ADP FY2015 Form 10-K Summary
Business context and reporting period. Automatic Data Processing, Inc. (ADP) provides human capital management, payroll, and business process outsourcing services. This is the annual report for the fiscal year ended June 30, 2015—not a report for calendar-year 2014 Q4. Unless otherwise noted, comparisons are with FY2014 and amounts are U.S. dollars. ADP reported Employer Services and Professional Employer Organization (PEO) Services as its two continuing reportable segments.
Financial highlights
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $10.94 billion | $10.23 billion | +7% |
| Gross profit | $4.51 billion | $4.19 billion | +8% |
| Earnings from continuing operations before tax | $2.07 billion | $1.88 billion | +10% |
| Net earnings from continuing operations | $1.38 billion | $1.24 billion | +11% |
| Diluted EPS from continuing operations | $2.89 | $2.57 | +12% |
| Operating cash flow | $1.91 billion | $1.82 billion | +$84 million |
- Gross margin was approximately 41.2%; pretax margin increased to 18.9% from 18.4%. Effective tax rate declined to 33.5% from 33.9%.
- Reported net earnings, including discontinued operations, were $1.45 billion versus $1.52 billion. Total diluted EPS was $3.05 versus $3.14; the continuing-operations measures better reflect the retained business after divestitures.
- Cash and marketable securities for continuing operations were $1.69 billion at year-end, down from $3.67 billion. Working capital excluding client funds and discontinued operations was $1.48 billion, up from $1.20 billion.
- Long-term debt was $9.2 million, and ADP had no commercial paper or reverse-repurchase borrowings outstanding at June 30, 2015. It had $8.25 billion of committed credit facilities and $3.25 billion of committed reverse-repurchase capacity.
- Funds held for clients were $24.87 billion against $24.65 billion of client-fund obligations. These balances are tied to payroll and tax remittances and should not be treated as unrestricted corporate liquidity.
- Dividends paid were $927.6 million; share repurchases were $1.56 billion. ADP repurchased approximately 18.2 million shares during the year.
Changes versus the prior comparable period
- Employer Services revenue grew 5% to $8.90 billion, with pretax earnings up 7% to $2.69 billion. Foreign currency translation reduced revenue growth by about two percentage points.
- PEO Services revenue grew 17% to $2.65 billion and pretax earnings grew 30% to $303.6 million. Average worksite employees increased 14%. PEO revenue includes certain benefits and insurance pass-through amounts; FY2015 pass-through costs were $2.02 billion.
- New business bookings rose 13% to more than $1.6 billion; Employer Services client revenue retention was 91.4%, and U.S. pays per control increased 3.0%.
- Interest on funds held for clients increased to $377.7 million from $373.4 million, as 5% growth in average client-fund balances outweighed a lower average yield of 1.7% versus 1.8%.
- ADP completed the tax-free spin-off of Dealer Services as CDK Global on September 30, 2014, and received an $825 million dividend from CDK. It sold its Procure-to-Pay business in June 2015. Prior-year results were adjusted to exclude discontinued operations.
- Systems development and programming investment from continuing operations increased to approximately $767 million from $686 million.
Outlook, commentary, risks, and unusual items
- Management cited strong bookings, record-level client retention, product investment, salesforce productivity, and an improving U.S. economic backdrop. It expected foreign-currency pressure to continue into early FY2016. The filing provides no specific revenue or earnings guidance.
- FY2016 capital expenditures were expected to be $225 million to $250 million, compared with $171 million in FY2015.
- In August 2015, ADP agreed to sell AdvancedMD, with closing expected in the first or second quarter of FY2016, subject to customary conditions. The expected pretax gain was approximately $30 million.
- Key risks include data security and privacy breaches, system outages, regulatory and compliance changes, competitive and technology pressures, economic and employment conditions, interest-rate and foreign-exchange movements, and reliance on banking partners and short-term funding markets. ADP also disclosed uncertainty over whether the CDK spin-off would retain tax-free treatment, and noted that CDK may be unable to fully indemnify ADP for related liabilities.
- ADP disclosed an EEOC investigation concerning alleged employment discrimination in Illinois; the company was cooperating. It stated that it could not estimate a reasonably possible loss or range for the matters described. It otherwise believed pending litigation would not materially affect its financial condition, results, or cash flows.
- Unusual items included a $102.3 million pretax gain on the P2P sale, recorded in discontinued operations, and a $50.1 million of costs associated with the CDK spin-off and P2P divestiture, also recorded in discontinued operations. No goodwill impairment was recorded in FY2015; the FY2013 comparison included a $42.7 million impairment.
Most important facts for investors to verify
- Confirm comparisons use continuing operations and account for the CDK spin-off and P2P sale; reported total net earnings include discontinued operations and disposal gains.
- Assess whether booking growth, client retention, and pays-per-control gains continue to convert into recurring revenue and margins, particularly given higher selling and development costs.
- Monitor client-fund investment yields and balances: client-fund interest income is sensitive to rates, and these client assets are matched to remittance obligations rather than freely available cash.
- Review the quality and sustainability of operating cash flow, including the benefit from the $226.7 million sale of notes receivable and lower pension contributions.
- Track foreign-exchange effects, the AdvancedMD sale and expected gain, FY2016 capital spending, and the tax and indemnification risks related to the CDK spin-off.
- Consider the disclosed cyber, regulatory, banking-liquidity, PEO workers’ compensation, tax-audit, and EEOC exposures; the filing does not quantify potential losses for certain litigation matters.