ADP 10-Q Summary
Business context and reporting period. Automatic Data Processing, Inc. (ADP) filed this unaudited Form 10-Q for the quarter ended December 31, 2011, the second quarter of fiscal 2012. Comparisons are with the quarter and six months ended December 31, 2010, unless otherwise noted. ADP reports Employer Services, PEO Services, and Dealer Services; PEO revenues are reported net of direct pass-through costs.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Total revenue | $2,583.0 million, up 7% | $5,105.5 million, up 10% |
| Pre-tax earnings | $579.7 million, up 20% | $1,039.0 million, up 13% |
| Net earnings | $375.0 million, up 21% | $677.7 million, up 15% |
| Diluted EPS | $0.76, up 23% | $1.38, up 16% |
| Operating cash flow | $747.9 million for the six months, compared with $647.3 million |
- Pre-tax margin was approximately 22% for the quarter, versus 20% a year earlier; six-month margin was approximately 20%, essentially unchanged.
- Quarterly and six-month results included a $66.0 million pre-tax gain ($41.2 million after tax, or $0.08 per diluted share) from selling assets related to a third-party expense-management platform. Excluding the gain, diluted EPS was $0.68 for the quarter and $1.29 for the six months; adjusted net earnings were $333.8 million and $636.5 million, respectively. These are non-GAAP measures.
- At December 31, ADP held $1,453.9 million in corporate cash and marketable securities and reported $6,182.4 million in stockholders’ equity. Working capital excluding client funds and related obligations was $1,270.3 million. Long-term debt was $25.5 million; long-term debt-to-equity was 0.4%. There was no commercial paper, reverse-repurchase borrowing, or credit-agreement borrowing outstanding at period-end.
- Six-month investing cash flow was positive $1,568.1 million, versus negative $6,138.1 million in the prior period, primarily reflecting timing of client-fund cash flows. Financing cash flow was negative $2,339.8 million, including client-fund obligation changes, $297.9 million of share repurchases, and $353.9 million of dividends paid. Cash and cash equivalents ended the period at $1,331.3 million.
- ADP declared dividends of $0.395 per share for the quarter, versus $0.36 a year earlier. It repurchased approximately 6.2 million shares during the six months at an average price of $47.99 per share.
Material changes and segment performance
- Quarterly revenue growth was broad-based: Employer Services rose 7%, PEO Services 16%, and Dealer Services 7%. For the six months, the respective increases were 8%, 16%, and 12%. Without recent acquisitions, consolidated revenue would have risen approximately 6% for the quarter and 8% for the six months.
- Employer Services revenue growth reflected new business, client payroll employment increases, and pricing; pays per control increased 2.8% in both the quarter and six-month period. Its pre-tax margin declined to 24.5% from 25.7% for the quarter, partly due to acquisitions and higher sales and service staffing.
- PEO Services’ average worksite employee count increased 13%; its pre-tax margin improved to 10.2% for the quarter and 9.7% for the six months.
- Dealer Services benefited from new clients, retention, product growth, and acquisitions. Pre-tax earnings increased 23% for the quarter and 25% for the six months.
- Client-fund interest revenue declined: quarterly interest earned fell to $117.9 million from $129.0 million as the average yield decreased to 3.0% from 3.5%, partly offset by a 6% increase in average client funds. For six months, the yield fell to 3.1% from 3.6%.
Outlook, commentary, risks, and unusual items
- Management described results as solid despite a mixed economic environment, citing sales growth, retention, and acquisitions. It said lower interest rates continued to pressure high-margin client-interest revenue. Foreign exchange reduced six-month revenue by approximately 1%, according to the executive overview.
- ADP expected fiscal 2012 capital expenditures of $160 million to $180 million, versus $184.8 million in fiscal 2011. It expected the five acquisitions completed through December 31, 2011, purchased for approximately $233 million net of cash acquired, not to materially affect fiscal 2012 earnings.
- Key sensitivities include interest-rate and foreign-exchange movements, employment and wage levels, economic conditions, competition, technology, client retention and sales, regulatory changes, auto-industry conditions, and acquisition or divestiture outcomes. Management estimated that a 25-basis-point change in short- and intermediate-term rates could affect pre-tax earnings by approximately $10 million over the following 12 months.
- Client funds are restricted to meeting payroll and tax obligations. ADP reported $23.35 billion of client funds assets against $22.69 billion of related obligations at December 31. It invests primarily in investment-grade securities and maintains access to commercial paper, committed reverse-repurchase capacity, and revolving credit facilities; management noted that market turmoil could limit short-term financing access.
- Legal matters included a patent-infringement suit against a subsidiary and an EEOC charge concerning alleged hiring and promotion discrimination. ADP said it intended to defend the patent claim and was cooperating with the EEOC; it could not estimate potential losses for the described matters. A separate class action was settled with final court approval in November 2011.
- Broadridge notified ADP it would not extend a data-center outsourcing agreement beyond June 30, 2012; ADP did not anticipate a material impact. The filing reported no material changes to the previously disclosed risk factors, effective disclosure controls, and no derivatives outstanding at period-end.
Important facts for investors to verify
- How much of reported earnings and EPS growth reflects the non-recurring $66.0 million asset-sale gain, and how do non-GAAP adjusted results compare with GAAP results?
- Whether client-fund yields and interest revenue continue to decline, and the effect of rate changes on earnings and client-fund liquidity.
- Organic growth, retention, employment-related metrics, and margins by segment, particularly the acquisition and staffing effects in Employer Services.
- Progress and integration of acquisitions, and actual fiscal 2012 capital expenditures versus the stated $160 million–$180 million range.
- Developments in the patent and EEOC matters, and the potential effects of the Broadridge agreement’s expiration.