ADP Form 10-Q Summary
Business context and reporting period
Automatic Data Processing, Inc. (ADP) provides cloud-based human capital management technology and related outsourcing services. This unaudited quarterly report covers the three and nine months ended March 31, 2023, in ADP’s fiscal 2023. The filing metadata labels the period “2022 Q3,” but the filing itself reports fiscal Q3 2023.
Financial performance
| Metric | Three months ended March 31, 2023 | Nine months ended March 31, 2023 |
|---|---|---|
| Total revenue | $4.928 billion, up 9% year over year | $13.534 billion, up 9% |
| Revenue growth, organic constant currency | 10% | 11% |
| Net earnings | $1.043 billion, up 12% | $2.635 billion, up 13% |
| Diluted EPS | $2.51, up 14% | $6.33, up 15% |
| EBIT margin | 27.7%, up 130 basis points | 25.4%, up 110 basis points |
| Adjusted EBIT margin (non-GAAP) | 27.8%, up 110 basis points | 25.6%, up 90 basis points |
| Operating cash flow | Not separately reported for the quarter | $3.022 billion, versus $2.187 billion |
For the nine-month period, Employer Services revenue rose 9% and PEO Services revenue rose 9%. Employer Services pays per control grew 5%; PEO average worksite employees increased 8%. PEO revenue includes zero-margin benefits pass-throughs, which grew 9% year over year for the nine months.
Cash, debt, and liquidity
- At March 31, 2023, cash and cash equivalents were $1.828 billion and long-term debt was $2.989 billion. ADP reported no commercial paper or credit-facility borrowings outstanding at period end.
- ADP reported $9.7 billion of committed credit facilities and said existing liquidity and expected operating cash flows were adequate for foreseeable operating, investing, and financing needs. One $3.75 billion facility matures in June 2023; the filing describes a one-year term-out option.
- Nine-month cash returned to shareholders included $1.386 billion in dividends paid and $817.5 million in share repurchases. ADP repurchased 3.5 million shares, compared with 7.0 million in the prior-year period.
- Funds held for clients were $45.848 billion, against $47.757 billion of client funds obligations. These balances relate to client payroll and tax remittances; ADP describes using client funds investments and short-term financing to meet obligations.
- Cash, cash equivalents, restricted cash, and restricted cash equivalents totaled $18.041 billion at March 31, 2023; most of this total was restricted client funds, not corporate cash.
Changes, outlook, and management commentary
- Revenue growth reflected client retention, new business, higher pays per control, PEO pass-throughs, and higher interest earned on client funds. Client-funds interest revenue for the nine months increased to $577.7 million from $325.0 million, supported by higher average balances and yields.
- Higher interest rates also raised costs: nine-month interest expense increased to $146.4 million from $55.3 million, partly reflecting higher commercial-paper borrowing costs and average borrowings during the period.
- Management cited product enhancements, a record third-quarter bookings amount, and continued investment in product development and transformation. It reported solid financial condition and sufficient liquidity.
- The filing provides a fiscal 2023 capital expenditure expectation of $175 million to $200 million. It does not provide a clear quantitative full-year revenue or EPS outlook in the supplied text.
- Available-for-sale securities had $1.943 billion of gross unrealized losses at March 31, 2023; all were reported as investment grade. Changes in these securities drove substantial other comprehensive income volatility.
- Market risks include interest-rate, credit, foreign-exchange, and client-funds liquidity risks. ADP estimated that a 25-basis-point change in both short- and intermediate-term rates would affect pretax earnings by approximately $12 million over the following 12 months.
- Two ERISA class-action complaints concerning the ADP TotalSource Retirement Savings Plan remain pending. ADP said the matters are at an early stage and it cannot estimate a reasonably possible loss or range. Management said other claims and proceedings are not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether revenue and earnings growth persist excluding the benefit of higher client-funds interest income and PEO zero-margin pass-through revenue.
- How higher rates affect both investment income and funding costs, and whether unrealized securities losses or client-funds liquidity needs change materially.
- Progress against the stated fiscal 2023 capital expenditure range and any subsequent full-year revenue or EPS guidance.
- Developments in the ERISA litigation and changes in ADP Indemnity’s actuarial loss estimates, which affected PEO results.
- The maturity and refinancing plan for the June 2023 credit facility, and the company’s continued access to commercial paper and other funding sources.