Business Context and Reporting Period
Company: Automatic Data Processing, Inc. (ADP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: ADP provides payroll, human resources, and benefits administration services (Employer Services), as well as brokerage, securities clearing, and dealer services. The company announced a plan to spin off its Brokerage Services Group into an independent publicly traded company.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2007 (Ended Sep 30, 2006) | Q1 2006 (Ended Sep 30, 2005) |
|---|---|---|
| Total Revenues | $2,217.6 | $1,921.7 |
| Net Earnings from Continuing Operations | $257.5 | $206.1 |
| Diluted EPS (Continuing Operations) | $0.46 | $0.35 |
| Operating Cash Flow | $167.3 | $401.8 |
| Cash and Cash Equivalents | $1,401.2 | $927.3 (Continuing Ops) |
| Long-Term Debt | $74.4 | $74.3 |
| Stockholders' Equity | $5,847.9 | $6,011.6 |
| Effective Tax Rate | 37.6% | 37.9% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% year-over-year, driven by growth in Employer Services (12%), Brokerage Services (16%), and Dealer Services (23%). Internal revenue growth was 13%.
- Profitability: Net earnings from continuing operations rose 25% to $257.5 million. Earnings before income taxes increased 24% to $412.7 million, with margins improving from 17% to 19%.
- Unusual Items: The increase in "Other income, net" was primarily due to a one-time gain of $38.6 million from the sale of a minority investment.
- Expense Increases: Operating expenses rose 20% and SG&A expenses rose 16%, attributed to higher pass-through costs in the PEO business, increased salesforce and implementation personnel, and restructuring charges of approximately $9 million.
- Cash Flow: Operating cash flow decreased significantly to $167.3 million from $401.8 million, largely due to timing of billings and changes in securities clearing receivables/payables.
Guidance, Outlook, and Risks
- Spin-Off: The Board approved a tax-free spin-off of the Brokerage Services Group. The company estimates spin-related expenses of $45 million to $55 million for fiscal 2007.
- Capital Allocation: The company repurchased 12.6 million shares of common stock during the quarter at an average price of $46.57. Dividends declared per share increased to $0.1850 from $0.1550.
- Acquisitions: ADP acquired one business for $25.2 million in the quarter and signed agreements in October 2006 to acquire two additional businesses for approximately $347 million combined.
- Capital Expenditures: Expected to be approximately $250 million for fiscal 2007, down from $289.2 million in fiscal 2006.
- Risks: Key risks include the successful consummation of the Brokerage Services spin-off, changes in interest rates affecting investment income, foreign currency fluctuations, and ongoing IRS examinations of tax years 1998 through 2006.
Investor Verification Checklist
- Spin-Off Timeline: Verify the regulatory approval status and expected completion date for the Brokerage Services Group spin-off.
- Investment Gain: Confirm the non-recurring nature of the $38.6 million gain on the sale of a minority investment when analyzing core operating performance.
- PEO Margins: Monitor the impact of rising pass-through costs on the Professional Employer Organization (PEO) segment margins.
- Share Repurchases: Track the remaining authorization for share repurchases (71.4 million shares remaining as of Sept 30, 2006) and future buyback activity.
- Acquisition Integration: Assess the financial impact and integration progress of the Kerridge acquisition and the new $347 million acquisition pipeline.