How much of ADP's fiscal 1996 growth came from acquisitions rather than organic expansion?

Consolidated revenue grew 23%, but excluding the GSI acquisition, growth was about 15%. Employer Services grew 18% (12% excluding GSI), and Dealer Services grew 26%, with roughly 10% of its growth from organic sources. Management also cited increased market penetration and new products as drivers. Investors should weigh how much of future growth depends on continued acquisitions.

Why did ADP's margins decline in fiscal 1996?

Consolidated pretax margin fell to 17.8% from 18.5%. Management attributed this to the lower margins of recent acquisitions, including GSI, a slight negative effect on Employer Services' operating margin (25% vs. 26%), a lower Dealer Services margin (about 18% vs. 20%), and an effective tax rate of about 28% versus 26% the prior year.

How significant is the payroll tax float to ADP's earnings?

ADP collects payroll taxes from clients and remits them to tax agencies, holding funds in between. Collected-but-unremitted funds averaged $3.7 billion during the year and reached $5.0 billion at year-end. Interest on these funds was about $178 million in fiscal 1996, a meaningful portion of pretax earnings of $635 million. Changes in interest rates or the size of the float could materially affect profitability.

Is ADP's balance sheet strong enough to support continued acquisitions and share buybacks?

Yes, based on the filing. The company ended the year with about $1.1 billion in cash and marketable securities, $644 million in operating cash flow, and long-term debt of $404 million, mainly zero-coupon convertible notes. It spent $718 million on acquisitions and share purchases in fiscal 1996, and the board authorized up to 6.8 million additional shares for repurchase. Intangible assets rose to $1.25 billion, which could require future impairment review if acquired businesses underperform.

Who is leading ADP, and does the leadership change affect the outlook?

Arthur F. Weinbach became President and Chief Executive Officer on August 1, 1996, succeeding Josh S. Weston, who remains Chairman of the Board. Weinbach had been with ADP for over 16 years, which management presented as continuity. Gary Butler, head of Employer Services, was added to the board. The filing does not indicate any change in strategy, and management reiterated its growth outlook for fiscal 1997.

ADP 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 23, 1996. Cited figures are marked; the original filing is the authoritative source.

Automatic Data Processing, Inc. (ADP) reported fiscal 1996 (year ended June 30, 1996) record results, with revenue up 23% to $3.57 billion^a and net earnings up 15% to $454.7 million, or $1.57 per share (up 14%).

The company marked its 35th consecutive year of double-digit EPS growth. Roughly 6 percentage points of the revenue growth came from the November 1995 acquisition of Paris-based GSI, Europe's largest payroll and HR services provider, which was ADP's largest acquisition ever at roughly $460 million^b in cash. Excluding GSI, revenue growth was about 15%.

Pretax margin slipped to 17.8% from 18.5%, partly due to lower-margin acquisitions and a higher effective tax rate of 28.4%. Employer Services remains the core engine, contributing about 56% of revenue ($1.98 billion^c, up 18%), anchored by the AutoPay payroll product, 401(k) recordkeeping and tax filing for over 260,000 clients. Brokerage Services ($787 million, up 20%) and Dealer Services ($555 million, up 26%) were the other major segments.

Management guided to double-digit revenue growth and about 15%^d EPS growth for fiscal 1997. The company also disclosed that Arthur Weinbach succeeded Josh Weston as CEO effective August 1, 1996, with Weston remaining chairman. Balance sheet strength is a central investor point.

Operating cash flow exceeded $644 million, cash and marketable securities were about $1.1 billion, long-term debt to equity was 17%, and return on equity was about 20%. Shareholders' equity reached $2.3 billion.

Intangibles rose sharply to $1.25 billion, largely from acquisitions, and the company repurchased 6.6 million shares. Investors should note that collected-but-unremitted payroll tax funds averaged $3.7 billion, a float that generated about $178 million of interest income and is an important, though non-core, contributor to earnings.

02—Key points

Key Highlights

Record fiscal 1996 revenue of $3.57 billion, up 23% (about 15% excluding the GSI acquisition).
Net earnings of $454.7 million, up 15%; EPS of $1.57, up 14%, marking 35 consecutive years of double-digit EPS growth.
Employer Services contributed 56% of revenue ($1.98 billion, up 18%); Brokerage Services grew 20% to $787 million; Dealer Services grew 26% to $555 million.
Acquisition of GSI (Europe's largest payroll/HR services provider) for about $460 million in cash, ADP's largest acquisition to date, with approximately $523 million of goodwill and intangibles recorded.
Strong balance sheet: $644 million operating cash flow, about $1.1 billion in cash and marketable securities, long-term debt-to-equity of 0.17, and roughly 20% return on equity.
Pretax margin declined to 17.8% from 18.5%, reflecting lower-margin acquisitions and an effective tax rate that rose to about 28%.
Guidance for fiscal 1997 calls for double-digit revenue growth and about 15% EPS growth; leadership transition saw Arthur Weinbach become CEO on August 1, 1996.

03—Questions

Frequently Asked Questions

How much of ADP's fiscal 1996 growth came from acquisitions rather than organic expansion?
Consolidated revenue grew 23%, but excluding the GSI acquisition, growth was about 15%. Employer Services grew 18% (12% excluding GSI), and Dealer Services grew 26%, with roughly 10% of its growth from organic sources. Management also cited increased market penetration and new products as drivers. Investors should weigh how much of future growth depends on continued acquisitions.
Why did ADP's margins decline in fiscal 1996?
Consolidated pretax margin fell to 17.8% from 18.5%. Management attributed this to the lower margins of recent acquisitions, including GSI, a slight negative effect on Employer Services' operating margin (25% vs. 26%), a lower Dealer Services margin (about 18% vs. 20%), and an effective tax rate of about 28% versus 26% the prior year.
How significant is the payroll tax float to ADP's earnings?
ADP collects payroll taxes from clients and remits them to tax agencies, holding funds in between. Collected-but-unremitted funds averaged $3.7 billion during the year and reached $5.0 billion at year-end. Interest on these funds was about $178 million in fiscal 1996, a meaningful portion of pretax earnings of $635 million. Changes in interest rates or the size of the float could materially affect profitability.
Is ADP's balance sheet strong enough to support continued acquisitions and share buybacks?
Yes, based on the filing. The company ended the year with about $1.1 billion in cash and marketable securities, $644 million in operating cash flow, and long-term debt of $404 million, mainly zero-coupon convertible notes. It spent $718 million on acquisitions and share purchases in fiscal 1996, and the board authorized up to 6.8 million additional shares for repurchase. Intangible assets rose to $1.25 billion, which could require future impairment review if acquired businesses underperform.
Who is leading ADP, and does the leadership change affect the outlook?
Arthur F. Weinbach became President and Chief Executive Officer on August 1, 1996, succeeding Josh S. Weston, who remains Chairman of the Board. Weinbach had been with ADP for over 16 years, which management presented as continuity. Gary Butler, head of Employer Services, was added to the board. The filing does not indicate any change in strategy, and management reiterated its growth outlook for fiscal 1997.

04—Continue

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