the expenses were so much more than we anticipated, Operating Income lagged our forecast by 15.3 percent. Operating Income in the quarter was 8.6 percent greater than the amount attained in June 2007.
Non-operating income made up some of the operating shortfall, since it was $35 million above our target value. The Income Tax Rate in the recent quarter was 36.2 percent, compared to the predicted 36.5 percent.
Net Income from continuing operations, therefore, was only 8.1 percent below the predicted value. Net Income exceeded the level attained a year ago by 16.6 percent. The growth rate was even higher, about 24 percent, on a per-share basis because the company repurchased enough of its common stock to reduce the number of shares outstanding, on a diluted basis, by 5.8 percent.
Cash Management. This gauge decreased from 18 points in March to 8 points now. However, the recent score is suspect because we had to substitute estimates for missing Balance Sheet data.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.7 | 1.8 | 1.9 |
| LTD/Equity | 1.0% | 1.0% | 0.8% |
| 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) | 46.7 days | 44.6 days | 42.3 days |
| Working Capital/Market Capitalization | 6.2% | 6.9% | 5.9% |
| Cash Conversion Cycle Time (CCCT) | 35.8 days | 34.7 days | 28.7 days |
Debt is a non-factor for this AAA company, but cash management efficiency has slipped when judged by DSO and CCCT.
Growth. This gauge increased from 18 points in March to 20 points now.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 12.5% | 13.3% | 13.2% |
| Revenue/Assets | 104% | 97% | 98% |
| CFO growth | 22% (est.) | 2.4% | -28.4% |
| Net Income growth | 13.8% | 16.6% | 19.1% |
Most of the Growth metrics improved, but there are hints of 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 37.1 to 35.9 percent.
Profitability. This gauge didn't change from 15 points in March.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 80.3% | 80.1% | 80.7% |
| ROIC | 31.1% | 27.9% | 27.5% |
| FCF/Equity | 27.8% (est) | 23.8% | 21.9% |
| Accrual Ratio | -3.6% (est) | -3.8% | -8.9% |
Although fourth-quarter Operating Expenses were higher than we anticipated, on a trailing four quarters basis they were remarkably stable. The growth in ROIC is comforting. We don't have the Cash Flow data needed to determine the exact values for two of the key Profitability metrics.
Value. ADP's stock price slipped from $42.39 to $41.90 during the June quarter -- it has since reversed decline. The Value gauge, based on the quarter-end closing price, moved up from 13 to 15 points.
| June 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 18.7 | 19.6 | 26.2 |
| P/E to S&P 500 average P/E | 106% | 114% | 160% |
| Price/Revenue | 2.5 | 2.6 | 3.4 |
| Enterprise Value/Cash Flow (EV/CFO) | 12.8 (est) | 13.8 | 19.2 |
ADP's valuation ratios can be compared with other companies in the Business Software and Services industry.
ADP shares have become less expensive by the metrics we follow most closesly.
If it holds up once we get the 10-K data, 56 out of 100 possible points for the Overall gauge is a relatively good score for ADP.
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