Automatic Data Processing, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2012; comparisons are with the corresponding 2011 periods. Financial statements are unaudited. ADP provides employer/payroll services, professional employer organization (PEO) services, and dealer services.
Financial performance
| Metric | Three months ended March 31, 2012 | Nine months ended March 31, 2012 |
|---|---|---|
| Total revenue | $2,923.1 million; up 7% | $8,028.6 million; up 9% |
| Earnings before income taxes | $685.6 million; up 5% | $1,724.6 million; up 10% |
| Net earnings | $452.4 million; up 7% | $1,130.1 million; up 12% |
| Diluted EPS | $0.92; up 8% | $2.29; up 13% |
| Pre-tax margin | Approximately 23%, versus 24% | 21.5%, versus 21.4% |
| Operating cash flow | Not reported separately for the quarter | $1,411.1 million, versus $1,220.3 million |
For the nine months, reported results include a $66.0 million pre-tax gain on the sale of assets related to a third-party expense-management platform ($41.2 million after tax, or $0.08 per diluted share). Excluding that gain, nine-month net earnings were $1,088.9 million and diluted EPS was $2.21, up 8% and 9%, respectively, from the prior-year reported results.
Liquidity, debt and capital
- At March 31, 2012, cash and marketable securities totaled $1,789.9 million; stockholders’ equity was $6,456.6 million. Working capital excluding client funds and related obligations was $1,499.7 million.
- Long-term debt on the balance sheet was $17.3 million. Total debt in the debt note was $35.5 million, including a $18.2 million current portion. ADP reported no commercial paper, reverse-repurchase obligations, or credit-facility borrowings outstanding at quarter-end.
- Nine-month investing cash outflow was $5,014.8 million and financing cash inflow was $3,903.7 million. These totals were substantially affected by movements in client funds and related obligations; ADP reported a $275.7 million increase in cash and cash equivalents over the period.
- ADP repurchased 8.2 million shares for $399.9 million and paid $546.4 million in dividends during the nine months. Dividends declared were $1.15 per share.
Client funds are restricted for client payroll and tax obligations. At March 31, 2012, funds held for clients were $29,836.9 million, compared with client funds obligations of $29,207.0 million; both are reported as current balance-sheet items.
Changes and operating drivers
- Revenue increased across all three reportable segments. For the nine months, Employer Services revenue rose 8%, PEO Services 16%, and Dealer Services 10%. PEO growth reflected a 13% increase in average worksite employees; Dealer Services growth included acquisitions and stronger product activity.
- Management said revenue growth would have been approximately 6% for the quarter and 7% for the nine months without the impact of recent acquisitions and the platform-related asset sale. Higher sales, payroll employment, pricing, and retention supported Employer Services; pays per control increased 3.3% for the quarter and 2.9% for the nine months.
- Client-funds interest revenue declined to $133.3 million for the quarter and $373.0 million for the nine months, as lower average yields outweighed growth in average client-funds balances. The average yield was 2.5% versus 2.9% for the quarter and 2.8% versus 3.3% for the nine months.
- Quarterly pre-tax margin declined about 40 basis points; management attributed approximately 40 basis points of decline to acquisitions. Nine-month margin was broadly stable, with the platform-sale gain contributing about 80 basis points and acquisitions reducing margin about 30 basis points.
- Operating cash flow increased year over year, reflecting higher earnings, lower pension contributions, and favorable working-capital changes, partly offset by the timing of tax-related payments. Investing cash outflow was substantially lower than in the prior period, including because acquisition spending declined.
Outlook, risks and unusual items
- The filing provides no specific revenue or EPS guidance. Management described the business as resilient, citing recurring revenues, retention, cash generation, and investment in product innovation and sales capacity. It also noted ongoing pressure from low interest rates and a softer European economic environment.
- ADP expected fiscal-2012 capital expenditures of $160 million to $180 million, versus $184.8 million in fiscal 2011. Six businesses acquired through March 31 cost approximately $235.4 million net of cash acquired; a subsequent acquisition cost approximately $65.6 million. The company did not expect these acquisitions to be material to fiscal-2012 earnings or, individually or together, to operations, financial position, or cash flows.
- Nine-month selling, general and administrative expense included $23.5 million of severance related to international cost-reduction initiatives. The quarter also included a $2.2 million impairment charge for buildings held for sale.
- ADP identified interest-rate, credit, liquidity, foreign-exchange, economic, competitive, employment, technology, and acquisition-related risks. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pre-tax earnings by about $11 million over the following 12 months; a 25-basis-point change in short-term rates alone was estimated at about $5 million.
- Pending matters include a patent-infringement suit brought against an ADP subsidiary and an EEOC charge alleging race discrimination in Illinois. ADP said it was defending or investigating the matters and could not estimate a possible loss or range; outcomes remain uncertain. No material changes to the previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much future growth and EPS performance depend on acquisitions, share repurchases, and the non-recurring $66 million asset-sale gain.
- Whether lower client-funds yields continue to pressure interest revenue and margins, and whether the company’s investment and funding strategy adequately manages rate and liquidity risks.
- Whether segment growth and margins persist, particularly as acquisition-related costs and the softer European environment affect performance.
- Developments and potential exposure in the patent and EEOC matters, for which the filing provides no estimable loss range.
- Execution of the fiscal-2012 capital-spending outlook and the performance and integration of recent and subsequent acquisitions.