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S&P Downgrades ADP (ADP) to 'AA'; Reflects More Narrowly-Focused Business Profile

April 10, 2014 12:24 PM EDT

Standard & Poor's Ratings Services today said it lowered its corporate credit rating on Roseland, N.J.-based Automatic Data Processing Inc. (Nasdaq: ADP) to 'AA' from 'AAA'. The outlook is stable. The commercial paper rating remains 'A-1+'.

"The rating downgrade reflects ADP's more narrowly focused business profile, with the company's operations now entirely devoted to the HCM sector," said Standard & Poor's credit analyst Jacob Schlanger.

The announced spin-off of the dealer services business comes after the company exited its broker–dealer business in 2007. We now view the company's business risk profile as "strong," a revision from "excellent."

The rating reflects the company's strong business risk profile stemming from its leading position in the highly competitive HCM market, including employer services (ES) and professional employer organization (PEO) services, where it has enjoyed above average and low volatility of profitability. We view ADP's financial risk profile as "minimal" (including our standard surplus cash adjustment, whereby we net 75% of available cash from gross debt). With a strong business risk profile and minimal financial risk profile, the anchor score can be 'aa' or 'aa-'; our application of the 'aa' anchor rating reflects the company's strong business position within its business sector. We assess country risk as "very low" reflecting the company's heavy concentration of business in North America and western Europe. Industry risk is "intermediate" reflecting the company's participation in the software and services sector of the technology industry. We view management and governance as strong.

The stable outlook reflects our view that the company will maintain strong cash flow generation, and that capital allocation and financial policies will be consistent with a "minimal" financial risk profile.

We could lower the rating if leverage were to exceed 1.5x for a sustained period, because of more aggressive financial policies or debt incurred to fund a major acquisition.

We do not foresee an upgrade given the company's relatively narrow business risk profile.



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