In a previous article, we examined Automatic Data Processing's (NASDAQ: ADP) Income Statement for the first quarter of fiscal 2010 and compared the figures on each line to our "look-ahead" estimates. Earnings in this period, which ended 30 September 2009, rose from $0.54 to $0.56 per share.Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated our usual set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.
Automatic Data Processing is one of the largest firms providing payroll and other personnel-related information technology services. Some background information about ADP and the business environment in which it is currently operating can be found in the look-ahead.
In summary, ADP's latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 11 of 25 (up from 10 in June)
- Growth: 5 of 25 (down from 6)
- Profitability: 17 of 25 (up from 15)
- Value: 13 of 25 (down from 18)
- Overall: 52 of 100 (down from 58)
| Cash Management | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Current Ratio (1) | 1.9 | 1.6 | 1.4 | 1.7 |
| LTD/Equity | 0.7% | 0.8% | 0.8% | 1.1% |
| Debt/CFO (years) | 0.0 | 0.5 | 0.7 | 0.1 |
| 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) | 41.3 | 43.0 | 39.7 | 49.2 |
| Working Capital/Invested Capital (1) | 40.1% | 40.0% | 39.6% | 42.2% |
| Cash Conversion Cycle Time (days) | 32.4 | 31.6 | 30.9 | 34.9 |
| Gauge Score (0 to 25) | 11 | 10 | 19 | 14 |
This AAA company has $1.6 billion in Cash and Short-term investments and minimal long-term debt. ADP's Working Capital -- the difference between Current Assets and Current Liabilities, but excluding client funds and obligations -- is also about $1.6 billion.
ADP lowered its short-term debt liabilities considerably by satisfying a $730 million "obligation under commercial paper borrowing."
The Cash Management metrics are nearly all improved relative to their respective five-year averages.
| Growth | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Revenue growth | -2.0% | 1.0% | 11.6% | 3.9% |
| Revenue/Assets (1) | 96.8% | 99.6% | 101.5% | 90.2% |
| Operating Profit growth | 15.0% | 14.5% | 8.0% | 7.8% |
| CFO growth | -25.7% | -11.8% | 34.6% | 7.3% |
| Net Income growth | 11.3% | 14.4% | 15.1% | 14.8% |
| Gauge Score (0 to 25) | 5 | 6 | 19 | 9 |
1. Assets excludes Funds held for clients.
Revenue was lower in the last four quarters than in the four previous quarters for the first time in several years. Growing unemployment can't be good for sales at a company providing payroll services. Downward pressure on Revenue has also come, for obvious reasons, from ADP's unit servicing auto dealers and from changes in foreign exchange rates.
Revenue is not only down on an absolute basis, it also lower as a percent of Assets.
Under these circumstances, the trailing-year Net Income and Operating Profit growth rates look quite good. Recall, however, that a large tax benefit in the June 2009 quarter boosted the bottom line considerably in that period.
Cash Flow from Operations fell a surprisingly steep 39 percent in the September 2009 quarter, which exacerbated the trailing-year decline. The 10-Q explains that a $104 million increase in pension plan contributions cut deeply into the latest quarter's Cash Flow. In addition, higher income taxes also hurt the cash flow comparison.
| Profitability | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 79.2% | 79.4% | 80.2% | 80.2% |
| ROIC | 34.4% | 34.7% | 33.4% | 27.5% |
| Free Cash Flow/Invested Capital | 34.0% | 38.1% | 50.0% | 36.4% |
| Accrual Ratio | -7.5% | 0.1% | 8.2% | -0.9% |
| Gauge Score (0 to 25) | 17 | 15 | 15 | 15 |
Operating Expenses have been stable, perhaps slightly decreasing, when assessed on a trailing four quarters basis.
The high ROIC is comforting, although we should remember it received a boost in the June quarter from a one-time tax benefit.
The big decrease in the Accrual Ratio, which can signal improved earnings quality, may be anomalous because of special benefits and charges. We will keep an eye on it in future quarters.
| Value | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| P/E | 14.8 | 13.4 | 18.1 | 19.6 |
| P/E vs. S&P 500 P/E | 0.7 | 0.7 | 1.0 | 1.2 |
| PEG | 1.0 | 0.9 | 2.3 | 2.4 |
| Price/Revenue | 2.3 | 2.0 | 2.4 | 3.0 |
| Enterprise Value/Cash Flow (EV/CFO) | 12.9 | 10.4 | 10.8 | 14.2 |
| Gauge Score (0 to 25) | 13 | 18 | 13 | 7 |
The price of ADP shares increased 10.9 percent in the September quarter, from $35.44 to $39.30. This helped lower the Value gauge, relative to its June reading. The drop in Cash Flow, however, made the biggest difference.
| Overall | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 52 | 58 | 62 | 45 |
In summary, ADP's Growth has weakened (no surprise) considerably in the last year. However, the Cash Management and Profitability scores have remained a stabilizing force. The recent five-point decline in the Value gauge did, however, have a negative effect on the Overall gauge.
Excluding the $120 million tax benefit in the June 2009 quarter would reduce the Overall score another 6 points, to 46.
Full disclosure: Long ADP at time of writing.
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