Business Context and Reporting Period
Company: Automatic Data Processing, Inc. (ADP)
Filing Type: Form 10-Q
Reporting Period: Quarter and six months ended December 31, 1998 (Fiscal Year 1999)
Business Overview: ADP provides payroll, human resource, and financial services. The company reported record revenues and earnings for the quarter, driven by growth in Employer and Dealer Services, partially offset by a decline in Brokerage Services due to a strategic divestiture.
Key Financial Metrics
| Metric | 3 Months Ended Dec 31, 1998 | 6 Months Ended Dec 31, 1998 |
|---|---|---|
| Revenues | $1,274.9 million | $2,485.2 million |
| Net Earnings | $168.4 million | $291.6 million |
| Diluted EPS | $0.27 | $0.47 |
| Operating Cash Flow (6mo) | $395.8 million | |
| Cash & Marketable Securities | $1.7 billion (as of Dec 31, 1998) | |
| Long-Term Debt | $165.8 million | |
| Shareholders' Equity | $3.7 billion | |
| Debt-to-Equity Ratio | 4% |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 11% year-over-year for the quarter and 14% for the six-month period.
- Segment Performance: Employer Services grew 15% (quarter) and 17% (six months). Dealer Services grew 8%. Brokerage Services declined 5% due to the sale of the "front-office" market data business; excluding this sale, growth was 14%.
- Earnings: Net earnings increased 14% for the quarter and 15% for the six months. Pretax earnings rose 29% for the quarter, aided by a one-time gain on the sale of the front-office business.
- Tax Rate: The effective tax rate increased to 39.0% from 31.3% in the prior year quarter, primarily due to the weighting of taxable versus non-taxable earnings.
- Dividends: Dividends per share increased to $0.07625 for the quarter (up from $0.06625).
Guidance, Outlook, and Risks
- Outlook: Management expects double-digit revenue growth for the full fiscal year and diluted earnings per share growth of 13-16%.
- Capital Expenditures: Expected to approximate $200 million for fiscal 1999, compared to $199 million in fiscal 1998.
- Acquisitions & Divestitures:
- Vincam Group: Agreed to acquire for ~7.4 million shares of ADP stock (pooling of interests); expected to close Q1 FY99.
- Peachtree Software: Agreed to sell to The Sage Group plc for $145 million; expected to close Q1 FY99.
- Front-Office Business: Sold to Bridge Information Systems in November 1998, resulting in a $3 million net loss after taxes.
- Year 2000 Compliance: Majority of mission-critical systems are compliant; remaining systems expected to be compliant by March 31, 1999. Management does not expect material adverse effects on results.
- Stock Split: A two-for-one stock split was declared effective January 1, 1999.
Investor Verification Checklist
- Divestiture Impact: Verify the net financial impact of the "front-office" business sale ($3 million net loss) and its exclusion from organic growth metrics.
- Acquisition Timing: Confirm the closing dates for the Vincam Group acquisition and Peachtree Software sale, as these affect future revenue recognition and EPS.
- Tax Rate Volatility: Monitor the effective tax rate, which rose significantly to 39.0% due to the mix of taxable income.
- Year 2000 Remediation: Assess the status of third-party interface testing and compliance for remaining non-compliant systems.
- Share Count: Note the two-for-one stock split effective January 1, 1999, which impacts share count and per-share metrics for future periods.