ADP Q1 FY2022 Form 10-Q Summary
Reporting period: Three months ended September 30, 2021; comparisons are with the three months ended September 30, 2020 unless otherwise noted. Amounts are in U.S. dollars.
Business context and performance
ADP provides human capital management technology and services. Revenue growth reflected strong client retention, new business, higher pays per control and PEO worksite employee growth. Management said it continued investing in products and transformation while managing non-essential spending prudently.
- Revenue: $3.832 billion, up 10%. Employer Services revenue rose 8% to $2.572 billion; PEO Services revenue rose 15% to $1.264 billion. PEO revenue includes zero-margin benefits pass-throughs of $839.5 million, up 13%.
- Profit: Earnings before income taxes were $900.8 million, up 18%; net earnings were $700.5 million, up 16%. Diluted EPS was $1.65, up 18%; fewer shares outstanding from repurchases contributed to EPS growth.
- Margins: GAAP pretax margin was approximately 23.5%, versus 22.0% in the prior-year quarter, a 150-basis-point expansion. Adjusted EBIT was $915.2 million, with an adjusted EBIT margin of 23.9%, versus 22.5%.
- Segment earnings before income taxes: Employer Services increased 14% to $784.0 million; PEO Services increased 21% to $193.0 million.
- Revenue drivers: U.S. pays per control grew 7%; average PEO worksite employees grew 15%. Interest revenue on client funds declined to $101.1 million from $106.5 million as the average yield fell to 1.5% from 1.9%, partly offset by higher average client funds balances.
Cash flow, liquidity and capital
- Operating cash flow: $121.9 million, down from $481.9 million. Management attributed the decline primarily to unfavorable changes in operating assets and liabilities, including higher incentive compensation payments.
- Investing and financing cash flow: Investing used $1.236 billion. Financing provided $11.185 billion, largely reflecting the timing of client fund impounds and payments; these client-related flows are not equivalent to corporate cash generation.
- Cash and client funds: Cash and cash equivalents were $1.602 billion at September 30, down from $2.575 billion at June 30. Funds held for clients were $46.809 billion, with related client funds obligations of $46.437 billion; these balances support client payroll and other payment obligations.
- Debt and facilities: Long-term debt was $2.986 billion, principally $3.0 billion of senior notes maturing in 2025, 2028 and 2030. ADP reported no outstanding commercial paper or borrowings under its $9.7 billion committed credit facilities at quarter-end.
- Shareholder returns and investment: ADP paid $393.2 million in dividends and repurchased $528.0 million of common stock during the quarter. It declared a quarterly dividend of $0.93 per share. Management expects fiscal 2022 capital expenditures of $200–$225 million.
Changes, outlook and risks
- Revenue growth and pretax margin expansion were supported by business growth and operating efficiencies, partly offset by lower client-fund yields and increased operating costs. Systems development costs rose 12% and selling, general and administrative expenses rose 6%.
- The effective tax rate increased to 22.2% from 21.3%, primarily because the prior-year quarter included favorable adjustments to prior-year tax liabilities.
- The filing provides no specific full-year earnings or revenue guidance. Management described the financial condition as solid and liquidity as sufficient for the foreseeable future.
- Market risks include interest-rate exposure: ADP estimated that a hypothetical 25-basis-point change in short- and intermediate-term rates would affect pretax earnings by approximately $24 million over the following 12 months; a 25-basis-point short-term rate change alone would have an estimated $9 million effect.
- Available-for-sale securities had $130.3 million of unrealized losses during the quarter; currency translation adjustments were negative $35.1 million. Other comprehensive loss totaled $133.5 million, reducing comprehensive income to $567.0 million.
- Two ERISA class actions concerning the ADP TotalSource Retirement Savings Plan remain at an early stage. ADP said it could not estimate a reasonably possible loss or range of loss and intends to defend the claims. Management does not expect other normal-course claims and proceedings, individually or collectively, to have a material adverse impact.
- Management cited risks including client retention, competition, regulation, interest and foreign-exchange rates, cybersecurity and service interruptions, staffing and technology changes, transformation execution, and COVID-19-related uncertainty. It reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Key facts for investors to verify
- Whether revenue and earnings growth persist, particularly in Employer Services and PEO, and how much PEO growth reflects pass-through benefits rather than service revenue.
- How lower client-fund yields and future interest-rate changes affect client-fund interest income and pretax earnings.
- Why operating cash flow was substantially lower year over year and how client-fund timing affects reported cash-flow movements.
- Execution of the $200–$225 million fiscal 2022 capital expenditure plan and the sustainability of dividends and share repurchases.
- Developments in the ERISA litigation and any changes to the estimated exposure from PEO workers’ compensation and insurance arrangements.