ADP Form 10-Q Summary
Reporting period: Second quarter of fiscal 2023, three and six months ended December 31, 2022. Amounts are in millions of dollars unless otherwise noted.
Business context and performance
ADP provides human capital management technology and outsourcing services. Its reportable segments are Employer Services and PEO Services. Management cited strong client retention, new business, growth in employees on client payrolls, and higher interest earned on client funds as drivers of revenue growth.
Key financial metrics
| Metric | Quarter | Six months |
|---|---|---|
| Total revenue | $4,391.0; up 9% year over year | $8,606.6; up 10% |
| Net earnings | $813.1; up 17% | $1,592.2; up 14% |
| Diluted EPS | $1.95; up 18% | $3.82; up 16% |
| EBIT margin | 24.1%, versus 22.6% | 24.0%, versus 23.0% |
| Adjusted EBIT margin (non-GAAP) | 24.3%, versus 23.1% | 24.2%, versus 23.5% |
| Operating cash flow | Not presented for quarter alone | $1,617.8, versus $1,215.6 |
Six-month revenue growth was 11% on an organic constant-currency basis. Employer Services revenue rose 8% as reported (11% organic constant currency) for the six months; PEO Services revenue rose 12%. PEO average worksite employees increased 10%, and pays per control increased 6% over the six-month period.
Interest on funds held for clients increased to $187.2 for the quarter from $106.0, and to $328.3 for six months from $207.1. For the six-month period, average client-fund balances increased 6.3% and the average earned rate rose to 2.1% from 1.4%.
Liquidity, debt and capital
- Cash and cash equivalents were $1,345.0 at December 31, 2022. Long-term debt was $2,988.1, principally three $1.0 billion fixed-rate note issues due in 2025, 2028 and 2030.
- No commercial paper or credit-facility borrowings were outstanding at period-end. ADP reported $9.7 billion of committed credit facilities and a $9.7 billion commercial paper program.
- Six-month cash dividends paid were $865.5; share repurchases were $553.5. ADP repurchased 2.3 million shares at an average $234.87 per share. A new $5 billion repurchase authorization was approved in November 2022.
- Capital expenditures were $91.2 for six months. Management expected fiscal 2023 capital expenditures of $200–$225.
- Client funds are restricted for client payroll and related obligations: funds held for clients were $40,760.5, against client funds obligations of $43,061.8. These are part of ADP’s client-funds operating and financing structure, not equivalent to unrestricted corporate cash.
Changes, outlook and risks
Year-over-year earnings and margins improved, while interest expense rose sharply: $57.0 for the quarter versus $18.4, and $108.1 for six months versus $36.9. Management attributed the increase to higher commercial-paper rates and average borrowing volumes. Operating costs also rose with business growth and investment in products, sales and marketing.
Management described ADP’s financial condition and liquidity as solid and sufficient for foreseeable operating, investing and financing needs. The filing provides capital-expenditure expectations but no specific revenue or earnings guidance.
- Available-for-sale securities had $2,305.1 of gross unrealized losses at December 31, 2022; the portfolio was reported as investment grade. The filing identifies interest-rate, credit and liquidity risks, including possible constraints on short-term financing during market stress.
- A 25-basis-point change in short- and intermediate-term rates was estimated to affect earnings before taxes by approximately $13 over the following 12 months; a 25-basis-point change in short-term rates alone by approximately $3.
- Two ERISA class-action complaints concerning the ADP TotalSource Retirement Savings Plan remain in early stages. ADP said it could not estimate a reasonably possible loss or range; management believes resolution of its claims and litigation will not materially affect the company.
- Management identified risks including client retention and sales, competition, economic and interest-rate trends, foreign exchange, cybersecurity and system interruptions, regulation, staffing, transformation initiatives and access to financing. No material change to the prior annual-report risk factors was disclosed.
- ADP reported effective disclosure controls as of December 31, 2022 and no material change in internal control over financial reporting during the quarter. Don Weinstein’s previously announced departure was scheduled for March 31, 2023; a separation agreement was dated January 30, 2023.
Important facts for investors to verify
- Whether revenue and margin momentum continues, particularly in Employer Services and PEO Services, and how much growth depends on higher client-fund interest income.
- How higher interest rates affect both client-fund investment income and ADP’s commercial-paper borrowing costs.
- The size, duration and potential effects of unrealized securities losses, and the liquidity available to meet client-fund obligations.
- Whether fiscal 2023 capital expenditures fall within the $200–$225 expectation and how repurchases and dividends are funded.
- Any developments in the ERISA litigation, and any changes in ADP’s stated liquidity, financing or operational risks.