Automatic Data Processing, Inc. — Form 10-Q Summary
Business context and reporting period
The filing is for the quarter ended March 31, 2011, ADP’s fiscal third quarter, with nine-month comparisons to March 31, 2010. This differs from the request metadata’s “2010 Q3.” ADP reports Employer Services, PEO Services and Dealer Services. Financial amounts below are in millions, except per-share data.
Key financial metrics
| Metric | Three months ended March 31, 2011 | Prior-year quarter | Nine months ended March 31, 2011 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $2,737.3 | $2,443.2 | $7,372.4 | $6,737.4 |
| Pre-tax earnings from continuing operations | $653.0 | $633.0 | $1,574.0 | $1,557.7 |
| Net earnings from continuing operations | $423.8 | $401.6 | $1,012.4 | $999.7 |
| Diluted EPS from continuing operations | $0.85 | $0.79 | $2.03 | $1.98 |
| Pre-tax margin | 24% | 26% | 21% | 23% |
| Operating cash flow | Not provided by quarter | $1,220.3 | $1,286.6 |
Quarterly revenue rose 12%, while pre-tax earnings increased 3% and continuing-operations net earnings increased 6%. Nine-month revenue rose 9%, but pre-tax earnings increased only 1%. Management attributed margin contraction partly to acquisitions; acquisitions accounted for about 100 basis points of quarterly and 90 basis points of nine-month consolidated margin decline.
For the quarter, Employer Services revenue grew 9%, PEO Services 18% and Dealer Services 29%. For the nine months, growth was 7%, 16% and 22%, respectively. Acquisitions materially contributed to Dealer Services growth: excluding recent acquisitions, Dealer Services revenue increased about 3% for both periods. Management also reported improving client retention, U.S. pays per control and PEO worksite employee levels.
Liquidity, debt and cash flows
- At March 31, 2011, cash and marketable securities were $1,741.1; stockholders’ equity was $6,194.5; long-term debt was $34.6. Long-term debt-to-equity was 0.6%.
- Cash and cash equivalents were $1,600.9, compared with $1,643.3 at June 30, 2010. ADP reported working capital excluding client funds assets and obligations of $1,672.7, up from $1,568.6.
- Nine-month operating cash flow was $1,220.3. Investing cash outflow was $14,634.8, largely reflecting client funds activity and $774.7 of net acquisition spending. Financing cash inflow was $13,335.8, primarily reflecting the $13,683.6 increase in client funds obligations. These large client-funds flows are not equivalent to ordinary corporate financing.
- Client funds held were $32,451.9 against client funds obligations of $32,015.4. ADP says these assets are restricted for client obligations and reports both as current; this substantially affects reported current assets and liabilities.
- No commercial paper, reverse-repurchase obligations or borrowings under revolving credit facilities were outstanding at March 31, 2011. Credit facilities totaling $6.25 billion supported liquidity; two facilities totaling $4.75 billion were scheduled to mature in June 2011.
Outlook, commentary, risks and unusual items
- Management described positive business trends after a difficult fiscal 2010, including improved Employer Services retention and payroll metrics, continued PEO growth, and stabilization in automotive-related Dealer Services activity.
- ADP expected the eight businesses acquired during the first nine months, including Cobalt, not to have a material impact on fiscal 2011 earnings. It gave no specific full-year earnings or revenue guidance in the supplied filing text.
- Fiscal 2011 capital expenditures were expected to be $160–$180 million, compared with $90.2 million in fiscal 2010.
- Lower interest rates reduced client-fund yields: the average rate earned on client funds was 2.9% in the quarter versus 3.2% a year earlier, and 3.3% for nine months versus 3.6%. ADP estimated a 25-basis-point change in short- and intermediate-term rates would affect pre-tax earnings by about $9 million over the following 12 months; a 25-basis-point short-term-only change would affect them by about $4 million.
- Acquisitions increased goodwill to $3,072.0 from $2,383.3 at June 30, 2010. ADP spent $774.7 net of cash acquired on acquisitions during the nine-month period.
- An $8.6 impairment charge was recorded for two buildings held for sale; ADP also recognized a $1.8 gain on building sales. Other income benefited from investment-security gains, but the prior-year period included larger gains related to the Reserve Fund.
- A California class action concerning client calls was agreed to be settled in April 2011, subject to court approval. The third-party vendor is to pay settlement costs and ADP’s legal fees; ADP expected dismissal from the action. The filing says other ordinary-course litigation was not expected to have a material impact.
- ADP’s outsourcing agreement with Broadridge was not expected to be extended beyond June 30, 2012; management did not anticipate a material impact. ADP also identified liquidity, interest-rate, credit, foreign-exchange, economic, employment, competitive, technology and acquisition-related risks.
Important facts for investors to verify
- Confirm the reporting period: the filing is for the quarter ended March 31, 2011, not 2010 Q3.
- Assess whether organic growth and margin trends support reported growth, particularly the acquisition contribution and rising operating and development costs.
- Monitor client-fund investment yields, rate sensitivity, securities valuation and access to short-term funding; distinguish restricted client funds from corporate cash.
- Review the June 2011 credit-facility maturities, acquisition integration and the expected capital-spending range.
- Check subsequent court approval and implementation of the class-action settlement, and the eventual operational impact of the Broadridge agreement’s expiration.