ADP FY2013 Form 10-K Summary
Business context and reporting period
Automatic Data Processing, Inc. (ADP) provides payroll, human capital management and business outsourcing services, professional employer organization (PEO) services, and dealer-management and digital marketing solutions. It reported approximately 620,000 clients in more than 125 countries. The filing covers the fiscal year ended June 30, 2013—not calendar 2012; it also presents fourth-quarter FY2013 results.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $11.310 billion | $10.616 billion |
| Gross profit | $4.661 billion | $4.402 billion |
| Continuing-operations pretax earnings | $2.084 billion | $2.108 billion |
| Continuing-operations net earnings | $1.364 billion | $1.380 billion |
| Diluted EPS, continuing operations | $2.80 | $2.80 |
| Operating cash flow | $1.577 billion | $1.910 billion |
| Cash, cash equivalents and marketable securities at year-end | $2.041 billion | $1.665 billion |
Revenue rose 7%, while reported pretax earnings and continuing-operations net earnings each fell about 1%. Pretax margin declined to 18.4% from 19.9%. Excluding the FY2013 $42.7 million non-deductible goodwill impairment and the FY2012 $66.0 million asset-sale gain, adjusted pretax earnings increased 4%, adjusted net earnings increased 5%, and adjusted diluted EPS rose 6% to $2.89; these are non-GAAP measures.
Segment revenue and pretax earnings increased: Employer Services revenue was $7.914 billion (+7%) and pretax earnings $2.134 billion (+9%); PEO Services revenue was $1.973 billion (+11%) and pretax earnings $199.2 million (+17%); Dealer Services revenue was $1.814 billion (+9%) and pretax earnings $335.7 million (+21%). PEO revenue includes substantial reimbursed benefit and insurance costs.
Year-end long-term debt was $14.7 million and stockholders’ equity $6.190 billion; reported long-term debt-to-equity was 0.2%. ADP also had $245.9 million outstanding under reverse repurchase agreements at June 30, 2013, repaid July 2. Client payroll and tax obligations of $21.956 billion were matched by $22.229 billion in restricted client funds. These client-fund balances are distinct from corporate liquidity. Working capital excluding client funds was $1.196 billion.
ADP returned $805.5 million through dividends and $647.3 million through share repurchases in FY2013; declared dividends were $1.70 per share. Capital expenditures were approximately $174.8 million.
Material changes versus the prior comparable period
- Revenue growth reflected all three segments, new business, payroll employment growth, pricing, acquisitions and favorable client retention. Employer Services’ retention rate reached 91.3%; pays per control increased 2.8%.
- Interest income on client funds fell 15% to $420.9 million as the average yield declined to 2.2% from 2.8%, partly offset by a 7% increase in average client-fund balances to $19.2 billion. Management attributed about 90 basis points of the overall margin decline to this pressure.
- FY2013 included a $42.7 million goodwill impairment for ADP AdvancedMD, reflecting lower sales-growth and profitability projections. FY2012 included a $66.0 million pretax gain from selling rights and obligations to resell a third-party expense-management platform.
- ADP sold its Taxware Enterprise Service business in December 2012. Discontinued operations included a $58.8 million pretax disposal gain and $41.7 million total net earnings in FY2013.
- Operating cash flow decreased $333.0 million, with management citing the $141.4 million reinsurance premium, higher pension contributions, tax-payment timing and unfavorable working-capital timing. Investing and financing cash-flow swings were substantially affected by timing of restricted client-fund flows.
Outlook, risks and unusual items
Management said it expected the year-over-year decline in client-fund revenue to have bottomed in FY2013, but expected the low-rate environment to continue weighing on FY2014 results. It forecast FY2014 capital expenditures of $190 million to $210 million. No broader quantified earnings or revenue guidance is provided in the supplied filing text.
Key risks include cybersecurity and privacy breaches, system outages or service disruptions, changing laws and regulations, economic weakness and employment levels, interest-rate and foreign-exchange movements, competition, technology changes, and the ability to attract and retain skilled personnel. Management also highlighted reliance on banks for payment transfers and the possibility that market disruption could constrain short-term funding. A hypothetical 25-basis-point rate change was estimated to affect pretax earnings by approximately $6 million over the following 12 months across short- and intermediate-term rates.
ADP reported $7.25 billion of committed revolving credit facilities, no borrowings under them at year-end, and access to a commercial-paper program increased to $7.25 billion in August 2013. Its investment portfolio was investment grade; approximately 83% of available-for-sale securities were rated AAA or AA. The company nevertheless noted liquidity, credit and interest-rate risks in client-fund investments.
Contingencies include an ongoing athenahealth patent-infringement lawsuit involving ADP AdvancedMD and an EEOC investigation alleging discriminatory hiring and promotion practices in Illinois. ADP said it was defending the lawsuit and cooperating with the investigation; it could not estimate a reasonably possible loss range for these matters. It also disclosed potential PEO workers’ compensation exposure if an insurer failed to meet its obligations, partly mitigated by reinsurance. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Confirm the reporting period: this is a fiscal-year 2013 10-K, not a calendar-year 2012 or standalone Q4 filing.
- Review the client-fund interest yield and balances, and assess how persistent low rates could affect revenue and margins.
- Reconcile reported and adjusted earnings, including the AdvancedMD impairment, the prior-year asset-sale gain, and the Taxware disposal.
- Assess the quality and sustainability of operating cash flow, distinguishing corporate cash from restricted client funds and noting financing-flow timing effects.
- Review PEO growth, pass-through costs, workers’ compensation reserves and reinsurance coverage, along with the disclosed litigation and regulatory risks.