10-QPeriod: Q3 FY2023

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q3 Ended Mar 31, 2023

Filed May 1, 2023For Securities:ADP

Summary

Automatic Data Processing, Inc. (ADP) reported a strong third quarter for fiscal year 2023, demonstrating robust financial performance and strategic execution. Total revenues grew by 9% year-over-year, reaching $4.93 billion, driven by solid client retention, new business bookings, and a significant increase in interest earned on client funds due to higher interest rates and balances. Earnings Before Income Taxes (EBIT) saw a healthy 15% increase, reflecting improved operational efficiency and margin expansion. The company continued to execute its modernization strategy, with ongoing roll-out of its new user experience across key platforms and strong sales performance. ADP's Employer Services segment showed robust revenue growth and margin improvement, while the PEO Services segment also delivered solid revenue increases and margin expansion. The company's financial position remains solid, supported by strong cash flows and a commitment to shareholder returns through dividends and share repurchases.

Financial Highlights

54 data points
Beta

Revenue

$4.93B

46.8% Gross Margin

Net Income

$1.04B

21.2% Net Margin

EPS (Diluted)

$2.51

Total Assets

$59.88B

Cash & Equivalents

$1.83B

Free Cash Flow

$1.40B

Financial Statements
Beta
Revenue$4.93B
Cost of Revenue$2.62B
Gross Profit$2.30B
R&D Expenses$208.60M
SG&A Expenses$938.00M
Operating Expenses$3.60B
Interest Expense$38.30M
Net Income$1.04B
EPS (Basic)$2.52
EPS (Diluted)$2.51
Shares Outstanding (Basic)413.70M
Shares Outstanding (Diluted)415.50M

Key Highlights

  • 1Total revenues increased by 9% to $4.93 billion for the third quarter of fiscal year 2023, compared to $4.51 billion in the prior year period.
  • 2Interest on funds held for clients more than doubled to $249.4 million, driven by higher average client fund balances and a significant increase in the average interest rate earned.
  • 3Earnings Before Income Taxes (EBIT) grew by 15% to $1.36 billion, with EBIT margin expanding by 130 basis points to 27.7%.
  • 4Diluted Earnings Per Share (EPS) increased by 14% to $2.51, driven by net earnings growth and a reduction in outstanding shares due to repurchases.
  • 5Employer Services segment revenues grew 11% and its EBIT margin expanded by 80 basis points, indicating strong performance in this core business.
  • 6PEO Services segment revenues increased by 5% and its EBIT margin expanded by 140 basis points, demonstrating continued growth and profitability in this segment.
  • 7The company returned $2.2 billion to shareholders via dividends and share repurchases in the first nine months of fiscal year 2023, underscoring its commitment to shareholder value.

Frequently Asked Questions

The significant increase in interest on funds held for clients was driven by two main factors: an increase in ADP's average client fund balances and a substantial rise in the average interest rate earned on these balances. For the three months ended March 31, 2023, average client funds balances increased to $39.2 billion, and the average interest rate earned rose to 2.5%, up from 1.2% in the prior year period.

Both segments demonstrated strong performance. Employer Services revenues grew 11% year-over-year, with EBIT margin expanding by 80 basis points, driven by client retention, new business bookings, and increased interest earned on client funds. PEO Services revenues increased by 5%, with EBIT margin expanding by 140 basis points, benefiting from growth in average worksite employees and improved insurance cost management.

ADP maintains a solid financial condition and sufficient liquidity. The company expects its existing cash, cash equivalents, operational cash flow, and committed credit facilities to be adequate for its operating, investing, and financing activities, including dividends and share repurchases, for the foreseeable future. They also have access to short-term financing arrangements to meet client fund obligations.

ADP is focused on its modernization journey, with continued roll-out of its new user experience across key platforms like RUN and Workforce Now to improve ease of use. They are also investing in research and development and driving transformation in their operational processes to support long-term sustainable and profitable growth.