ADP 10-Q Summary: Fiscal 2023 First Quarter
Reporting period: Three months ended September 30, 2022, compared with the three months ended September 30, 2021. ADP’s fiscal year differs from the calendar year; this is fiscal Q1 2023. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $4,215.6 | $3,832.3 | +10% reported; +11% organic constant currency |
| EBIT (earnings before income taxes) | $1,010.0 | $900.8 | +12% |
| EBIT margin | 24.0% | 23.5% | +50 basis points |
| Adjusted EBIT margin (non-GAAP) | 24.1% | 23.9% | +30 basis points |
| Net earnings | $779.0 | $700.5 | +11% |
| Diluted EPS | $1.87 | $1.65 | +13% |
| Operating cash flow | $718.1 | $121.9 | +$596.2 |
Revenue growth reflected client retention, new business, higher pays per control, increased PEO pass-through benefits, and higher interest on client funds; foreign exchange partly offset growth. Interest revenue on client funds rose to $141.0 from $101.1, with average client-fund balances up 9.5% to $29.4 billion and the average yield increasing to 1.9% from 1.5%.
- Segments: Employer Services revenue was $2,790.2, up 9% reported and 11% organic constant currency; pretax earnings increased 10% to $863.5 and margin expanded 50 basis points to 30.9%. PEO Services revenue was $1,429.4, up 13%; excluding zero-margin benefits pass-throughs, revenue increased 14% to $483.6. PEO average worksite employees grew 12%, pretax earnings rose 19% to $230.3, and margin increased to 16.1% from 15.3%.
- Costs and taxes: Total expenses increased 10% to $3,245.1. Interest expense rose to $51.2 from $18.5, driven by higher commercial-paper rates and average borrowings. The effective tax rate was 22.9%, versus 22.2%.
- Cash flow and capital returns: The operating cash flow increase primarily reflected timing in receivable collections and incentive compensation payments. Investing cash outflow was $1,577.6, including security purchases and maturities. Financing cash outflow was $16,302.6, largely reflecting a $15,592.0 decrease in client-funds obligations. ADP paid $432.9 in dividends and repurchased $333.3 of shares; the declared dividend was $1.04 per share.
Financial position and liquidity
At September 30, 2022, cash and cash equivalents were $1,207.7, long-term debt was $2,987.6, and total assets were $46,364.7. ADP reported $9.7 billion of committed credit facilities and no borrowings under those facilities or outstanding commercial paper at quarter-end. Reverse-repurchase obligations were $167.6. Client-funds assets of $32,937.9 and related obligations of $35,471.7 are substantial, timing-sensitive balances associated with payroll and other client payments; they should be distinguished from ADP’s corporate liquidity.
Available-for-sale securities had $2,555.4 of gross unrealized losses at quarter-end, compared with $1,731.1 at June 30, 2022. Other comprehensive loss was $730.4, mainly from unrealized securities losses and currency translation; comprehensive income was $48.6 versus $567.0 a year earlier. Stockholders’ equity declined to $2,576.5 from $3,225.3 at June 30, largely reflecting the accumulated other comprehensive loss, dividends, and share repurchases.
Changes, outlook, and risks
- Management described the quarter as solid, citing 6% growth in U.S. pays per control, 12% growth in PEO average worksite employees, and continued product investment, including a unified user experience rollout and an updated ADP RUN mobile app.
- The filing does not provide specific revenue, earnings, or EPS guidance. ADP expects fiscal 2023 capital expenditures of $200–$225, versus $177.1 in fiscal 2022.
- Management said corporate liquidity was sufficient for foreseeable operating, investing, and financing needs. Client-funds investing and funding carry liquidity, interest-rate, and credit risks; a hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $14 over the following 12 months.
- Two ERISA class-action complaints concerning the ADP TotalSource Retirement Savings Plan remain at an early stage; ADP said it cannot estimate a reasonably possible loss. Management did not expect the resolution of other ordinary-course claims to materially adversely affect results, financial condition, or cash flows.
- Other notable items: ADP recorded a $14.5 pretax benefit from changes in estimated PEO workers’ compensation losses and paid a $284 premium for fiscal 2023 reinsurance coverage. Beginning in September 2022, it discontinued grants of stock options and restricted stock, with future awards generally to use restricted stock units.
- Management identified risks including client retention and sales, competition, regulation, economic and interest-rate conditions, foreign exchange, cybersecurity and system disruptions, staffing, transformation execution, and access to funding markets. It reported no material changes to the risk factors in its fiscal 2022 Form 10-K.
Important facts for investors to verify
- Whether organic growth and segment margins persist, and how much growth comes from underlying services versus zero-margin PEO pass-throughs and client-fund interest.
- How rising rates affect client-fund investment income, commercial-paper and reverse-repurchase costs, and the market value of available-for-sale securities.
- Whether the large unrealized securities losses remain unrealized or lead to sales, impairment, or other earnings effects; review the portfolio’s duration, maturities, and funding structure.
- How much of reported cash flow volatility reflects client-fund timing rather than corporate operating performance.
- Developments in the ERISA litigation, PEO insurance loss estimates and reinsurance protection, and ADP’s planned capital spending and shareholder returns.