ADP Form 10-Q Summary
Business context and reporting period
Automatic Data Processing, Inc. (ADP) reported its first quarter of fiscal 2010, the three months ended September 30, 2009, compared with the three months ended September 30, 2008. ADP provides employer, professional employer organization (PEO), and dealer services. Dollar amounts are in millions, except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Total revenue | $2,102.8 | $2,181.5 | Down $78.7 (4%) |
| Continuing pretax earnings | $447.3 | $441.3 | Up $6.0 (1%) |
| Net earnings from continuing operations | $284.1 | $278.0 | Up $6.1 (2%) |
| Diluted continuing EPS | $0.56 | $0.54 | Up 4% |
| Operating cash flow | $243.7 | $398.2 | Down $154.5 |
| Capital expenditures | $34.4 | $45.1 | Down $10.7 |
- Reported pretax margin rose to 21% from 20%. The effective tax rate was 36.5%, versus 37.0%.
- Revenue excluding interest on client funds and PEO revenue was $1,681.0, down from $1,752.5. Client-fund interest revenue was $127.9, down from $151.9; PEO revenue was $293.9, up from $277.1. PEO revenue is reported net of substantial payroll and tax pass-through costs.
- Cash and cash equivalents were $1,582.8 at September 30, down from $2,265.3 at June 30. Cash plus marketable securities totaled $1,718.6. Working capital excluding funds held for clients and client-fund obligations was $1,635.6, versus $1,521.0 at June 30.
- Long-term debt was $42.2; long-term debt-to-equity was 0.7%. No commercial paper or credit-facility borrowings were outstanding at quarter-end. ADP had $6.0 billion of committed revolving credit facilities and a commercial-paper program with capacity of up to $6.0 billion.
- Client funds held were $16,272.5, against client-fund obligations of $15,633.7. These funds are restricted for client payroll and tax remittances and should not be treated as unrestricted corporate liquidity.
- ADP declared dividends of $0.33 per share, compared with $0.29 a year earlier.
Material changes and segment trends
- Revenue declined primarily from Employer Services (down $40.0) and Dealer Services (down $13.3), along with a $38.0 unfavorable foreign-exchange effect. PEO Services revenue increased $17.0.
- Employer Services revenue fell 3%; payroll and payroll-tax filing revenue declined 7%. Pays per control fell 6.5%, and worldwide client retention decreased 1.0 percentage point. Cost reductions largely offset lower revenue, leaving segment pretax earnings nearly flat at $367.6.
- PEO Services revenue rose 6%, supported by 3% growth in average worksite employees. Segment pretax earnings increased 25% to $35.2, including a $9.2 benefit from settling a state unemployment-tax matter.
- Dealer Services revenue declined 4% and pretax earnings fell 12% to $45.5. Dealership closures and cost pressure weighed on results; new-client and product growth partly offset the declines.
- Total expenses fell 5%, reflecting lower costs, currency effects, cost-saving measures, and lower interest expense. Interest expense declined to $3.2 from $19.2, largely because short-term borrowing rates were lower.
- Operating cash flow decreased substantially, principally due to pension contributions that reduced cash flow by $104.0 versus the prior-year quarter and increased income-tax payments that reduced it by $76.4. Investing activities provided $367.7, while financing activities used $1,306.4, including repayment of $730.0 of commercial paper and dividend payments of $165.6.
Outlook, risks, contingencies, and unusual items
- Management did not provide a specific revenue or earnings forecast in the supplied filing text and cautioned that quarterly results may not indicate full-year results. Fiscal 2010 capital expenditures were expected to be approximately $130, versus $167.7 in fiscal 2009.
- ADP expected U.S. GM and Chrysler dealership counts to decline by about 1,800 over the next 12–18 months, with an estimated annualized Dealer Services revenue impact of approximately $50. It reported gross receivables of $69 due from GM- or Chrysler-brand dealerships and $35 of accounts receivable from those dealerships, with no significant amounts due directly from GM or Chrysler.
- Lower client employment and wage levels, client losses, dealership closures, pricing pressure, interest-rate and foreign-currency changes, competition, technology, and access to short-term financing were identified as risks. Management said liquidity sources remained available, but acknowledged that economic turmoil could constrain short-term debt-market access.
- Unusual or notable items included a $6.8 asset impairment charge following GM’s Saturn shutdown announcement; a $5.3 impairment loss on available-for-sale securities; and a $1.5 gain on a building sale. A $13.2 foreign-exchange forward-contract loss substantially offset a gain on the related intercompany payable.
- The Reserve Fund, affected by Lehman Brothers’ bankruptcy, had $3.9 remaining on ADP’s books at September 30; ADP received a further $4.3 distribution in October. ADP reported that the remaining unrealized securities losses it assessed were not credit losses.
- ADP said ordinary-course litigation and service/product warranties were not expected to have a material effect. Tax audit outcomes and timing remained uncertain, though resolution was not expected to materially affect financial condition. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether declines in payroll activity, pays per control, and client retention persist, and how they affect Employer Services revenue.
- Whether projected dealership closures and the approximately $50 annualized revenue impact develop as estimated.
- How client-fund investment yields, interest rates, and access to commercial paper and other liquidity facilities affect earnings and liquidity.
- Whether the reported expense improvements are sustainable apart from foreign exchange, the PEO tax settlement, and other unusual items.
- Whether the Reserve Fund liquidation, securities valuations, pension funding, and outstanding tax matters result in further material charges or cash requirements.