ADP 10-Q Summary — Fiscal Q1 2014
Reporting period: Three months ended September 30, 2013, compared with the three months ended September 30, 2012. ADP provides payroll, human capital management, business-processing and dealership services. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $2,839.6 million | $2,637.5 million | +8% |
| Pre-tax continuing earnings | $497.3 million | $465.6 million | +7% |
| Pre-tax margin | 17.5% | 17.7% | Down 0.2 percentage points |
| Net earnings from continuing operations | $328.6 million | $302.5 million | +9% |
| Diluted EPS from continuing operations | $0.68 | $0.62 | +10% |
| Operating cash flow | $81.3 million | $(65.1) million | Improved $146.4 million |
Revenue grew across all reportable segments: Employer Services +8% to $1,968.0 million; PEO Services +12% to $505.1 million; and Dealer Services +7% to $472.8 million. Management said total revenue would have grown approximately 7% excluding recently completed acquisitions. PEO revenue is presented net of substantial payroll-related pass-through costs.
Client-funds interest revenue fell to $89.2 million from $106.8 million as the average yield declined to 2.0% from 2.7%, partly offset by an 8% increase in average client funds to $17.4 billion. Management attributed a 90-basis-point drag on consolidated pre-tax margin to lower client-funds interest revenue. The effective tax rate declined to 33.9% from 35.0%, reflecting resolution of certain tax matters.
Cash, liquidity and capital
- Cash and marketable securities totaled $4.24 billion at September 30; this included $2.5 billion associated with commercial paper outstanding and approximately $0.3 billion pledged as reverse-repurchase collateral.
- Commercial paper outstanding was $2.477 billion at quarter-end and was repaid October 2, 2013. Reverse-repurchase obligations of $340.9 million were repaid October 1. These short-term financings support client-funds obligations; ADP reported no borrowings under its revolving credit agreements.
- Long-term debt was $14.2 million. Stockholders’ equity was $6.19 billion; long-term debt-to-equity was 0.2%. Working capital before client-funds assets and obligations was $(1.08) billion, mainly reflecting the quarter-end commercial paper borrowing.
- Investing cash flow was $2.50 billion, driven primarily by client-funds cash timing; financing cash flow was $(3.14) billion, including a $5.30 billion net decrease in client-funds obligations, $2.48 billion of commercial-paper proceeds, $303 million of share repurchases and $210.6 million of dividends paid. These client-funds-related movements make headline cash flows less indicative of operating trends.
- ADP repurchased approximately 4.2 million shares for $303 million and declared dividends of $0.435 per share, versus $0.395 a year earlier.
Changes, outlook and risks
- Employer Services pre-tax earnings rose 15% and margin expanded to 26.6%; PEO Services earnings rose 12% with margin of 10.3%; Dealer Services earnings rose 13% with margin of 20.5%. Management cited operating efficiencies, client growth and retention, and higher pays per control (up 2.6%) as positive factors.
- Management described the business model and balance sheet as solid and said it expected fiscal 2013 to mark the bottom in the year-over-year decline in client-funds revenue. The filing provides no specific revenue or earnings guidance for fiscal 2014.
- Fiscal 2014 capital expenditures were expected to be $190–$210 million, compared with $174.8 million in fiscal 2013.
- Key exposures include interest-rate changes, the ability to access short-term funding during market stress, investment credit and liquidity risk, employment and wage levels, competition, technology, regulation, foreign exchange, and auto-industry conditions. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pre-tax earnings by approximately $7 million over the following 12 months.
- Pending matters include a patent-infringement suit involving ADP AdvancedMD and an EEOC charge concerning alleged employment discrimination. ADP said it could not estimate a reasonably possible loss or range for these matters; it believes it has defenses and is contesting them. No material change to previously disclosed risk factors was reported.
- The prior-year comparison includes $2.8 million of after-tax discontinued-operation earnings from Taxware, sold in December 2012. The sale had generated a $58.8 million pre-tax gain in fiscal 2013, outside the quarter comparison.
Investor verification priorities
- Track client-funds yields and balances, and their effect on revenue and consolidated margins.
- Distinguish client-funds-related borrowings and cash-flow movements from corporate operating liquidity; verify subsequent repayment of quarter-end borrowings.
- Assess segment growth and margins, including acquisition contributions and PEO pass-through costs.
- Monitor the stated capital-expenditure range, share repurchases and dividend commitments against cash generation.
- Review developments in the patent and EEOC matters, for which potential losses were not estimable, and monitor interest-rate and short-term funding risks.