ADP FY2020 Form 10-K Summary
Period note: The filing is for the fiscal year ended June 30, 2020, not calendar 2019 Q4. It also reports the fourth quarter of FY2020 separately.
Business context and reporting period
Automatic Data Processing, Inc. (ADP) provides cloud-based human capital management, payroll, HR outsourcing and related services to more than 860,000 clients in 140 countries and territories. Its reportable segments are Employer Services and Professional Employer Organization (PEO) Services.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $14,589.8 million | $14,110.2 million | +3% reported; +4% organic constant currency |
| Earnings before income taxes | $3,182.6 million | $3,005.6 million | +6% |
| Net earnings | $2,466.5 million | $2,292.8 million | +8% |
| Diluted EPS | $5.70 | $5.24 | +9% |
| Operating cash flow | $3,026.2 million | $2,688.3 million | +$337.9 million |
| Cash dividends declared per share | $3.52 | $3.06 | +15% |
GAAP pretax margin was approximately 21.8%, versus 21.3% in FY2019. Adjusted EBIT was $3,348.9 million, up 6%, and adjusted EBIT margin was 23.0%, up 60 basis points. Adjusted diluted EPS was $5.92, up 9%; these are non-GAAP measures.
Employer Services revenue rose 1% reported (2% organic constant currency) to $10,086.6 million; segment pretax earnings increased 3% to $3,063.0 million. PEO revenue rose 8% to $4,511.5 million, while segment pretax earnings declined 2% to $605.5 million. PEO’s average worksite employee count increased 4%; revenue excluding zero-margin benefits pass-throughs rose 5%.
FY2020 fourth-quarter revenue was $3,376.8 million, net earnings were $411.5 million and diluted EPS was $0.96, compared with $3,479.3 million, $475.5 million and $1.09, respectively, in FY2019’s fourth quarter.
Liquidity, debt and capital
At June 30, 2020, corporate cash and cash equivalents were $1,908.5 million and corporate investments totaled $1,922.1 million. Debt was approximately $2.0 billion, including $1.0 billion of notes due September 2020 and $1.0 billion due 2025. ADP had no commercial paper or credit-facility borrowings outstanding at year-end and reported $9.7 billion of committed credit facilities. Management said corporate liquidity was sufficient for expected operating and financing needs, while noting pandemic-related uncertainty.
Client funds are distinct from corporate liquidity: funds held for clients were $26,708.1 million against client funds obligations of $25,831.6 million. ADP sold approximately $1.6 billion of client-fund securities in the fourth quarter as it anticipated obligations would decline with employment. Financing cash flow was negative $5,890.6 million, primarily reflecting the timing-related decrease in client funds obligations, dividends, repurchases and reverse-repurchase activity. ADP repurchased 6.2 million shares for approximately $1,006 million and paid $1,470.5 million in dividends during the year.
Material changes, outlook and risks
- COVID-19 materially affected clients and business trends. Employer Services new business bookings fell 21% for FY2020; pays per control declined 1.0% for the year, and Employer Services retention fell 20 basis points to 90.5%, driven by more out-of-business losses. Management expected pandemic effects to continue, but provided no specific FY2021 revenue or earnings forecast in the supplied filing text.
- ADP shifted more than 98% of its workforce to remote work and supplied clients with pandemic-related reporting, compliance and return-to-work tools. Management cited continued investment in cloud platforms and transformation initiatives as strategic priorities.
- FY2021 capital expenditures were expected to be $175–$200 million. ADP planned to redeem the $1.0 billion 2.25% notes in August 2020 and intended to issue new long-term notes, using commercial paper if needed in the interim.
- Notable costs and estimates included a $50.4 million associate assistance payment, $25.4 million of COVID-related severance, a $25.0 million accrual for an Illinois biometric privacy settlement, $29.9 million of asset impairment charges, a $26.0 million increase in the allowance for doubtful accounts, and a $59.2 million year-over-year change in estimated ADP Indemnity losses. PEO reported a roughly $20 million pretax Indemnity loss in FY2020 versus a roughly $39 million benefit in FY2019.
- Key risks include pandemic-driven employment and client demand declines, lower interest rates reducing income on client funds, cybersecurity or service disruptions, privacy and regulatory compliance, and liquidity or market risks affecting client-fund investments. A 25-basis-point change in short- and intermediate-term rates was estimated to affect pretax earnings by about $17 million over the following 12 months.
- Prior-year PEO revenue and operating expenses were revised to a net presentation: revenue was reduced by $65.0 million in FY2019 and $53.5 million in FY2018, with no effect on earnings, financial condition or cash flows. The auditor issued unqualified opinions on the financial statements and internal controls; goodwill was not impaired.
Important facts for investors to verify
- How pandemic-related employment levels, bookings, client retention and implementation delays affect FY2021 growth.
- Whether PEO profitability recovers, including the development of workers’ compensation and ADP Indemnity estimates and reinsurance costs.
- The effect of interest rates and client-fund balances on interest income, and the adequacy of liquidity arrangements for client obligations.
- Progress on refinancing the September 2020 notes, and whether planned capital spending and shareholder distributions remain consistent with cash generation.
- The assumptions supporting goodwill valuations for next-generation platforms, which had limited operating history, and the status of the biometric settlement and ERISA lawsuits.