The prior-year result was boosted by a tax benefit of $0.24 per share. Excluding this one-time benefit, diluted quarterly earnings from continuing operations declined from $0.45 in June 2009 to $0.42 per share in June 2010.
A previous article examined ADP's Income Statement for the June quarter. Reported earnings fell $0.01 short of the $0.43 per share we had forecast.
We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value. This post reports on the metrics for ADP and the associated financial gauge scores. The metrics were calculated using data from ADP's current and historical financial statements, including those in the 10-K for fiscal 2010.
Before getting into the details, we will take a step back to introduce the subject of today's analysis.
Automatic Data Processing performs payroll, human resource, data processing, and outsourcing Business Services for more than 500,000 clients, large and small, in the United States and other countries. ADP pays one of every six private sector employees in the U.S. The company is one of four remaining of U.S. firms with a AAA bond rating. It is also an S&P 500 Dividend Aristocrat, having hiked its dividend for 35 consecutive years.
Fortune Magazine deemed ADP to be Most Admired in the Financial Data Services industry.
Additional 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: 9 of 25 (down from 10 in March)
- Growth: 5 of 25 (down from 7)
- Profitability: 14 of 25 (down from 15)
- Value: 5 of 25 (up from 4)
- Overall: 34 of 100 (down from 36)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.
| Cash Management | 30 Jun 2010 | 31 Mar 2010 | 30 Jun 2009 | 5-Yr Avg |
| Current Ratio (1) | 1.8 | 2.1 | 1.5 | 1.8 |
| LTD to Equity | 0.7% | 0.7% | 0.8% | 1.0% |
| Debt/CFO (years) | 0.0 | 0.0 | 0.5 | 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) | 44.0 | 43.8 | 43.6 | 48.3 |
| Working Capital/Revenue (1) | 19.0% | 18.8% | 15.4% | 20.8% |
| Cash Conversion Cycle Time (days) | 34.3 | 34.7 | 33.7 | 35.0 |
| Gauge Score (0 to 25) | 9 | 10 | 9 | 12 |
ADP, one of few remaining of U.S. companies with a AAA bond rating, has a Balance Sheet that features $1.6 billion in Cash and Long-term Debt of only $40 million.
The amount of Working Capital relative to Revenue is stable.
The Current Ratio, also excluding client funds, slipped under 2.0, which took a point from the Cash Management gauge score. However, the ratio is at its five-year average value.
Days of Sales Outstanding, an indicator of cash efficiency, has flattened.
| Growth | 30 Jun 2010 | 31 Mar 2010 | 30 Jun 2009 | 5-Yr Avg |
| Revenue Growth | 1.0% | -1.2% | 0.9% | 7.0% |
| Revenue/Assets (1) | 98.9% | 102.9% | 99.5% | 92.9% |
| Operating Profit Growth | 9.8% | 15.1% | 14.5% | 11.5% |
| CFO Growth | 7.6% | 6.6% | -11.8% | 8.1% |
| Net Income Growth | -8.9% | 11.8% | 14.3% | 1.0% |
| Gauge Score (0 to 25) | 5 | 7 | 6 | 10 |
1. Assets excludes Funds held for clients.
Revenue-to-Assets declined, but the ratio remains well above its five-year average. We exclude Client funds from Assets when making this calculation.
The negative growth rate for Net Income was made worse by a fiscal 2009 tax settlement that reduced taxes and boosted prior-year income. Conversely, the growth rate for Cash Flow from Operations benefited from a $158.7 million tax refund received by a Canadian subsidiary of ADP.
| Profitability | 30 Jun 2010 | 31 Mar 2010 | 30 Jun 2009 | 5-Yr Avg |
| Operating Expense/Revenue | 80.2% | 79.5% | 79.3% | 80.3% |
| ROIC | 30.1% | 33.4% | 34.6% | 28.5% |
| Free Cash Flow/Invested Capital | 41.3% | 41.8% | 38.1% | 38.8% |
| Accrual Ratio | -1.3% | 0.6% | -5.0% | -3.4% |
| Gauge Score (0 to 25) | 14 | 15 | 17 | 16 |
Operating Expenses have been stable when assessed on a trailing four quarters basis.
Greater Cash Flow helps the Accrual Ratio's positive assessment of earnings quality.
| Value | 30 Jun 2010 | 31 Mar 2010 | 30 Jun 2009 | 5-Yr Avg |
| P/E | 16.6 | 16.6 | 13.4 | 18.2 |
| P/E vs. S&P 500 P/E | 1.1 | 0.9 | 0.6 | 1.1 |
| PEG | 1.7 | 1.1 | 0.9 | 2.1 |
| Price/Sales | 2.3 | 2.5 | 2.0 | 2.9 |
| Enterprise Value/Cash Flow (EV/CFO) | 11.0 | 12.0 | 10.4 | 13.0 |
| Gauge Score (0 to 25) | 5 | 4 | 19 | 8 |
| Share Price ($) | $40.26 | $44.47 | $35.44 | - |
The Price/Earnings multiple stayed constant because Net Income and the company's share price declined proportionately in the June quarter. Since Revenue increased in this period, the Price/Sales Ratio came down a tad.
In general, the current value metrics are attractive when compared to their five-year averages, but they are not quite as appealing when compared to their value one year earlier. This explains why the Value score was so much higher in June 2009 than June 2010.
| Overall | 30 Jun 2010 | 31 Mar 2010 | 30 Jun 2009 | 5-Yr Avg |
| Gauge Score (0 to 100) | 34 | 36 | 61 | 45 |
None of the gauge scores changed by more than 2 points in the second quarter. Small decreases in the Cash Management, Growth, and Profitability gauges were just slightly more significant that the small rise in the double-weighted Value gauge.
As mentioned above, one-time items have skewed some a few of the financial metrics that determine the gauge scores. The overall weakness that is, nevertheless, evident can be attributed to the negative marginal effects high unemployment has on a payroll-processing company.
Full disclosure: Long ADP at time of writing.
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