Business context and reporting period
Automatic Data Processing, Inc. (ADP) provides cloud-based human capital management services. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2020, the second quarter and first half of ADP’s fiscal 2021. Comparisons are with the corresponding periods ended December 31, 2019.
Financial performance and position
Amounts are in millions except per-share data.
| Metric | Quarter | Six months |
|---|---|---|
| Total revenue | $3,695.7, up 0.7% | $7,166.5, essentially flat |
| Net earnings | $647.5, down 0.6% | $1,249.6, up 1.3% |
| Diluted EPS | $1.51, versus $1.50 | $2.91, versus $2.84 |
| Adjusted EBIT (non-GAAP) | $848.1, down 1%; margin 22.9%, versus 23.3% | $1,628.8, up 2%; margin 22.7%, versus 22.3% |
| Operating cash flow | $1,188.3 for six months, versus $1,130.9 |
Quarterly revenue included $105.4 of interest on client funds, down from $137.7; the six-month amounts were $211.9 and $271.5. Lower earned rates drove much of the decline. For the quarter, Employer Services revenue fell 1% and PEO Services revenue rose 5%; PEO growth included a 6% increase in zero-margin benefits pass-throughs. Excluding those pass-throughs, PEO revenue rose 2% for the quarter.
At December 31, cash and cash equivalents were $1,602.2. Total debt was approximately $2.0 billion, comprising senior notes due 2025 and 2030; the company had no commercial paper, reverse-repurchase, or credit-facility borrowings outstanding at period-end. The $9.7 billion of committed credit facilities were undrawn. Funds held for clients of $36,866.2 and related client obligations of $36,066.1 are restricted/client-related balances and should not be treated as ordinary corporate liquidity.
Changes, outlook, and management commentary
- Management said business momentum improved sequentially amid the continuing COVID-19 environment. U.S. pays per control declined 6% in the quarter, improving from a 9% decline in the September quarter; six-month decline was 7%. PEO average worksite employees declined 2% in both the quarter and six-month period.
- Employer Services new-business bookings were down 2% for the first half, which management said nearly matched the prior-year first-half performance. Management cited strong retention, new business, and transformation-related cost reductions.
- ADP reported GAAP earnings before taxes of $832.6 for the quarter, versus $835.5, and $1,597.8 for six months, versus $1,574.6. Six-month adjusted EBIT margin expanded, while quarterly adjusted margin contracted.
- Management expects fiscal 2021 capital expenditures of $150–$175. The filing provides no specific full-year revenue or earnings guidance.
- COVID-19, employment and wage levels, interest-rate and foreign-currency movements, competition, cybersecurity and system interruptions, and the success of transformation initiatives are cited risks. A 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $21 over the following 12 months.
Contingencies and notable items
ADP reached a $25.0 settlement in June 2020 concerning Illinois biometric-privacy claims, subject to final court approval. Two ERISA class-action complaints filed in May 2020 remained at an early stage; ADP said it could not estimate a reasonably possible loss and intends to defend them. Management did not expect other pending claims, individually or collectively, to materially affect results, financial condition, or cash flows.
During the first half, ADP issued $1.0 billion of 1.25% senior notes due 2030 and redeemed $1.0 billion of 2.25% notes due 2020. A $43.6 loss from terminated cash-flow hedges will be amortized to earnings over the new notes’ life. ADP repurchased 3.2 million shares for $475.1 and paid $781.7 in dividends during the six months.
Important facts for investors to verify
- Reconcile the MD&A’s $79.7 of capital expenditures with the cash-flow statement’s $81.0 of capital expenditures.
- Track whether improvement in pays per control, worksite employees, and bookings continues, and assess the effect on Employer Services revenue.
- Separate PEO’s underlying service growth from zero-margin benefits pass-through revenue when evaluating reported growth and margins.
- Monitor client-funds investment income and interest-rate sensitivity, while distinguishing client assets and obligations from corporate cash and debt.
- Confirm final court approval and settlement treatment for the biometric matter, and follow developments in the ERISA cases.