Automatic Data Processing, Inc.- Financial and Strategic Analysis Review

Transcription

1 Automatic Data Processing, Inc. - Financial and Strategic Analysis Review Publication Date: Nov-2015 Company Snapshot Key Information Automatic Data Processing, Inc., Key Information Web Address Financial year-end June Number of Employees 55,000 NASD ADP Key Ratios Automatic Data Processing, Inc., Key Ratios P/E EV/EBITDA Company Overview Automatic Data Processing, Inc. (ADP) is a technology based company that provides business and employment administration outsourcing, and human capital management solutions. Its offering includes payroll services, benefits administration, recruiting and talent management, human resources management, time and attendance management, insurance services, retirement services, and payment and compliance solutions. The company also offers wage and tax collection, and remittance services. SWOT Analysis Automatic Data Processing, Inc., SWOT Analysis Strengths Weaknesses Return on Equity (%) Debt/Equity.00 Operating profit margin (%) Dividend Yield 0.02 Note: Above ratios are based on share price as of 18-Nov-2015 Strong Financial Performance Comprehensive Offerings Growing Segmental Revenues Opportunities Patent Infringement Suits Declining Working Capital Threats Share Data Automatic Data Processing, Inc., Share Data Price (USD) as on 18-Nov EPS (USD) 2.89 Book value per share (USD) Shares Outstanding (in million) Product Innovations Growing Global BPO Industry Strategic Initiatives Intense Competition Rising Man Power Costs in the US Rapid Technological Changes Performance Chart Automatic Data Processing, Inc., Performance Chart ( ) Financial Performance The company reported revenues of (US Dollars) US$10,938.5 million for the fiscal year ended June 2015 (FY2015), an increase of 7% over FY2014. In FY2015, the company s operating margin was 18.4%, compared to an operating margin of 17.7% in FY2014. In FY2015, the company recorded a net margin of 13.3%, compared to a net margin of 14.8% in FY2014. Page 1

2 Key Information Automatic Data Processing, Inc., Key Information Corporate Address 1 Adp Boulevard, Roseland, NJ, , United States Ticker Symbol, Stock Exchange ADP [NASDAQ] Telephone No. of Employees 55,000 (Estimated) Fax Fiscal Year End June URL Revenue (in USD Million) 10,938.5 Industry Locations Business and Consumer Services, Technology and Telecommunication Australia, Austria, Belgium, Brazil, Canada, China, Cyprus, Denmark, Egypt, France, Germany, Italy, Japan, Mexico, Netherlands, New Zealand, Poland, South Korea, Spain, United Kingdom, United States Company Overview Automatic Data Processing, Inc. (ADP) is a technology based company that provides business and employment administration outsourcing, and human capital management solutions. Its offering includes payroll services, benefits administration, recruiting and talent management, human resources management, time and attendance management, insurance services, retirement services, and payment and compliance solutions. The company also offers wage and tax collection, and remittance services. ADP markets its solutions through direct sales force; and indirect sales channels such as marketing relationships with banks and certified public accountants, and others. Geographically, the company serves in Australia, Canada, China, France, India, Netherlands, the US, and the UK. ADP is headquartered in Roseland, New Jersey, the US. Page 2

3 Automatic Data Processing, Inc. - SWOT Analysis SWOT Analysis - Overview Automatic Data Processing, Inc. (ADP) is a business outsourcing, and cloud-based human capital management services provider. Strong financial performance, comprehensive offerings and growing segmental revenues are the key strengths of the company. But, declining working capital is a cause of concern for the company. Nevertheless, it may benefit from the growing global BPO industry, product innovations and strategic initiatives. Furthermore, the company faces challenges from intense competition, changing technology, and rising labor costs in the US. Automatic Data Processing, Inc. - Strengths Strength - Strong Financial Performance The company reported an increase in revenue in FY2015. ADP reported total revenue of US$ 10,938.5 million in FY2015 as compared to US$10,226.4million in FY2014, an increase of 7%. The increase in revenue is attributed to increase in performance of its operating segments. In FY2015, Employer Services segment registered an increase of 5% and PEO Services segment revenue increased by 17% as compared to FY2014. Increasing revenue helps the company to maintain its stand in the market. The company also showed an improvement its operating income in FY2015. In FY2015, the company reported operating income of US$2,015.4million, as compared to US$1,815.1million in FY2014. The company also showed improvement in its operating margin for the FY2015, which stood at 18.4%, as compared to 17.7% in FY2014. The increase in operating margin indicates that the company's revenue increased at a higher rate than that of its expenses. Strength - Comprehensive Offerings ADP leverages its comprehensive portfolio of products and solutions for its revenue growth and fueling its profitability. Its product offerings include ADP TotalSource, ADP Resource, ADP Workforce Now, ADP Vantage HCM, ADP GlobalView HCM, ADP Streamline, ADP Mobile Solutions, ADP SmartCompliance and ADP Health Compliance. The services offerings of the company include human capital management, payroll services, talent management, HR management, health care reform management, benefits administration, time and attendance, HR business process outsourcing, professional employer organization, retirement plans, insurance plans, tax and compliance and payment solutions. The company can leverage its portfolio to enhance its financial and operational position. Strength - Growing Segmental Revenues The company leverages its business segments to drive revenue and profitability. The company operates its business through two reportable segments, including employer services and professional employer organization (PEO) services. In FY2015, employer services' revenues increased to US$8,897.3 million, showing an increase of 5% over FY2014. This was due to starting of new business during the year from new business bookings growth. In FY2015, the PEO services' revenues increased to US$2,647.2 million, showing an increase of 17% over that of the previous year. The increase was due to increase in the average number of worksite employees, resulting from an increase in the number of new clients and growth in existing clients. Automatic Data Processing, Inc. - Weaknesses Weakness - Patent Infringement Suits The company was beset by a variety of litigations and regulatory investigation in connection with its operations. Lawsuits, including regulatory actions, may seek recovery of large and indeterminate amounts or otherwise limit its operations, and their magnitude may remain unknown for substantial periods of time. In October 2014, Douglas Maurice Shortridge has filed a case against Automatic Data Processing and Integrated Design, Inc. in the California northern district court regarding the Patent Infringement. The company is also involved in other lawsuits, including job discrimination, diversity-tort/motor vehicle, civil rights act, Americans with disabilities act, wage payment and collection law, and others. The company may also be required to pay damages and could be subject to equitable remedies that adversely affect its financial performance and results of operations. Weakness - Declining Working Capital ADP reported decline in working capital in FY2015. In FY2015, the company reported a net working capital of US$1,696 million over the working capital of US$3,325 million in FY2014. Its working capital decreased due to the increase in current liabilities. Its total current liabilities increased to US$27,113.7 million for the FY2015 reflecting an increase of 12.2% from US$24,167.6 million in FY2014. This led to a marginal deficit in its working capital. In FY2015, the company reported decrease in cash reserves. The cash and short term investments of the company decreased to US$1,665.9 million in FY2015 from US$3,616.2 million in FY2014. This led to a marginal deficit in its working capital. Due to deficit in working capital the company may face problems to meet the short term obligations which will be a cause of concern. Page 3

4 Automatic Data Processing, Inc. - Opportunities Opportunity - Product Innovations ADP's initiative in launching automated talent management solutions in line with potential in talent management helps it to serve and enhance customer base. In August 2015, the company launched the ADP Private Exchange, a benefits administration technology platform supported by human capital management systems. In April 2014, the company launched new ADP Mobile Solutions tablet application. This new service enables enhanced oversight of human capital management data and tasks within any workplace environment. During the same month, it launched IPS Zero, an investment platform to appeal to advisors employing a fee-for-service structure with their retirement plan clients and plan sponsors who want simplified fees. Opportunity - Growing Global BPO Industry Strong growth in global BPO market may enhance the demand for the company's offerings, increasing its revenue. The global BPO market is expected to grow at an accelerated rate in the coming five years. As the supplier capability continues to mature, the growth of the BPO market is being augmented by economic slowdown in the US, which increases pressure on outsourcers across all the sectors to evaluate their efficiency in mature markets. Economic slowdown will drive globalization as companies will use offshore outsourcing not only to reduce costs, but also to expand their abilities to leverage growth opportunities in emerging markets. North America is expected to be the most affected region with equal possibility of an increase or a decrease in BPO outsourcing operations. Such growth in BPO market may enhance the demand for the company's BPO offerings, increasing its revenue. Opportunity - Strategic Initiatives Strategic initiatives would help the company to expand its presence and improve financial performance. In October 2015, the company expanded its comprehensive global solution that helps large, global enterprises better manage HR and payroll systems supporting employees around the world. Also, the company has added new capabilities to and broadened the reach of its benefits and time-and-labor management solutions. In August 2015, the company and USI Insurance Services, entered into a partnership to create a private exchange that offers employers a broad range of health benefits plan options powered by a Human Capital Management company. In July 2015, the company entered into collaboration with Wolters Kluwer's CT Corporation. Through this collaboration, both the companies help clients expedite and further automate the processing of wage garnishment orders. In June 2015, Air Products expanding its relationship with the company to better serve the overall needs of its workforce, including enhancing the timeliness, accuracy and compliance of payroll operations across Air Products' network of globally shared services centers. Opportunity - Spin-off of Dealer Services Business Strategic business initiatives help the company strengthen its focus on the core business and thereby excel in the field. In April 2014, the company announced its intent to separate its Dealer Services Business and form a new business entity in the name of CDK Global, Inc. post completion of the separation. In response to the increasing demand for integrated dealer management systems, digital marketing/advertising solutions in the automobiles market, the company plans to make use of its expertise to excel in the field. Through this strategic initiative, the company believes that both the entities will be able to focus on their respective businesses, industries, and strategic opportunities and further direct their attention and resources to fulfill its mission. ADP expects to complete the separation by October Automatic Data Processing, Inc. - Threats Threat - Intense Competition The industries in which ADP operates are highly competitive. Employer Services and PEO Services compete with other independent business outsourcing companies, enterprise resource planning service providers, software companies and financial institutions. Captive in-house functions, whereby a company installs and operates its own business processing systems, are another competitive factor in the industry. Dealer Services competitors include full service DMS providers such as The Reynolds & Reynolds Company, DealerTrack, Inc., and companies providing applications and services that compete with Dealer Services non-dms applications and services, such as Auto Trader Group, Inc. and Dealer.com, Inc. Major competitors in the BPO services market include Computer Sciences Corporation, Global Payments Inc, The Western Union Company, Hewitt Associates, Inc, Administaff, Inc., Intuit Inc., The Ultimate Software Group, Inc., and Total System Services, Inc. Competitive environment may affect the financial results of the company. Threat - Rising Man Power Costs in the US Labor costs in the US have been increasing in the recent past. The tight labor markets, government mandated increases in minimum wages and a higher proportion of full-time employees are resulting in an increase in labor costs. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). Rising manpower costs could increase the company s operating costs. With the shortage of talented manpower and increasing government mandated minimum wages, the labor costs have been recording an increase. In the future, there may be regulatory pressure to revise wages for its approximately 30,000 employees. There is also a reduced labor share being faced by companies due to Page 4

5 technological progress, trade globalization, expansion of financial markets, and decreasing union density. If the company fails to comply with future wage increases, it may face labor strikes that might result in huge losses to the company. Any such increase in the minimum wages increases the operating costs of the company and has an adverse affect on its profits. The company has strong presence in the US. Therefore, rise in minimum wages may increase its operating costs, which in turn affects its profit margins. Threat - Rapid Technological Changes The technology market is subject to rapid changes, and, to compete effectively, the company must continually introduce new products that achieve market acceptance. IT enabled communication equipment industry is characterized by fast technological changes, evolving industry standards, changing market conditions and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make the existing products or products under development obsolete or unmarketable. In order to remain competitive and in order to increase its sales, the company needs to adapt to the rapidly changing business environment. NOTE: The above strategic analysis is based on in-house research and reflects the publishers opinion only Page 5