ADP Form 10-Q Summary
Reporting period: Three months ended September 30, 2020 (ADP fiscal 2021 first quarter). The request metadata says “2020 Q1,” but the filing itself reports the quarter ended September 30, 2020.
Business context and results
ADP provides human capital management services, including Employer Services, Professional Employer Organization (PEO) Services, and Global Solutions. Management said COVID-19 continued to weigh on clients and employment, while some business indicators improved.
- Revenue: $3.471 billion, down 1% year over year. Employer Services revenue fell 3%; PEO Services revenue rose 4%, partly from higher zero-margin benefits pass-throughs. Revenue excluding those PEO pass-throughs declined 1%.
- Profit: Earnings before tax were $765.2 million, up 4%; net earnings were $602.1 million, up 3%. Diluted EPS was $1.40 versus $1.34.
- Margins: GAAP pretax margin was approximately 22.1%, compared with 21.1%. Adjusted EBIT margin, a non-GAAP measure, was 22.5% versus 21.3%; adjusted diluted EPS was $1.41 versus $1.34.
- Cash flow: Operating cash flow was $481.9 million, compared with $432.8 million. Investing cash flow was $264.2 million; financing cash flow was $2.524 billion, primarily reflecting timing of client funds obligations. Cash, cash equivalents, restricted cash and restricted cash equivalents totaled $10.362 billion at quarter-end, including $8.749 billion of restricted client funds cash.
- Liquidity and debt: Cash and cash equivalents were $1.613 billion. Debt was approximately $2.0 billion, comprising senior notes due 2025 and 2030; no commercial paper, reverse repurchase agreements, or credit-facility borrowings were outstanding at quarter-end. ADP reported $9.7 billion of committed credit facilities.
- Client funds: Funds held for clients were $29.950 billion against client funds obligations of $29.098 billion. These assets are restricted for client-related payments and should not be treated as freely available corporate liquidity.
Changes versus the prior-year quarter
- Revenue declined $25.0 million, as lower Employer Services revenue and client-funds interest outweighed PEO growth. Client-funds interest revenue fell to $106.5 million from $133.9 million, reflecting lower average yields and a 7.2% decline in the average client funds balance.
- Expenses declined 3%, including lower SG&A and interest expense; depreciation and amortization rose 16%. Lower costs from transformation actions, reduced travel and facilities spending, and lower pension costs supported profitability.
- Operating cash flow increased $49.1 million. The large change in financing cash flow versus the prior year mainly reflects the timing of client impounds and payments, not solely corporate financing.
- Average pays per control declined 9%, improving from an 11% decline in the quarter ended June 30, 2020. Employer Services new business bookings grew 2%; PEO average worksite employees declined 3%.
Outlook, risks and notable items
- ADP provided no specific revenue or earnings guidance in the supplied filing text. It expected fiscal 2021 capital expenditures of $175 million to $200 million, versus $168.3 million in fiscal 2020.
- Management described its financial condition as solid and expected cash, operating cash flow, committed facilities, and access to capital markets to support operations, dividends, repurchases, and investment. It cautioned that COVID-19-related uncertainty could affect liquidity and estimates.
- Market risks include interest-rate changes, investment credit and liquidity risk, foreign currency exposure, and possible reduced access to short-term funding during market stress. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $22 million over the following 12 months.
- ADP issued $1.0 billion of 1.250% senior notes due 2030 and redeemed $1.0 billion of 2.250% notes due 2020. It deferred a $43.6 million hedge loss in accumulated other comprehensive income for amortization over the new notes’ life.
- A $25.0 million settlement of Illinois biometric privacy claims was reached, subject to preliminary court approval. Separate ERISA class action claims were at an early stage; ADP said it could not estimate a reasonably possible loss.
- ADP recorded $2.8 million of impairment charges for facilities classified as held for sale. Its fiscal 2021 reinsurance premium for the ADP Indemnity policy year was $240 million.
Most important facts for investors to verify
- Confirm the reporting period: this is the quarter ended September 30, 2020, not a calendar-year first quarter.
- Review the quality and sustainability of earnings growth, including transformation savings, lower interest expense, and the $10.4 million ADP Indemnity benefit.
- Track employment-related indicators, bookings, retention, PEO worksite employees, and the continuing effects of COVID-19 on clients.
- Distinguish restricted client funds and related obligations from corporate cash and liquidity; assess sensitivity to interest rates and short-term funding access.
- Monitor court approval and final costs of the biometric settlement, as well as developments in the ERISA litigation and other contingencies.