ADP Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. Comparative figures are for the three months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
ADP provides payroll, human capital management, and related business-processing services. Management highlighted strong new-business bookings, investment in product development and sales capacity, and continued expansion in PEO Services. The company sold its AdvancedMD (AMD) business on September 1, 2015; it was reported in continuing operations under the newly adopted discontinued-operations guidance.
| Metric | Q1 FY2016 | Q1 FY2015 | Change / context |
|---|---|---|---|
| Total revenue | $2,714.0 | $2,566.1 | Up 6% reported; 9% constant currency |
| Pre-tax earnings from continuing operations | $505.0 | $450.4 | Up 12%; reported margin 18.6% vs. 17.6% |
| Net earnings from continuing operations | $337.5 | $296.6 | Up 14% |
| Diluted EPS from continuing operations | $0.72 | $0.62 | Up 16% |
| Net earnings | $336.6 | $295.2 | Includes discontinued-operations losses of $0.9 and $1.4, respectively |
| Adjusted EBIT margin | 17.6% | 17.5% | Adjusted EBIT rose 6% reported; excludes AMD sale gain and specified interest adjustments |
Revenue, margins, and operating trends
- Employer Services revenue was $2,130.8 million, up 3% reported and 7% constant currency. Earnings before tax increased 1% to $587.2 million; segment margin fell to 27.6% from 28.0%, reflecting implementation and selling investments.
- PEO Services revenue was $701.5 million, up 18%; earnings before tax increased 32% to $88.4 million and margin rose to 12.6% from 11.3%. Growth reflected a 13% increase in average worksite employees. PEO revenue includes pass-through costs, which increased to $534.1 million from $454.4 million.
- Client funds interest revenue declined to $87.8 million from $90.2 million as the average yield fell to 1.8% from 1.9%, partly offset by a 3% increase in average client funds balances. The effective tax rate was 33.2%, versus 34.1%.
- The $29.1 million pre-tax gain on AMD’s sale increased reported earnings. Excluding the sale gain and specified interest adjustments, adjusted net earnings from continuing operations were $315.7 million, up 6%, and adjusted diluted EPS was $0.68, up 10%.
Cash flow, liquidity, and capital
- Cash from operating activities was $93.2 million, down from $378.2 million. ADP attributed the decline primarily to a $207.2 million prior-year receipt from selling notes receivable and higher current-year workers’ compensation reinsurance payments ($202.0 million versus $167.9 million).
- Investing activities provided $319.2 million, including $162.5 million in proceeds from the AMD sale. Financing activities provided $1,144.1 million, principally reflecting $1,986.4 million in net proceeds from debt issuance, partly offset by share repurchases, dividends, and a decrease in client funds obligations. Cash and cash equivalents increased by $1,545.4 million to $3,184.7 million.
- Corporate cash and marketable securities totaled $3,233.2 million. Working capital before client funds assets and obligations was $3,320.3 million, compared with $1,480.7 million at June 30, 2015. Client funds are restricted for client payroll and tax obligations and should not be viewed as general corporate liquidity.
- ADP issued $2.0 billion of senior unsecured notes: $1.0 billion due in 2020 at a 2.250% coupon and $1.0 billion due in 2025 at a 3.375% coupon. Long-term debt was $1,995.2 million; long-term debt-to-equity was 43.1%. Management said it intends to use the proceeds for share repurchases over the next 12–24 months, subject to market conditions. ADP repurchased 4.2 million shares during the quarter and declared dividends of $0.49 per share.
- No commercial paper, reverse-repurchase obligations, or credit-facility borrowings were outstanding at quarter-end. The company reported access to an $8.25 billion commercial-paper program and $8.25 billion in revolving credit facilities; $3.25 billion was available under committed U.S. reverse-repurchase arrangements.
Outlook, risks, and unusual items
- Management expects client-funds interest margin pressure to continue through fiscal 2016. Foreign-currency pressure was expected to persist through most of the year but begin subsiding in the second half; management expected ACA-related investments to start producing increased recurring revenue in that half.
- Capital expenditures for fiscal 2016 were expected to be $225–$250 million, compared with $171.2 million in fiscal 2015.
- Management reported lower revenue retention year over year, down 160 basis points, citing elevated losses on legacy client platforms and increased market activity around ACA providers. It also cited strong bookings and a 2.3% increase in Employer Services pays per control.
- Key risks include interest-rate and foreign-exchange movements, access to short-term funding during market disruption, client-funds investment liquidity and credit risk, competition and client retention, cybersecurity or systems failures, regulatory changes, and execution of new-client implementations. A 25-basis-point change in short- and intermediate-term rates was estimated to affect pre-tax earnings by about $13 million over the following 12 months.
- ADP disclosed an ongoing EEOC charge alleging race discrimination in hiring and employment practices in Illinois. The company said it could not estimate a reasonably possible loss range for the matter and other described claims. It reported no material changes to the risk factors in its latest Form 10-K and said disclosure controls were effective.
Important facts for investors to verify
- Whether strong bookings convert into recurring revenue as implementation spending rises, and whether client retention stabilizes.
- How much reported earnings growth reflects underlying operations versus the AMD gain, share repurchases, and the lower tax rate; review GAAP and adjusted measures together.
- Whether operating cash flow recovers after the quarter’s reinsurance payments and working-capital movements.
- Execution of the planned debt-funded buybacks, their timing and price, and the resulting leverage and per-share effects.
- Progress against the stated FY2016 outlook for currency pressure, client-funds yields, ACA-related revenue, and capital spending.
- Developments in the EEOC matter and other contingencies, for which the filing provides no clear estimate of possible losses.