Business Context and Reporting Period
Company: Automatic Data Processing, Inc. (ADP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2006 (First half of Fiscal Year 2007)
Business Overview: ADP provides human capital management solutions, including payroll, HR, and benefits administration (Employer Services), as well as investor communications, securities clearing, and dealer services. The company is currently executing a plan to spin off its Brokerage Services Group into an independent entity named Broadridge Financial Solutions, Inc.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2006 | Six Months Ended Dec 31, 2006 |
|---|---|---|
| Total Revenues | $2,316.1 million | $4,515.2 million |
| Net Earnings (Continuing Ops) | $283.0 million | $538.1 million |
| Net Earnings (Total) | $297.7 million | $555.1 million |
| Diluted EPS (Continuing Ops) | $0.51 | $0.97 |
| Diluted EPS (Total) | $0.54 | $1.00 |
| Operating Cash Flow | N/A | $497.4 million |
| Cash & Cash Equivalents | $1,294.7 million | $1,294.7 million |
| Long-Term Debt | $73.8 million | $73.8 million |
| Working Capital | $1,740.6 million | $1,740.6 million |
Note: Revenues include interest on funds held for Employer Services' clients ($142.4M for Q1, $277.0M for YTD) and PEO revenues ($205.4M for Q1, $400.4M for YTD).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14% for the quarter and 15% year-to-date compared to the prior year. Growth was driven by Employer Services (+12%), Dealer Services (+19%), and Brokerage Services (+10%).
- Profitability: Earnings from continuing operations before taxes rose 10% for the quarter and 16% year-to-date. Margins remained flat at 20% for the quarter and 19% year-to-date.
- Expense Increases: Total expenses increased 15% for the quarter and 14% year-to-date. Increases were attributed to higher pass-through costs in the PEO business, expanded salesforce, and implementation personnel for new business opportunities.
- Discontinued Operations: Net earnings from discontinued operations were $14.7 million for the quarter and $17.0 million year-to-date, primarily due to a $12.6 million gain on the final purchase price adjustment for the sale of the Claims Services business.
- Share Count: Diluted weighted average shares outstanding decreased to 555.3 million (quarter) and 557.9 million (YTD) from 582.3 million and 582.0 million in the prior year, respectively, due to significant stock repurchases.
Guidance, Outlook, and Risks
- Spin-off of Broadridge: ADP plans to spin off its Brokerage Services Group into Broadridge Financial Solutions, Inc. The company expects to incur incremental separation costs of $45 million to $55 million for the fiscal year ending June 30, 2007. $10.6 million of these costs were incurred in the first six months.
- Capital Allocation: The company repurchased 17.7 million shares of common stock during the six months ended December 31, 2006, at an average price of $47.15 per share. Approximately 66.3 million shares remain authorized for repurchase.
- Dividends: Dividends declared per common share increased to $0.4150 for the six months ended December 31, 2006, compared to $0.3400 in the prior year.
- Acquisitions: ADP acquired four businesses for approximately $368.3 million net of cash, primarily in Employer Services, resulting in $264.8 million of goodwill.
- Accounting Changes: The company is evaluating the impact of new accounting pronouncements including SAB 108, SFAS No. 158 (Pension Plans), SFAS No. 157 (Fair Value), and FIN 48 (Income Taxes), with adoption expected in fiscal 2007 or 2008.
- Risks: Key risks include the successful consummation of the Broadridge spin-off, changes in interest rates affecting investment income, foreign currency fluctuations, and regulatory changes affecting payroll and clearing services.
Investor Verification Checklist
- Spin-off Timeline: Verify the status of the IRS ruling and regulatory approvals required to complete the Broadridge Financial Solutions spin-off.
- PEO Margin Impact: Confirm the sustainability of margins given the high pass-through costs associated with the growing PEO segment.
- Stock Repurchase Authorization: Monitor the remaining 66.3 million shares authorized for repurchase and the company's commitment to returning capital to shareholders.
- Discontinued Operations: Ensure the $12.6 million gain from the Claims Services sale is treated as a one-time item and not indicative of recurring earnings.
- Interest Rate Sensitivity: Assess the impact of rising interest rates on the company's investment portfolio (client funds) versus its short-term borrowing costs.