ADP Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2016. The filing is an annual report, not a fiscal 2015 fourth-quarter filing; fiscal 2016 fourth-quarter results are included below. Dollar amounts are in U.S. dollars.
Business context
ADP provides payroll, human capital management (HCM), benefits, HR outsourcing and related services in more than 110 countries. Its reportable segments are Employer Services and Professional Employer Organization (PEO) Services. ADP serves more than 650,000 clients; PEO serves approximately 9,700 clients and 439,000 worksite employees.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $11.668 billion | $10.939 billion | +7% reported; +8% constant currency |
| Pre-tax earnings | $2.235 billion | $2.071 billion | +8% |
| Pre-tax margin | 19.2% | 18.9% | +0.3 percentage points |
| Adjusted EBIT | $2.274 billion | $2.062 billion | +10% |
| Adjusted EBIT margin | 19.5% | 18.8% | +0.7 percentage points |
| Net earnings from continuing operations | $1.493 billion | $1.377 billion | +8% |
| Diluted EPS from continuing operations | $3.25 | $2.89 | +12% |
| Cash provided by operating activities | $1.860 billion | $1.906 billion | Down $46 million |
| Dividends declared per share | $2.08 | $1.95 | +7% |
Adjusted results are non-GAAP measures. FY 2016 adjusted earnings excluded a $48.2 million workforce-optimization charge and gains of $29.1 million from the AdvancedMD sale and $13.9 million from a building sale, among other adjustments. FY 2016 reported net earnings were $1.493 billion; total net earnings, including discontinued operations, were $1.493 billion, versus $1.453 billion in FY 2015.
Employer Services revenue increased 5% to $9.212 billion, while PEO Services revenue increased 16% to $3.073 billion. PEO growth reflected a 13% rise in average worksite employees and higher benefits-related pass-through revenue and costs. Employer Services worldwide revenue retention declined 100 basis points to 90.5%, mainly because of elevated losses on legacy platforms; U.S. pays per control increased 2.5%.
For fiscal 2016 Q4, revenue was $2.898 billion, pre-tax earnings were $427 million, continuing-operations net earnings were $282 million, and diluted continuing-operations EPS was $0.62. The comparable FY 2015 Q4 figures were $2.695 billion, $382 million, $257 million, and $0.55, respectively.
Cash, debt and liquidity
At June 30, 2016, corporate cash, cash equivalents and marketable securities totaled $3.222 billion, compared with $1.695 billion a year earlier. Long-term debt was $2.008 billion, following issuance of $2.0 billion in senior notes in September 2015: $1.0 billion due 2020 at 2.25% and $1.0 billion due 2025 at 3.375%. No commercial paper or reverse-repurchase obligations were outstanding at year-end.
ADP reported $1.860 billion of operating cash flow, $9.087 billion of investing cash outflow and $8.790 billion of financing cash inflow. Investing cash flow was substantially affected by restricted client-fund cash movements; financing cash flow included changes in client-fund obligations and the debt issuance. Capital expenditures were $165.7 million. The company returned approximately $1.2 billion through share repurchases and more than $900 million through dividends.
Client funds are distinct from corporate liquidity: $33.841 billion of funds held for clients supported $33.332 billion of client-fund obligations at year-end. ADP cited $9.25 billion of committed credit facilities and a $9.25 billion commercial-paper program as liquidity sources. Approximately 80% of available-for-sale securities were rated AAA or AA, and all were investment grade.
Outlook, commentary and notable items
- Management reported 12% growth in new-business bookings and said product innovation, sales and implementation investment, ACA-compliance offerings, and U.S. economic growth supported results. ACA solutions began contributing to recurring revenue in the second half of FY 2016.
- ADP gave no specific revenue or EPS guidance in the supplied filing text. It expected FY 2017 capital expenditures of approximately $250 million.
- A multi-year service-alignment initiative announced in July 2016 is expected to generate $100 million to $125 million of pre-tax charges through FY 2018.
- Interest income on client funds was $377.3 million, essentially flat year over year; the average client-funds investment balance rose 2.8% to $22.419 billion, while portfolio yield declined to 1.6% from 1.7%. Management estimated a 25-basis-point change in short- and intermediate-term rates could affect pre-tax earnings by about $13 million over the following 12 months.
- Risk factors include cyberattacks, data privacy and security obligations, system outages, regulatory and money-transmission requirements, foreign exchange and interest-rate exposure, competition, and economic or employment weakness. The filing notes that GDPR was adopted in 2016 and would take effect in May 2018.
- ADP disclosed prior service arrangements with U.S.-sanctioned entities through French subsidiaries, terminated them, and voluntarily notified OFAC. Potential fines or penalties could not be reasonably estimated. A patent-infringement lawsuit filed in July 2016 also seeks unspecified damages; ADP said it would defend the claim. The EEOC matter was settled in July 2016 without a material adverse impact.
- ADP said pending ordinary-course litigation was not expected to materially affect results, financial condition or cash flows. It also disclosed tax risk related to whether the 2014 CDK Global spin-off retains tax-free treatment.
Most important facts for investors to verify
- Whether Employer Services retention improves as clients migrate from legacy platforms, and whether that migration supports continued bookings and revenue growth.
- How much of PEO revenue growth reflects underlying service economics versus pass-through benefits and insurance costs.
- Execution costs and expected benefits of the service-alignment initiative, including the $100 million to $125 million projected charge range.
- Exposure of client-fund income and liquidity to rate changes, client-fund flows, and availability of short-term financing.
- Developments in the OFAC review and patent litigation, and any material change in potential liabilities or the CDK spin-off tax position.
- Reconciliation of reported and adjusted results, including the one-time gains and workforce-optimization charge; the filing cautions that adjusted measures are non-GAAP.