How much of ADP's cash is actually its own versus held for clients?

ADP reports $2.1 billion of its own cash and marketable securities. Separately, $12.9 billion of funds held for clients are offset by $12.8 billion of client funds obligations, which represent payroll and payroll-tax amounts to be remitted to tax agencies and employees. These client funds generate interest income for ADP but are not available for corporate use.

Is ADP's debt a concern for investors?

Not materially. Long-term debt was just $76 million at June 30, 2004, roughly 1.4% of stockholders' equity, consisting mainly of small zero-coupon convertible notes and industrial revenue bonds. ADP has never drawn on its $4.5 billion of revolving credit facilities, and its commercial paper program was undrawn at year end.

What is the outlook for fiscal 2005 and what risks should investors watch?

Management guides to mid-single-digit revenue growth and double-digit EPS growth, though it expects slower early-year earnings growth that accelerates later as investment spending laps and interest rate comparisons improve. Key risks include declining interest rates on client funds, continued weakness in pays-per-control, lower mutual fund mailing volumes after regulatory activity, and integration and regulatory risk around the Bank of America clearing acquisition.

What is the significance of the pending Bank of America acquisition?

ADP agreed on June 22, 2004 to acquire the U.S. Clearing and BrokerDealer Services divisions of Bank of America, which provide third-party clearing. The FTC granted early termination of the Hart-Scott-Rodino waiting period on July 21, 2004. The deal is expected to close before calendar year-end 2004 and should add about $0.01 of dilution to fiscal 2005 EPS, while extending Brokerage Services into a full outsourced clearing and back-office offering.

ADP 10-K FY2004 Annual Report — Revenue, Net Income, EPS

Q: Why did ADP's earnings decline even though revenue grew 9%?

Expenses rose faster than revenue, growing 14% in operating expenses and 14% overall to $6.26 billion. Management cited roughly $170 million of incremental investments in associate compensation, salesforce expansion, and product maintenance. Lower interest rates also reduced investment income on client and corporate funds by about $90 million, and the effective tax rate improved only modestly to 37.4% from 38.1%.

01—Abstract

Summary

Summary of the 10-K filed August 30, 2004. Cited figures are marked; the original filing is the authoritative source.

Automatic Data Processing (ADP) reported fiscal 2004 (year ended June 30, 2004) with total revenues up 9% to $7.75 billion^a, but earnings declined: earnings before income taxes fell 9% to $1.49 billion, net earnings fell 8% to $936 million, and diluted EPS fell 7% to $1.56.

Management attributes the profit decline mainly to roughly $170 million^b of 'incremental investments' in associate compensation, salesforce expansion, and product maintenance, plus lower interest rates that cut investment income on client and corporate funds by about $90 million. Underlying revenue growth excluding acquisitions and divestitures was about 6%, and Employer Services (the largest segment, about 62% of revenue) grew 10%, while Brokerage Services grew 3% and Dealer Services grew 9%. The balance sheet remains very strong, with about $2.1 billion in cash and marketable securities, long-term debt of only $76 million (a debt-to-equity ratio of about 1.4%), and no borrowings under its $4.5 billion of revolving credit facilities.

ADP returned capital aggressively, repurchasing about 15.8 million shares for roughly $649 million^c and paying dividends of $0.54 per share (up from $0.475). Operating cash flow was $1.4 billion, down from $1.6 billion. A significant portion of the balance sheet reflects funds held for clients ($12.9 billion) offset by client funds obligations ($12.8 billion), which are payroll-tax pass-throughs rather than corporate earnings.

Management guides to mid-single-digit revenue growth and double-digit EPS growth for fiscal 2005, though it expects slower early-year growth. The pending acquisition of Bank of America's U.S. Clearing and BrokerDealer Services divisions, expected to close by calendar year-end 2004, is a key strategic move into third-party clearing. Investors should watch sensitivity to interest rates, the pace of new business sales, pays-per-control trends, and whether the incremental investment spending translates into the promised growth acceleration.

02—Key points

Key Highlights

Revenue rose 9% to $7.75 billion, but 6% excluding acquisitions and divestitures; currency added about 2%.
Diluted EPS fell 7% to $1.56 and net earnings fell 8% to $936 million, driven by about $170 million of incremental investment spending and lower interest income on funds.
Employer Services (about $4.8 billion revenue, 10% growth) remains the core driver, with PEO revenue up 28% to $467 million and new business sales up 6% to about $750 million.
Balance sheet is strong: about $2.1 billion in cash and marketable securities, long-term debt of $76 million, and no borrowings under $4.5 billion of revolving credit lines.
Returned capital via about $649 million of share repurchases (15.8 million shares at an average of $41.09) and dividends of $0.54 per share, up 14%.
Operating cash flow declined to $1.4 billion from $1.6 billion, and capital expenditures rose to $204 million.
Fiscal 2005 guidance calls for mid-single-digit revenue growth and double-digit EPS growth, with a pending Bank of America clearing acquisition expected to close by end of calendar 2004.

03—Questions

Frequently Asked Questions

Why did ADP's earnings decline even though revenue grew 9%?
Expenses rose faster than revenue, growing 14% in operating expenses and 14% overall to $6.26 billion. Management cited roughly $170 million of incremental investments in associate compensation, salesforce expansion, and product maintenance. Lower interest rates also reduced investment income on client and corporate funds by about $90 million, and the effective tax rate improved only modestly to 37.4% from 38.1%.
How much of ADP's cash is actually its own versus held for clients?
ADP reports $2.1 billion of its own cash and marketable securities. Separately, $12.9 billion of funds held for clients are offset by $12.8 billion of client funds obligations, which represent payroll and payroll-tax amounts to be remitted to tax agencies and employees. These client funds generate interest income for ADP but are not available for corporate use.
Is ADP's debt a concern for investors?
Not materially. Long-term debt was just $76 million at June 30, 2004, roughly 1.4% of stockholders' equity, consisting mainly of small zero-coupon convertible notes and industrial revenue bonds. ADP has never drawn on its $4.5 billion of revolving credit facilities, and its commercial paper program was undrawn at year end.
What is the outlook for fiscal 2005 and what risks should investors watch?
Management guides to mid-single-digit revenue growth and double-digit EPS growth, though it expects slower early-year earnings growth that accelerates later as investment spending laps and interest rate comparisons improve. Key risks include declining interest rates on client funds, continued weakness in pays-per-control, lower mutual fund mailing volumes after regulatory activity, and integration and regulatory risk around the Bank of America clearing acquisition.
What is the significance of the pending Bank of America acquisition?
ADP agreed on June 22, 2004 to acquire the U.S. Clearing and BrokerDealer Services divisions of Bank of America, which provide third-party clearing. The FTC granted early termination of the Hart-Scott-Rodino waiting period on July 21, 2004. The deal is expected to close before calendar year-end 2004 and should add about $0.01 of dilution to fiscal 2005 EPS, while extending Brokerage Services into a full outsourced clearing and back-office offering.

04—Continue

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