ADP Form 10-Q Summary
Business context and period. Automatic Data Processing, Inc. (ADP) provides cloud-based human capital management services, including payroll, HR, benefits and workforce solutions. This unaudited report covers the three months ended September 30, 2019, ADP’s fiscal 2020 first quarter, compared with the three months ended September 30, 2018.
Financial performance
| Metric | Quarter ended Sep. 30, 2019 | Prior comparable quarter | Change / context |
|---|---|---|---|
| Total revenue | $3,495.7 million | $3,310.3 million | Up 6%; organic constant-currency growth was 6% |
| Earnings before income taxes | $739.1 million | $646.8 million | Up 14%; reported EBIT margin was 21.1%, up 160 basis points |
| Net earnings | $582.4 million | $505.4 million | Up 15% |
| Diluted EPS | $1.34 | $1.15 | Up 17%; adjusted diluted EPS was $1.34, up 12% |
| Operating cash flow | $432.8 million | $149.2 million | Increase attributed primarily to favorable working-capital changes |
| Investing cash flow | $122.2 million provided | $452.7 million used | Reflects timing of investment purchases and maturities, among other items |
| Financing cash flow | $5,045.9 million used | $1,817.7 million used | Includes client-fund flows, dividends, repurchases and commercial paper borrowing |
Employer Services revenue increased 4% as reported (5% organic constant currency); PEO Services revenue increased 8%. Average PEO worksite employees rose 7% to 563,000. PEO revenue excluding zero-margin benefits pass-throughs increased 7%. Interest revenue on client funds rose to $133.9 million from $118.5 million, reflecting a higher average yield (2.3% versus 2.1%) and a 6.8% increase in average client-fund balances.
At September 30, ADP reported $1.4 billion of cash and cash equivalents, $3.5 billion of short-term marketable securities, $2.0 billion of notes and other debt, and $3.5 billion of commercial paper outstanding. The commercial paper was repaid in early October. The company also had $428.6 million of reverse repurchase obligations outstanding at quarter-end; these were repaid in early October. ADP reported $21.4 billion of funds held for clients and $21.0 billion of related client-fund obligations; these balances are associated with client payment operations, not ordinary corporate liquidity. Cash, cash equivalents and restricted cash totaled $2.3 billion at quarter-end.
ADP had $10.3 billion in committed credit facilities and reported no borrowings under them. Management said available corporate resources and financing sources were expected to cover operating, investing and financing needs. Capital expenditures were $52.2 million in the quarter; the company expected approximately $175 million for fiscal 2020.
Changes, outlook and notable items
- Management cited new business, strong client retention, higher client-fund interest, transformation-related efficiencies and improved systems-infrastructure spending as contributors to performance. Foreign currency was about a one-percentage-point headwind to revenue growth, partly offset by acquisitions.
- Management said it remained on track to deliver balanced revenue and profit growth and margin expansion in fiscal 2020, but did not provide specific full-year numerical guidance in the filing.
- Reported and adjusted EBIT margins were 21.1% and 21.3%, respectively; adjusted EBIT margin was up 60 basis points. The adjusted measures exclude specified transformation items and should be considered alongside GAAP results.
- Other income, net was $54.6 million, compared with $13.9 million in the prior quarter. The improvement primarily reflected pension non-service components and the absence of a prior-year $12.1 million software impairment. The current quarter also included transformation-related net reversals/gains and charges; the filing reports a $0.6 million net reversal in the adjustment reconciliation.
- ADP adopted the new lease standard on July 1, 2019. At September 30 it reported a $504.0 million operating lease right-of-use asset and $458.7 million of lease liabilities. Adoption did not affect earnings or cash flows.
- ADP revised prior-period PEO revenue and operating expenses to present certain benefit-related amounts net rather than gross. The 2018 quarter’s revenue and operating expenses each decreased by $12.9 million; earnings and cash flows were unchanged.
- Risk factors were reported as unchanged from the fiscal 2019 Form 10-K. ADP identified Illinois biometric-data class-action matters for which it could not estimate a reasonably possible loss; management said other pending claims were not expected to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Confirm the drivers and sustainability of revenue, margin and EPS growth, including the contribution from client-fund interest, transformation savings and share repurchases.
- Track client-fund investment yields, balances and liquidity, and the use and repayment of commercial paper and reverse repurchase agreements; these balances can materially affect reported cash flows.
- Review PEO growth, pass-through benefit costs, workers’ compensation and unemployment-insurance pricing, and ADP Indemnity claims and reinsurance exposure.
- Monitor the Illinois biometric-privacy litigation and any developments that could make potential losses estimable.
- Compare future results with management’s stated fiscal 2020 priorities and the approximately $175 million capital-expenditure expectation; the filing provides no specific full-year revenue or EPS target.