Moody's Cuts ADP's (ADP) Issuer Rating to 'Aa1'; Sees Higher Credit Risk on Dealer Services Spin

Moody's Investors Service downgraded Automatic Data Processing, Inc.'s (Nasdaq: ADP) Issuer Rating to Aa1 from Aaa. As part of the rating action, Moody's assigned an Aa1 rating to a $5.25 million industrial revenue bond backed by ADP, and affirmed the company's P-1 Short-term Rating. The rating outlook remains Stable.

RATINGS RATIONALE

The downgrade of ADP's issuer rating reflects Moody's view that the company's plan to effect a tax-free spinoff of its Dealer Services ("DS") business segment increases the company's credit risk due to the diminished scale of the company's operations and decreased diversification of its product portfolio. The downgrade also reflects Moody's view that, in the unlikely event that the spinoff does not occur, the company will pursue alternative shareholder reward strategies that would also be consistent with the Aa1 rating. Supporting the Aa1 rating and stable outlook are ADP's predictable profit and cash flow that result from its dominant market positions in human resources and payroll processing markets, and ADP's significant recurring revenue base that is spread over a large and diverse group of customers. ADP has reported operating margins of 19-21% over the past five fiscal years and Moody's expect the company to continue to generate solid profits within its steadily-growing core businesses.

Moody's views the DS spinoff as a significant weakening to ADP's cash generating profile considering that ADP's scale was relatively small compared to that of other companies at the Aaa rating level even prior to the DS spinoff. Moody's estimates that ADP will not attain its fiscal year 2013 levels of revenue and cash flow generation for at least two years following the DS spinoff. Also supporting the downgrade, Moody's notes the loss of diversification in ADP's service offerings from the removal of its DS business.

Ratings downgraded / ratings assigned / outlook and ratings affirmed:

Issuer Rating downgraded to Aa1 from Aaa

Short-term Rating affirmed at P-1

Rating Outlook maintained at Stable

Senior Unsecured Debt Rating assigned at Aa1

What Could Change the Rating - Up

Ratings could be upgraded if ADP demonstrates a diversified business and sustainable free cash flow profile, and scale consistent with that of issuers rated at the Aaa level.

What Could Change the Rating - Down

ADP's Aa1 rating or outlook could face downward pressure if increased competition from other payroll processors causes market share losses or if operating expense growth outpaces revenue growth leading to significant margin pressure and a material decline in free cash flow generation. This margin deterioration would result in financial leverage approaching 1.0x total debt to EBITDA (after standard adjustments) or free cash flow to debt (after standard adjustments) declining to under 20% for an extended period. The rating would also be pressured if management departs from its historically conservative financial policies resulting in significant increases in funded debt, acquisition spending, share repurchases and/or dividend payouts above internal cash flow generation for a sustained period.

For ratings drivers and additional analysis, please refer to Automatic Data Processing, Inc's credit opinion on www.moodys.com.

The principal methodology used in this rating was Global Business and Consumer Service Industry published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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