Business context and reporting period
ADP provides cloud-based human capital management (HCM), payroll and HR outsourcing services. Its reportable segments are Employer Services and Professional Employer Organization (PEO) Services; it serves more than 990,000 clients and pays over 39 million workers across 140 countries and territories.
Period clarification: The supplied filing is ADP’s Form 10-K for the fiscal year ended June 30, 2022, compared primarily with fiscal 2021. It is not a quarterly filing for “2021 Q4.”
Financial performance
| Metric | FY2022 | Prior comparable period / change |
|---|---|---|
| Total revenue | $16.50 billion | $15.01 billion; up 10% |
| Operating expenses and other expenses | $12.78 billion total expenses | $11.74 billion; up 9% |
| Earnings before income taxes | $3.80 billion | $3.36 billion; up 13%; margin expanded 70 basis points |
| Net earnings | $2.95 billion | $2.60 billion; up 13% |
| Diluted EPS | $7.00 | $6.07; up 15% |
| Adjusted EBIT / margin | $3.87 billion / 23.5% | $3.38 billion / 22.6%; up 14%, margin expanded 90 basis points |
| Adjusted diluted EPS | $7.01 | $6.02; up 16% |
| Operating cash flow | $3.10 billion | $3.09 billion; essentially flat |
Adjusted figures are non-GAAP measures; ADP reconciles them to GAAP and cautions that they should not be viewed as substitutes for GAAP results.
Segments and operating indicators
- Employer Services: Revenue of $10.97 billion, up 8%; pretax earnings of $3.41 billion, up 12%. U.S. pays per control grew 7%; new business bookings rose 15%; client retention was 92.1%.
- PEO Services: Revenue of $5.55 billion, up 15%; pretax earnings of $871 million, up 21%. Average worksite employees grew 15%. Revenue excluding zero-margin benefits pass-throughs was $2.03 billion, up 18%.
- PEO benefits pass-through revenue increased 14% to $3.51 billion. These amounts add revenue and operating costs with little or no margin.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.44 billion at June 30, 2022, down from $2.58 billion a year earlier. ADP said corporate liquidity was sufficient, citing operating cash flow and $9.7 billion of committed credit facilities.
- Long-term debt was $2.99 billion, principally three series of $1.0 billion senior unsecured notes maturing in 2025, 2028 and 2030. No commercial paper or credit-facility borrowings were outstanding at year-end. Reverse-repurchase obligations were $136 million.
- Client funds are distinct from corporate liquidity: funds held for clients were $49.57 billion against client funds obligations of $51.29 billion at year-end. ADP uses short-term financing and other liquidity sources to manage timing differences.
- ADP returned approximately $3.6 billion through dividends and repurchases. It repurchased about 9.2 million shares for $1.97 billion in cash-flow statements and paid $1.66 billion in dividends. The annual dividend per share was $4.05.
- Capital expenditures were $177 million. Management expected fiscal 2023 capital expenditures of $175 million to $200 million.
Material changes, outlook and unusual items
- Revenue growth reflected new business, stronger employment/payroll measures, client retention and higher PEO pass-throughs. Interest on client funds increased to $452 million from $422 million, as average client balances rose 18.7% to $32.5 billion, partly offset by a lower average yield of 1.4% versus 1.5%.
- Management highlighted investment in product development, platform modernization and a unified user experience. Systems development and programming investment was approximately $1.21 billion, compared with $1.02 billion in FY2021. No specific revenue or earnings guidance was provided in the supplied filing text.
- Available-for-sale securities had $1.72 billion of gross unrealized losses at year-end, versus $502 million of net unrealized gains a year earlier; the decline largely affected accumulated other comprehensive income, not current-period net earnings. Management reported all securities were investment grade.
- Fiscal 2022 included $23 million of asset impairment charges. PEO results also benefited from a $28.8 million net reduction in estimated ADP Indemnity losses; the company’s fiscal 2022 reinsurance premium was $260 million, and it paid $284 million for fiscal 2023 coverage after year-end.
- Material risks include cybersecurity or service disruptions, privacy and regulatory compliance, competition and technology execution, employment and economic conditions, inflation, foreign exchange, and the liquidity and interest-rate risks of investing client funds. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by approximately $18 million over the following 12 months.
- ADP disclosed two early-stage ERISA class-action complaints concerning the ADP TotalSource Retirement Savings Plan; it could not estimate a reasonably possible loss. Management said other ordinary-course claims were not expected to materially affect results, financial condition or cash flows.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls. The audit identified goodwill valuation and client funds obligations as critical audit matters; no goodwill impairment was recorded.
Important facts for investors to verify
- Confirm the intended reporting period: this is FY2022, not “2021 Q4.”
- Review the reconciliation and consistency of GAAP and adjusted growth, margins and EPS, including excluded transformation and other items.
- Track client-funds investment yields, securities valuation losses, funding access and the relationship between funds held and client obligations.
- Assess whether bookings, retention, pays per control and PEO worksite-employee growth continue, while distinguishing PEO pass-through revenue from underlying fee growth.
- Monitor next-generation platform adoption and the assumptions supporting Employer Services goodwill valuation.
- Follow developments in the ERISA litigation, workers’ compensation estimates and reinsurance arrangements, alongside cybersecurity and regulatory risks.