Why did ADP's revenue growth slow to 2% in fiscal 2002?

Management cited several factors: continued weak economic conditions reduced new sales and client retention (largely due to client bankruptcies), fewer employees were on clients' payrolls, and brokerage industry weakness reduced discretionary spending and lowered revenue per trade. Sharp declines in U.S. interest rates also reduced interest earned on client funds. Excluding acquisitions and dispositions, consolidated revenue rose only about 1%.

How much did earnings grow, and how comparable is the reported figure to the prior year?

Reported diluted EPS rose to $1.75 from $1.44, but the prior year included a $90 million ($54 million after-tax) non-cash write-off of the Bridge Information Systems investment. Adjusting for the write-off and the pro forma effect of eliminating goodwill amortization under SFAS 142, management said diluted EPS rose about 10% (from $1.59 to $1.75), and pre-tax earnings rose roughly 7%.

Is ADP's balance sheet and liquidity position strong enough to support its capital returns?

Yes. ADP ended the year with about $2.7 billion in cash and marketable securities, long-term debt of only $91 million (about 2% of equity), and an undrawn $4.0 billion revolving credit facility plus a $4.0 billion commercial paper program. Operating cash flow of $1.5 billion covered capital expenditures of $146 million, acquisitions of about $232 million, and share repurchases plus dividends of roughly $1.15 billion, with $35.9 million shares still authorized for repurchase.

What are the main risks investors should monitor?

Key risks include weak employment levels and client bankruptcies that reduce retention and payroll volumes, pricing pressure and consolidation in brokerage, and interest rate exposure on the roughly $11 billion of client funds and corporate investments (a 25 basis point rate change implies about a $9 million pre-tax impact). Goodwill of $1.4 billion and intangibles of $1.9 billion could face impairment if business prospects deteriorate. ADP is also a defendant in a trade secret lawsuit (UCS) over its CARMan dealer software, which it believes it will successfully defend.

ADP 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 16, 2002. Cited figures are marked; the original filing is the authoritative source.

Automatic Data Processing, Inc. (ADP) reported fiscal 2002 (year ended June 30, 2002) results that reflected continued profitability despite a weak economy.

Total revenues grew 2% to $7.0 billion^a, with net earnings rising 19% to $1.10 billion and diluted EPS up to $1.75 from $1.44 (a 22% increase as reported, though management cites roughly 10% growth on a comparable, pro forma basis excluding the prior-year Bridge write-off and goodwill amortization). Pre-tax margin improved to 25.5%, driven by cost containment, operating efficiencies, and a shift in the investment portfolio, while return on equity was 22.4%. Management attributed slower top-line growth to bankruptcies reducing client retention, fewer employees on client payrolls, weak brokerage activity, and sharply lower U.S. interest rates that reduced earnings on client funds.

The balance sheet remains very strong, with about $2.7 billion^b in cash and marketable securities against long-term debt of only $91 million, a debt-to-equity ratio of roughly 2%. ADP returned significant capital to shareholders, repurchasing about 17.4 million shares at an average near $50 and paying dividends of $0.4475 per share, up from $0.395. Operating cash flow was $1.53 billion.

Management forecasts another record year in fiscal 2003 with mid-single-digit revenue and EPS growth, and capital spending near $150 million^c. Key risks include continued weakness in employment levels and small-business formation, interest rate exposure on the roughly $11 billion of client funds and corporate investments (a 25 basis point move implies about a $9 million pre-tax impact), pricing pressure in brokerage, and a pending trade secret lawsuit (UCS) related to the CARMan dealer software, which management believes it will defend successfully. Note that the filing incorporates much of its financial detail by reference to the 2002 Annual Report, and that 2001 results include a $90 million non-recurring write-off of the Bridge Information Systems investment.

02—Key points

Key Highlights

Revenue grew 2% to $7.004 billion in fiscal 2002, with Employer Services (60% of revenue) up 5% and Brokerage Services up only 1%.
Net earnings rose to $1.101 billion from $925 million; diluted EPS of $1.75 vs. $1.44 in 2001, with pre-tax margin improving to 25.5% from 24.4% (excluding non-recurring items).
Balance sheet remains exceptionally strong: $2.7 billion in cash and marketable securities, long-term debt of $91 million, and shareholders' equity of $5.1 billion.
Returned capital aggressively: repurchased about 17.4 million shares (~$875 million) and paid $277 million in dividends, with $0.4475 per share dividends, up 13% year over year.
Cost containment initiatives reduced the annual expense run rate by about $100 million, supporting margin expansion despite weak economic conditions.
Interest rate headwinds: sharply lower U.S. rates reduced interest earnings on client funds, while the company's $10.9 billion average investment base yielded 4.9% versus 6.2% in fiscal 2001.
Management guides to another record year in fiscal 2003, with mid-single-digit revenue and EPS growth and capital spending of about $150 million.

03—Questions

Frequently Asked Questions

Why did ADP's revenue growth slow to 2% in fiscal 2002?
Management cited several factors: continued weak economic conditions reduced new sales and client retention (largely due to client bankruptcies), fewer employees were on clients' payrolls, and brokerage industry weakness reduced discretionary spending and lowered revenue per trade. Sharp declines in U.S. interest rates also reduced interest earned on client funds. Excluding acquisitions and dispositions, consolidated revenue rose only about 1%.
How much did earnings grow, and how comparable is the reported figure to the prior year?
Reported diluted EPS rose to $1.75 from $1.44, but the prior year included a $90 million ($54 million after-tax) non-cash write-off of the Bridge Information Systems investment. Adjusting for the write-off and the pro forma effect of eliminating goodwill amortization under SFAS 142, management said diluted EPS rose about 10% (from $1.59 to $1.75), and pre-tax earnings rose roughly 7%.
Is ADP's balance sheet and liquidity position strong enough to support its capital returns?
Yes. ADP ended the year with about $2.7 billion in cash and marketable securities, long-term debt of only $91 million (about 2% of equity), and an undrawn $4.0 billion revolving credit facility plus a $4.0 billion commercial paper program. Operating cash flow of $1.5 billion covered capital expenditures of $146 million, acquisitions of about $232 million, and share repurchases plus dividends of roughly $1.15 billion, with $35.9 million shares still authorized for repurchase.
What are the main risks investors should monitor?
Key risks include weak employment levels and client bankruptcies that reduce retention and payroll volumes, pricing pressure and consolidation in brokerage, and interest rate exposure on the roughly $11 billion of client funds and corporate investments (a 25 basis point rate change implies about a $9 million pre-tax impact). Goodwill of $1.4 billion and intangibles of $1.9 billion could face impairment if business prospects deteriorate. ADP is also a defendant in a trade secret lawsuit (UCS) over its CARMan dealer software, which it believes it will successfully defend.

04—Continue

← View all 10-K filings