ADP(US:ADP)2024-05-02 16:41PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Automatic Data Processing, Inc. (ADP) as of and for the three and nine months ended March 31, 2024, providing a comprehensive view of the company's financial performance and position Statements of Consolidated Earnings For the third quarter ended March 31, 2024, ADP reported total revenues of $5.25 billion, a 6.6% increase year-over-year, and net earnings of $1.18 billion, up 13.6% from the prior year Consolidated Earnings Summary (Three Months Ended March 31) | Metric | 2024 (in millions) | 2023 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | $5,253.8 | $4,927.8 | +6.6% | | Earnings Before Income Taxes | $1,546.3 | $1,364.0 | +13.4% | | Net Earnings | $1,184.9 | $1,043.1 | +13.6% | | Diluted EPS | $2.88 | $2.51 | +14.7% | Consolidated Earnings Summary (Nine Months Ended March 31) | Metric | 2024 (in millions) | 2023 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | $14,434.1 | $13,534.4 | +6.7% | | Earnings Before Income Taxes | $3,783.0 | $3,432.0 | +10.2% | | Net Earnings | $2,922.7 | $2,635.3 | +10.9% | | Diluted EPS | $7.07 | $6.33 | +11.7% | Statements of Consolidated Comprehensive Income For the third quarter of 2024, comprehensive income was $1.08 billion, a decrease from $1.37 billion in the same period of 2023, primarily due to a significant swing in unrealized net losses on available-for-sale securities Consolidated Comprehensive Income (in millions) | Period | 2024 | 2023 | | :--- | :--- | :--- | | Three Months Ended March 31 | | | | Net Earnings | $1,184.9 | $1,043.1 | | Other Comprehensive (Loss)/Income | $(106.7) | $323.1 | | Comprehensive Income | $1,078.2 | $1,366.2 | | Nine Months Ended March 31 | | | | Net Earnings | $2,922.7 | $2,635.3 | | Other Comprehensive Income/(Loss) | $453.9 | $(134.1) | | Comprehensive Income | $3,376.6 | $2,501.2 | Consolidated Balance Sheets As of March 31, 2024, ADP's total assets were $64.18 billion, up from $50.97 billion at June 30, 2023, largely driven by a rise in funds held for clients Key Balance Sheet Items (in millions) | Account | March 31, 2024 | June 30, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,291.7 | $2,083.5 | | Funds held for clients | $47,929.5 | $36,333.6 | | Total Assets | $64,181.6 | $50,971.0 | | Client funds obligations | $49,512.3 | $38,538.6 | | Long-term debt | $2,990.7 | $2,989.0 | | Total Liabilities | $59,554.9 | $47,461.9 | | Total Stockholders' Equity | $4,626.7 | $3,509.1 | Statements of Consolidated Cash Flows For the nine months ended March 31, 2024, net cash provided by operating activities was $2.86 billion, with financing activities providing $9.68 billion due to increased client funds obligations Cash Flow Summary (Nine Months Ended March 31, in millions) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Operating Activities | $2,857.0 | $3,021.9 | | Investing Activities | $(1,171.8) | $(2,052.8) | | Financing Activities | $9,683.8 | $(5,686.2) | | Effect of exchange rate changes | $(15.7) | $(25.3) | | Net change in cash | $11,353.3 | $(4,742.4) | Notes to the Consolidated Financial Statements This section provides detailed explanations of the accounting policies and financial data presented in the consolidated statements, covering revenue recognition, investments, assets, debt, and segment reporting Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the third quarter and first nine months of fiscal 2024, highlighting solid revenue growth, strategic priorities including generative AI, and detailed financial analysis - For the nine months ended March 31, 2024, ADP delivered solid revenue growth of 7% (6% organic constant currency), driven by a 2% growth in pays per control and a 2% increase in PEO average worksite employees99 - The company is advancing its strategic priorities by rolling out ADP Assist, which uses generative AI to enhance HR productivity, and extending GenAI capabilities to its service associates to improve client experience98 Nine Months Ended March 31, 2024 Highlights | Metric | Performance | | :--- | :--- | | Revenue Growth | 7% to $14.4B (6% organic constant currency) | | Adjusted EBIT Margin | Expansion of 60 bps | | Diluted and Adjusted Diluted EPS Growth | 12% to $7.07 and $7.08, respectively | | Cash Returned to Shareholders | $2.4B ($1.6B dividends, $0.8B repurchases) | Results and Analysis of Consolidated Operations Consolidated revenues for the nine months ended March 31, 2024, increased 7% to $14.4 billion, with EBIT margin expanding by 90 basis points to 26.2%, reflecting operating efficiencies and higher interest income Consolidated Revenue Growth (YoY) | Period | Total Revenue Growth | Organic Constant Currency Growth | | :--- | :--- | :--- | | Three Months Ended Mar 31 | 7% | 6% | | Nine Months Ended Mar 31 | 7% | 6% | - Interest on funds held for clients increased to $747.9 million for the nine-month period from $577.7 million a year ago, driven by a higher average interest rate (2.8% vs 2.3%) and a 3.5% increase in average client funds balances103 - Total expenses for the nine months rose 6% to $10.8 billion Key drivers included a 14% increase in R&D expenses for product development and GenAI integration, and a 77% jump in interest expense due to higher borrowing rates and volumes104105106 Segment Results For the nine months ended March 31, 2024, Employer Services revenue grew 8% to $9.8 billion with margin expansion, while PEO Services revenue grew 3% to $4.7 billion but experienced margin contraction Segment Performance (Nine Months Ended March 31, 2024) | Segment | Revenue Growth (As Reported) | Earnings Before Income Taxes Growth | Margin | Margin Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Employer Services | +8% | +15% | 35.8% | +200 bps | | PEO Services | +3% | -4% | 15.2% | -130 bps | - Employer Services' performance was boosted by new business, strong retention, a 2% increase in pays per control, and higher interest earned on client funds119120 - PEO Services' earnings were negatively impacted by lower releases of workers' compensation reserves in ADP Indemnity, which amounted to a pre-tax benefit of only $6.1 million in the nine-month period compared to $32.1 million in the prior year123125 Financial Condition, Liquidity and Capital Resources ADP maintains a solid financial position with $3.3 billion in cash and cash equivalents, supported by $9.7 billion in committed credit facilities and a commercial paper program to ensure liquidity - The company has a $9.7 billion commercial paper program and $9.7 billion in committed credit facilities to support liquidity for corporate purposes and client fund obligations135136144 - Net cash flow from financing activities changed significantly, providing $9.7 billion in the nine months to March 2024 versus using $5.7 billion in the prior year, mainly due to a $14.4 billion net increase in cash flow from client funds obligations138139 - During the nine months ended March 31, 2024, ADP repurchased 3.3 million shares of its common stock for $796.2 million14020 Quantitative and Qualitative Disclosures About Market Risk ADP is exposed to market risks, primarily interest rate, credit, and foreign currency risks, managed through a laddered investment strategy and high-quality securities - The company's client funds investment strategy ladders maturities out to five years (extended portfolio) and ten years (long portfolio) to average through interest rate cycles150 - A hypothetical 25 basis point change in both short-term and intermediate-term interest rates would result in an approximate $19 million impact to earnings before income taxes over the next twelve months156 - Credit risk is mitigated by investing in high-grade securities, with minimum ratings of BBB for corporate bonds and AAA for asset-backed securities at the time of purchase152157 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2024161 - No changes occurred during the quarter ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting162 PART II – OTHER INFORMATION Legal Proceedings The company is subject to various claims and litigation in the normal course of business, with management believing that their ultimate resolution will not materially impact financial condition or results - The company is vigorously defending against a putative class action complaint filed in May 2020, which alleges violations of ERISA in connection with the ADP TotalSource Retirement Savings Plan The company cannot estimate a reasonably possible loss for this matter75 - Management believes that the resolution of various claims and litigation from the normal course of business will not have a material adverse impact on the company's financial condition or results164 Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2023 - No material changes have occurred in the company's risk factors since the filing of its Annual Report on Form 10-K for the fiscal year ended June 30, 2023165 Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2024, ADP repurchased 1,221,074 shares, with approximately $3.51 billion remaining available for future repurchases under its common stock repurchase plan Issuer Purchases of Equity Securities (Q3 FY2024) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased Under Plan | | :--- | :--- | :--- | :--- | | Jan 2024 | 178,249 | $236.60 | 177,549 | | Feb 2024 | 512,379 | $250.89 | 512,114 | | Mar 2024 | 530,446 | $245.21 | 530,196 | | Total | 1,221,074 | - | 1,219,859 | - As of March 31, 2024, the approximate dollar value of shares that may yet be purchased under the common stock repurchase plan is $3.51 billion166 Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and various Inline XBRL documents - Exhibits filed include CEO and CFO certifications under Rules 13a-14(a) and Section 906 of the Sarbanes-Oxley Act, along with Inline XBRL data files170