Business context and reporting period
Automatic Data Processing, Inc. (ADP) filed this Form 10-Q for the quarter ended March 31, 2021, and the nine months then ended. This corresponds to fiscal 2021 Q3, not calendar 2020 Q3 as stated in the request metadata. ADP provides human capital management (HCM), HR outsourcing, and global solutions; its reportable segments are Employer Services and PEO Services. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended March 31, 2021 | Nine months ended March 31, 2021 |
|---|---|---|
| Total revenue | $4.102 billion, up 1% year over year | $11.268 billion, essentially flat |
| Earnings before income taxes | $1.066 billion, down 1%; margin down about 60 basis points | $2.664 billion, essentially flat; margin flat |
| Net earnings | $810.7 million, down 1% | $2.060 billion, up slightly |
| Diluted EPS | $1.90, flat | $4.80, up 1% |
| Operating cash flow | Not provided for the quarter alone | $2.441 billion, versus $2.250 billion |
For the nine months, investing cash flow was a use of $2.366 billion, largely reflecting purchases and maturities of corporate and client-fund securities. Financing cash flow was a source of $12.924 billion, primarily reflecting a $15.000 billion net increase in client-fund obligations, partly offset by dividends and share repurchases. ADP paid $1.180 billion in dividends and repurchased $902.5 million of stock during the period.
At March 31, cash and cash equivalents were $1.892 billion. Long-term debt was $1.994 billion; there was no short-term debt, commercial paper outstanding, or borrowing under committed credit facilities at quarter-end. The balance sheet reported $41.491 billion of funds held for clients against $41.043 billion of client-fund obligations. These client funds are restricted for related remittances and should not be viewed as ordinary corporate liquidity. Stockholders’ equity was $5.674 billion.
Material changes versus the prior comparable period
- Client-fund interest revenue fell to $107.4 million for the quarter from $158.9 million, as the average yield declined to 1.3% from 2.0%; for the nine months, it fell to $319.2 million from $430.4 million.
- Employer Services revenue declined 1% for the quarter and 2% for the nine months; management cited lower pays per control and reduced client-fund interest, partly offset by retention and new business. Employer Services pretax earnings declined 4% and 2%, respectively.
- PEO Services revenue grew 7% for the quarter and 5% for the nine months. Excluding zero-margin benefits pass-throughs, growth was 10% and 4%, respectively. PEO pretax earnings rose 14% and 11%.
- Interest expense declined to $13.5 million for the quarter from $20.0 million and to $42.4 million for the nine months from $91.5 million, reflecting lower commercial-paper borrowing levels and rates.
- Operating cash flow increased year over year, while investing cash flow swung from a source of $478.6 million to a use of $2.366 billion, primarily due to the timing of securities purchases and proceeds.
- Other comprehensive loss was $298.0 million for the quarter and $242.9 million for the nine months, mainly reflecting unrealized losses on available-for-sale securities. Accumulated other comprehensive loss increased to $257.7 million.
Outlook, management commentary, risks and unusual items
Management said Employer Services bookings reaccelerated, growing 7% in the quarter and 1% for the nine months, with record March bookings. However, the U.S. pays-per-control measure remained weak, down 7% for the nine months, and PEO average worksite employees were flat year over year in the quarter and down 2% for the nine months. ADP described the COVID-19 environment as uncertain while emphasizing continued client support, investment in products, and cost discipline. The filing does not provide quantified revenue or earnings guidance. It expects fiscal 2021 capital expenditures of $150 million to $175 million.
ADP issued $1.0 billion of 1.25% senior notes due 2030 and redeemed $1.0 billion of 2.25% notes due 2020. It reported a $43.6 million deferred hedge loss to be amortized over the new notes’ life. A $25.0 million settlement of Illinois biometric privacy claims received final court approval in February 2021. Separate ERISA class-action claims concerning the ADP TotalSource Retirement Savings Plan remained at an early stage; ADP said it could not estimate a reasonably possible loss.
Principal disclosed risks include client retention and new-business execution, economic and employment conditions, interest-rate and foreign-currency movements, competition, cybersecurity and system interruptions, regulatory changes, transformation execution, and access to funding markets. ADP noted that a 25-basis-point change in short- and intermediate-term rates could affect pretax earnings by approximately $20 million over the ensuing 12 months. Management said controls and procedures were effective as of March 31, 2021, with no material change in internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm how persistently low client-fund yields affect revenue and earnings, and review sensitivity to changes in short- and intermediate-term interest rates.
- Track Employer Services bookings and pays per control, alongside PEO worksite-employee growth and PEO earnings.
- Distinguish corporate cash and liquidity from restricted client funds and related client-fund obligations when assessing liquidity and cash-flow trends.
- Review the scale and timing of securities purchases and maturities, portfolio unrealized losses, and any resulting impact on reported comprehensive income.
- Assess the treatment and eventual resolution of the ERISA litigation and any developments beyond the approved biometric privacy settlement.
- Compare reported GAAP results with ADP’s adjusted non-GAAP measures; the filing cautions that adjusted measures are not substitutes for GAAP results.