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Global Credit Research - 13 Jul 2011
New York, July 13, 2011 -- Moody's Investors Service affirmed all ratings, including
the Aaa long-term ratings, of Automatic Data Processing,
Inc., ("ADP"), Exxon Mobil Corporation
("ExxonMobil"), Johnson & Johnson ("J&J"),
and Microsoft Corporation ("Microsoft") -- the
four U.S. based non-financial companies rated at
the Aaa level -- following the action that placed the U.S.
government's Aaa rating under review for possible downgrade.
The rating outlook is stable for ADP, ExxonMobil and Microsoft,
and remains negative for J&J.
RATIONALE FOR AFFIRMATION
Each of the companies exhibits characteristics, to varying degrees,
that could enable its Aaa long-term rating to be sustained as much
as 2-3 notches above the U.S. government's
ADP, ExxonMobil, J&J, and Microsoft provide products
and services that are essential to their customers, and set world-class
standards for market position, margins and efficiency. Moody's
expects these companies to continue to generate superior earnings and
cash flow. While financial performance fluctuates somewhat along
with trends for their industries and the broad economy, these companies
have substantial capacity to generate free cash flow under a wide range
of conditions. As a result, their operations are self-funded
without reliance on the government or the domestic banks, and these
companies would be expected to access the debt capital markets to fund
only large strategic investments. Direct U.S. government
exposure is minimal, as these firms have a diversified customer
base with substantial revenue derived from outside the U.S.
Debt levels of each company are very modest relative to normalized cash
flow. Moreover, each company has amassed a considerable cash
stockpile to ensure ongoing investment and to meet obligations in the
face of unforeseen disruptions to its business.
ADP (Aaa, stable) is deeply entrenched in its customers' payroll
processing operations. Cash flow predictability from high customer
retention, recurring revenues and low capital expenditures generates
superior profit margins and enables conversion of about 40% of
EBITDA to free cash flow annually. With about 550,000 customers,
we estimate that ADP derives less than 1% of its approximate $10
billion in revenues from government sources. Overseas clients account
for 20% of revenues and provide very sizeable non-U.S.
cash flow sources relative to ADP's $35 million of long-term
debt. We expect ADP to supplement its cash resources of about $1.7
billion with annual free cash flow of at least $1 billion.
ExxonMobil (Aaa, stable) is the only Aaa-rated company among
a group of highly rated integrated oil peers (Royal Dutch Shell,
Chevron and Total), reflecting its differential position in reserves,
production, financial flexibility, and free cash generation.
Its rating is supported by a massive base of proven oil and gas reserves
that are geographically diversified across the world's major hydrocarbon-producing
regions and also by a position in technology and integrated project expertise
that make it a preferred partner. ExxonMobil generates about 75%
of its earnings after tax outside of the U.S. and over 70%
of its proved reserves are located in foreign countries. The company's
$12.9 billion of cash at March 31, 2011 and substantial
operating cash flow generation provide ample liquidity to manage its debt
maturities, capital spending and dividends. Its exposure
to the U.S. government as a customer is not significant.
For J&J (Aaa, negative), a temporary delay in U.S.
government payments would not substantially affect J&J's financial
position, given its excellent free cash flow and its portfolio of
cash and short-term investments totaling over $26 billion.
J&J maintains limited exposure to the U.S. government
as a direct customer, and J&J's non-U.S.
sales represent over 50% of total revenues. Many of J&J's
customers, however, are reimbursed by government programs,
including Medicare and Medicaid. We estimate that roughly one-fifth
of J&J's revenues are indirectly related to such U.S.
government sources. Therefore, a protracted delay in U.S.
government payments could begin to affect J&J's revenue stream.
In addition, longer-term efforts to reduce the U.S.
budget deficit via reductions in healthcare spending could negatively
affect healthcare companies including J&J. The outlook on J&J's
Aaa rating remains negative, tied to higher leverage resulting from
J&J's acquisition strategy and higher operating risks,
including product quality issues and slow top-line growth.
Microsoft (Aaa, stable) derives a very low single-digit percentage
of its revenue from the U.S. federal government and about
half its total revenue from non-U.S. customers.
Based on good demand conditions and a strong competitive position in mission
critical software applications, Microsoft has very strong free cash
flow that has resulted in the accumulation of $52 billion of cash
and equivalents on its balance sheet.
Please see the ratings tab on the issuer/entity page on Moodys.com
for the last Credit Rating Action and the rating history.
The principal methodology used in rating ADP was the Global Business and
Consumer Service Industry, published in October 2010. The
principal methodology used in rating ExxonMobil was the Global Integrated
Oil & Gas Industry, published in November, 2009.
The principal methodology used in rating Johnson & Johnson was the
Global Pharmaceutical Rating Methodology, published in October 2009.
The principal methodology used in rating Microsoft was the Global Software
Methodology, published in May 2009. Other methodologies and
factors that may have been considered in the process of rating these issuers
can also be found in the Rating Methodologies sub-directory on
Automatic Data Processing, Inc., headquartered in Roseland,
New Jersey, is a worldwide provider of human resources, tax,
benefits, and automotive dealership management software and IT services.
Exxon Mobil Corporation, headquartered in Irving, Texas,
is among the world's largest investor owned integrated oil and gas
companies. Johnson & Johnson, headquartered in New Brunswick,
New Jersey, is one of the world's largest healthcare companies.
Microsoft Corporation, headquartered in Redmond, Washington,
is the world's largest software manufacturer.
For more information on the US government's rating, please
MD-US and Amer Corporate Fin
Corporate Finance Group
Moody's Investors Service, Inc.
MD-US and Amer Corporate Fin
Corporate Finance Group
Moody's Investors Service, Inc.
Moody's Investors Service, Inc.
Moody's affirms Aaa ratings of ADP, ExxonMobil, J&J, and Microsoft
250 Greenwich Street
New York, NY 10007
No Related Data.
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