ADP Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2019. The filing is a fiscal 2019 Q3 report, despite the request metadata’s “2018 Q3” label. Prior-year comparative figures are presented as restated, primarily for accounting-standard adoption and presentation changes.
Business context and performance
ADP provides payroll, human-capital management and related services. Its reportable segments are Employer Services and PEO Services. Management cited recurring revenue, client retention, new business, technology investment and operational efficiency as key drivers.
- Q3 revenue was $3.847 billion, up 4% reported (5% constant currency); nine-month revenue was $10.677 billion, up 7%.
- Q3 revenue included $167.4 million of interest on client funds, versus $134.8 million a year earlier. For nine months, client-fund interest was $415.0 million, versus $340.9 million.
- Employer Services revenue rose 3% in Q3 and 6% for nine months; PEO Services revenue rose 6% and 9%, respectively. PEO average worksite employees grew 8% in Q3 and 9% for nine months.
Financial results and liquidity
- Profit: Q3 earnings before taxes were $984.5 million, up 12%; net earnings were $753.7 million, up 14%. Diluted EPS was $1.73, up 16%. For nine months, pretax earnings were $2.372 billion, up 17%; net earnings were $1.817 billion, up 4%; diluted EPS was $4.15, up 6%.
- Margins: Pretax margin increased to 25.6% from 23.7% in Q3 and to 22.2% from 20.3% for nine months. Adjusted EBIT margin was 26.3% for Q3 and 23.3% for nine months, versus 25.0% and 21.3%, respectively.
- Cash flow: Nine-month operating cash flow was $1.956 billion, versus $1.810 billion. Investing cash flow was negative $1.198 billion, versus negative $1.958 billion; financing cash flow was positive $6.945 billion, including an $8.612 billion increase in client-fund obligations. ADP paid $949.6 million in dividends and repurchased $760.6 million of shares.
- Balance sheet at March 31: Cash and cash equivalents were $1.826 billion; long-term debt was $2.002 billion; stockholders’ equity was $5.246 billion. Funds held for clients were $36.078 billion, against client-fund obligations of $36.056 billion. These client funds are restricted for related obligations and should not be viewed as ordinary corporate liquidity.
- Funding: ADP reported no commercial-paper or credit-facility borrowings at quarter-end and no outstanding reverse-repurchase obligations. It had $9.8 billion of committed credit facilities. The $3.8 billion, 364-day facility was due to mature in June 2019, with a one-year term-out option.
Material changes and unusual items
- Q3 and nine-month earnings growth reflected higher revenue, improved operating efficiency and increased client-fund interest. Share repurchases also contributed to EPS growth through fewer shares outstanding.
- Nine-month GAAP net earnings growth was lower than pretax earnings growth, in part because the prior-year period included a substantial one-time tax benefit. The effective tax rate was 23.4% for nine months, versus 14.0% in the restated prior-year period; adjusted diluted EPS was $4.31, up 22%.
- Transformation-related items included VERP and service-alignment costs, partly offset by reversals and a $4.1 million asset-sale gain. ADP also recorded a $12.1 million software impairment during the first fiscal quarter.
- ADP adopted revenue-recognition and pension-cost presentation standards, with prior periods restated. Management said the revenue standard did not materially change revenue timing or amount. The company expected lease accounting adoption in fiscal 2020 to add approximately $600–$700 million of operating-lease right-of-use assets and $500–$600 million of lease liabilities, with no expected earnings or cash-flow impact.
Outlook, commentary and risks
- For fiscal 2019, management expected Employer Services new-business bookings growth of 8%–9% and PEO average worksite-employee growth of 8%–9%. It estimated an adjusted effective tax rate of 23.8% and capital expenditures of approximately $180 million.
- Management said it remained focused on client experience, retention, productivity and margin expansion, and expected cash, operating cash flow and financing access to be adequate for planned operations, dividends, repurchases and investment.
- Risks identified include client retention and sales, competition and pricing, regulation, economic and interest-rate conditions, foreign exchange, cybersecurity and system interruptions, labor-market changes, technology, acquisitions, transformation execution and access to financing. The filing reported no material changes to previously disclosed risk factors.
- ADP disclosed Illinois biometric-data class-action claims at an early stage and said it could not estimate a reasonably possible loss or range. Management did not expect the resolution of claims and other proceedings, individually or collectively, to materially affect results, financial condition or cash flows.
Key facts for investors to verify
- Confirm the correct period: fiscal Q3 2019, ended March 31, 2019.
- Review the reconciliation and assumptions behind adjusted EBIT, adjusted EPS and the adjusted tax rate; these are non-GAAP measures.
- Assess the sustainability of growth in bookings, client retention, worksite employees and client-fund interest as rates and balances change.
- Distinguish restricted client-fund assets and obligations from corporate cash and debt when evaluating liquidity and cash flows.
- Monitor the biometric-data litigation, transformation costs, pension-related charges and fiscal 2020 lease-accounting adoption.