10-QPeriod: Q2 FY2013

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q2 Ended Dec 31, 2012

Filed February 6, 2013For Securities:ADP

Summary

Automatic Data Processing, Inc. (ADP) reported its fiscal second-quarter results for the period ending December 31, 2012. The company demonstrated revenue growth across its key segments, Employer Services, PEO Services, and Dealer Services, driven by new business sales, client retention, and an increase in employees on client payrolls. While overall revenue saw a 7% increase year-over-year for the quarter, driven by acquisitions and organic growth, profitability was impacted by several factors. Net earnings from continuing operations saw a decrease of 6% for the quarter, impacted by lower interest income from client funds due to declining interest rates, and the absence of a significant gain on asset sale recorded in the prior year. Despite these pressures, the company maintained a strong financial position with solid cash flows and equity. ADP continues to return value to shareholders through dividends and share repurchases, underscoring a resilient business model with a high percentage of recurring revenue.

Financial Highlights

51 data points
Beta

Revenue

$2.74B

40.9% Gross Margin

Net Income

$390.90M

14.3% Net Margin

EPS (Diluted)

$0.80

Total Assets

$33.33B

Cash & Equivalents

$1.39B

Free Cash Flow

$448.50M

Financial Statements
Beta
Revenue$2.74B
Gross Profit$1.12B
SG&A Expenses$624.70M
Operating Expenses$2.25B
Interest Expense$3.00M
Net Income$390.90M
EPS (Basic)$0.81
EPS (Diluted)$0.80
Shares Outstanding (Basic)482.10M
Shares Outstanding (Diluted)486.80M

Key Highlights

  • 1Total revenues increased by 7% to $2.75 billion for the three months ended December 31, 2012, compared to the prior year, driven by growth in all key segments.
  • 2Net earnings from continuing operations decreased by 6% to $352.0 million for the quarter, impacted by lower interest income and the prior year's gain on asset sale.
  • 3Diluted earnings per share from continuing operations decreased by 5% to $0.72 for the quarter.
  • 4Employer Services revenue grew by 7% to $1.91 billion, driven by new business, increased employee counts, and price increases.
  • 5PEO Services revenue grew by 13% to $465.7 million, supported by a 10% increase in worksite employees.
  • 6Dealer Services revenue increased by 11% to $449.8 million, benefiting from new clients, improved retention, and growth in key products.
  • 7The company repurchased approximately 2.0 million shares of common stock during the quarter.

Frequently Asked Questions

The primary drivers for the decrease in net earnings from continuing operations were the absence of a significant gain on the sale of assets that was recorded in the prior year's quarter and a decrease in interest income earned on funds held for clients due to lower prevailing interest rates, partially offset by an increase in the average client funds balance.

The PEO Services segment showed strong performance with a 13% increase in revenue to $465.7 million for the quarter. This growth was primarily attributed to a 10% increase in the average number of worksite employees, resulting from acquiring new clients and expanding services for existing ones. The segment's margin also improved due to slower growth in pass-through costs relative to revenue.

ADP continues to return value to shareholders through its share repurchase program. In the three months ended December 31, 2012, the company repurchased approximately 2.0 million shares of its common stock. The company considers various factors, including acquisition activity, cash flows, and market conditions, when determining the execution of its share repurchase programs.

Funds held for clients are invested with a primary focus on safety of principal, liquidity, and diversification. The portfolio is predominantly invested in highly liquid, investment-grade marketable securities, with a maximum maturity of 10 years. Approximately 84% of these securities held a AAA or AA rating at December 31, 2012. The investment strategy also involves extending maturities and utilizing short-term financing to meet immediate funding needs.