ADP Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2021, compared with fiscal 2020. Although the request metadata says “2020 Q4,” the supplied filing is an annual report for fiscal 2021, not a quarterly filing.
Business context
Automatic Data Processing, Inc. provides cloud-based human capital management (HCM), payroll, HR outsourcing and related services. It reported two segments: Employer Services and Professional Employer Organization (PEO) Services. ADP served more than 920,000 clients and paid over 38 million workers across 140 countries and territories.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $15.005 billion | $14.590 billion | +3% reported; +2% organic constant currency |
| Earnings before income taxes | $3.361 billion | $3.183 billion | +6%; margin expanded 60 bps |
| Net earnings | $2.599 billion | $2.467 billion | +5% |
| Diluted EPS | $6.07 | $5.70 | +6% |
| Adjusted EBIT margin | 22.6% | 23.0% | Down 40 bps |
| Adjusted diluted EPS | $6.02 | $5.92 | +2% |
| Cash from operating activities | $3.093 billion | $3.026 billion | +$67 million |
Segment revenue was $10.195 billion for Employer Services (+1%) and $4.818 billion for PEO (+7%). PEO revenue excluding zero-margin benefits pass-throughs rose 8%. Employer Services pretax earnings were essentially flat at $3.052 billion; PEO pretax earnings rose 18% to $719 million.
Interest on funds held for clients declined to $422 million from $545 million as the average yield fell to 1.5% from 2.1%, partly offset by a 5.2% increase in average client-fund balances to $27.4 billion. The effective tax rate was 22.7%, versus 22.5%.
Balance sheet, liquidity and capital returns
- Cash and cash equivalents were $2.575 billion at June 30, 2021. ADP reported $9.7 billion of committed credit facilities, with no facility or commercial-paper borrowings outstanding at year-end.
- Long-term debt was $2.985 billion; total notes had $3.0 billion principal, including $1.0 billion due in 2025, $1.0 billion due in 2028 and $1.0 billion due in 2030.
- Funds held for clients were $34.906 billion, against client-fund obligations of $34.404 billion. These balances relate to client payroll and tax remittances and should not be treated as unrestricted corporate liquidity.
- Operating cash flow was $3.093 billion. Investing cash flow was an outflow of $3.515 billion, largely reflecting the timing of securities purchases and maturities; financing cash flow was an inflow of $6.438 billion, substantially affected by client-fund obligations and debt issuance.
- ADP returned approximately $3.0 billion to shareholders: $1.6 billion in dividends and $1.4 billion in share repurchases. It repurchased 8.2 million shares during the year.
Material changes and management commentary
- Employer Services new-business bookings increased 23%; client revenue retention improved 170 basis points to 92.2%. PEO average worksite employees grew 2% for the year, including 12% growth in the fourth quarter.
- Management said the pandemic weighed on revenue and bookings through client impacts and changes in buying behavior, while ADP continued payroll operations and supplied client relief and workplace-return tools. Pays per control declined 3% for the year but turned positive in the fourth quarter.
- Management cited stronger retention, new business, foreign-exchange benefit and PEO growth as revenue drivers. Lower client-fund yields were a headwind. Cost efficiencies and lower prior-year transformation and severance charges helped reported pretax margin; adjusted EBIT margin nevertheless contracted.
- ADP continued investing in next-generation cloud platforms and product development. Systems development and programming investment was approximately $1.016 billion, compared with $947 million in FY2020.
Outlook, risks and unusual items
- The filing does not provide a clear consolidated revenue or earnings forecast. Management expected FY2022 capital expenditures of $200 million to $225 million.
- Key risks include cybersecurity or privacy incidents, service interruptions and third-party cloud disruption; changing regulation; competition and technology execution; economic and employment weakness; interest-rate and foreign-exchange movements; and the availability of short-term funding for client-fund obligations.
- Reported FY2021 results included $19.9 million of asset impairment charges, including a $10.5 million software write-down and charges associated with vacated or sale-designated facilities. Adjusted measures exclude specified items and are non-GAAP.
- ADP recorded a $32 million pretax benefit at ADP Indemnity in FY2021, primarily from updated actuarial loss estimates, compared with a $20 million pretax loss in FY2020. It paid $240 million for FY2021 workers’ compensation reinsurance and $260 million in July 2021 for FY2022 coverage.
- A $25 million settlement of Illinois biometric privacy claims received final court approval in February 2021; ADP received a $15 million insurance recovery in June. Separate ERISA lawsuits involving the ADP TotalSource retirement plan remained at an early stage, and the company could not estimate a possible loss.
- The company reported no goodwill impairment. The auditor identified goodwill valuation—particularly forecasts for a next-generation platform—and client-funds obligation reconciliation as critical audit matters. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the applicable period: this is FY2021 ended June 30, 2021, despite the “2020 Q4” request metadata.
- Review the sustainability of Employer Services bookings and retention gains, and the recovery in pays per control after its full-year decline.
- Track client-fund yields and balances: lower yields reduced interest revenue, while the large client-fund asset and obligation balances depend on liquidity and money-movement operations.
- Assess reported versus adjusted profitability, including the adjusted EBIT margin decline and the treatment of excluded items.
- Monitor debt, planned capital spending, reinsurance costs, unresolved litigation and the execution and valuation assumptions for next-generation platforms.