ADP Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2014, corresponding to ADP fiscal 2014 Q3 (not calendar 2013 Q3). Financial statements are unaudited; amounts are in U.S. dollars.
Business context and results
ADP provides payroll, human resources, benefits, and related services, including services to automotive dealerships. Continuing-operations segments are Employer Services, PEO Services, and Dealer Services.
| Metric | Three months ended Mar. 31, 2014 | Year-over-year | Nine months ended Mar. 31, 2014 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $3.320 billion | +7% | $9.133 billion | +8% |
| Pre-tax earnings from continuing operations | $769.8 million | +6% | $1.825 billion | +6% |
| Pre-tax margin | 23.2% | 23.3% prior year | 20.0% | 20.2% prior year |
| Net earnings from continuing operations | $510.4 million | +6% | $1.214 billion | +7% |
| Diluted continuing-operations EPS | $1.06 | $0.99 prior year | $2.51 | $2.33 prior year |
| Net earnings, including discontinued operations | $521.6 million | $482.7 million prior year | $1.227 billion | $1.179 billion prior year |
Quarterly segment revenue growth was 6% in Employer Services, 15% in PEO Services, and 7% in Dealer Services. Nine-month growth was 7%, 14%, and 7%, respectively. Revenue and expense growth in PEO include substantial reimbursable pass-through costs; reported PEO revenue is net of direct pass-through costs.
Cash flow, balance sheet, and liquidity
- Operating cash flow for the nine-month period was $1.217 billion, versus $1.002 billion a year earlier. Investing activities used $4.179 billion and financing activities provided $2.936 billion; much of the movements reflected timing and changes in client funds.
- At March 31, cash and cash equivalents were $1.671 billion; corporate cash and marketable securities totaled $1.748 billion. Long-term debt was $12.1 million. No commercial paper, credit-agreement borrowings, or reverse-repurchase obligations were outstanding at quarter-end.
- Working capital excluding client funds and related obligations was $1.703 billion, compared with $1.209 billion at June 30, 2013. Stockholders’ equity was $6.616 billion.
- Funds held for clients were $26.244 billion and client funds obligations were $25.992 billion. These client-related balances are restricted/contractual operating balances, not unrestricted corporate liquidity.
- ADP had $7.25 billion of committed revolving credit facilities and $3.0 billion available under committed reverse-repurchase arrangements. A $2.0 billion 364-day credit agreement was due to mature in June 2014.
- Dividends declared were $0.48 per share for the quarter and $1.395 per share for the nine months. The company repurchased 6.2 million shares for $459 million in the nine-month period.
Changes, outlook, and material items
- Client-funds interest revenue declined: quarterly interest revenue was $100.1 million versus $112.0 million, and nine-month revenue was $278.6 million versus $320.4 million. Average client-funds yields fell to 1.6% from 1.9% for the quarter and 1.8% from 2.3% for the nine months, partly offset by 9% higher average client-funds balances. Management said lower interest revenue continued to pressure consolidated margins, despite margin improvement in business segments.
- Management cited stronger client retention and 2.8% growth in Employer Services pays per control for both the quarter and nine-month period. It described the business model, recurring revenue, cash generation, and balance sheet as strong. No quantified revenue or earnings guidance is provided in the supplied filing text.
- ADP sold its Occupational Health and Safety business on February 28, 2014, recording a $15.6 million pre-tax disposal gain ($10.5 million after tax). Discontinued operations generated $11.2 million of net earnings for the quarter. Prior-year nine-month discontinued earnings included a $58.8 million pre-tax Taxware disposal gain, affecting comparison with current-period discontinued earnings of $13.3 million.
- On April 10, 2014, the board approved a tax-free spin-off of 100% of Dealer Services to shareholders, targeted for October 2014 and subject to regulatory approvals and reviews. Management expected at least $700 million in connection with the separation. It stated an intent to continue annual dividend increases, subject to board approval, with dividend growth slower than earnings and a return to a 55%–60% payout ratio in about two years.
- Fiscal 2014 capital expenditures were expected to be $190 million–$210 million. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pre-tax earnings by about $10 million over the following 12 months; a 25-basis-point change in short-term rates alone, about $5 million.
- Key risks include interest-rate and investment liquidity/credit exposure, economic and employment trends, foreign exchange, competition, technology and staffing, and execution and costs of the proposed spin-off. ADP disclosed an ongoing patent-infringement suit and an EEOC investigation; it could not estimate reasonably possible losses for the described matters. Management said it believed it had valid defenses.
Important facts for investors to verify
- Whether the Dealer Services spin-off received required approvals, closed on schedule, and delivered the anticipated proceeds; also verify separation costs and post-spin dividend policy.
- Whether falling client-funds yields continue to offset operating growth and segment margin gains, and how rate changes affect earnings and liquidity.
- Underlying revenue and margin trends by segment, especially PEO growth net of pass-through costs and Dealer Services’ client concentration.
- Use of cash for dividends and repurchases, availability and renewal of credit facilities, and the distinction between corporate liquidity and client funds.
- Developments in the disclosed litigation and EEOC matter, for which the filing provides no clear loss estimate.