ADP Form 10-Q Summary
Period clarification: The filing is for the quarter ended March 31, 2010 (ADP fiscal 2010 third quarter), with year-to-date results for the nine months ended that date. This differs from the request metadata’s “2009 Q3.” Unless otherwise noted, amounts are in millions of dollars.
Business context and reporting period
ADP provides payroll, human resources, benefits, professional employer organization (PEO), and dealer technology services. Its reportable segments are Employer Services, PEO Services, and Dealer Services. The interim financial statements are unaudited; management cautions that results for the quarter and nine-month period may not indicate full-year results.
Financial performance and liquidity
| Metric | Three months ended March 31, 2010 | Nine months ended March 31, 2010 |
|---|---|---|
| Total revenue | $2,443.2, up 3% | $6,737.4, essentially flat |
| Pre-tax earnings from continuing operations | $633.0, up 1% | $1,557.7, up 1% |
| Pre-tax margin | 26%, versus 27% | 23%, unchanged |
| Net earnings from continuing operations | $401.6, versus $402.1 | $999.7, up 2% |
| Diluted continuing-operations EPS | $0.79, versus $0.80 | $1.98, up 3% |
| Operating cash flow | Not separately stated for the quarter | $1,286.6, versus $1,135.1 |
Revenue mix and segment trends: Quarterly Employer Services revenue rose 1% to $1,786.7; PEO Services rose 15% to $378.5; and Dealer Services fell 3% to $310.3. For nine months, Employer Services declined 1% to $4,850.2, PEO Services grew 10% to $985.9, and Dealer Services declined 4% to $922.2. PEO revenue includes substantial pass-through amounts and is reported net of direct pass-through costs in the consolidated revenue presentation.
Cash flow and capital allocation: Nine-month investing cash flow was a use of $10,081.3, largely reflecting restricted client-fund investment flows; financing cash flow provided $8,492.4, including a $9,799.7 increase in client-fund obligations. ADP paid $498.1 in dividends and repurchased $279.2 of stock during the period. Cash and cash equivalents were $1,965.0 at March 31, 2010, down from $2,265.3 at June 30, 2009.
Balance sheet and liquidity: Total assets were $34,986.2, including $26,552.1 of funds held for clients; client-fund obligations were $25,956.9. These client-related balances are restricted or arise from payroll and tax remittances and should not be viewed as ordinary corporate liquidity. Corporate cash and marketable securities totaled $2,107.6. Long-term debt was $41.3; no commercial paper or credit-agreement borrowings were outstanding at quarter-end. Working capital before client funds was $1,977.8, versus $1,515.5 at June 30, 2009. Long-term debt-to-equity was 0.7%.
Other key metrics: The effective tax rate was 36.6% for the quarter and 35.8% year to date, compared with 36.0% and 36.5%, respectively, in the prior periods. The company declared dividends of $0.34 per share for the quarter. Approximately 85% of available-for-sale securities were rated AAA or AA, and all were investment grade.
Material changes versus prior comparable periods
- Quarterly revenue growth reflected higher PEO and Employer Services revenue, partly offset by lower Dealer Services revenue. Foreign exchange added $46.4, or 2%, to quarterly revenue.
- Year-to-date revenue was flat: PEO growth was offset by declines in Employer and Dealer Services. Foreign exchange added $55.0, or 1%, to nine-month revenue.
- Quarterly expenses rose 6%, chiefly due to higher PEO pass-through costs and foreign exchange; lower severance, headcount-related costs, and travel spending partly offset the increases. Nine-month expenses were essentially flat, with cost savings and reduced severance and stock compensation offset by PEO pass-through costs and foreign exchange.
- Interest earned on client funds declined year over year: to $147.9 from $164.3 for the quarter and to $403.5 from $463.5 year to date. Lower average yields were the primary pressure; average client-fund balances increased for the quarter but declined year to date.
- Quarterly continuing-operations EPS was slightly lower, while nine-month EPS increased, supported by higher pre-tax earnings, a lower year-to-date tax rate, and fewer shares outstanding.
Outlook, management commentary, risks, and unusual items
- Outlook: The filing provides no companywide earnings or EPS guidance. ADP expected fiscal 2010 continuing-operations capital expenditures of approximately $130, compared with $167.7 in fiscal 2009.
- Employment and dealer exposure: “Pays per control,” a measure of employees on a same-store payroll sample, declined 2.5% in the quarter and 4.6% year to date. ADP estimated dealership closures would reduce Dealer Services revenue by approximately $35 annually over the following 12–15 months. Gross receivables from U.S. GM- or Chrysler-brand dealerships were $63 of notes receivable and $30 of accounts receivable at March 31, 2010; ADP reported no significant amounts due directly from GM or Chrysler.
- PEO economics: Worksite-employee growth supported revenue, but higher healthcare and other pass-through costs, price concessions, and lower state-unemployment-tax margins pressured quarterly segment earnings. Year-to-date PEO earnings also benefited by $9.2 from settlement of a state unemployment tax matter.
- Investment and interest-rate risks: Client funds are invested in a maturity-laddered portfolio and supported by short-term funding arrangements. ADP identified liquidity, interest-rate, and credit risks; it estimated a 25-basis-point change in short- and intermediate-term rates could affect pre-tax earnings by about $9 over the following 12 months. The portfolio had $10.6 of unrealized losses, which management attributed to factors such as interest rates rather than credit losses.
- Unusual items: A $14.8 quarterly and $15.2 year-to-date gain reflected distributions from the Reserve Fund, reversing prior-period losses. ADP recorded a $5.3 year-to-date impairment loss on securities sold in October 2009 and a $6.8 asset impairment charge related to GM’s planned Saturn shutdown. The sale of the Commercial Systems business on March 24, 2010 generated $21.6 cash proceeds and a reported $1.0 after-tax gain in discontinued operations.
- Other developments: Broadridge notified ADP it would not extend a data-center outsourcing agreement beyond June 30, 2012; ADP did not then anticipate a material impact. A contract extension added obligations of $34.2, $73.1, and $74.3 in fiscal 2013, 2014, and 2015, respectively. ADP said pending litigation and product/service warranties were not expected to have a material effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
- Forward-looking risks: ADP cited client retention and sales, pricing, employment and wage levels, economic and interest-rate conditions, currency movements, regulation, competition, technology, skilled-worker availability, and acquisition/divestiture impacts. It reported no material changes to the risk factors in its fiscal 2009 Form 10-K.
Important facts for investors to verify
- Confirm the correct reporting period: the filing covers fiscal Q3 2010, not 2009 Q3.
- Assess whether ongoing employment trends and dealership closures continue to weigh on Employer and Dealer Services revenue, and compare actual Dealer Services performance with the stated $35 annualized impact estimate.
- Track PEO margins and pass-through cost trends, distinguishing reported PEO revenue growth from underlying fee and earnings growth.
- Separate corporate liquidity from restricted client funds, and monitor the maturity and renewal of credit facilities, including the facility due in June 2010.
- Review the effects of lower investment yields and portfolio valuation or liquidity risks on client-fund interest income and earnings.
- Distinguish reported year-to-date EPS growth from adjusted results: ADP disclosed $1.98 reported diluted EPS and $1.96 adjusted for $12.2 of favorable tax items.