ADP Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2015. The supplied filing is for fiscal 2015 Q3, although the request metadata says 2014 Q3. All dollar amounts are in millions unless otherwise noted.
Business context
ADP provides payroll, human resources, benefits, and related employer services. Its reportable segments are Employer Services and PEO Services. The former Dealer Services business was spun off as CDK Global on September 30, 2014; its results are presented as discontinued operations.
Key financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Continuing-operations revenue | $3,031.7; +7% | $8,266.8; +8% |
| Pre-tax earnings from continuing operations | $742.6; +12% | $1,696.2; +11% |
| Pre-tax margin from continuing operations | 24.5%, versus 23.4% | 20.5%, versus 19.9% |
| Net earnings from continuing operations | $492.0; +14% | $1,124.0; +11% |
| Diluted EPS from continuing operations | $1.04; +16% | $2.35; +12% |
| Total net earnings, including discontinued operations | $489.6, versus $521.6 | $1,116.3, versus $1,227.1 |
| Total diluted EPS | $1.03, versus $1.08 | $2.33, versus $2.54 |
| Operating cash flow | Not reported for the quarter alone | $1,464.2, versus $1,216.9 |
| Dividends declared per share | $0.49, versus $0.48 | $1.46, versus $1.395 |
At March 31, ADP reported $1,808.6 cash and cash equivalents and $56.1 of marketable securities classified as corporate investments, or $1,864.7 combined. Long-term debt was $9.7; there was no commercial paper outstanding or borrowing under its credit agreements. Client funds are separately restricted: funds held for clients were $28,702.5 against client funds obligations of $28,328.3. These balances should not be treated as general corporate liquidity.
For the nine months, investing cash outflow was $7,476.5 and financing cash inflow was $5,949.8, largely reflecting changes in restricted client funds and related obligations. ADP repurchased 13.3 million shares for $1,127.7 and paid $696.2 in dividends. Stockholders’ equity was $5,178.1; the reported long-term-debt-to-equity ratio was 0.2%.
Material changes and management commentary
- Continuing-operations revenue grew, with Employer Services revenue up 5% for both the quarter and nine months, and PEO Services revenue up 15% and 17%, respectively. PEO growth reflected more worksite employees and included substantial pass-through costs.
- Management attributed improved continuing-operations earnings and margins to business growth, scale, productivity, and operating efficiencies. Sales-force and product-development investment increased.
- Foreign currency translation reduced quarterly total revenue growth by two percentage points and nine-month growth by one point. Management expected currency pressure to continue through fiscal 2015.
- Client-funds interest revenue grew more slowly than overall revenue amid lower average yields. Average client-funds yields were 1.5% for the quarter and 1.7% for the nine months, down from 1.6% and 1.8% in the comparable periods.
- Total net earnings and EPS declined year over year, principally reflecting the absence of prior-year discontinued-operations earnings, including CDK results and an OHS disposal gain. Continuing-operations earnings and EPS increased.
- The CDK spin-off reduced retained earnings by $1.5 billion, partly offset by an $825.0 million dividend received from CDK. ADP said it returned that dividend to shareholders through repurchases.
Outlook, risks, and unusual items
- No specific revenue or EPS forecast is provided in the supplied filing text. Management forecast fiscal 2015 continuing-operations capital expenditures of $175–$200 million.
- Management cited exposure to foreign exchange, interest rates, investment credit and liquidity risk, competition, client retention and sales, regulation, cybersecurity and system interruptions, labor conditions, technology changes, and access to financing.
- A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pre-tax continuing earnings by approximately $13 million over the following 12 months; a 25-basis-point change in short-term rates alone, approximately $5 million.
- ADP disclosed an ongoing EEOC charge alleging race discrimination in hiring and other employment practices in Illinois. The company was cooperating with the investigation and said it did not expect outstanding claims, individually or collectively, to have a material adverse effect, while noting litigation uncertainty.
- ADP reported no material change in its previously disclosed risk factors and said disclosure controls were effective as of March 31, 2015.
Important facts for investors to verify
- Confirm the intended period: the filing covers fiscal 2015 Q3, not 2014 Q3.
- Assess continuing-operations performance separately from discontinued operations and the prior-year OHS gain when comparing earnings.
- Review the effect of FX and client-funds interest yields on growth and margins, and monitor whether management’s stated pressures persist.
- Distinguish corporate cash and investments from restricted client funds; review liquidity facilities and the June 2015 maturity of the $2.25 billion 364-day credit agreement.
- Evaluate the sustainability of repurchases and dividends alongside operating cash flow, including the effect of the CDK distribution and client-funds cash-flow timing.