ADP Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 31, 2018 (ADP fiscal 2018 third quarter), not 2017 Q3. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
ADP provides global human capital management services, including payroll, HR, benefits, and professional employer organization (PEO) services. For the quarter, revenue grew 8% as reported (7% at constant currency); for the nine months, it grew 7% (6% at constant currency). Growth was primarily driven by new business, with client payroll employment, PEO worksite employee growth, foreign currency, and acquisitions also contributing.
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Total revenue | $3,693.0 | $3,410.8 | $10,007.2 | $9,314.9 |
| Earnings before income taxes | $852.6 | $827.9 | $1,966.5 | $2,142.7 |
| Net earnings | $643.1 | $587.9 | $1,512.1 | $1,467.6 |
| Diluted EPS | $1.45 | $1.31 | $3.40 | $3.25 |
| Pretax margin | 23.1% | 24.3% | 19.7% | 23.0% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,810.0 | $1,668.7 |
Financial position, cash flow, and capital
- At March 31, 2018, cash and cash equivalents were $2.3 billion; long-term debt was $2.0 billion and was essentially unchanged from June 30, 2017. ADP reported no commercial paper, reverse-repurchase, or credit-facility borrowings outstanding at quarter-end.
- Nine-month investing cash outflow was $2.0 billion, including $612.4 million for acquisitions; financing cash inflow was $5.4 billion. The latter chiefly reflected a $6.7 billion increase in client funds obligations, driven by the timing of client receipts and payments, and should not be read as ordinary corporate financing cash generation.
- Funds held for clients ($33.6 billion) and client funds obligations ($33.9 billion) are related to payroll and other client payments. These restricted client-related balances substantially affect reported current assets and liabilities and are not equivalent to freely available corporate liquidity.
- ADP paid $785.1 million in dividends and repurchased $596.2 million of stock during the nine months. The quarterly dividend was raised 10%; declared dividends were $0.63 per share for the quarter.
Changes versus prior comparable period
- Quarterly net earnings rose 9% and diluted EPS rose 11%; nine-month net earnings rose 3% and diluted EPS rose 5%. Lower effective tax rates supported reported earnings growth.
- Nine-month pretax earnings fell 8%, principally because the prior-year period included a $205.4 million pretax gain from selling the CHSA and COBRA businesses. Nine-month pretax margin declined to 19.7% from 23.0%; adjusted EBIT margin also declined, to 20.7% from 21.6%.
- For the quarter, pretax margin declined to 23.1% from 24.3%, while adjusted EBIT margin declined to 24.4% from 24.6%. Management cited transformation and acquisition costs and growth in lower-margin pass-through revenues, partly offset by operating and selling efficiencies.
- Employer Services revenue grew 7% for the quarter and 5% for the nine months. PEO Services revenue grew 10% and 13%, respectively, with growth in average worksite employees of 9% for the quarter and 10% for the nine months.
- ADP acquired Global Cash Card for approximately $490 million net of cash acquired and WorkMarket for approximately $125 million. The GCC allocation included $404.2 million of goodwill; purchase-price allocations were preliminary.
Outlook, commentary, risks, and unusual items
- Management estimated a fiscal 2018 adjusted effective tax rate of 26.2% and expected an adjusted effective tax rate of 25%–26% beyond fiscal 2018, excluding one-time items. It expected fiscal 2018 capital expenditures of about $200 million.
- Management said liquidity was sufficient for operating needs, investment, dividends, and repurchases, citing corporate cash, operating cash flow, financing access, and $9.5 billion of committed facilities. It continued to emphasize investment in strategic platforms, sales, and service operations. New business bookings increased 4% in the nine months.
- A voluntary early retirement program was offered to about 3,500 eligible U.S. associates. ADP expected approximately $300 million of pretax special termination benefit charges in Q4 FY2018, plus potential non-cash pension settlement and healthcare charges dependent on elections and actuarial assumptions.
- The Tax Cuts and Jobs Act reduced the U.S. federal corporate rate; ADP recorded a provisional $42.9 million one-time net tax benefit for the nine months. Tax accounting remained incomplete, including the transition-tax calculation and potential realization of foreign tax credits.
- Interest-rate, credit, and liquidity risks apply to the client funds investment strategy. A hypothetical 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $9 million over the following 12 months. Available-for-sale securities had $339.4 million of gross unrealized losses at March 31, 2018; management reported that all were investment grade and approximately 80% were rated AAA or AA.
- ADP reported no material change in previously disclosed risk factors and stated that pending claims and litigation were not expected to have a material adverse impact. The Uniloc patent matter remained on appeal, but ADP cited its license and release and did not expect a material adverse impact.
Important facts for investors to verify
- Whether revenue and booking growth, client retention, and payroll/worksite employee trends persist, and how much growth depends on currency, acquisitions, and pass-through revenues.
- Whether margin pressure eases as transformation and acquisition costs develop, and whether reported results reconcile clearly to management’s adjusted non-GAAP measures.
- The final cost and participation outcomes of the early retirement program, including any pension settlement and healthcare charges.
- The final tax effects of the Tax Cuts and Jobs Act and whether the stated tax-rate outlook changes as provisional calculations are completed.
- Client-funds investment liquidity and interest-rate exposure, while distinguishing restricted client balances from corporate cash and liquidity.
- Final acquisition purchase-price allocations and integration performance for Global Cash Card and WorkMarket.