How did ADP perform financially in fiscal 1998?

ADP delivered record results, with revenue up 17% to $4.8 billion, net earnings up 18% to $605 million, and basic EPS up 16% to $2.04 on a reported basis (management cites about 13% growth against the 1997 figure including a non-recurring charge). Return on equity was 20.1%, and the company marked its 37th straight year of double-digit EPS growth.

What is driving ADP's growth?

Growth came from higher market penetration, a broader product set, and acquisitions. Employer Services accelerated to roughly 14% internal growth, and Brokerage Services benefited from record trading volumes and new Investor Communications clients. Acquisitions such as Audatex, the Royal Bank of Canada payroll business, and Mercer's benefits administration unit added revenue, with acquisitions contributing about 3 points of the 17% total growth.

How strong is ADP's balance sheet and cash generation?

The balance sheet is very conservative. Cash and marketable securities totaled about $1.7 billion, long-term debt fell to $192 million after more than half of the convertible notes converted to equity, and the debt-to-equity ratio was about 6%. Operating cash flow was $852 million, comfortably covering $199 million in capital expenditures, $153 million in dividends, and acquisitions.

What are the main risks or concerns highlighted in the filing?

Key concerns include a decline in Dealer Services revenue growth (7%) and margins (14%, down from 17%), a higher effective tax rate of 31.5%, the planned divestiture of the $190 million revenue front-office brokerage business, and Year 2000 remediation costs of over $30 million. The company also depends on investment income from roughly $6.5 billion of collected but unremitted payroll tax funds, and it notes that interest rate movements could affect results.

What is management's outlook for fiscal 1999?

Management expects another record year, with double-digit revenue growth and basic and diluted EPS growth of 13% to 16%. It also expects strong cash flow of similar magnitude, capital spending of about $200 million, and continued internal growth acceleration in Employer Services, with ongoing investment in client service and Year 2000 testing.

ADP 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 23, 1998. Cited figures are marked; the original filing is the authoritative source.

Automatic Data Processing, Inc. (ADP) reported a strong fiscal 1998 (year ended June 30, 1998), with revenue rising 17% to $4.8 billion^a and basic earnings per share up 13% to $2.04 (from $1.76 in fiscal 1997, or roughly 17% growth excluding a small 1997 non-recurring charge, per management).

Net earnings reached $605.3 million^b, return on equity was 20.1%, and management highlighted its 37th consecutive year of double-digit EPS growth and 148th consecutive quarter of record revenue and EPS. Employer Services, the largest segment at $2.7 billion in revenue (up 21%), drove much of the growth, with internal growth accelerating to about 14%. Brokerage Services grew 23% to $1.1 billion, and Dealer Services grew 7% to $698 million, with margins under pressure.

The balance sheet remained very conservative. Cash and marketable securities totaled about $1.7 billion, shareholders' equity rose to $3.4 billion^c, and long-term debt fell to $192 million after more than half of the zero coupon convertible notes converted to equity, bringing the long-term debt-to-equity ratio to about 6%. Operating cash flow exceeded $850 million, and capital expenditures were about $199 million.

Growth was supported by acquisitions, including Audatex (European auto claims), the Royal Bank of Canada payroll business, Mercer's benefits administration unit, and a Brazilian payroll firm, with about $338 million^d in cash spent on acquisitions during the year. Management guided to another year of double-digit revenue growth and 13% to 16% EPS growth in fiscal 1999.

For investors, the filing points to a high-margin, recurring-revenue franchise with a long client retention record, a sound balance sheet, and disciplined capital returns (dividends raised to $.53 per share annualized, plus share repurchases). Key risks flagged in the filing include the effective tax rate rising to 31.5%, a Dealer Services margin decline, a pending divestiture of the $190 million revenue front-office brokerage business, Year 2000 remediation costs (over $30 million spent in fiscal 1998), and reliance on the interest float from roughly $6.5 billion of collected but unremitted payroll tax funds.

02—Key points

Key Highlights

Revenue grew 17% to $4.80 billion in fiscal 1998, versus $4.11 billion in fiscal 1997, with roughly 14% growth before acquisitions and dispositions.
Net earnings rose to $605.3 million from $513.5 million, and basic EPS increased to $2.04 from $1.76 (diluted EPS $1.98 versus $1.71).
Employer Services, the largest segment at $2.75 billion, grew 21% with internal growth of about 14%, while its operating margin slipped to 21%.
Brokerage Services revenue rose 23% to $1.10 billion, and ADP processed over 15% of U.S. and Canadian retail equity trades, averaging 620,000 per day.
The balance sheet is strong, with about $1.7 billion in cash and marketable securities, $3.4 billion in shareholders' equity, and long-term debt reduced to $192 million (about 6% of equity).
Operating cash flow was $852 million, and capital expenditures were $199 million, with $338 million spent on acquisitions and $41 million on share repurchases.
Management guided to double-digit revenue growth and 13% to 16% EPS growth for fiscal 1999; the company also raised its annual dividend to $.53 per share.

03—Questions

Frequently Asked Questions

How did ADP perform financially in fiscal 1998?
ADP delivered record results, with revenue up 17% to $4.8 billion, net earnings up 18% to $605 million, and basic EPS up 16% to $2.04 on a reported basis (management cites about 13% growth against the 1997 figure including a non-recurring charge). Return on equity was 20.1%, and the company marked its 37th straight year of double-digit EPS growth.
What is driving ADP's growth?
Growth came from higher market penetration, a broader product set, and acquisitions. Employer Services accelerated to roughly 14% internal growth, and Brokerage Services benefited from record trading volumes and new Investor Communications clients. Acquisitions such as Audatex, the Royal Bank of Canada payroll business, and Mercer's benefits administration unit added revenue, with acquisitions contributing about 3 points of the 17% total growth.
How strong is ADP's balance sheet and cash generation?
The balance sheet is very conservative. Cash and marketable securities totaled about $1.7 billion, long-term debt fell to $192 million after more than half of the convertible notes converted to equity, and the debt-to-equity ratio was about 6%. Operating cash flow was $852 million, comfortably covering $199 million in capital expenditures, $153 million in dividends, and acquisitions.
What are the main risks or concerns highlighted in the filing?
Key concerns include a decline in Dealer Services revenue growth (7%) and margins (14%, down from 17%), a higher effective tax rate of 31.5%, the planned divestiture of the $190 million revenue front-office brokerage business, and Year 2000 remediation costs of over $30 million. The company also depends on investment income from roughly $6.5 billion of collected but unremitted payroll tax funds, and it notes that interest rate movements could affect results.
What is management's outlook for fiscal 1999?
Management expects another record year, with double-digit revenue growth and basic and diluted EPS growth of 13% to 16%. It also expects strong cash flow of similar magnitude, capital spending of about $200 million, and continued internal growth acceleration in Employer Services, with ongoing investment in client service and Year 2000 testing.

04—Continue

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