ADP 10-Q Summary — Fiscal 2020 Second Quarter
Reporting period: Three and six months ended December 31, 2019. ADP provides cloud-based human capital management services, including payroll, benefits, HR and workforce management. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $3,669.5 | $3,492.4 | $7,165.2 | $6,802.7 |
| Earnings before income taxes | $835.5 | $741.0 | $1,574.6 | $1,387.8 |
| Net earnings | $651.6 | $558.2 | $1,234.0 | $1,063.6 |
| Diluted EPS | $1.50 | $1.27 | $2.84 | $2.42 |
- Revenue grew 5% as reported and 6% on an organic constant-currency basis in both periods. Growth reflected new business, client retention and higher interest income on client funds.
- Net earnings rose 17% in Q2 and 16% for the six months; diluted EPS increased 18% and 17%, respectively. Fewer shares outstanding from repurchases contributed to EPS growth.
- Reported EBIT increased 13% in Q2 and for the six months. Overall EBIT margin improved 160 basis points in both periods. Adjusted EBIT margin was 23.3% in Q2 versus 22.5%, and 22.3% for six months versus 21.7%; adjusted EBIT grew 9% in each period. Adjusted figures are non-GAAP.
- The effective tax rate declined to 22.0% in Q2 from 24.7%, and to 21.6% for six months from 23.4%. ADP cited foreign tax credit valuation allowance releases, earnings mix and, for the six-month period, software development tax incentives.
- Revenue by segment grew 4% in Employer Services and 9% in PEO Services in Q2; six-month growth was 4% and 9%, respectively. PEO average worksite employees increased 6% in Q2 and 7% for six months, to 571,000.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1,130.9, up from $931.5. Investing cash flow was an outflow of $124.9, compared with an outflow of $469.2; financing cash flow was an inflow of $5,525.1, versus an outflow of $1,488.3. Financing results were heavily affected by the timing-driven $7,093.7 increase in client funds obligations.
- Cash and cash equivalents were $1,500.4 at December 31, down from $1,949.2 at June 30. Funds held for clients were $36,608.6, with corresponding client funds obligations of $36,269.9; these client-related balances are restricted to serving payroll and other client payment obligations.
- Debt totaled approximately $2,004.6, including $1,001.6 classified as short-term, principally reflecting $1.0 billion of notes due September 2020. ADP had no commercial paper or committed credit-facility borrowings at period-end and no reverse-repurchase obligations. It reported $10.3 billion of committed credit facilities and a commercial paper program with capacity up to $10.3 billion.
- Management said available corporate liquidity, operating cash flow and financing access should be adequate for operating needs, dividends, repurchases and capital expenditures. Fiscal 2020 capital expenditures were expected to be about $175 million, compared with $163 million in fiscal 2019.
- ADP paid $686.0 in dividends and repurchased $615.1 of common stock in the first six months. The board authorized a new $5 billion repurchase program in November 2019.
Changes, outlook and notable items
- Management attributed margin improvement to transformation initiatives and operating efficiencies, partly offset by selling and marketing investment, amortization, and growth in PEO zero-margin benefits pass-through costs. New business bookings rose 4% over the six-month period.
- Management described continued positive momentum for fiscal 2020, but this filing does not provide a specific full-year revenue or earnings forecast. It identifies employment and wage levels, interest and foreign-exchange trends, competition, cybersecurity, technology, regulation and execution of transformation initiatives among factors that could affect results.
- Comparative 2018 PEO revenue and operating expenses were revised downward by $13.5 for Q2 and $26.4 for six months to present certain benefit-related amounts net. The revision had no effect on pretax earnings, net earnings, financial condition or cash flows.
- ADP adopted lease accounting in July 2019, recording operating lease right-of-use assets and liabilities. The adoption did not affect earnings or cash flows.
- Illinois biometric-data class-action matters remain at an early stage; ADP said it could not estimate a reasonably possible loss or range. Management did not expect other ordinary-course claims to have a material adverse effect. ADP reported no material change in risk factors from its fiscal 2019 Form 10-K.
- Client-funds investments expose ADP to liquidity, interest-rate and credit risks. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $15 over the following 12 months; a 25-basis-point change in short-term rates alone by about $5.
Key facts for investors to verify
- Whether organic growth, new bookings and client retention continue, and how foreign currency affects reported growth.
- Whether margin expansion is sustained as ADP invests in sales, technology and transformation while PEO pass-through costs rise.
- How client-funds investment returns and access to short-term funding respond to interest-rate movements or market disruption.
- The timing and potential financial exposure of the biometric privacy litigation, for which the filing provides no clear loss estimate.
- Execution of the $5 billion repurchase authorization, dividend commitments, and refinancing of the notes due in 2020.