Automatic Data Processing Inc. (ADP) announced results for the fourth quarter of fiscal 2010. Adjusted net earnings from continuing operations for the quarter were 42 cents per share, in line with the Zacks Consensus Estimate.
Earnings per share were down 3 cents from 45 cents reported in the year-ago quarter, attributable to increased unemployment and the negative effect of the economic downturn. Earnings per share were negatively affected by a higher effective tax rate in the quarter and increased operating expenses.
However, revenues were slightly above the Zacks Consensus Estimate as the quarter benefited from an improved demand in Employer Services and PEO Services due to new business sales growth in the quarter. Additionally, positive pays per control and a slowdown in the decline of client retention rate compared with the year-ago period contributed to the sales increase.
Management provided a cautious outlook on the overall economic condition and does not expect any major changes in the current economic environment. Additionally, ADP closed two strategic acquisitions during the quarter, which are not expected to add to fiscal 2011 earnings.
Operating margin of 33.2% in the quarter slightly benefited from improved sales, offset by higher selling, general and administrative expenses, which increased 6.5% year over year.
Revenue
Fourth quarter revenues of $2.19 billion were up 4.3% year over year, of which 0.6% of the growth came from favorable foreign currency gain. Revenues were slightly above the Zacks Consensus Estimate of $2.14 billion.
By segment, Employer Services and PEO Services performed well in the quarter as sales increased 4% (all organic) and 13%, respectively. Dealer Services sales were flat year over year.
The growth in Employer Services revenue was attributable to higher payroll revenues and a slight revenue increase from traditional payroll and payroll tax filing business in the United States. The number of employees on the company’s client payrolls in the U.S. grew 0.3%, as measured on a same-store-sales basis for clients on the AutoPay platform. Worldwide client revenue retention improved 1.6% from the last year.
Employer Services’ pre-tax margin declined 290 basis points compared with the year-ago period, as the benefits from the fourth quarter of fiscal 2009 restructuring and growth in client funds balances were offset by increased sales expense, investments in client service and product along with higher benefits and compensation expense. PEO Services’ pre-tax margin declined 40 basis points, primarily due to higher pass-through costs and increased pricing. Average worksite employees paid increased 8.5% year over year to nearly 210,000.
Combined Employer Services and PEO Services worldwide new business sales leaped 25% for the quarter, which is encouraging. New business sales were over $1.0 billion for the full-year 2010.
Dealer Services’ revenues were flat (down 1% organically) compared with the year-ago quarter, mainly attributable to an increased market share and strong competitive win rates, partially offset by the cumulative impact of dealership closings, along with lower international software license fee revenues.
Dealer Services’ pre-tax margin decreased 310 basis points, benefiting from lower headcount levels resulting from the fourth quarter fiscal 2009 restructuring as well as other cost-containment measures, more than offset by acquisition-related costs, increased sales expense and higher benefits and compensation expense.
For the quarter, interest on funds held for clients dipped 4.8% year over year to $139.3 million, due to a decline of 50 basis points in the average interest yield to 3.4%, partially offset by an increase of 9.2% in average client funds balances to $16.3 billion. Interest expense slashed 49% to $1.8 million.
Balance Sheet
Automatic Data Processing ended the quarter with $1.78 billion in cash and marketable securities (including long-term) and $39.8 million in long-term debt. This compares with $2.1 billion million in cash and marketable securities (including long-term) and $41.3 million in long-term debt in the previous quarter.
The company acquired 11.7 million shares of its at a cost of nearly $485 million in the reported quarter and about 18.2 million shares at a cost of over $765 million during full year 2010. The company declared a dividend of 34 cents per share in the quarter.
Guidance
Increased investment and higher expenses related to increased sales and service started during the second half of 2010 are expected to pressure the company’s earnings growth in 2011.
Management expects earnings per share from continuing operations to increase 1% to 3% in fiscal 2011, compared with $2.37 per share reported in 2010. The current Zacks Consensus Estimate for 2011 calls for $2.51 in EPS. Automatic Data Processing expects revenues for fiscal 2011 to increase 1% to 3% year over year.
By segment, Employer Services revenues are expected to grow 1% to 3%, with pre-tax margin expansion of up to 50 basis points with a flat to up 0.5% in pays per control for the full year. The company expects client revenue retention to be about flat to up 0.4% compared with the last year.
PEO Services revenues are expected to increase in the low double-digit range with pre-tax margin declining due to increased pass-through revenues. The company anticipates high single-digit growth compared with $1.0 billion sold in fiscal 2010, combined Employer Services and PEO Services worldwide new business sales growth. Dealer Services revenues and pre-tax margin are expected to be flat to slightly up in 2011.
Automatic Data has a Zacks rank of #3, indicating a short-term Hold rating on the stock.
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