01 August 2009

ADP: Income Statement Analysis for the June 2009 Quarter

Automatic Data Processing (NASDAQ: ADP) earned $0.70 per share in the three months that ended on 30 June 2009, up from $0.45 in the same quarter of last year.  The April-to-June period is the fourth quarter of ADP's fiscal year.

Earnings in the recent quarter benefited from tax settlements that led to a one-time
$120 million reduction in income taxes.  If this tax benefit had not been realized, earnings per share would have been $0.46.

This post examines the Income Statement for the quarter and compares it to our "look-ahead" estimates.  Our target for ADP's Net Income in the latest quarter was $0.47 per share.

In a second article, we will report ADP's scores as measured by the GCFR Financial Gauges. The follow-up post will also provide the latest figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Our principal sources were the earnings announcement and the conference call transcript at SeekingAlpha.  Some background information about Automatic Data Processing and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue was 4.5 percent less than in June 2008 quarter and 2.0 percent less than our estimate.  ADP reported: 

"Revenue growth was negatively impacted by continued severe economic conditions and about 4 percentage points from unfavorable foreign exchange rates"

Fiscal 2009 Revenue was 1.0 percent more than in fiscal 2008.  This tepid growth rate was at the bottom end of the 1-to-2 percent range forecast by ADP in May.

Revenue from ADP's Employer Services business segment, which is (by far) the company's largest operation, was essentially flat in the June quarter.  Revenue from the business supporting automotive dealers was down, but (only?) by 9 percent.

The Cost of Goods Sold -- what ADP calls "Operating Expenses" -- was 47.8 percent of Revenue, which translates into a Gross Margin of 52.2 percent.  The margin was down from 55.0 percent in the year-earlier quarter, and it was also less profitable than the 54.0 percent we predicted.

Depreciation and amortization expenses were unchanged from last year, and the current value was just $1 million more than our $60 million estimate.

Research and Development expenses ("Systems Development and Programming Costs") were 10 percent lower than last year's value, but 6 percent greater than our estimate.  The R&D expense was 6.0 percent of Revenue, a little more than our 5.6 percent estimate.

Sales, General, and Administrative expenses were 17 percent less than in the June 2008 quarter and 8.4 percent less than our estimate.  As a percentage of Revenue, SG and A costs fell from 31.6 percent last year to 27.4 percent.

Although Revenue was lower than in last year's second quarter, Operating Income increased by 6 percent as a result of ADP's cost-cutting successes.  Our estimate for Operating Income was 5 percent too high, mostly because our Revenue and Gross Margin predictions were overly optimistic.

Other income less interest expense was $7 million more than we anticipated.  In the June 2008 quarter, ADP recorded a $16 million gain on the sale of a building.

As mentioned above, the provision for income taxes in the June 2009 quarter was $120 million less burdensome, $13.6 million instead of $133.6 million, because of the favorable settlement of certain tax matters.  This benefit resulted in an effective Income Tax Rate of only 3.8 percent.  The tax rate would have been 37 percent (our assumption was 36 percent) if the benefit had not been realized.

The tax benefit allowed Net Income to soar 51 percent (56 percent on a per-share basis) beyond last year's amount.  If the tax benefit is excluded, Net Income in the quarter would have been almost exactly the same as last year and just $4 million ($0.01 per share) below our prediction.

Full disclosure: Long ADP at time of writing.

No comments:

Post a Comment