ADP 10-K Summary
Period clarification: The filing is ADP’s annual report for the fiscal year ended June 30, 2019, not a standalone 2018 Q4 filing. It includes unaudited quarterly results for fiscal Q4 2019.
Business context and reporting period
ADP provides cloud-based human capital management services, including payroll, HR, benefits, talent and workforce management, and professional employer organization (PEO) services. It serves more than 810,000 clients in 140 countries and territories. Its reportable segments are Employer Services and PEO Services.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $14.175 billion | $13.328 billion |
| Earnings before income taxes | $3.006 billion | $2.283 billion |
| Net earnings | $2.293 billion | $1.885 billion |
| Diluted EPS | $5.24 | $4.25 |
| Adjusted diluted EPS (non-GAAP) | $5.45 | $4.53 |
| Operating cash flow | $2.688 billion | $2.515 billion |
- Revenue grew 6%; management cited new Employer Services business, retention, acquisitions and higher client-fund interest, partly offset by approximately one percentage point of foreign-currency pressure.
- Reported pretax margin rose to 21.2% from 17.1%; adjusted EBIT margin increased to 22.3% from 20.7%. Management attributed improvement to efficiencies and higher client-fund interest, as well as lower transformation-related charges than in FY2018.
- Employer Services revenue rose 5% to $9.943 billion; segment pretax earnings increased 14% to $2.957 billion. Client revenue retention improved to 90.8% from 90.4%.
- PEO revenue rose 9% to $4.243 billion, including $2.713 billion of zero-margin benefits pass-throughs. Revenue excluding those pass-throughs increased to $1.530 billion. Average worksite employees grew 8% to 547,000.
- Cash and cash equivalents were $1.949 billion; cash plus marketable securities was $2.221 billion. Long-term debt was $2.002 billion. ADP had $10.3 billion of committed credit facilities, with no borrowings under them at year-end.
- Client funds are distinct from corporate liquidity: $29.434 billion of funds held for clients supported $29.145 billion of client-fund obligations at June 30, 2019. These funds relate primarily to payroll and tax remittances.
- ADP declared $3.06 per share in dividends and returned approximately $1.3 billion through dividends and $938 million through share repurchases during FY2019.
Changes versus the prior comparable period
- Net earnings increased 22% and diluted EPS 23%; adjusted net earnings rose 19% and adjusted diluted EPS 20%. Share repurchases reduced weighted-average shares outstanding.
- Client-fund interest revenue increased to $561.9 million from $466.5 million, reflecting an average yield of 2.2% versus 1.9% and average client-fund balances up 4.6% to $25.5 billion.
- The effective tax rate increased to 23.7% from 17.4%, primarily because FY2018 included a one-time deferred-tax remeasurement benefit and other tax effects.
- Operating cash flow increased $173 million. Investing cash outflow narrowed to $2.198 billion from $2.505 billion, mainly reflecting lower acquisition payments; financing cash outflow narrowed to $208 million, in part due to client-fund timing.
- Prior-period statements were restated for ASC 606 revenue-accounting adoption and pension-cost presentation changes. ADP said ASC 606 did not materially affect the timing or amount of revenue, but it changed capitalization and amortization of contract acquisition and implementation costs.
Outlook, commentary, risks and unusual items
- Management said ADP was positioned to maintain positive momentum into FY2020 and remained focused on balanced revenue and profit growth, margin expansion, cloud platforms and transformation initiatives. The filing provides no specific numerical revenue or EPS guidance. Expected FY2020 capital expenditures were approximately $175 million.
- FY2019 included $138.3 million of transformation initiative charges, including pension settlement and termination costs, continuing health coverage, workforce optimization and other initiative costs. A $15.7 million investment-sale gain and a $12.1 million software impairment were also reported.
- Key risks include cybersecurity, privacy and service interruption; regulatory and compliance changes; competition and technology execution; economic, interest-rate and foreign-exchange movements; and the availability of short-term funding for client-fund obligations. The CCPA was scheduled to take effect January 1, 2020.
- ADP disclosed Illinois biometric-data class-action claims and related potential class actions. The matters were in early stages and the company could not estimate a reasonably possible loss. Management said other ordinary-course claims were not expected to materially affect consolidated results, financial condition or cash flows.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. A critical audit matter concerned goodwill valuation in Employer Services, including forecasts for the next-generation platform, and another concerned reconciliation of client-fund obligations.
Most important facts for investors to verify
- Confirm the reporting period: the filing covers FY2019 ended June 30, 2019; Q4 FY2019 revenue was $3.499 billion and net earnings were $475.5 million.
- Assess how much reported earnings and margin growth reflects recurring operations versus tax effects, transformation charges, pension items and other unusual gains or costs; compare GAAP with non-GAAP measures.
- Track Employer Services bookings and retention, PEO worksite-employee growth, and the profitability impact of PEO benefits pass-throughs.
- Review the client-fund asset/liability matching, liquidity facilities and financing access separately from corporate cash and debt.
- Monitor execution and assumptions underlying next-generation platform growth and goodwill valuation, as well as cybersecurity, biometric-privacy litigation and regulatory developments.