ADP FY2018 Form 10-K Summary
Business context and reporting period. Automatic Data Processing, Inc. provides cloud-based human capital management, payroll and related services to more than 740,000 clients in over 110 countries. Its reportable segments are Employer Services and Professional Employer Organization (PEO) Services. This 10-K covers the fiscal year ended June 30, 2018; it is not a quarterly report.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $13.326 billion | $12.380 billion |
| Earnings before income taxes | $2.171 billion | $2.531 billion |
| Net earnings from continuing operations | $1.621 billion | $1.733 billion |
| Diluted EPS from continuing operations | $3.66 | $3.85 |
| Adjusted EBIT, non-GAAP | $2.643 billion | $2.448 billion |
| Adjusted diluted EPS, non-GAAP | $4.35 | $3.70 |
| Cash provided by operating activities | $2.515 billion | $2.126 billion |
- Revenue increased 8% as reported (7% on a constant-currency basis). Employer Services revenue rose 5%; PEO Services revenue rose 12%, with growth supported by a 9% increase in average worksite employees. PEO revenue includes substantial pass-through benefit and insurance costs.
- Reported pre-tax margin fell to 16.3% from 20.4%; adjusted EBIT margin was 19.8% in both years. The filing attributes the reported decline chiefly to the voluntary early retirement program (VERP) charges and the prior-year gain from selling the CHSA and COBRA businesses.
- The effective tax rate declined to 25.3% from 31.5%, reflecting the Tax Cuts and Jobs Act and releases of uncertain-tax-position reserves, among other factors.
- At June 30, 2018, cash and cash equivalents were $2.170 billion; cash, cash equivalents and marketable securities of continuing operations totaled approximately $2.181 billion. Long-term debt was $2.002 billion, principally two senior notes due 2020 and 2025. There was no commercial paper or credit-facility borrowing outstanding at year-end.
- ADP reported $27.138 billion of funds held for clients and $27.494 billion of related client-fund obligations. These balances support payroll and tax remittances and should be distinguished from corporate liquidity. Available committed credit facilities totaled $9.8 billion.
- Capital returned to shareholders included $1.064 billion of dividends paid and $989 million of share repurchases. Dividends declared were $2.52 per share, up from $2.24.
Material changes and unusual items
- FY2018 included $404.8 million of transformation-related charges for management’s adjusted measures, including $319.6 million for special termination benefits associated with the VERP. About 2,200 employees accepted the offer. The program also produced other charges, including $17.5 million of additional VERP costs.
- FY2017 included a $205.4 million pre-tax gain from the sale of the CHSA and COBRA businesses, which did not recur in FY2018. FY2018 reported earnings also included $33.3 million in non-operational proxy-contest costs.
- Worldwide new-business bookings increased 8% to $1.8 billion; Employer Services retention improved 50 basis points to 90.4%. ADP acquired Global Cash Card and WorkMarket during FY2018. It acquired Celergo in July 2018, after year-end.
- FY2018 investing cash outflow was $2.505 billion, including $612 million of net acquisition payments and purchases of marketable securities. Cash-flow comparisons are affected by the timing of client-fund receipts and payments.
Outlook, risks and contingencies
- Management said it expected momentum to continue into FY2019, citing investment in sales, products and strategic platforms. The filing does not provide a specific FY2019 revenue or EPS forecast. It expects an adjusted effective tax rate of 25%–26% beyond FY2018 and capital expenditures of about $250 million in FY2019.
- ADP expects approximately $10 million of further Service Alignment Initiative charges in FY2019. Additional VERP-related health coverage costs may reach $35 million, and a non-cash pension settlement charge is also anticipated; the amount depends on participant elections and actuarial assumptions.
- Key stated risks include cybersecurity or privacy incidents involving sensitive personal data and client funds; service, systems or data-center disruptions; evolving regulation, including GDPR and money-transmission requirements; interest-rate, credit and liquidity exposure in client-fund investments; foreign exchange and economic conditions; and the execution of transformation and technology initiatives.
- Potential Illinois class actions allege violations of biometric privacy law and related claims; the matters were at an early stage and ADP said it could not estimate a reasonably possible loss. ADP stated that other ordinary-course claims were not expected to have a material adverse effect. The Uniloc patent case was dismissed and the appeal was ended in August 2018.
- ADP plans to adopt the new revenue standard in FY2019 using full retrospective application. It estimated capitalization of additional contract-acquisition and implementation costs would increase assets by about $1.7 billion and raise reported pre-tax income, net earnings and EPS compared with then-current accounting, without materially changing the timing or amount of revenue.
Important facts for investors to verify
- Reconcile GAAP results with management’s adjusted measures, particularly the large FY2018 VERP charge and the FY2017 divestiture gain.
- Assess whether bookings, client retention and pays-per-control growth translate into sustained organic revenue and margin improvement.
- Review client-fund asset liquidity and financing access separately from corporate cash, and monitor interest-rate sensitivity.
- Confirm the final accounting effects of revenue-standard adoption, including retrospective comparatives and the expected capitalization of selling and implementation costs.
- Track FY2019 pension, VERP and restructuring costs, as well as developments in the biometric privacy litigation and evolving data-protection regulation.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of June 30, 2018.