Business context and reporting period
Automatic Data Processing, Inc. (ADP) filed this unaudited Form 10-Q for its fiscal second quarter and six months ended December 31, 2021; comparisons are with the corresponding prior-year periods. ADP provides human capital management technology and services, including Employer Services and Professional Employer Organization (PEO) Services. PEO revenue includes substantial zero-margin benefits pass-throughs.
Financial performance and position
| Metric | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2021 |
|---|---|---|
| Total revenue | $4.025 billion; up 9% | $7.858 billion; up 10% |
| Earnings before income taxes | $910.1 million; up 9%; margin up 10 basis points | $1.811 billion; up 13%; margin up 80 basis points |
| Net earnings | $694.4 million; up 7% | $1.395 billion; up 12% |
| Diluted EPS | $1.65; up 9% | $3.30; up 13% |
| Adjusted EBIT / margin (non-GAAP) | $929.8 million / 23.1%; up 10% / 20 basis points | $1.845 billion / 23.5%; up 13% / 80 basis points |
- Six-month operating cash flow was $1.216 billion, versus $1.188 billion a year earlier. Investing cash outflow was $3.468 billion and financing cash inflow was $9.665 billion, the latter substantially reflecting client funds obligations.
- Cash and cash equivalents were $1.745 billion at December 31, down from $2.575 billion at June 30. Long-term debt was $2.986 billion. ADP had no commercial paper, credit-facility or reverse-repurchase obligations outstanding at quarter-end.
- Funds held for clients were $45.890 billion, against $45.767 billion of client funds obligations. These client-related balances are restricted/operational funds, not general corporate liquidity.
- Six-month dividends paid were $787 million and common-stock repurchases were $991 million. The declared quarterly dividend was $1.04 per share.
Changes versus prior comparable periods
- Growth reflected strong client retention, new business, higher pays per control and increased PEO pass-throughs. Six-month pays per control grew 7%; PEO average worksite employees grew 15%.
- Employer Services revenue increased 7% for the six months; PEO Services revenue increased 15%. Excluding zero-margin pass-throughs, PEO revenue grew 19% for the six months.
- Operating costs rose 10% for the six months, including higher client-service costs and PEO pass-through costs. Systems development costs rose 13%, reflecting product investment. SG&A rose 4%.
- Six-month interest on client funds declined to $207.1 million from $211.9 million as average yield fell to 1.4% from 1.8%, partly offset by higher average balances. Interest expense increased, primarily following a $1 billion note issued in fiscal 2021.
- Unrealized losses on available-for-sale securities drove other comprehensive loss of $339.0 million for the six months; net earnings were not reduced by this unrealized amount. Accumulated other comprehensive income/loss moved from $10.6 million income at June 30 to a $328.4 million loss at December 31.
Outlook, commentary and risks
- Management described sales momentum, retention and client satisfaction as solid, and cited ongoing investment in product development, research and development, and business transformation. It stated that liquidity and financial condition remained solid.
- No specific revenue or EPS forecast was provided in the supplied filing text. ADP expected fiscal 2022 capital expenditures of $200 million to $225 million, compared with $178.3 million in fiscal 2021.
- Management said existing liquidity, operating cash flow, market access and $9.7 billion of committed facilities should support foreseeable needs. A $3.75 billion facility matures in June 2022 and includes a one-year term-out option.
- Risks include client retention and sales, competition, regulation, economic and employment conditions, interest and foreign-exchange rates, cyber/security incidents, technology and staffing, transformation execution, acquisitions, and COVID-19 uncertainty. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $23 million over the ensuing 12 months.
- Two early-stage ERISA class-action cases concerning the ADP TotalSource Retirement Savings Plan seek unspecified damages and other relief; ADP said it could not estimate a reasonably possible loss. Management did not expect other pending claims, individually or collectively, to materially affect results, financial condition or cash flows.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether growth in Employer Services, PEO worksite employees and new business bookings continues, and how much PEO growth reflects zero-margin pass-throughs.
- Whether lower investment yields or interest-rate movements affect client-funds earnings, fair values or liquidity; available-for-sale securities had $229.6 million of gross unrealized losses at December 31.
- Capital allocation, including the pace of repurchases and dividends, and the planned $200–$225 million fiscal 2022 capital expenditure range.
- Developments in the ERISA litigation, PEO workers’ compensation estimates and reinsurance arrangements, and any changes to management’s view of contingencies.
- Reconcile non-GAAP adjusted results with GAAP results; adjusted measures exclude specified items and may not be comparable with similarly titled measures at other companies.