ADP Form 10-Q Summary
Business context and reporting period
Automatic Data Processing, Inc. (ADP) reported its first fiscal quarter of 2015, the three months ended September 30, 2014, compared with the same quarter of 2013. ADP provides payroll, human-capital management, and related business services. Results are presented for continuing operations after the September 30 spin-off of Dealer Services as CDK Global and the earlier sale of Occupational Health and Safety services.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Continuing-operations revenue | $2,573.8 million | $2,362.0 million | +9% |
| Pre-tax earnings from continuing operations | $452.5 million | $403.6 million | +12% |
| Pre-tax margin | 17.6% | 17.1% | +0.5 percentage points |
| Net earnings from continuing operations | $298.0 million | $264.9 million | +12% |
| Diluted EPS from continuing operations | $0.62 | $0.55 | +13% |
| Total net earnings | $295.2 million | $328.6 million | Down |
| Operating cash flow | $378.2 million | $81.3 million | +$296.9 million |
Employer Services revenue rose 7% to $2,099.1 million; PEO Services revenue rose 18% to $594.9 million. PEO growth included a 15% increase in average worksite employees. PEO revenue is reported net of direct pass-through costs in the consolidated statements.
At September 30, ADP had $2,175.7 million of cash and cash equivalents and $2,308.2 million of corporate marketable securities, or $4,483.9 million in total cash and marketable securities. Long-term debt was $10.9 million; commercial paper outstanding was $1,937.0 million and was repaid October 1, 2014. The company also reported $19,138.7 million of funds held for clients and $18,935.3 million of corresponding client-funds obligations; these balances principally support payroll and tax remittances and should not be treated as unrestricted liquidity. Working capital excluding client funds and specified discontinued-operation balances was $2,430.7 million, versus $1,192.5 million at June 30.
Investing cash flow was $267.1 million, including an $825.0 million dividend from CDK; financing cash flow was negative $418.0 million, including $229.8 million in dividends paid. ADP declared dividends of $0.48 per share, up from $0.435. Comprehensive income was $131.1 million, down from $383.7 million, reflecting $108.9 million of currency translation losses and $94.1 million of unrealized losses on available-for-sale securities, before related tax and reclassification effects.
Material changes and unusual items
- ADP completed the tax-free CDK spin-off on September 30, distributing approximately 160.6 million CDK shares. It recorded a $1.5 billion reduction in retained earnings for net assets distributed, partly offset by the $825.0 million CDK dividend.
- Discontinued operations generated a $2.8 million net loss, versus $63.7 million of net earnings in the prior-year quarter. This included $42.8 million of spin-off-related costs, primarily professional fees, and a $68.4 million tax provision on $65.6 million of pre-tax discontinued-operations earnings. The different discontinued-operations result drove total net earnings lower despite growth in continuing operations.
- Operating cash flow included $207.2 million of proceeds from selling Dealer Services-related notes receivable. The sale also resulted in a $1.4 million gain and a $10.0 million reserve reversal recorded in SG&A.
- Stock-based compensation expense from continuing operations increased to $38.8 million from $23.3 million.
Outlook, management commentary, and risks
Management cited growth in new-business bookings, improved client retention, a 3.1% increase in pays per control, and margin expansion in both reportable business segments. It expects client-interest revenue to grow more slowly than processing revenue through fiscal 2015. ADP plans to use the CDK dividend for share repurchases during the remainder of fiscal 2015, subject to market conditions. Continuing-operations capital expenditures for fiscal 2015 are expected to be $175 million to $200 million. The filing provides no specific earnings or revenue guidance.
Key risks include client retention and sales, pricing and competition, economic and interest-rate movements, foreign exchange, regulation, cybersecurity and system interruptions, staffing and technology changes, and acquisition or divestiture impacts. ADP disclosed liquidity risk related to funding client obligations, although it cited access to cash, commercial paper, committed credit facilities, and reverse-repurchase capacity. A pending EEOC investigation concerns alleged discriminatory hiring and promotion practices; ADP said it could not estimate a reasonably possible loss. ADP entered a memorandum of understanding to settle patent litigation with athenahealth, with no expected material adverse impact. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Track continuing-operations growth and margins separately from discontinued-operations results and spin-off costs.
- Confirm whether planned repurchases of the $825.0 million CDK dividend occur and how they affect share count and capital returns.
- Monitor client-funds liquidity and commercial-paper access; distinguish client funds from corporate cash available for general use.
- Assess sensitivity to interest rates: management estimated a 25-basis-point change in short- and intermediate-term rates could affect pre-tax earnings by about $11 million over the following 12 months.
- Follow the EEOC matter, the athenahealth settlement process, and the implementation impact of newly issued revenue-recognition guidance, which ADP had not yet determined.