ADP

Business Context and Reporting Period

Company: Automatic Data Processing, Inc. (ADP)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2009
Business Overview: ADP is a leading global provider of business outsourcing solutions, primarily offering human resource (HR), payroll, tax, and benefits administration services (Employer Services), professional employer organization (PEO) services, and integrated computing solutions for automotive and heavy machinery dealers (Dealer Services). The company serves approximately 570,000 clients worldwide.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 1% to $8.87 billion. Growth was driven by a 4% increase in Employer Services and a 12% increase in PEO Services. These gains were partially offset by a 3% decline in Dealer Services due to automotive industry distress and a $188 million negative impact from foreign currency fluctuations.
• Profitability: Net earnings from continuing operations rose 14% to $1.33 billion, and diluted EPS increased 20% to $2.63. The EPS growth was aided by share repurchases (13.8 million shares in 2009) and a lower effective tax rate.
• Expense Management: Total expenses decreased 1% despite revenue growth, largely due to cost-saving initiatives, lower selling expenses, and a significant reduction in interest expense (down 59%) resulting from lower interest rates on commercial paper.
• Investment Losses: The company recorded an $18.3 million loss related to its investment in the Reserve Fund (impacted by Lehman Brothers bankruptcy), which reduced "Other income, net."

Guidance, Outlook, and Risks

• Outlook: Management expects capital expenditures for fiscal 2010 to range between $130 million and $150 million. The company anticipates continued pressure on Dealer Services revenues due to the expected closure of approximately 1,800 GM and Chrysler dealerships over the next 12-18 months, potentially impacting revenues by up to $50 million annually.
• Liquidity: ADP maintains a strong liquidity position with $2.39 billion in cash and marketable securities. It has access to $6.0 billion in commercial paper and $6.0 billion in committed revolving credit facilities.
• Key Risks:
  • Economic Conditions: Rising unemployment and declining auto sales continue to impact client funds balances and Dealer Services demand.
  • Regulatory Changes: Changes in tax laws or payroll regulations could reduce interest income on client funds.
  • Credit Risk: Exposure to automotive dealers through notes receivable; however, the company has increased its allowance for doubtful accounts.
  • Investment Portfolio: While the portfolio is heavily weighted toward investment-grade securities, the company faces interest rate risk and potential credit risk from asset-backed securities.

Investor Verification Checklist

• Dealer Services Exposure: Verify the specific impact of GM and Chrysler dealership closures on future revenue streams and the adequacy of the allowance for doubtful accounts regarding automotive receivables.
• Client Funds Interest Income: Monitor the trend of average client funds balances and interest rates, as this is a significant revenue component for Employer Services.
• Reserve Fund Recovery: Track the liquidation status of the Reserve Fund investment to determine if further losses or recoveries are expected beyond the $18.3 million already recorded.
• Tax Settlements: Confirm the realization of the $52.5 million net cash receipt from the IRS audit settlement mentioned in the filing.
• Share Repurchases: Review the remaining capacity under the stock repurchase plan ($47 million shares remaining) and the company's commitment to returning capital to shareholders.