ADP Reports Fourth Quarter and Fiscal 2018 Results; Provides Fiscal 2019 Outlook

• Revenues increased 8% to $13.3 billion for the year, 6% organic constant currency
• Worldwide new business bookings increased 18% in the fourth quarter; 8% for the year
• Employer Services client revenue retention increased 50 basis points to 90.4% for the year
• Diluted earnings per share decreased 5% to $3.66 for the year; adjusted diluted earnings per share increased 18% to $4.35
• Forecasting fiscal 2019 adjusted diluted earnings per share to increase 13% to 15%, as compared to $4.53 pro-forma fiscal 2018 adjusted diluted earnings per share, which includes adjustments for the impact of the new revenue recognition accounting standard

ROSELAND, N.J., Aug. 01, 2018 (GLOBE NEWSWIRE) -- ADP® (Nasdaq:ADP), a leading global provider of Human Capital Management (HCM) solutions, today announced its fourth quarter and fiscal 2018 financial results and provided its fiscal 2019 outlook.

Fourth Quarter and Fiscal 2018 Consolidated Results

Compared to last year’s fourth quarter, revenues grew 8% to $3.3 billion, 6% organic constant currency. Net earnings were ahead of Company expectations, but decreased 59% to $109 million primarily due to the impact of pre-tax charges of $365 million related to the Company’s Voluntary Early Retirement Program and other transformation initiatives. Earnings before income taxes decreased 47% to $205 million, and include the effects of the charges discussed above. Adjusted EBIT increased 31% to $576 million. Adjusted EBIT margin increased about 300 basis points in the quarter to 17.3%, supported by benefits from operational efficiencies and transformation initiatives, offset in part by acquisition-related expenses. ADP’s effective tax rate for the quarter was 46.9%, and 28.7% on an adjusted basis. Diluted earnings per share decreased 58% to $0.25 and adjusted diluted earnings per share increased 39% to $0.92.

For the year, revenues grew 8% to $13.3 billion, 6% organic constant currency.  Net earnings were ahead of Company expectations but decreased 6% to $1.6 billion primarily due to the impacts of fiscal 2018 pre-tax charges of $405 million related to the Company’s Voluntary Early Retirement Program and other transformation initiatives, fiscal 2018 pre-tax charges of about $33 million related to proxy contest matters, and a fiscal 2017 $205 million pre-tax gain on the sale of our CHSA and COBRA businesses.  Earnings before income taxes decreased 14% to $2.2 billion, and include the effects of the items discussed above.  Adjusted EBIT increased 8% to $2.6 billion. Adjusted EBIT margin increased about 10 basis points to 19.8% and included about 30 basis points of pressure from acquisitions.  Diluted earnings per share decreased to $3.66, or 5%.  Adjusted diluted earnings per share increased to $4.35, representing growth of 18%, and benefited from fewer shares outstanding and a lower effective tax rate compared to last year.

“We are pleased with our growing momentum from our multi-year investments in distribution, product, and operational initiatives,” said Carlos Rodriguez, President and Chief Executive Officer, ADP. “In particular, we remain confident that our client-centric focus and our drive to meet the evolving needs of the global HCM market through leading-edge product and unparalleled service is delivering clear and positive results that are also contributing to an improvement in retention and a sustained acceleration in our new business bookings.”

“As we highlighted in our recent investor day, we see ample opportunity to add value in new and innovative ways,” added Jan Siegmund, Chief Financial Officer, ADP. “Investing in our strategic initiatives while executing on margin opportunities is a key focus of ours, and we believe that our strategy to create long-term shareholder value by balancing top line revenue growth and strong margins to drive EPS growth is working.”

Adjusted EBIT, adjusted EBIT margin, adjusted diluted earnings per share, adjusted effective tax rate, constant currency, and organic constant currency revenue are all non-GAAP financial measures. Please refer to the accompanying financial tables at the end of this release for a discussion of why ADP believes these measures are important and for a reconciliation of non-GAAP financial measures to their comparable GAAP financial measures.

Fourth Quarter and Fiscal 2018 Segment Results

Employer Services – Employer Services offers a comprehensive range of HCM and human resources outsourcing solutions.

• Employer Services revenues increased 7% compared to last year’s fourth quarter, 4% organic constant currency. Revenues increased 5% for the fiscal year, 4% organic constant currency.
• Pays per control, the number of employees on ADP clients' payrolls in the United States when measured on a same-store-sales basis for a subset of clients ranging from small to large businesses, increased 3.1% for the fourth quarter and 2.7% for the full year.
• Employer Services client revenue retention was down 120 basis points compared to last year’s fourth quarter, in line with expectations, and up 50 basis points for the full year to 90.4%.
• Employer Services segment margin increased 200 basis points compared to last year’s fourth quarter, including approximately 50 basis points of pressure from acquisitions. For the full year, segment margin increased 10 basis points, including 40 basis points of pressure from acquisitions.

PEO Services – PEO Services provides comprehensive employment administration outsourcing solutions.

• PEO Services revenues increased 10% compared to last year’s fourth quarter driven primarily by an 8% increase in average worksite employees for the quarter. For the full year, revenues increased 12%, driven by 9% growth in average worksite employees.
• Average worksite employees paid by PEO Services were about 523,000 for the fourth quarter and 504,000 for the full year.
• PEO Services segment margin increased approximately 60 basis points compared to last year’s fourth quarter, and increased approximately 10 basis points for the full year.

Interest on Funds Held for Clients – The safety, liquidity and diversification of ADP clients’ funds are the foremost objectives of the Company’s investment strategy. Client funds are invested in accordance with ADP’s prudent and conservative investment guidelines and the credit quality of the investment portfolio is predominantly AAA/AA.

• For the fourth quarter, interest on funds held for clients increased 20% to $126 million, and for the full year increased 17% to $466 million.
• Average client funds balances increased 4% in the fourth quarter to $24.9 billion, 3% on a constant currency basis. For the full year, average client funds balances increased 6% to $24.3 billion, 5% on a constant currency basis.
• For the fourth quarter, the average interest yield on client funds was 2.0%, which was up 30 basis points compared to a year ago, and for the full year, average interest yield was 1.9%, up 20 basis points compared to a year ago.

Other Matters

On July 31, 2018, ADP acquired Celergo, a leading provider of global payroll management services. Global HCM continues to represent a significant opportunity for ADP, as multinational companies are increasingly looking for business partners with broad-based geographic and technological capabilities to facilitate greater integration and alignment with their businesses. This acquisition will enhance ADP’s international payroll offerings with a strong proprietary cloud-based technology platform.

Fiscal 2019 Outlook

The following outlook reflects the impact of certain changes to ADP’s segment reporting as well as the adoption of ASC 606, “Revenue from Contracts with Customers.” Accordingly, comparisons to fiscal 2018 results refer to pro-forma fiscal 2018 financials using the same methodology. Please see the included bridge of as-reported fiscal 2018 results to pro-forma fiscal 2018 results.

Certain components of ADP’s fiscal 2019 outlook and related growth comparisons exclude the impact of the following items and are discussed on an adjusted basis where applicable. Please refer to the accompanying financial tables for a reconciliation of these adjusted amounts to their closest comparable GAAP measure.

• Fiscal 2018 pre-tax proxy contest charges of about $33 million.
• Fiscal 2018 one-time net tax benefit of about $196 million from the Tax Cuts and Jobs Act.
• Fiscal 2018 pre-tax charges of about $405 million related to the Voluntary Early Retirement Program, the Service Alignment Initiative, and other transformation initiatives.
• Fiscal 2019 pre-tax restructuring charges of $15 million related to the Service Alignment Initiative and other transformation initiatives.

ADP anticipates full-year fiscal 2019 revenue growth of 5% to 7% and expects adjusted EBIT margin to increase 100 to 125 basis points for the full year, from 20.7% pro-forma adjusted EBIT margin in fiscal 2018. This margin expansion outlook reflects downward pressure created by the adoption of ASC 606 in fiscal 2019 and the associated comparison to pro-forma 2018 financials. ADP estimates that margin expansion on an ASC 605 basis in fiscal 2019 would have been about 30 basis points higher.

ADP expects full-year diluted earnings per share to be up 19% to 21%, compared to $4.28 pro-forma fiscal 2018 diluted earnings per share, and expects adjusted diluted earnings per share growth of 13% to 15%, compared to $4.53 pro-forma fiscal 2018 adjusted diluted earnings per share. ADP anticipates an adjusted effective tax rate of 25.1%.

Reportable Segments Fiscal 2019 Forecast

• For the Employer Services segment, ADP anticipates revenue growth of approximately 4% to 6%, and expects margins to increase 150 to 175 basis points. ADP anticipates growth in Employer Services new business bookings of 6% to 8% and Employer Services client revenue retention to improve 25 to 50 basis points.
• ADP expects an increase in pays per control of 2.5% for the year.
• For the PEO Services segment, ADP anticipates average Worksite Employee growth of 7% to 8%, total revenue growth of 7% to 9%, and revenue growth excluding zero-margin pass-through costs of 5% to 7%. ADP expects PEO Services margins to decline 75 to 50 basis points for the year, reflecting more than 75 basis points of anticipated grow-over pressure related to fiscal 2018 worker’s compensation reserve reductions by ADP Indemnity, the results of which are now included in the PEO Services segment.

Client Funds Extended Investment Strategy Fiscal 2019 Forecast

The interest assumptions in our forecasts are based on Fed Funds futures contracts and forward yield curves as of July 30, 2018. The Fed Funds futures contracts used in the client short and corporate cash interest income forecasts assume increases in the Fed Funds rate in September 2018 and December 2018. The three-and-a-half and five-year U.S. government agency rates based on the forward yield curves as of July 30, 2018 were used to forecast new purchase rates for the client and corporate extended, and client long portfolios, respectively.

• Interest on funds held for clients is expected to increase about $80 to $90 million, or 17% to 19%. This is based on anticipated growth in average client funds balances of approximately 3% to 4% from $24.3 billion in fiscal 2018, and an average yield which is anticipated to increase about 30 basis points to 2.2% compared to the fiscal 2018 average yield of 1.9%.
• The total contribution from the client funds extended investment strategy is expected to increase about $60 to $70 million.

Investor Webcast Today

ADP will host a conference call for financial analysts today, Wednesday, August 1, 2018 at 8:30 a.m. ET.

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