ADP FY2012 10-K Summary
Business context and reporting period. Automatic Data Processing, Inc. (ADP) provides payroll, human-resources, tax, benefits and business-outsourcing services, plus dealer-management and digital-marketing solutions. Its reportable segments are Employer Services, Professional Employer Organization (PEO) Services and Dealer Services. This annual report covers the fiscal year ended June 30, 2012; the filing also presents fourth-quarter results. The filing date is August 20, 2012.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Total revenue | $10,665.2 million | $9,879.5 million | +8% |
| Gross profit | $4,425.2 million | $4,148.0 million | +7% |
| Earnings before tax from continuing operations | $2,122.1 million | $1,932.7 million | +10% |
| Net earnings from continuing operations | $1,388.5 million | $1,254.2 million | +11% |
| Diluted EPS from continuing operations | $2.82 | $2.52 | +12% |
| Operating cash flow | $1,910.2 million | $1,705.8 million | +12% |
- Gross margin was approximately 41.5%, versus 42.0% in FY2011; pretax margin increased to 19.9% from 19.6%. The effective tax rate fell to 34.6% from 35.1%.
- Reported results included a $66.0 million pretax asset-sale gain ($41.2 million after tax; $0.08 per diluted share). Excluding it, adjusted net earnings increased 7% and adjusted diluted EPS rose 9% to $2.74. These are non-GAAP measures.
- Employer Services revenue rose 7% to $7,567.7 million; PEO Services rose 15% to $1,771.4 million; Dealer Services rose 10% to $1,683.7 million. Management said consolidated revenue growth would have been approximately 6% excluding recent acquisitions and the asset-sale-related revenue impact.
- FY2012 fourth-quarter revenue was $2,636.6 million versus $2,507.1 million; net earnings were $258.4 million versus $241.8 million, and diluted EPS was $0.53 versus $0.48.
Cash, debt and liquidity
- At June 30, 2012, cash, cash equivalents and marketable securities totaled $1,665.4 million; stockholders’ equity was $6,114.0 million. Long-term debt was $16.8 million, and the reported long-term-debt-to-equity ratio was 0.3%.
- Working capital excluding funds held for clients and client-fund obligations was $1,233.3 million, compared with $1,252.2 million a year earlier.
- Operating cash flow was $1,910.2 million. Investing activities provided $3,243.6 million and financing activities used $4,953.9 million; both were substantially affected by the timing of client-fund cash flows and restricted cash.
- ADP had no commercial paper, reverse-repurchase borrowings or revolving-credit borrowings outstanding at year-end. It reported a $6.75 billion commercial-paper program, $3.0 billion of committed reverse-repurchase capacity and $6.75 billion of revolving-credit facilities.
- Client funds held were $21,539.1 million against client-fund obligations of $20,856.2 million. These balances relate to client payroll and tax remittances and should not be treated as unrestricted corporate liquidity.
Material changes and management commentary
- Management attributed growth to new-business sales, higher payroll counts, pricing, PEO worksite-employee growth and Dealer Services products, alongside acquisitions. Employer Services pays per control increased 3.0%; worldwide client revenue retention ended the year at 91%.
- New-business sales for Employer and PEO Services grew 13% worldwide to more than $1.2 billion. ADP repurchased approximately 14.6 million shares for $741.3 million and paid $739.7 million in dividends during FY2012.
- Client-fund interest revenue fell 9% to $493.3 million. The average yield declined to 2.8% from 3.2%, partly offset by a 6% increase in average client-fund balances to $17.9 billion. Management expected low interest rates to continue affecting FY2013.
- Seven businesses were acquired in FY2012 for approximately $301 million net of cash acquired; disclosed acquisitions included recruitment, tax-credit, benefits-outsourcing and medical-billing businesses. Capital expenditures were $146.2 million; management expected FY2013 capital expenditures of $160 million to $180 million.
- Management described its business model as recurring and cash-generative, while noting a softer European environment and $51.2 million of severance expense from cost-reduction initiatives. The filing does not provide a specific FY2013 revenue or earnings-growth forecast.
Risks, contingencies and unusual items
- Key risks include economic weakness, employment and wage levels, interest-rate declines, foreign-exchange movements, regulatory or tax changes, competition, technology change, cyberattacks, privacy breaches and disruption to critical processing systems or banking transfers.
- ADP reported pending patent litigation involving its AdvancedMD medical-practice services and an EEOC investigation concerning alleged discrimination in Illinois. The company said it could not reasonably estimate potential losses for the described matters; outcomes remain uncertain.
- PEO workers’ compensation liabilities rely on actuarial estimates. ADP Indemnity reported $320.9 million in assets against estimated claims of $239.1 million; ADP could be responsible if the insurer providing excess coverage cannot meet its obligations.
- Unrecognized tax benefits were $84.7 million at year-end. Management said certain settlements could increase earnings by up to $10 million over the next twelve months, subject to significant uncertainty.
- Management and the auditor reported effective internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of revenue and earnings growth is organic, and how acquisitions affect segment margins and integration costs.
- Whether lower client-fund yields persist, and how interest-rate changes affect client-interest revenue and earnings.
- Whether reported growth remains strong after excluding the $66.0 million asset-sale gain and other nonrecurring items.
- Developments in the patent claim, EEOC investigation, tax examinations and workers’ compensation estimates or coverage.
- Liquidity available for corporate needs after separating restricted client funds from corporate cash and securities; also review the timing and terms of credit facilities and contractual commitments.