ADP 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2016 (ADP fiscal 2016 third quarter). The request metadata says “2015 Q3,” but the filing itself covers 2016 Q3.
Business context
ADP provides cloud-based human capital management services, including payroll, HR, benefits, and time and attendance solutions. Its reportable segments are Employer Services and PEO Services. The statements are unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Three months ended March 31, 2016 | Nine months ended March 31, 2016 |
|---|---|---|
| Total revenue | $3.249 billion, up 7% reported and 9% constant currency | $8.770 billion, up 6% reported and 8% constant currency |
| Continuing-operations net earnings | $532.5 million, up 9% | $1.211 billion, up 8% |
| Diluted continuing-operations EPS | $1.17, versus $1.03 | $2.63, versus $2.34 |
| Pre-tax margin | 24.5%, unchanged | 20.6%, versus 20.5% |
| EBIT margin (non-GAAP) | 24.8%, versus 24.4% | 20.9%, versus 20.4% |
For the nine-month period, adjusted EBIT was $1.789 billion, up 6%, with a 20.4% margin, unchanged year over year; adjusted diluted EPS was $2.56, up 9%. These non-GAAP measures exclude gains on the AMD business and building sales. The filing reports PEO revenue growth of 16% for the quarter and 17% year to date, primarily reflecting 14% growth in average worksite employees. Employer Services revenue rose 5% and 4%, respectively.
Operating cash flow was $1.201 billion for nine months, down from $1.464 billion. Capital expenditures were $127.6 million company-wide; continuing-operations capital spending was $116 million. Cash and cash equivalents were $2.941 billion at March 31, 2016. Corporate cash and marketable securities totaled $2.973 billion; client funds are restricted to meeting client obligations and should not be viewed as corporate liquidity.
Balance sheet, liquidity and shareholder returns
Long-term debt was $2.008 billion, compared with $9.2 million at June 30, 2015, following issuance of $2.0 billion of senior notes in September 2015. Long-term debt-to-equity was 44.6%; stockholders’ equity was $4.503 billion. Working capital excluding client funds and related obligations was $3.198 billion, versus $1.481 billion at June 30, 2015. No commercial paper or revolving-credit-facility borrowings were outstanding at quarter end. ADP had $8.25 billion of committed revolving credit facilities and a $3.25 billion committed reverse-repurchase facility available.
ADP repurchased 13.2 million shares for $1.091 billion during the nine months and paid $701.2 million in dividends. Dividends declared per share were $0.53 for the quarter, versus $0.49 a year earlier.
Changes, outlook and notable items
- Revenue growth reflected new business bookings, pricing, higher client payroll employment, and PEO client and worksite-employee growth. Management said ACA-compliance solutions were beginning to generate recurring revenue.
- Management reported weaker client revenue retention year to date, down 100 basis points, primarily due to elevated losses on legacy platforms. Employer Services margins also declined year over year as ADP invested in selling, implementation, and service capacity; PEO margins improved with operating and sales efficiencies.
- Reported nine-month results included a $29.1 million pre-tax gain on the AMD sale and a $13.9 million gain on a building sale. AMD was sold in September 2015 and was not classified as discontinued operations. The filing also recorded a $3.6 million impairment on securities subsequently sold.
- Management expected foreign-currency pressure on revenue and earnings to continue through the remainder of fiscal 2016, but at a reduced level. Fiscal 2016 continuing-operations capital expenditures were expected to be $175 million to $200 million. The filing provides no specific earnings or revenue guidance.
- ADP disclosed that French subsidiaries had provided payroll-related managed services to three OFAC-designated entities. The arrangements were terminated and reported voluntarily to OFAC; potential fines or penalties could not be reasonably estimated while the review remained ongoing. ADP was reviewing client and vendor relationships globally.
- Other disclosed matters include an ongoing EEOC investigation alleging race discrimination in Illinois and ordinary-course litigation. Management said it could not estimate reasonably possible losses for the described matters. The filing reported no material change in previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether client retention improves as clients migrate from legacy platforms, and whether new bookings translate into sustained recurring revenue.
- Whether growth in implementation and selling costs, ACA-related demand, and PEO pass-through costs affect future margins.
- How foreign-exchange movements, interest rates, and client-funds investment returns affect earnings and liquidity needs.
- Whether the OFAC review leads to additional disclosures, fines, or penalties; the filing states that any amount is not currently estimable.
- How the $2.0 billion debt issuance and planned return of proceeds through share repurchases affect leverage and per-share results.
- Reconcile the filing’s reported and adjusted results, including the AMD and building-sale gains, and distinguish restricted client funds from corporate cash.