ADP 10-Q Summary
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, 2018. ADP provides global human capital management services, including payroll, HR, benefits and professional employer organization (PEO) services. Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Year-over-year | Six months ended Dec. 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $3,505.9 | +8% (+9% constant currency) | $6,829.1 | +8% (+9% constant currency) |
| Earnings before income taxes | $741.0 | +26% | $1,387.8 | +20% |
| Net earnings | $558.2 | -17% | $1,063.6 | -2% |
| Diluted EPS | $1.27 | -16% | $2.42 | -1% |
| Adjusted diluted EPS (non-GAAP) | $1.34 | +30% | $2.54 | +29% |
| Pretax margin | 21.1% | 18.1% prior year | 20.3% | 18.2% prior year |
Revenue growth reflected new business, higher client-fund interest and acquisitions; foreign currency partly offset growth. Client-fund interest revenue rose to $129.1 million for the quarter and $247.6 million for the six months, as both average yields and client-fund balances increased. Adjusted EBIT rose 26% for the quarter and 22% for the six months; adjusted EBIT margins were 22.4% and 21.6%, respectively.
Employer Services revenue grew 7% in both periods; PEO Services revenue grew 12% for the quarter and 11% for the six months. PEO worksite employees averaged 536,000, up 9%. PEO reported revenue includes benefits pass-throughs, which have associated costs.
Cash flow, debt and liquidity
- Six-month operating cash flow was $931.5 million, versus $675.1 million a year earlier. Investing cash flow was negative $469.2 million; financing cash flow was negative $1,488.3 million.
- Six-month cash uses included $605.0 million of dividends and $526.6 million of share repurchases. ADP repurchased 3.8 million shares.
- At December 31, cash and cash equivalents were $2,785.6 million. This included $1,206.0 million associated with commercial paper borrowings. The $1.206 billion of commercial paper outstanding was repaid January 2, 2019.
- Long-term debt was $2,002.3 million, principally fixed-rate notes maturing in 2020 and 2025. ADP reported no borrowings under its committed credit facilities and $9.8 billion of available committed facilities.
- Funds held for clients were $25,605.9 million and client-funds obligations were $25,842.3 million. These balances relate to client payroll and other remittances and should not be treated as ordinary corporate cash or debt.
Changes, outlook and notable items
- GAAP net earnings and EPS declined despite higher revenue and pretax earnings, mainly because the prior-year comparison included a substantial one-time tax benefit from the Tax Cuts and Jobs Act. The reported effective tax rate was 24.7% for the quarter versus negative 14.1% a year earlier, and 23.4% for the six months versus 6.0%.
- Management reaffirmed fiscal 2019 expectations for Employer Services new-business bookings growth of 6%–8% and PEO average worksite-employee growth of 8%–9%. It estimated a fiscal 2019 adjusted effective tax rate of 24.4%, and 25%–26% beyond fiscal 2019 excluding one-time items. Fiscal 2019 capital expenditures were expected to be about $200 million. No overall revenue or EPS guidance is stated in the provided filing text.
- Management cited operating efficiencies, automation and transformation initiatives as supporting margins and client satisfaction, and said it was on track to improve retention during fiscal 2019. Adjusted results exclude specified items and are non-GAAP measures.
- Transformation-related charges were $69.6 million for the six months, including voluntary early retirement program costs and other initiatives. ADP also recorded a $12.1 million software impairment in the first fiscal quarter and a $4.1 million gain on asset sales in the second quarter.
- Prior-period results were restated for adoption of ASC 606 and a pension-cost presentation standard; these changes affected reported presentation and, for ASC 606, certain prior-period balances. Segment measures were also revised and prior periods recast for comparison.
- ADP faces Illinois biometric-data class action claims; the cases were at an early stage and the company said it could not estimate a reasonably possible loss. Management said other ordinary-course claims were not expected to have a material adverse effect.
- Key disclosed risks include client retention and sales, competition, regulation, economic and interest-rate changes, foreign exchange, cybersecurity and system interruptions, hiring skilled staff, acquisitions, and execution of transformation initiatives. ADP also disclosed liquidity, interest-rate and credit risks in its client-funds investment strategy.
Important facts for investors to verify
- Reconcile reported and adjusted EPS, including the tax benefit in the prior-year period and the transformation charges excluded from adjusted results.
- Track organic and constant-currency growth, new-business bookings, client retention, pays per control, and PEO worksite-employee growth.
- Monitor client-fund investment yields, portfolio values and liquidity alongside the matching client-funds obligations; these balances fluctuate with payment timing.
- Confirm subsequent-period financing and cash trends, including repayment of the December commercial paper and planned capital spending, dividends and repurchases.
- Follow developments in biometric-data litigation, PEO insurance-loss estimates, and the expected balance-sheet effects of the new lease accounting standard.