Operating Performance
Automatic Data Processing, Inc. (ADP) announced operating results for the third quarter of fiscal 2010. Net earnings from continuing operations for the quarter were 79 cents per share, one cent above the Zacks Consensus Estimate. However, earnings per share were down by one cent from 80 cents reported in the year-ago quarter. EPS was affected by a higher effective tax rate in the quarter and higher cost of sales.
The quarter benefited from improved demand in Employer Services and PEO Services, the slowdown in the decline of pays per control and client retention rate compared to the year-ago period. Management said that the Dealer Services continued to execute well in the challenging automotive marketplace, with significant growth in new business sales during the quarter.
Additionally, ADP closed four strategic acquisitions in its Employer Services business during the quarter, which is expected to add over $10 million in revenues and dilute EPS by about 1 cent per share in fiscal 2010.
During the quarter, ADP completed the sale of Dealer Services’ non-core Commercial business, which was part of the 2005 Kerridge Computer acquisition. The results of operations for this business are reported within discontinued operations.
Gross margins decreased to 45.5% in the quarter from 48.7% in the year-ago period, due to higher Systems development and programming costs.
Operating margin of 24.9 % benefited from improved sales and lower selling, general and administrative expenses, which declined 3% year over year.
Revenue
Third quarter revenues of $2.44 billion were up 3.1% year over year, of which 2% of the growth came from favorable foreign currency gain. However, this was partially offset by a negative effect of the economic downturn.
By segment, Employer Services and PEO Services segments performed well in the quarter as sales increased 1% (all organic) and 15.1%, respectively. However, this was partially offset by Dealer Services segment sales, which fell 3% year over year.
The growth in Employer Services revenue was due to higher payroll revenues, which grew 8%, partially offset by a 3% decline in revenues from traditional payroll and payroll tax filing business in the United States. The number of employees on the company’s clients’ payrolls in the U.S. declined 2.5%, as measured on a same-store-sales basis for clients on AutoPay platform. Worldwide client revenue retention improved 1.4% from the last year.
Employer Services’ pretax margin was flat compared to the year-ago period as the benefits from the fourth quarter of fiscal 2009 restructuring and growth in client funds balances were offset by fewer W2’s processed due to lower employment levels, continued investment in client facing-resources as well as the dilutive impact of recent acquisition activity.
PEO Services’ revenues increased due to higher pass-through revenues and an increase in the number of worksite employees. PEO Services’ pretax margin declined 200 basis points, primarily due to the impact of one-time items in both the current and prior-year quarters and higher pass-through costs. Average worksite employees paid increased 5% to nearly 206,000.
The decline in Dealer Services’ revenues was attributable to the cumulative impact of dealership closings, along with lower transactional revenues and lower international software license fee revenues. Dealer Services’ pretax margin increased 140 basis points, benefiting from lower headcount levels resulting from the fourth quarter fiscal 2009 restructuring as well as other cost containment measures.
For the quarter, interest on funds held for clients declined 10% year over year to $147.9 million, due to a decline of 50 basis points in the average interest yield to 3.2% due to the seasonally high level of client funds that are invested overnight, partially offset by an increase of 4.8% in average client funds balances.
Balance Sheet
Automatic Data Processing ended the quarter with $2.1 billion million in cash and marketable securities (including long-term) and $41.3 million in long-term debt. The company acquired over 6.5 million shares of its stock for treasury at a cost of nearly $280 million as of March 31, 2010.
Guidance Updated
Management said that its key business metrics showed improvement during the quarter, and were consistent with the company’s expectations, despite the continued effect from the recession. However, increased investment is expected to pressure the company’s near-term earnings growth. Thus the company expects fiscal 2010 to be flat compared to 2009.
Management expects earnings per share to be in the range of $2.36 – $2.38 compared to $2.38 generated in fiscal 2009. Earnings per share from continuing operations in fiscal 2010 and 2009 have each been reduced by 1 cent as a result of discontinued operations. The current Zacks Consensus Estimate calls for $2.40 in EPS for 2010, above the company’s guidance.
Automatic Data Processing expects flat year-over-year revenues for fiscal 2010.
By segments, Employer Services revenue is expected to decline by 1%, with an average decline of about 4% in pays per control for the full year. The company expects client revenue retention to be about flat with last year.
PEO Services revenue is expected to increase 8% to 10%, driven by increased pass-through revenues. The company anticipates slightly positive combined Employer Services and PEO Services worldwide new business sales growth. Dealer Services revenue is expected to decline by 3% to 4% with no improvement in the segment’s pretax margin.
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