ADP Form 10-Q Summary
Business context and reporting period
Automatic Data Processing, Inc. (ADP) filed this unaudited quarterly report for the three and six months ended December 31, 2014, its fiscal 2015 second quarter and first half. ADP provides payroll, human capital management, and related business services. Following the September 30, 2014 tax-free spin-off of Dealer Services as CDK Global, ADP reports Employer Services and PEO Services as its operating segments; CDK results are presented as discontinued operations.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 | Comparable prior-period change |
|---|---|---|---|
| Revenue | $2.661 billion | $5.235 billion | +7% and +8% |
| Continuing-operations pretax earnings | $501.1 million | $953.6 million | +8% and +10% |
| Continuing-operations net earnings | $334.0 million | $632.0 million | +6% and +9% |
| Diluted EPS, continuing operations | $0.70 | $1.31 | +8% and +9% |
| Overall pretax margin | 18.8% | 18.2% | Up from 18.5% and 17.8% |
For the quarter, Employer Services revenue grew 4% to $2.170 billion, while PEO Services revenue grew 18% to $625.8 million. PEO growth reflected a 15% rise in average worksite employees; reported PEO revenue includes substantial pass-through costs. Segment pretax margins improved: Employer Services to 28.9% for the quarter and 28.4% for the half; PEO Services to 12.6% and 11.9%, respectively.
Total net earnings were $331.5 million for the quarter and $626.7 million for the half, down from $377.0 million and $705.6 million. This comparison includes discontinued operations: the prior-year periods included CDK earnings, while the current quarter included $2.5 million of discontinued-operation losses; the current half included a $5.3 million loss. Continuing-operations results increased in both periods.
Cash flow, liquidity, and capital
- First-half operating cash flow was $607.1 million, up from $473.0 million. The $225.5 million sale of Dealer Services-related notes receivable contributed to the increase.
- Cash and cash equivalents were $1.851 billion and total corporate cash and marketable securities were approximately $1.999 billion at December 31, 2014. ADP reported $5.492 billion of stockholders’ equity and $10.3 million of long-term debt.
- No commercial paper or credit-agreement borrowings were outstanding at December 31; $2.173 billion of commercial paper outstanding at June 30 was repaid July 1. Available facilities included $7.5 billion of committed revolving credit and $3.25 billion of committed reverse-repurchase capacity.
- Funds held for clients were $34.707 billion, matched by $34.461 billion of client-fund obligations. These balances support client payroll and tax remittances and should not be treated as ordinary corporate cash or debt.
- ADP paid $461.3 million in dividends and repurchased $462.2 million of shares in the first half, including approximately 5.7 million shares at an average $83.25. The declared dividend was $0.49 per share for the quarter.
- Capital expenditures for continuing operations were $77.2 million in the first half; fiscal 2015 capex was expected to be $175 million–$200 million.
Material changes, outlook, and risks
- The CDK spin-off reduced ADP’s scope and changed period comparability. ADP received an $825 million cash dividend from CDK and said it planned to return the remaining proceeds to shareholders through repurchases by fiscal year-end, subject to market conditions.
- Management cited solid organic growth, stronger client retention, new-business bookings, and operating efficiency. Client revenue retention improved year over year; pays per control increased 3.0% in both the quarter and first half.
- Management expected foreign-currency translation pressure and slower growth in high-margin client-fund interest revenue to continue through the remainder of fiscal 2015. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- Average interest earned on funds held for clients declined to 1.8% in the quarter from 1.9%, and to 1.9% for the half from 2.0%. ADP estimated that a 25-basis-point change in short- and intermediate-term rates could affect pretax earnings by about $13 million over the following 12 months.
- Key stated risks include client retention and new sales, pricing, competition, economic and employment conditions, foreign exchange and interest rates, technology change, security breaches or system failures, and access to short-term funding during market stress. ADP reported no material changes to the risk factors in its fiscal 2014 Form 10-K.
- ADP reported an ongoing EEOC investigation concerning alleged discrimination in Illinois. It settled patent litigation with athenahealth in November 2014; the settlement had no material adverse impact. The company said other claims were not expected to have a material adverse effect, while noting litigation uncertainty.
- ADP extended a contract in December, adding purchase and maintenance obligations of $43.1 million for fiscal 2019 and $87.3 million for fiscal 2020. It reported no derivative instruments outstanding at period-end.
Most important facts for investors to verify
- How much of continuing-operations growth is organic and sustainable after the CDK spin-off, currency effects, and the contribution of PEO pass-through revenues?
- Whether client retention, new-business bookings, and employee/worksite growth continue to support revenue and margin expansion.
- How lower reinvestment yields or other interest-rate changes affect client-fund interest income and earnings.
- Timing and completion of the planned repurchases from the CDK dividend, and the effect of repurchases on shares outstanding and per-share results.
- Current status and potential exposure of the EEOC matter and other contingencies, plus the effect of the new contract commitments.