10-QPeriod: Q2 FY2021

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q2 Ended Dec 31, 2020

Filed February 1, 2021For Securities:ADP

Summary

Automatic Data Processing, Inc. (ADP) reported relatively stable total revenues for the six months ended December 31, 2020, with slight growth of 1% in the third quarter of fiscal year 2021 compared to the prior year period. Net earnings and diluted earnings per share also showed modest increases, reflecting the company's resilience amidst the ongoing COVID-19 pandemic. While interest income on client funds decreased due to lower interest rates, this was partially offset by growth in PEO Services and strong client retention in Employer Services. The company continued to execute on its transformation initiatives, which contributed to profit growth and margin expansion. ADP's strong business model, characterized by low capital intensity and significant free cash flow generation, enabled continued investment in product development and shareholder-friendly actions like share repurchases and dividends. The financial condition remains solid, with ample liquidity to meet operational and financing needs.

Financial Highlights

54 data points
Beta

Revenue

$3.70B

42.6% Gross Margin

Net Income

$647.50M

17.5% Net Margin

EPS (Diluted)

$1.51

Total Assets

$49.33B

Cash & Equivalents

$1.60B

Free Cash Flow

$706.40M

Financial Statements
Beta
Revenue$3.70B
Cost of Revenue$2.12B
Gross Profit$1.57B
SG&A Expenses$755.80M
Operating Expenses$2.89B
Interest Expense$13.90M
Net Income$647.50M
EPS (Basic)$1.51
EPS (Diluted)$1.51
Shares Outstanding (Basic)427.40M
Shares Outstanding (Diluted)429.00M

Key Highlights

  • 1Total revenues remained stable year-over-year for the six months ended December 31, 2020, with a 1% increase in the three months ended December 31, 2020.
  • 2Net earnings increased slightly to $1,249.6 million for the six months ended December 31, 2020, from $1,234.0 million in the prior year period.
  • 3Diluted EPS increased to $2.91 for the six months ended December 31, 2020, from $2.84 in the prior year period.
  • 4PEO Services revenue saw a 5% increase in the three months and 4% increase in the six months ended December 31, 2020, driven by an increase in zero-margin benefits pass-throughs.
  • 5Despite challenges, the company continued its digital and procurement transformation initiatives, contributing to profit growth and margin expansion.
  • 6The company repurchased approximately 3.2 million shares of common stock for the six months ended December 31, 2020, demonstrating a commitment to shareholder returns.
  • 7Interest income on funds held for clients decreased significantly due to lower average interest rates and a decrease in average client funds balances.

Frequently Asked Questions

ADP's financial performance demonstrated resilience despite the COVID-19 pandemic. While the pandemic created headwinds, including a 7% decline in 'pays per control' for the six months ended December 31, 2020, the company maintained stable revenues and saw sequential improvement in key metrics. ADP also focused on providing support to clients navigating relief programs and launched a 'Return to Workplace' solution.

Employer Services revenues saw a slight decrease of 1% for the three months and 2% for the six months ended December 31, 2020, primarily due to a decrease in 'pays per control' and lower interest earned on client funds, though offset by strong retention and new business. PEO Services revenue, however, increased by 5% for the three months and 4% for the six months ended December 31, 2020, driven by an increase in zero-margin benefits pass-throughs, despite a 2% decrease in average Worksite Employees.

ADP maintains a strong balance sheet and significant free cash flow generation, enabling it to fund its operations, invest in growth initiatives, and return capital to shareholders. This includes consistent quarterly dividends and share repurchases. For the six months ended December 31, 2020, ADP repurchased approximately 3.2 million shares of its common stock.

The decrease in average interest rates led to a notable decline in interest income on funds held for clients. For the three months ended December 31, 2020, this revenue stream decreased to $105.4 million from $137.7 million in the prior year. The six-month period saw a similar trend, with interest income falling to $211.9 million from $271.5 million, impacting overall revenue growth.