ADP FY2011 Form 10-K Summary
Business context and reporting period
Automatic Data Processing, Inc. (ADP) provides payroll, HR, tax, benefits, professional employer organization (PEO), and dealership software and services. Its reportable segments are Employer Services, PEO Services, and Dealer Services. The filing covers the fiscal year ended June 30, 2011, with comparisons to fiscal 2010; it is an annual report, not a standalone “2010 Q4” filing. ADP reported approximately 570,000 clients and 51,000 employees.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $9,879.5 million | $8,927.7 million |
| Gross profit | $4,148.0 million | $3,898.0 million |
| Income before tax | $1,932.7 million | $1,863.2 million |
| Net income from continuing operations | $1,254.2 million | $1,207.3 million |
| Diluted continuing-operations EPS | $2.52 | $2.40 |
| Operating cash flow | $1,705.8 million | $1,682.1 million |
| Cash, cash equivalents and marketable securities at year-end | $1,523.7 million | $1,775.5 million |
| Long-term debt at year-end | $34.2 million | $39.8 million |
- Revenue increased 11%; gross profit rose 6%. Gross margin was approximately 42.0%, versus 43.7% in FY2010. Pretax margin declined to 19.6% from 20.9%, with management attributing much of the reduction to acquisitions.
- Income before tax increased 4%, net income from continuing operations increased 4%, and diluted EPS increased 5%. FY2010 included a $12.2 million favorable tax item; excluding it, FY2011 net income increased 5% and diluted EPS increased 6%.
- Segment revenue growth: Employer Services 8% to $6,861.7 million; PEO Services 17% to $1,543.9 million; Dealer Services 24% to $1,494.4 million. Dealer Services growth was mainly acquisition-driven: excluding acquisitions, it grew about 3%. Consolidated revenue growth excluding acquisitions was about 6.3%.
- Cash flow from investing was negative $7,340.6 million, reflecting increased restricted client-fund cash, securities activity, and $776.0 million of business acquisitions. Financing provided $5,339.2 million, substantially affected by client-fund flows. These client-fund balances support payroll and tax remittances and should not be treated as freely available corporate cash.
- Year-end stockholders’ equity was $6,010.4 million; long-term debt-to-equity was 0.6%. Working capital before client funds and related obligations was $1,252.2 million, down from $1,568.6 million. ADP had no commercial paper, reverse-repurchase, or revolving-credit borrowings outstanding at year-end; it reported substantial committed funding facilities for liquidity needs.
Material changes versus the prior comparable period
- Growth improved from FY2010’s 1% revenue increase. U.S. pays per control increased 2.4%, compared with a 3.4% decline in FY2010; worldwide Employer Services retention rose to 91.1% from 89.9%.
- PEO average worksite employees increased 12%; its revenue also reflected higher benefit costs and state unemployment insurance rates. PEO revenue includes substantial pass-through costs, so revenue growth does not equal comparable growth in service fees.
- Acquisitions, including Cobalt in Dealer Services, contributed materially to reported growth. Acquisition spending was $776.0 million, compared with $100.0 million in FY2010. Goodwill increased to $3,073.6 million from $2,383.3 million.
- Client-fund interest revenue decreased 0.5% to $540.1 million as the average earned rate fell to 3.2% from 3.6%, partly offset by 11% growth in average client-fund balances.
- ADP returned approximately $1.4 billion to shareholders through dividends and share repurchases. Dividends declared per share rose to $1.42 from $1.35.
- FY2011 fourth-quarter continuing-operations revenue was $2,507.1 million and net income was $241.8 million, versus $2,190.3 million and $207.6 million, respectively, in FY2010’s fourth quarter; diluted EPS was $0.48 versus $0.42.
Outlook, commentary, risks, and unusual items
- Management described the business as strengthening and outlined priorities to reinforce core services, grow HR outsourcing, expand internationally, enter adjacent markets, and improve pretax margin. No consolidated revenue or EPS forecast is provided in the supplied filing text. ADP expected FY2012 capital expenditures of $160 million to $180 million.
- Key risks include economic weakness affecting employment, client spending and interest rates; competition and pricing pressure; regulatory or tax-law changes; cybersecurity, privacy, and service disruptions; foreign-exchange exposure; and constraints on short-term funding access. ADP also depends on banking networks to execute client payroll and tax transfers.
- The investment portfolio was primarily investment grade; approximately 86% of available-for-sale securities carried AAA or AA ratings. Following the August 2011 U.S. sovereign and government-sponsored-enterprise rating downgrades, ADP said it did not intend, and was not required, to sell the affected securities and expected principal and interest recovery.
- ADP Indemnity increased workers’ compensation claim reserves by $39.2 million in FY2011, citing PEO growth in higher-cost states, adverse claim development, higher medical costs, and longer claim duration. ADP noted it could be responsible for claims if its AIG reinsurance provider cannot meet its obligations.
- Unusual items included an $11.7 million impairment on buildings held for sale and $34.4 million of net realized gains on available-for-sale securities. The annual goodwill impairment test found no impairment.
- Legal matters included a patent-infringement complaint involving the acquired AdvancedMD business and an EEOC charge alleging race discrimination in Illinois. ADP said it was investigating and intended to defend or cooperate as appropriate; it could not estimate possible losses for the matters described. The company stated that ordinary-course litigation was not expected to materially affect its financial condition, results, or cash flows.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of June 30, 2011. Cobalt was excluded from the internal-control assessment.
Important facts for investors to verify
- How much of FY2011’s growth and margin pressure is attributable to acquisitions, and whether acquired businesses deliver the expected growth, synergies, and cost savings.
- Underlying Employer Services momentum, including client retention, pays per control, and growth in beyond-payroll services.
- PEO economics after separating service fees from pass-through benefits, workers’ compensation, and unemployment-tax costs; monitor reserve development and reinsurance exposure.
- Client-fund investment yields, portfolio credit and liquidity, and continued access to commercial paper, repurchase agreements, and committed credit facilities.
- Resolution and financial exposure, if any, from the AdvancedMD patent complaint, EEOC charge, and pending tax examinations.
- Cash available for corporate purposes versus restricted client funds, and execution of capital-spending plans and shareholder returns.