10-QPeriod: Q2 FY2019

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q2 Ended Dec 31, 2018

Filed January 31, 2019For Securities:ADP

Summary

Automatic Data Processing, Inc. (ADP) reported solid revenue growth of 8% for both the three and six months ended December 31, 2018, reaching $3.51 billion and $6.83 billion, respectively. This growth was driven by increases in both Employer Services and PEO Services segments, with Employer Services revenues up 7% and PEO Services up 12% for the quarter. Net earnings for the six-month period decreased slightly by 2% to $1.06 billion, impacting diluted EPS, which fell to $2.42 from $2.44 in the prior year period, primarily due to an increased effective tax rate resulting from the Tax Cuts and Jobs Act. However, adjusted net earnings saw a significant increase of 28% for the six-month period, reaching $1.12 billion, and adjusted diluted EPS grew 29% to $2.54, highlighting strong operational performance excluding certain items. The company's financial position remains robust, supported by strong operating cash flows and significant returns to shareholders through dividends and share repurchases, totaling approximately $600 million and over $500 million, respectively, during the six-month period. ADP continues to invest in strategic initiatives and acquisitions to enhance its global cloud-based Human Capital Management (HCM) solutions, positioning itself to capitalize on trends like the gig economy and expand its offerings across the entire worker spectrum.

Financial Highlights

52 data points
Beta

Revenue

$3.49B

42.7% Gross Margin

Net Income

$558.20M

16.0% Net Margin

EPS (Diluted)

$1.27

Total Assets

$38.81B

Cash & Equivalents

$2.79B

Free Cash Flow

$782.30M

Financial Statements
Beta
Revenue$3.49B
Cost of Revenue$2.00B
Gross Profit$1.49B
SG&A Expenses$745.20M
Operating Expenses$2.78B
Interest Expense$38.60M
Net Income$558.20M
EPS (Basic)$1.28
EPS (Diluted)$1.27
Shares Outstanding (Basic)435.70M
Shares Outstanding (Diluted)438.00M

Key Highlights

  • 1Total revenues increased by 8% year-over-year for both the three and six-month periods, reaching $3.51 billion and $6.83 billion, respectively.
  • 2Employer Services segment revenue grew 7% year-over-year for the quarter, while PEO Services segment revenue saw a strong 12% increase.
  • 3Net earnings for the six months ended December 31, 2018, were $1.06 billion, a slight decrease of 2% compared to the prior year, largely influenced by tax rate changes.
  • 4Diluted earnings per share (EPS) for the six months decreased marginally to $2.42 from $2.44 in the prior year.
  • 5Adjusted net earnings showed robust growth of 28% for the six-month period, reaching $1.12 billion.
  • 6Adjusted diluted EPS increased significantly by 29% to $2.54 for the six-month period, indicating strong underlying operational performance.
  • 7The company returned approximately $600 million via dividends and over $500 million via share repurchases during the six-month period, demonstrating a commitment to shareholder returns.

Frequently Asked Questions

ADP's revenue growth was primarily driven by new business bookings and an increase in the average number of worksite employees in its PEO segment. Additionally, higher interest rates on funds held for clients contributed positively to revenue, particularly in the Employer Services segment.

The decrease in reported net earnings and EPS was primarily due to the impact of the Tax Cuts and Jobs Act, which led to a higher effective tax rate for the period. The significant increase in adjusted metrics reflects strong operational performance excluding the impact of tax law changes and other specific non-operational items like transformation initiatives and proxy contest matters.

Total expenses increased at a slower pace than revenues, indicating some cost management. Operating expenses grew 4-5%, while SG&A grew 3-4% for the reported periods. The company is undertaking transformation initiatives, including the Service Alignment Initiative and a Voluntary Early Retirement Program (VERP), which incurred charges but are expected to yield operating efficiencies and improvements in client satisfaction and productivity in the long run. These initiatives are detailed in Notes 5 and 12 of the filing.

ADP expects continued growth in both Employer Services and PEO Services. For fiscal year 2019, they anticipate Employer Services New Business Bookings growth of 6% to 8% and PEO Services' average Worksite Employees growth of 8% to 9%. The company is also investing in technology and acquisitions to enhance its global HCM solutions and address evolving workforce trends.