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Automatic Data Processing Inc. (ADP)

Analysis of Investments

High level of difficulty

Accounting Policy on Investments

All of ADP’s marketable securities are considered to be “available-for-sale” and, accordingly, are carried on the Consolidated Balance Sheets at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) on the Consolidated Balance Sheets until realized. Realized gains and losses from the sale of available-for-sale securities are determined on an aggregate approach basis and are included in other (income)/expense, net on the Statements of Consolidated Earnings.

If the fair value of an available-for-sale debt security is below its amortized cost, ADP assesses whether it intends to sell the security or if it is more likely than not ADP will be required to sell the security before recovery. If either of those two conditions is met, ADP would recognize a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If ADP does not intend to sell a security or it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income (loss).

Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned.

Source: 10-K (filing date: 2019-08-09).

Adjustment to Net Income (Loss): Mark to Market Available-for-sale Securities

Automatic Data Processing Inc., adjustment to net earnings

US$ in thousands

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12 months ended Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Net earnings (as reported) 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Add: Unrealized net gains (losses) on available-for-sale securities, net of tax 498,000  (337,300) (264,100) 186,600  (64,400) 35,300 
Less: Reclassification of net (gains) losses on available-for-sale securities to net earnings, net of tax 600  2,100  (1,400) 3,300  (3,300) (10,400)
Net earnings (adjusted) 2,791,400  1,285,600  1,467,900  1,682,400  1,384,800  1,540,800 

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Adjusted Profitability Ratios: Mark to Market Available-for-sale Securities (Summary)

Automatic Data Processing Inc., adjusted profitability ratios

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Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Net Profit Margin
Reported net profit margin 16.17% 12.16% 14.00% 12.79% 13.28% 12.42%
Adjusted net profit margin 19.69% 9.65% 11.86% 14.42% 12.66% 12.62%
Return on Equity (ROE)
Reported ROE 42.46% 46.85% 43.59% 33.30% 30.21% 22.73%
Adjusted ROE 51.69% 37.16% 36.91% 37.54% 28.80% 23.10%
Return on Assets (ROA)
Reported ROA 5.47% 4.37% 4.66% 3.42% 4.39% 4.73%
Adjusted ROA 6.66% 3.47% 3.95% 3.85% 4.18% 4.81%

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Profitability ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Automatic Data Processing Inc.’s adjusted net profit margin ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders’ equity. Automatic Data Processing Inc.’s adjusted ROE improved from 2017 to 2018 and from 2018 to 2019.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Automatic Data Processing Inc.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Automatic Data Processing Inc., Profitability Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

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Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Revenues 14,175,200  13,325,800  12,379,800  11,667,800  10,938,500  12,206,500 
Profitability Ratio
Net profit margin1 16.17% 12.16% 14.00% 12.79% 13.28% 12.42%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in thousands)
Adjusted net earnings 2,791,400  1,285,600  1,467,900  1,682,400  1,384,800  1,540,800 
Revenues 14,175,200  13,325,800  12,379,800  11,667,800  10,938,500  12,206,500 
Profitability Ratio
Adjusted net profit margin2 19.69% 9.65% 11.86% 14.42% 12.66% 12.62%

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 Net profit margin = 100 × Net earnings ÷ Revenues
= 100 × 2,292,800 ÷ 14,175,200 = 16.17%

2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Revenues
= 100 × 2,791,400 ÷ 14,175,200 = 19.69%

Profitability ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Automatic Data Processing Inc.’s adjusted net profit margin ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Adjusted Return on Equity (ROE)

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Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Stockholders’ equity 5,399,900  3,459,600  3,977,000  4,481,600  4,808,500  6,670,200 
Profitability Ratio
ROE1 42.46% 46.85% 43.59% 33.30% 30.21% 22.73%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in thousands)
Adjusted net earnings 2,791,400  1,285,600  1,467,900  1,682,400  1,384,800  1,540,800 
Stockholders’ equity 5,399,900  3,459,600  3,977,000  4,481,600  4,808,500  6,670,200 
Profitability Ratio
Adjusted ROE2 51.69% 37.16% 36.91% 37.54% 28.80% 23.10%

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 ROE = 100 × Net earnings ÷ Stockholders’ equity
= 100 × 2,292,800 ÷ 5,399,900 = 42.46%

2 Adjusted ROE = 100 × Adjusted net earnings ÷ Stockholders’ equity
= 100 × 2,791,400 ÷ 5,399,900 = 51.69%

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders’ equity. Automatic Data Processing Inc.’s adjusted ROE improved from 2017 to 2018 and from 2018 to 2019.

Adjusted Return on Assets (ROA)

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Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Total assets 41,887,700  37,088,700  37,180,000  43,670,000  33,110,500  32,051,700 
Profitability Ratio
ROA1 5.47% 4.37% 4.66% 3.42% 4.39% 4.73%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in thousands)
Adjusted net earnings 2,791,400  1,285,600  1,467,900  1,682,400  1,384,800  1,540,800 
Total assets 41,887,700  37,088,700  37,180,000  43,670,000  33,110,500  32,051,700 
Profitability Ratio
Adjusted ROA2 6.66% 3.47% 3.95% 3.85% 4.18% 4.81%

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × 2,292,800 ÷ 41,887,700 = 5.47%

2 Adjusted ROA = 100 × Adjusted net earnings ÷ Total assets
= 100 × 2,791,400 ÷ 41,887,700 = 6.66%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Automatic Data Processing Inc.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.