ADP 10-Q Summary
Period note: The request metadata says “2021 Q3,” but this filing is ADP’s fiscal third-quarter 10-Q for the three and nine months ended March 31, 2022, compared with the corresponding 2021 periods. Dollar amounts below are in millions unless noted.
Business context and reporting period
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, so reported PEO revenue growth does not represent equivalent growth in margin-bearing revenue.
Financial performance
| Metric | Three months ended March 31, 2022 | Nine months ended March 31, 2022 |
|---|---|---|
| Total revenue | $4,513; up 10% year over year (11% organic constant currency) | $12,371; up 10% (10% organic constant currency) |
| Net earnings | $929; up 15% | $2,323; up 13% |
| Diluted EPS | $2.21; up 16% | $5.51; up 15% |
| Earnings before income taxes | $1,190; up 12% | $3,001; up 13% |
| Adjusted EBIT margin (non-GAAP) | 26.8%, up 50 basis points | 24.7%, up 70 basis points |
| Operating cash flow | Not presented separately for the quarter | $2,187, versus $2,441 a year earlier |
| Long-term debt | $2,987 at March 31, 2022 | $2,987 at March 31, 2022 |
Employer Services revenue rose 8% in both reported periods; PEO Services revenue increased 14% for the quarter and 15% year to date. PEO average worksite employees grew 16% year over year in both periods. Nine-month diluted EPS growth also benefited from lower weighted-average shares following repurchases.
Cash flow, liquidity, and capital
- Nine-month investing cash outflow was $5,964, principally reflecting purchases and maturities of corporate and client-fund securities; financing cash inflow was $22,379, including a $25,029 net increase in client-fund obligations.
- Cash and cash equivalents were $1,634 at March 31, 2022. ADP reported no commercial-paper or credit-facility borrowings and no reverse-repurchase obligations at that date.
- ADP reported $3.0 billion of senior unsecured notes and $9.7 billion in committed credit facilities. Management said available liquidity was sufficient for expected operating, investing, and financing needs.
- ADP returned approximately $2.7 billion to shareholders in the first nine months: $1.2 billion in dividends and $1.5 billion in share repurchases. Capital expenditures were $126 million.
Material changes, outlook, and risks
- Revenue growth reflected strong client retention, new business, higher pays per control, and increased PEO benefits pass-throughs. U.S. pays per control grew 7% year to date. Foreign currency reduced quarterly reported growth by about one percentage point.
- Operating costs and systems-development spending increased with business growth and product investment. Management cited lower estimated COVID-related credit losses as a partial offset to expense growth.
- Unrealized losses on available-for-sale securities drove a $1,273 net-of-tax other comprehensive loss for the first nine months; quarterly comprehensive income was a loss of $5 despite positive net earnings. The filing attributes the investment portfolio exposure in part to interest-rate movements and reports $1,133 of gross unrealized securities losses at March 31.
- Management forecast fiscal 2022 capital expenditures of $200–$225 million. The filing provides no specific full-year revenue or EPS guidance.
- Risks include interest-rate, investment liquidity and credit exposure; foreign-currency movements; cyber or system disruptions; economic and employment conditions; and access to short-term funding in stressed markets. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $19 million over the following 12 months.
- Two ERISA class-action complaints concerning the ADP TotalSource Retirement Savings Plan remain at an early stage; 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.
Key facts for investors to verify
- Confirm the fiscal-period labeling: the filing covers the quarter ended March 31, 2022, not 2021 Q3.
- Review the scale and duration of unrealized securities losses and how interest rates may affect client-fund investment income and liquidity.
- Separate PEO pass-through revenue growth from growth in PEO revenue excluding pass-throughs and assess the effect on segment margins.
- Assess the decline in operating cash flow and the large client-fund-related movements in investing and financing cash flows.
- Monitor the ERISA litigation, PEO workers’ compensation loss estimates, and progress toward the stated fiscal 2022 capital-expenditure range.