05 November 2009

ADP: Income Statement Analysis for the September 2009 Quarter

Automatic Data Processing (NASDAQ: ADP) earned $0.56 per share in the first quarter of fiscal 2010, which ended 30 September 2009, up from $0.54 in the same quarter of last year.

This post examines the Income Statement for the quarter in the earnings announcement, and it compares the entries on each line to our "look-ahead" estimates.  Our target for ADP's Net Income in the latest quarter was $0.49 per share, which ADP beat by $0.07.

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 various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

ADP is one of the largest firms providing payroll and other personnel-related information technology services.  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 3.6 percent less than in the September 2008 quarter, and about half the decline was attributable to unfavorable foreign exchange rates.  Since we estimated Revenue would decline 8.3 percent, ADP exceeded our expectations. Our target was derived from the company's Revenue guidance for all of fiscal 2010. 

Revenue from ADP's Employer Services business segment, which is (by far) the company's largest operation, was down 2.6 percent in the September quarter.  U.S. Traditional Payroll and Payroll Tax Filing services were especially weak, which might not be surprising given that the unemployment rate has increased significantly over the last year.

Revenue from the business supporting automotive dealers was also lower, but (only?) by 4.1 percent.  ADP recorded a $7 million asset impairment charge in response to GM's plan to close all Saturn dealerships.

The Cost of Goods Sold -- what ADP calls "Operating Expenses" -- was 47.9 percent of Revenue, which translates into a Gross Margin of 52.1 percent. The margin was slightly better than last year's 52.0 percent, but it was less profitable than the 53.5 percent we predicted based on fiscal 2009's results.

Depreciation and amortization expenses matched our $60 million estimate, which was essentially the same as last year's amount.

Research and Development expenses ("Systems Development and Programming Costs") also matched our expectation.

Sales, General, and Administrative expenses were 6.5 percent less than last year and 6.1 percent less than our $525 million estimate.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, fell a mere 0.3 percent compared to last year's September quarter. Our estimate for Operating Income was 13.7 percent too low, mostly because our Revenue prediction was too low and our SG&A expense estimate was too high.

Other income less interest expense was $11 million more than we anticipated.

The provision for income taxes in the September 2009 quarter corresponded to an effective Income Tax Rate of 36.5 percent, compared to 37 percent last year. We estimated the tax rate would be 36.0 percent.

Net Income for the quarter rose 2.6 percent (4.7 percent on a per-share basis) above last year's amount. Because of the better-than-expected operating performance, Net Income surpassed our estimate by 17 percent (14 percent on a per-share basis). 

ADP concluded its presentation by noting:

"Near-term growth under pressure from difficult economic landscape; however, now more positive on fiscal 2010 full year outlook as it appears the U.S. economy is at the bottom of the downturn"

and claiming:

"ADP is well positioned to leverage the inevitable recovery in the economy."

Full disclosure: Long ADP at time of writing.

No comments:

Post a Comment