ADP Form 10-Q Summary
Business context and reporting period
Automatic Data Processing, Inc. (ADP) reported unaudited results for the three months ended September 30, 2012, its first quarter of fiscal 2013. The filing compares results with the three months ended September 30, 2011. ADP provides employer, professional employer organization (PEO), and dealer services.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Total revenue | $2,637.5 million | $2,510.9 million |
| Earnings before tax from continuing operations | $465.6 million | $455.7 million |
| Net earnings from continuing operations | $302.5 million | $300.4 million |
| Diluted EPS from continuing operations | $0.62 | $0.61 |
| Operating cash flow | $(65.1) million | $316.3 million |
- Total revenue increased 5%; continuing-operations earnings before tax increased 2%, while net earnings from continuing operations grew 1%. Reported diluted EPS rose 2%, partly reflecting fewer shares outstanding after repurchases.
- Pre-tax margin was approximately 18%, down about 50 basis points year over year. ADP attributed pressure in part to acquisitions and lower interest income on client funds.
- Interest on funds held for clients was $106.8 million, down from $121.9 million. Average yield declined to 2.7% from 3.2%, partly offset by 6% growth in average client funds to $16.1 billion.
- Cash and cash equivalents were $1.117 billion; corporate cash and marketable securities totaled $1.676 billion. Working capital, excluding client funds assets and obligations, was $855.4 million, versus $1.337 billion at June 30, 2012.
- Long-term debt was $16.3 million; long-term debt-to-equity was 0.3%. ADP had no commercial paper outstanding at quarter-end and no borrowings under its revolving credit facilities. It reported $442.7 million of reverse-repurchase obligations at September 30; these were repaid by October 3, 2012.
- Other comprehensive income was $119.2 million, bringing comprehensive income to $424.5 million, principally reflecting unrealized gains on available-for-sale securities and currency translation adjustments.
Material changes and segment results
- Revenue growth was reported across all segments: Employer Services +6% to $1,819.0 million; PEO Services +13% to $451.9 million; and Dealer Services +9% to $439.8 million. ADP said consolidated growth would have been about 3% excluding specified fiscal 2012 acquisitions and the effect of a prior asset sale; foreign exchange reduced revenue by $47.7 million.
- Segment pre-tax earnings increased 4% in Employer Services to $421.8 million, 26% in PEO Services to $46.2 million, and 20% in Dealer Services to $76.0 million. Employer Services margin declined to 23.2% from 23.8%; PEO Services margin rose to 10.2% from 9.2%; Dealer Services margin rose to 17.3% from 15.8%.
- Reported operating cash flow swung to a use of $65.1 million from a source of $316.3 million. ADP cited a $141.4 million reinsurance premium, pension contributions that were $50.3 million higher, unfavorable working-capital movements, and timing of tax payments. Investing and financing cash flows are significantly affected by client-fund activity and should not be read as ordinary corporate cash flows alone.
- ADP repurchased 3.3 million shares for $194.5 million and paid $192.1 million in dividends. Dividends declared per share increased to $0.395 from $0.360.
Outlook, commentary, risks and unusual items
- Management cited new-business sales, client retention, payroll employment growth, pricing, and acquisitions as revenue supports, while noting continued pressure from low interest rates on client-fund interest revenue. The filing provides no quantified earnings or revenue guidance.
- Fiscal 2013 capital expenditures were expected to be $180 million to $200 million, compared with $146.2 million in fiscal 2012.
- ADP classified its Taxware Enterprise Service business as discontinued operations while pursuing strategic alternatives. The quarter included $2.8 million of after-tax discontinued-operations earnings; no impairment was recorded because management expected sale proceeds net of costs to exceed carrying value.
- ADP paid a $141.4 million premium for reinsurance covering substantially all ADP Indemnity losses for the fiscal 2013 policy year up to the $1 million per-occurrence retention for specified PEO employee coverage.
- Key exposures include client-fund liquidity, interest-rate and investment credit risk, foreign exchange, economic and employment conditions, competition, technology, and auto-industry conditions. Management estimated that a 25-basis-point change in short- and intermediate-term rates could affect pre-tax earnings by about $10 million over the following 12 months.
- Pending matters include a patent-infringement complaint by athenahealth and an EEOC investigation concerning alleged hiring and promotion discrimination. ADP said it was defending the patent claim and cooperating with the EEOC; it could not estimate a reasonably possible loss range for these matters.
Most important facts for investors to verify
- Whether recurring revenue, new sales, and retention continue to offset lower client-fund yields; worldwide client revenue retention declined 40 basis points year over year.
- Whether reported cash generation improves after the quarter’s reinsurance payment, pension funding, working-capital movements, and tax-payment timing.
- How client-fund investment returns, maturities, and short-term funding access evolve, particularly if interest rates or credit markets change.
- Whether the Taxware sale proceeds exceed carrying value and whether the legal matters produce any material adverse outcome.
- Whether the planned $180 million–$200 million capital expenditure range and ongoing repurchases and dividends are consistent with future cash flows.