ADP Form 10-Q Summary
Business context and reporting period
Automatic Data Processing, Inc. reported results for the quarter and nine months ended March 31, 2013, the third quarter of fiscal 2013. Comparisons are with the same periods in 2012. ADP provides Employer Services, PEO Services, and Dealer Services. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total revenue | $3,114.3 million, up 7% | $8,499.6 million, up 6% |
| Continuing-operations pretax earnings | $724.8 million, up 6%; pretax margin 23%, roughly flat | $1,719.2 million, essentially flat; pretax margin 20% versus 21% |
| Continuing-operations net earnings | $482.7 million, up 7% | $1,137.1 million, up 1% |
| Diluted continuing-operations EPS | $0.99 versus $0.91, up 9% | $2.33 versus $2.28, up 2% |
| Operating cash flow | Not reported separately for the quarter | $1,001.7 million versus $1,411.1 million |
Quarterly revenue increased across all three segments: Employer Services +7%, PEO Services +10%, and Dealer Services +8%. For the nine months, segment revenue increased 7%, 12%, and 9%, respectively. PEO revenue is reported net of direct pass-through costs, which were $442.3 million in the quarter and $1,143.9 million year to date.
Interest on client funds declined to $112.0 million for the quarter from $133.3 million, and to $320.4 million year to date from $373.0 million. Lower average yields drove the decline, partly offset by client-fund balances that were 7% higher on average in both periods. Quarterly diluted EPS also benefited from a lower average share count.
Cash, liquidity, debt, and capital returns
At March 31, 2013, cash and cash equivalents were $1,647.7 million and corporate marketable securities were $109.6 million, totaling $1,757.3 million. Working capital excluding client funds assets and obligations was $1,681.8 million, up from $1,337.0 million at June 30, 2012. Long-term debt was $15.3 million; ADP reported no borrowings under its credit agreements and no commercial paper or reverse-repurchase obligations outstanding at quarter-end.
Funds held for clients of $30,336.3 million are restricted for client payroll and tax obligations, which were $29,703.4 million; these balances should not be treated as unrestricted corporate liquidity. ADP also had access to a $6.75 billion commercial-paper program, $3.0 billion of committed reverse-repurchase capacity, and $6.75 billion of revolving credit facilities. One $2.0 billion credit agreement was due to mature in June 2013.
Nine-month capital returns included $594.7 million of dividends and $402.0 million of share repurchases. Dividends declared were $0.435 per share for the quarter. Stockholders’ equity was $6,561.1 million.
Changes, outlook, commentary, and risks
- Management cited new-business growth, improved salesforce productivity, client retention, price increases, and increased payroll/worksite employee counts as revenue drivers. It reported stronger segment performance and margin expansion, while noting ongoing pressure from lower client-fund interest income and acquisition-related margin dilution.
- Year-to-date operating cash flow fell by $409.4 million. Management attributed the decrease to a $141.4 million reinsurance premium, higher pension contributions, timing of tax payments, and unfavorable working-capital changes. Investing and financing cash flows were substantially affected by movements in restricted client funds.
- ADP sold its Taxware Enterprise Service business in December 2012. The disposal generated a $58.8 million pretax gain, or $36.7 million after tax, reported in discontinued operations. Prior-year nine-month results also included a $66.0 million pretax gain from the sale of assets related to a third-party expense-management platform; this makes reported year-to-date comparisons less representative of underlying growth.
- Capital expenditures for fiscal 2013 were expected to be $180 million to $200 million, compared with $146.2 million in fiscal 2012. The filing provides no explicit earnings or revenue guidance.
- Principal disclosed risks include interest-rate and investment-liquidity exposure, foreign-currency movements, economic and employment conditions, competition, technology and staffing needs, and auto-industry trends. ADP said its investment portfolio was investment grade, with about 84% of available-for-sale securities rated AAA or AA.
- Pending matters include a patent-infringement suit and an EEOC charge. ADP said it was defending or investigating the matters and could not estimate a reasonably possible loss or range; it cautioned that outcomes could be adverse. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess underlying growth and profitability after accounting for acquisitions, discontinued Taxware, and the prior-year asset-sale gain.
- Track the effect of lower client-fund yields on revenue and margins, alongside changes in average client-fund balances.
- Distinguish restricted client funds and related obligations from corporate cash and liquidity; monitor the maturity and renewal of the June 2013 credit agreement.
- Review the drivers of lower operating cash flow, planned fiscal 2013 capital spending, and ongoing pension and reinsurance costs.
- Follow developments in the disclosed litigation and EEOC matter, for which the filing provides no estimable loss range.