Business Context and Reporting Period
Company: Automatic Data Processing, Inc. (ADP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009 (Nine months ended March 31, 2009)
Business Overview: ADP provides payroll, human resources, and benefits administration services. The company operates through three primary segments: Employer Services, PEO Services, and Dealer Services.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Mar 31, 2009 |
Three Months Ended Mar 31, 2008 |
Nine Months Ended Mar 31, 2009 |
Nine Months Ended Mar 31, 2008 |
|---|---|---|---|---|
| Total Revenues | $2,374.7 | $2,427.2 | $6,759.4 | $6,569.3 |
| Net Earnings (Continuing Ops) | $402.5 | $403.6 | $981.0 | $935.7 |
| Diluted EPS (Continuing Ops) | $0.80 | $0.77 | $1.93 | $1.77 |
| Operating Cash Flow | N/A | N/A | $1,135.1 | $1,298.6 |
| Cash & Cash Equivalents | $1,363.4 | N/A | $1,363.4 | $1,644.7 |
| Long-Term Debt | $43.1 | N/A | $43.1 | $52.1 |
| Effective Tax Rate | 36.0% | 36.5% | 36.5% | 35.8% |
Material Changes vs. Prior Period
- Revenue Trends: For the three months ended March 31, 2009, total revenues declined 2% ($52.5 million) primarily due to foreign currency fluctuations (-$76.8 million) and a decrease in Dealer Services revenue. Conversely, for the nine-month period, revenues increased 3% ($190.1 million), driven by growth in Employer Services (+$226.1 million) and PEO Services (+$107.0 million).
- Profitability: Net earnings from continuing operations remained flat for the quarter (-$1.1 million) but increased 5% ($45.3 million) for the nine-month period. Diluted EPS increased 4% for the quarter and 9% for the nine months, aided by share repurchases.
- Expense Management: Selling, general, and administrative expenses decreased 11% for the quarter and 3% for the nine months due to cost-saving initiatives and lower new client sales activity. Interest expense dropped significantly (68% for the quarter, 56% for nine months) due to lower interest rates on commercial paper and reverse repurchase agreements.
- Investment Losses: The company recorded a $15.0 million loss in the quarter and $18.3 million for the nine months related to its investment in the Reserve Fund (Primary Fund), which was impacted by the Lehman Brothers bankruptcy.
Guidance, Outlook, Risks, and Unusual Items
- Dealer Services Risk: Management anticipates a decline in the number of automotive dealerships due to the restructuring of General Motors and Chrysler. ADP estimates a potential revenue impact of approximately $75 million in Dealer Services over the next 12-24 months as dealerships close.
- Reserve Fund Contingency: The Reserve Fund has suspended redemptions and is in liquidation. ADP recorded losses based on the fund's special reserve for potential liabilities. Future distributions remain uncertain as the fund evaluates claims and expenses.
- Tax Matters: ADP received a favorable ruling in April 2009 regarding a state tax matter, expecting a $7 million reduction in tax provision and a $5 million refund in the fourth quarter of fiscal 2009. The company faces ongoing IRS and state audits with potential adjustments up to $110 million.
- Liquidity: Despite market volatility, ADP maintains a strong liquidity position with $1.47 billion in cash and marketable securities and access to $6.0 billion in committed credit facilities and commercial paper programs.
- Capital Expenditures: Expected to be approximately $185 million for the fiscal year ending June 30, 2009.
Key Facts for Investor Verification
- Reserve Fund Exposure: Verify the remaining balance of the Reserve Fund investment ($3.9 million as of March 31, 2009) and the potential for further losses or distributions as the liquidation plan progresses.
- Dealer Services Exposure: Confirm the specific impact of GM and Chrysler dealership closures on ADP's receivables ($72 million in notes receivable and $29 million in accounts receivable from GM/Chrysler dealers) and future revenue projections.
- Foreign Currency Impact: Monitor the volatility of foreign exchange rates, which reduced revenue by $79.6 million in the quarter and $144.6 million in the nine-month period.
- Share Repurchases: Note the aggressive buyback program, with 13.8 million shares repurchased in the nine months ended March 31, 2009, contributing to EPS growth despite flat net earnings in the quarter.
- Tax Liability: Review the $418.8 million liability for unrecognized tax benefits and the potential for cash payments up to $110 million in the next twelve months.