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Automatic Data Processing Inc. (ADP)

Analysis of Investments

Difficulty: Advanced

Investment Accounting Policy

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 a specific-identification basis and are included in other expense/(income), 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: 2018-08-03).

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

Automatic Data Processing Inc., adjustment to Net Earnings

USD $ in thousands

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12 months ended Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013
Net earnings (as reported) 1,620,800  1,733,400  1,492,500  1,452,500  1,515,900  1,405,800 
Add: Unrealized net gains (losses) on available-for-sale securities, net of tax (337,300) (264,100) 186,600  (64,400) 35,300  (256,100)
Less: Reclassification of net (gains) losses on available-for-sale securities to net earnings, net of tax 2,100  (1,400) 3,300  (3,300) (10,400) (18,500)
Net earnings (adjusted) 1,285,600  1,467,900  1,682,400  1,384,800  1,540,800  1,131,200 

Based on: 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), 10-K (filing date: 2013-08-19).

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

Automatic Data Processing Inc., adjusted ratios

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Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013
Net Profit Margin
Reported net profit margin 12.16% 14.00% 12.79% 13.28% 12.42% 12.43%
Adjusted net profit margin 9.65% 11.86% 14.42% 12.66% 12.62% 10.00%
Return on Equity (ROE)
Reported ROE 46.85% 43.59% 33.30% 30.21% 22.73% 22.71%
Adjusted ROE 37.16% 36.91% 37.54% 28.80% 23.10% 18.27%
Return on Assets (ROA)
Reported ROA 4.37% 4.66% 3.42% 4.39% 4.73% 4.36%
Adjusted ROA 3.47% 3.95% 3.85% 4.18% 4.81% 3.51%

Based on: 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), 10-K (filing date: 2013-08-19).

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 deteriorated from 2016 to 2017 and from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders’ equity. Automatic Data Processing Inc.’s adjusted ROE deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Automatic Data Processing Inc.’s adjusted ROA improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.

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

Adjusted Net Profit Margin

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Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net earnings 1,620,800  1,733,400  1,492,500  1,452,500  1,515,900  1,405,800 
Revenues 13,325,800  12,379,800  11,667,800  10,938,500  12,206,500  11,310,100 
Ratio
Net profit margin1 12.16% 14.00% 12.79% 13.28% 12.42% 12.43%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (USD $ in thousands)
Adjusted net earnings 1,285,600  1,467,900  1,682,400  1,384,800  1,540,800  1,131,200 
Revenues 13,325,800  12,379,800  11,667,800  10,938,500  12,206,500  11,310,100 
Ratio
Adjusted net profit margin2 9.65% 11.86% 14.42% 12.66% 12.62% 10.00%

Based on: 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), 10-K (filing date: 2013-08-19).

2018 Calculations

1 Net profit margin = 100 × Net earnings ÷ Revenues
= 100 × 1,620,800 ÷ 13,325,800 = 12.16%

2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Revenues
= 100 × 1,285,600 ÷ 13,325,800 = 9.65%

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 deteriorated from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Equity (ROE)

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Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net earnings 1,620,800  1,733,400  1,492,500  1,452,500  1,515,900  1,405,800 
Stockholders’ equity 3,459,600  3,977,000  4,481,600  4,808,500  6,670,200  6,189,900 
Ratio
ROE1 46.85% 43.59% 33.30% 30.21% 22.73% 22.71%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (USD $ in thousands)
Adjusted net earnings 1,285,600  1,467,900  1,682,400  1,384,800  1,540,800  1,131,200 
Stockholders’ equity 3,459,600  3,977,000  4,481,600  4,808,500  6,670,200  6,189,900 
Ratio
Adjusted ROE2 37.16% 36.91% 37.54% 28.80% 23.10% 18.27%

Based on: 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), 10-K (filing date: 2013-08-19).

2018 Calculations

1 ROE = 100 × Net earnings ÷ Stockholders’ equity
= 100 × 1,620,800 ÷ 3,459,600 = 46.85%

2 Adjusted ROE = 100 × Adjusted net earnings ÷ Stockholders’ equity
= 100 × 1,285,600 ÷ 3,459,600 = 37.16%

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 deteriorated from 2016 to 2017 but then slightly improved from 2017 to 2018.

Adjusted Return on Assets (ROA)

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Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net earnings 1,620,800  1,733,400  1,492,500  1,452,500  1,515,900  1,405,800 
Total assets 37,088,700  37,180,000  43,670,000  33,110,500  32,051,700  32,268,100 
Ratio
ROA1 4.37% 4.66% 3.42% 4.39% 4.73% 4.36%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (USD $ in thousands)
Adjusted net earnings 1,285,600  1,467,900  1,682,400  1,384,800  1,540,800  1,131,200 
Total assets 37,088,700  37,180,000  43,670,000  33,110,500  32,051,700  32,268,100 
Ratio
Adjusted ROA2 3.47% 3.95% 3.85% 4.18% 4.81% 3.51%

Based on: 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), 10-K (filing date: 2013-08-19).

2018 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × 1,620,800 ÷ 37,088,700 = 4.37%

2 Adjusted ROA = 100 × Adjusted net earnings ÷ Total assets
= 100 × 1,285,600 ÷ 37,088,700 = 3.47%

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 improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.