ADP Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2010. The filing also reports fourth-quarter results; it is an annual report, not a filing for calendar 2009 Q4.
Business context
ADP provides payroll, HR, tax and benefits administration, professional employer organization (PEO) services, and software and related services to vehicle dealers. Its reportable segments are Employer Services, PEO Services and Dealer Services. Management cited approximately 90% recurring revenue and a broad client base; no client or affiliated group contributed more than 2% of annual revenue.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $8.93 billion | $8.84 billion |
| Gross profit / gross margin | $3.90 billion / 43.7% | $4.02 billion / 45.4% |
| Pretax earnings from continuing operations / margin | $1.86 billion / 20.9% | $1.90 billion / 21.5% |
| Net earnings from continuing operations | $1.21 billion | $1.33 billion |
| Diluted EPS from continuing operations | $2.40 | $2.62 |
| Operating cash flow | $1.68 billion | $1.56 billion |
| Cash, cash equivalents and marketable securities at year-end | $1.78 billion | $2.39 billion |
| Long-term debt at year-end | $39.8 million | $42.7 million |
| Cash dividends declared per share | $1.35 | $1.28 |
Net earnings including discontinued operations were $1.21 billion in FY2010. Operating cash flow rose by $119.5 million; investing activities used $2.38 billion and financing activities provided $89.0 million. Capital expenditures for continuing operations were $90.2 million. Stockholders’ equity was $5.48 billion, and long-term debt was 0.7% of equity. The company reported $1.57 billion of working capital before client funds and client funds obligations.
Changes versus FY2009
- Revenue increased 1%, while pretax earnings declined 2%, continuing-operations net earnings declined 9%, and diluted continuing-operations EPS declined 8%.
- FY2009 included $120.0 million of favorable tax items, compared with $12.2 million in FY2010. Excluding those items, adjusted continuing-operations net earnings fell about 1% and adjusted diluted EPS slipped from $2.38 to $2.37; these are non-GAAP measures.
- Employer Services revenue was essentially flat: U.S. traditional payroll and payroll-tax revenue fell 4%, while beyond-payroll revenue grew 6%. Pays per control declined 3.4% for the year but was slightly positive in Q4 year over year; worldwide client retention improved to 89.9%.
- PEO Services revenue grew 11%, reflecting 5% growth in average worksite employees and higher benefits and unemployment-tax costs. Dealer Services revenue fell 3%, amid dealership closures, service reductions and lower transaction volumes.
- Interest on funds held for clients fell 11% to $542.8 million as the average yield decreased to 3.6% from 4.0%. Consolidated expenses rose 2%; the pretax margin contracted 60 basis points.
Outlook, risks and notable items
- Management said results were better than initially anticipated and cited signs of economic stabilization, improving Employer Services sales and retention, and slightly positive Q4 pays per control. The filing gives no formal revenue or EPS forecast. It projected FY2011 capital expenditures of $150 million to $170 million.
- ADP completed five acquisitions during FY2010 for approximately $101 million net of cash acquired. After year-end, it acquired Cobalt and Workscape; the filing also describes three post-year-end acquisitions totaling approximately $500 million. Cobalt alone was reported at approximately $400 million. These subsequent transactions warrant review for final purchase price and scope.
- FY2010 included a $14.4 million impairment loss on available-for-sale securities, a $15.2 million gain related to the Reserve Fund, and a $6.8 million impairment charge associated with GM’s planned Saturn shutdown. Management reported no goodwill impairment.
- Key risks include continued economic weakness, unemployment and dealership conditions; low interest rates reducing client-fund interest income; client-fund investment liquidity, credit and interest-rate exposure; reliance on short-term funding and banking networks; foreign-exchange movements; data security and service continuity; regulatory and tax changes; and technology and talent needs. A 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $9 million over the following 12 months.
- Client funds are distinct from corporate liquidity: at June 30, 2010, ADP reported $18.83 billion of funds held for clients against $18.14 billion of client-fund obligations. These balances support client payroll and tax remittances and should not be treated as unrestricted cash.
- Management said ordinary-course litigation was not expected to have a material effect. Unrecognized tax benefits were $107.2 million; potential settlements could increase earnings by up to $10 million over the next 12 months, with no related cash payments expected in that period. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile reported PEO segment revenue with the consolidated income-statement presentation, which reports PEO revenue net of direct payroll and payroll-tax pass-through costs.
- Assess whether underlying profitability is improving, separating the FY2009 tax benefit, lower client-fund yields, pass-through PEO costs and FY2010 unusual items.
- Review liquidity and funding availability independently of client funds, including commercial-paper access, committed credit facilities and the timing of client obligations.
- Confirm the consideration, financing, integration costs and expected contribution from post-year-end acquisitions, particularly the approximately $500 million aggregate amount disclosed.
- Monitor employment trends, client retention, pays per control, Dealer Services demand, interest rates, tax examinations and the $107.2 million unrecognized-tax-benefit balance.