Automatic Data Processing Inc. (ADP) reported fourth quarter 2011 earnings per share of 48 cents that were in line with the Zacks Consensus Estimate. Earnings per share increased 14.3% year over year.
The fourth quarter earnings were primarily driven by strength in the Employer Services and PEO Services businesses. Additionally, the Dealer Services segment continued its recovery. Moreover, the year-over-year increase in earnings and revenues were aided by favorable foreign exchange rates.
Operating Performance
Net income from continuing operations increased 16.5% year over year to $241.8 million. Net margin of 9.6% was relatively flat with the year-ago quarter.
Total expenses for the quarter increased 15.0% from the year-ago quarter to $2.18 billion.
Operating income increased 10.8% on a year-over-year basis to $326.3 million. Operating margin decreased 40 basis points (bps) to 13.0% from the year-ago quarter. An increase in the total expenses (operating expenses and selling, general and administrative expenses increased 20.0% and 8.0%, respectively, from the year-ago quarter) dragged the operating margin down.
During the quarter, pre-tax income increased 17.4% year over year to $358.7 million. Pre-tax margin increased 40 bps on a year-over-year basis to 14.3% for the quarter due to an increase in other income (other income increased to $32.3 million from the year-ago quarter’s $11.1 million).
Employer Services pre-tax margin decreased 0.3% and Dealer Services margin dropped 0.8% and PEO Services margin was down 1.0% in the quarter.
Revenue
Revenues increased 14.0% year over year to $2.50 billion, which was well above the Zacks Consensus Estimate of $2.44 billion. Organic growth was 9.0% in the quarter.
The strong year-over-year growth in revenues was driven by broad-based strength across all major business segments and favorable currency rates compared with the year-ago quarter.
Employer Services revenue increased 9.0% year over year (6.0% organically) to $1.71 billion. In the US, revenues from the traditional payroll and payroll tax filing business grew 4% in the quarter. Beyond payroll, revenues were up 13% in the quarter, driven by acquisitions.
The number of employees on clients' payrolls in the United States grew 2.6% in the quarter on a same-store-sales basis. Employer Services' pre-tax margin improved 60 bps. The expansion was attributable to solid organic revenue growth and comparisons from previous year’s increased investments in sales and service headcount.
PEO Services revenue was up 20.0% year over year to $396.6 million in the fourth quarter. Interest on funds held for clients declined 2.6% year over year to $135.7 million, which was the result of a decline of 50 basis points in the average interest yield to 2.9%, but was partially offset by an increase of 13% in average client funds balances to $18.5 billion.
Dealer Services revenue increased 30.0% year over year (4.0% organically) to $391.2 million. The revenue was positively impacted by the Cobalt acquisition, which closed in the first quarter of 2011.
Balance Sheet
As of June 30, 2011, cash and cash equivalents (including short-term marketable securities) were $1.43 billion, compared with $1.64 billion in the previous quarter.
Long-term debt decreased marginally to $34.2 million at the end of the third quarter, from $34.6 million in the prior quarter.
ADP acquired 10.4 million shares at a cost of $560 million during the fourth quarter, and approximately 14.2 million shares at a cost of $730 million during the fiscal year 2011.
Fiscal 2012 Outlook
Automatic Data Processing expects total revenue for FY12 to increase 6.0%-7.0% year over year.
Employer Services is expected to achieve 6%-7% revenue growth and expects pre tax margins to expand 50 bps. Automatic Data Processing expects pays per control to increase approximately 1.0%-2.0% for the fiscal 2012.
PEO Services revenue is forecasted to improve 15.0%-17.0% and expects pretax margin to remain flat year over year.
New business sale from Employer Services and PEO Services is expected to achieve 8%-10% growth over the $1.1 billion reported in fiscal 2011.
Automatic Data Processing expects revenue from Dealer Services to increase by 8%-9% with a pretax margin expansion of about 50 basis points.
The company expects interest on funds held for clients to decline $25- $35 million, or 5% -6%, from $540.1 million in fiscal 2011. However, the company expects 7%-8% increase in the average client funds balances.
Moreover, Automatic Data Processing expects its diluted earnings per share to increase 8%-10% over $2.52 earnings per share in fiscal 2011. The Zacks Consensus Estimate for the fiscal year 2012 is pegged at $2.72 per share.
Conclusion
We remain Neutral on the stock over the long term. Automatic Data Processing’s 2012 outlook displays enough strength, suggesting a positive growth in higher client retention and revenue growth from new business.
However, competition from Paychex Inc. (PAYX) and Insperity Inc. (NSP) remain headwinds for the company.
Currently, Automatic Data Processing has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
AUTOMATIC DATA (ADP): Free Stock Analysis Report
INSPERITY INC (NSP): Free Stock Analysis Report
PAYCHEX INC (PAYX): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment