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Tax Reform Boosts Automatic Data Processing Earnings

Automatic Data Processing (NASDAQ: ADP) reported fiscal second-quarter results on Jan. 31. The provider of human capital management solutions delivered solid increases in sales and adjusted profits, prompting it to raise its earnings forecast for the year ahead.

ADP results: The raw numbers

What happened with ADP this quarter?

Worldwide new business bookings grew 6% year over year, placing ADP on track to hit its full-year goal of 5% to 7% growth. Revenue rose 8% to $3.2 billion, and 7% on an organic basis.

"This revenue growth was slightly above our expectations, and we are pleased with the progress that we've made so far in the first half of fiscal 2018," CEO Carlos Rodriguez said during a conference call with analysts.

PEO Services, which is ADP's co-employment division, enjoyed a 15% rise in revenue, to $945 million, fueled by a 10% increase in average worksite employees, to 498,000.

Meanwhile, ADP's employer services segment, which includes ADP's human capital management and human resources outsourcing businesses, delivered 6% higher revenue, at $2.4 billion. The number of employees on ADP clients' payrolls in the U.S. rose 2.6%. Client revenue retention, however, decreased by 20 basis points compared with the year-ago quarter.

All told, ADP's earnings before interest and taxes -- adjusted to exclude restructuring charges and other non-recurring items -- rose 2% to $602 million, with adjusted EBIT margin declining 120 basis points to 18.6%, in part because of the impact of recent acquisitions. Adjusted net earnings, however, benefited from a lower effective tax rate and jumped 13% to $440 million. In turn, adjusted EPS -- boosted by stock buybacks -- leapt 14% to $0.99.

Looking forward

These results, combined with the expected benefits of tax reform, prompted ADP to raise its financial guidance for fiscal 2018. The new forecast now includes:

  • Revenue growth of 7% to 8%, up from a previous estimate of 6% to 8%.
  • Earnings per share growth of 8% to 9%, compared to down 1% to up 1%.
  • Adjusted EPS growth of 12% to 13%, up from 5% to 7%.

"Clearly, we are one of the beneficiaries of U.S. corporate tax reform," CFO Jan Siegmund said. "And while this offers us additional financial flexibility going forward, our priorities, which have delivered strong total shareholder return performance to our shareholders, remain unchanged."

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Automatic Data Processing. The Motley Fool has a disclosure policy.