10-QPeriod: Q3 FY2020

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q3 Ended Mar 31, 2020

Filed May 1, 2020For Securities:ADP

Summary

Automatic Data Processing, Inc. (ADP) reported its fiscal third-quarter and year-to-date results for the period ending March 31, 2020. The company demonstrated revenue growth driven by its Employer Services and PEO Services segments, with total revenues increasing by 6% and 5% for the three and nine months respectively. Net earnings also saw a significant increase of 9% and 13% for the respective periods, translating to diluted EPS of $1.90 and $4.74. Despite the challenges posed by the early stages of the COVID-19 pandemic, ADP maintained its operational resilience, shifting over 98% of its workforce to remote work. Management highlighted the company's strong financial position, its ability to generate consistent free cash flow, and its commitment to shareholder returns through dividends and share repurchases, while continuing strategic investments in its business transformation initiatives.

Financial Highlights

54 data points
Beta

Revenue

$4.05B

44.7% Gross Margin

Net Income

$820.90M

20.3% Net Margin

EPS (Diluted)

$1.90

Total Assets

$43.38B

Cash & Equivalents

$1.71B

Free Cash Flow

$1.12B

Financial Statements
Beta
Revenue$4.05B
Cost of Revenue$2.24B
Gross Profit$1.81B
SG&A Expenses$756.60M
Operating Expenses$3.02B
Interest Expense$20.00M
Net Income$820.90M
EPS (Basic)$1.91
EPS (Diluted)$1.90
Shares Outstanding (Basic)430.00M
Shares Outstanding (Diluted)431.80M

Key Highlights

  • 1Total Revenues increased by 6% to $4.05 billion for the three months ended March 31, 2020, and by 5% to $11.21 billion for the nine months ended March 31, 2020.
  • 2Net Earnings increased by 9% to $820.9 million for the three months and by 13% to $2.05 billion for the nine months ended March 31, 2020.
  • 3Diluted Earnings Per Share (EPS) rose by 10% to $1.90 for the three months and by 14% to $4.74 for the nine months ended March 31, 2020.
  • 4The Employer Services segment saw revenue growth of 3% and 4% for the three and nine months, respectively, while PEO Services revenue grew by 11% and 9%.
  • 5The company reported that over 98% of its workforce transitioned to remote work due to the COVID-19 pandemic, ensuring uninterrupted client service.
  • 6ADP returned approximately $1.08 billion via dividends and $1.01 billion via share repurchases for the nine months ended March 31, 2020.
  • 7The company experienced a significant increase in selling, general, and administrative expenses primarily due to an increased allowance for doubtful accounts ($26.0 million) related to the impact of COVID-19 on clients.

Frequently Asked Questions

While ADP maintained operational resilience with over 98% of its workforce working remotely, the COVID-19 pandemic began to impact financial metrics in March 2020. Management noted a significant and rapid decline in Employer Services New Business Bookings starting mid-March. The company also anticipates slower growth in PEO average Worksite Employees, potential deterioration in pays per control, and an increase in out-of-business losses in the fourth quarter, all of which are expected to adversely affect future financial results.

Total revenues grew by 6% for the quarter and 5% year-to-date. The Employer Services segment showed steady revenue growth, while the PEO Services segment experienced stronger growth driven by an increase in the average number of Worksite Employees. Interest income on funds held for clients saw a slight decrease for the quarter due to lower average interest rates, though this was partially offset by an increase in the client funds balance.

ADP expects its existing cash, cash equivalents, short-term marketable securities, and operating cash flow, along with its significant committed credit facilities ($10.3 billion), to be adequate for its operating, investing, and financing activities. The company also has access to short-term debt financing. Management is continuously evaluating the impact of COVID-19 on financial condition and liquidity but maintains confidence in its ability to meet obligations.

ADP's investment portfolio, including funds held for clients, is primarily invested in highly liquid, investment-grade marketable securities with safety of principal as a key objective. The company employs a strategy of laddering investment maturities and utilizing short-term financing to manage liquidity. In April 2020, following the reporting period, ADP decided to sell approximately $1.3 billion of available-for-sale securities in funds held for clients to align the fund size with anticipated declines in client fund obligations due to reduced employment levels.