ADP Automatic Data Processing, Inc. (ADP) 10-Q 2026-09-30 section summaries

ADP Q1 FY2027 (three months ended September 30, 2026)

Consolidated results

Revenue increased 6.1%; earnings before tax and net earnings grew 11.3% and 11.1%, respectively. Other income was $140.3M versus $110.1M, including corporate-funds interest income of $133.7M versus $101.5M. The effective tax rate was 22.7%, compared with 22.5%; the increase reflected higher uncertain-tax-position reserves and a lower excess stock-compensation tax benefit, partly offset by tax credits and a deferred tax benefit related to foreign R&D capitalization.

Segment results

Total segment revenue was $5,493.5M versus $5,178.7M; intercompany eliminations were $2.8M versus $3.5M. Unallocated “Other” reduced pretax earnings by $123.0M, compared with $140.1M, and includes corporate overhead, legal settlements, company-wide severance, non-recurring items, eliminations, and interest income and expense. PEO zero-margin benefits pass-through costs increased to $1,228.6M from $1,131.0M; workers’ compensation coverage and state unemployment taxes rose to $145.1M from $134.9M.

Cash flow and capital returns

Operating cash flow was constrained by outflows for other assets ($346.2M), accrued expenses and other liabilities ($389.4M), and deferred contract costs ($263.1M). Financing included a $1,654.0M increase in client-funds obligations, versus $573.1M a year earlier.

ADP repurchased 2.9M shares for $821.2M, compared with 1.2M shares for $463.7M. Dividends declared were $1.70 per share versus $1.54. Common shares outstanding declined from 397.8M at June 30, 2026 to 395.6M at September 30.

Balance sheet and client funds

Implied tangible equity (equity less goodwill and other intangible assets) was $154.9M, down from $1,093.5M. Goodwill decreased primarily due to $3.2M of currency translation adjustments. Gross intangible assets comprised software and licenses of $4,426.2M, customer contracts and lists of $1,515.2M, and other intangibles of $250.1M; accumulated amortization was $4,535.4M. Amortization expense was $104.9M versus $95.4M, with $330.4M estimated over the following nine months.

Client funds are restricted to payroll, tax, and other client payments. They included restricted cash and cash equivalents of $7,406.2M, restricted short-term marketable securities of $5,063.2M, and restricted long-term marketable securities of $32,263.9M. $39,999.7M was held in a grantor trust; its liabilities eliminate on consolidation.

Investments, liquidity and other matters

Available-for-sale securities had amortized cost of $38,885.1M and fair value of $37,572.3M at September 30, versus $38,160.5M and $37,701.3M at June 30; gross unrealized losses increased to $1,322.3M from $574.4M. Securities with losses outstanding over 12 months had $516.1M of gross unrealized losses and $7,321.2M fair value. All available-for-sale securities were investment grade. Other comprehensive loss was $668.3M, versus income of $152.7M, driven principally by $855.0M of pretax unrealized securities losses (prior-year quarter: $215.7M of gains). AOCI loss widened to $1,570.4M from $730.7M a year earlier, chiefly reflecting accumulated available-for-sale securities losses of $1,023.7M versus $172.7M. This loss reduced comprehensive income and equity despite higher net earnings.

Corporate investments totaled $3,544.4M, down from $4,368.7M. Available-for-sale securities had expected maturities totaling $37,572.3M, including $5,113.2M due within one year and $5,610.3M after five years.

ADP had no period-end borrowings under its $5.7B 364-day and $2.5B and $3.5B five-year credit facilities, or its $11.7B commercial-paper program. Average daily commercial-paper borrowings were $5.4B versus $4.5B, at average rates of 3.7% versus 4.4%. Reverse-repurchase obligations were $198.3M versus $139.3M; $7.5B of U.S. capacity was committed. Long-term debt consisted of five $1.0B fixed-rate note tranches maturing from 2028 through 2036, with coupons of 1.25%–5.00%; the Notes’ Level 2 fair value was $4,618.1M.

Stock-based compensation expense was $67.2M versus $58.7M. Outstanding awards included 745,000 options (weighted-average exercise price $165), 1.288M time-based RSUs, and 882,000 performance-based RSUs. ADP had recorded a $48M ERISA class-action settlement accrual, subject to court approval, and a related $30M insurance receivable for probable recovery. ADP is assessing ASU 2025-06, effective fiscal 2029, concerning capitalization of internal-use software costs; its impact has not been determined.

ADP — Q1 FY2027 (three months ended September 30, 2026)

Consolidated results

Revenue and organic constant-currency revenue each grew 6%; reported growth was slower than the prior-year quarter’s 7%, while organic constant-currency growth was unchanged. Growth reflected new business, retention and pricing, plus higher client-fund interest and $97.6M more in zero-margin PEO benefits pass-throughs. Operating expenses within cost of revenue were $2,584.9M versus $2,461.6M; R&D was $251.3M versus $251.2M, and depreciation and amortization was $129.0M versus $123.3M. SG&A rose 6% to $1,062.8M from $1,006.3M, including $40.0M of higher sales and marketing expense. Interest expense increased 9% to $148.1M from $135.4M, primarily reflecting senior notes issued in FY2026.

Earnings before income taxes grew 11%; its margin expanded 120 basis points to 26.5%. Adjusted margin increased 130 basis points to 26.8%. Net earnings rose 11%, while diluted EPS grew 14%, helped by fewer shares following repurchases. The effective tax rate was 22.7%, compared with 22.5%.

Segments

Employer Services revenue grew 6%, including 6% organic constant-currency growth; earnings rose 9% and margin improved to 36.5% from 35.2%. Revenue benefited from client retention, new business, pricing, 2% growth in U.S. pays per control, and $42.1M more in client-funds interest; $33.6M of higher selling and marketing costs partly offset profit growth. PEO revenue rose 7%, mostly from pass-through growth; revenue excluding pass-throughs increased 4%. PEO earnings grew 7%, with margin unchanged at 13.0%, as higher pass-through costs and $10.2M of net higher workers’ compensation and state unemployment costs constrained profitability. Other/unallocated includes corporate overhead and other items; segment earnings reconcile to consolidated earnings before income taxes.

Cash flow and capital allocation

Operating cash flow increased modestly as business growth was partly offset by unfavorable timing in operating assets and liabilities, mainly collections and payments. The improvement in investing cash outflow primarily reflected timing of net proceeds and purchases of corporate and client-fund marketable securities. Financing cash flow reflected a $1,080.9M increase in cash flow from client-fund obligations, partly offset by lower net proceeds from commercial paper and reverse repos and $392.8M higher share repurchases.

ADP returned $1.5B to shareholders: $0.7B in dividends and $0.8B in repurchases. It repurchased 2.9M shares at an average $269.40, versus 1.2M at $302.10 a year earlier. FY2027 capital expenditure guidance is $200.0M–$225.0M, compared with FY2026 spending of $195.7M.

Client funds, liquidity and risk

Interest on funds held for clients increased to $329.3M from $286.8M. Average client-fund balances rose 5.7% to $36.9B, and the average yield increased to 3.6% from 3.3%. Average investment balances at cost were $13.9208B for corporate investments and $36.9169B for client funds, totaling $50.8377B, compared with $11.3938B, $34.9287B and $46.3225B, respectively. The total portfolio’s average yield rose to 3.6% from 3.4%. Available-for-sale securities had a fair value of $37.5723B at September 30, 2026, versus $37.7013B at June 30, 2026; net unrealized pre-tax losses widened to $1.3128B from $459.2M.

Cash and cash equivalents were $3.3B. ADP had $5.0B of senior unsecured notes maturing from 2028 through 2036 and $11.7B of committed credit facilities, with no facility borrowings outstanding. No commercial paper was outstanding at September 30, 2026; the client-fund program has up to $11.7B aggregate maturity value. Average daily commercial-paper borrowings were $5.4B at a 3.7% weighted-average rate, versus $4.5B at 4.4% a year earlier. Reverse repos outstanding were $198.3M at quarter-end, versus $139.3M at June 30, and $7.5B was available on a committed U.S. basis.

ADP’s client-fund strategy uses maturity ladders alongside short-term financing, emphasizing safety, liquidity and diversification. It identifies reliance on short-term funding and the timing of client collections and obligations as liquidity exposures, alongside interest-rate, credit and foreign-exchange risks. A 25-basis-point change in both short- and intermediate-term rates would affect pre-tax earnings by about $20.0M over the next 12 months; a 25-basis-point short-term rate change alone would affect them by about $10.0M. ADP Indemnity recorded a $3.1M pre-tax actuarial gain, compared with $4.3M, and paid $327.8M for FY2027 reinsurance covering substantially all qualifying losses up to $1M per occurrence.

ADP Assist gained more than 100,000 clients during the quarter; ADP also expanded AI-agent capabilities and extended ADP Lyric HCM availability to the UK, France, Germany and the Netherlands. Key business risks include client acquisition and retention, adoption of new solutions and technology, cyber incidents and service interruptions, competition, economic and employment conditions, regulation, funding costs, and workers’ compensation claims and reserve estimates.

Item 3 provides no standalone market-risk discussion; it refers readers to “Quantitative and Qualitative Disclosures about Market Risk” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4 — Controls and Procedures

As of September 30, 2026, ADP’s CEO and CFO assessed its disclosure controls and procedures as effective. They concluded that required information was timely accumulated and communicated to management, and appropriately recorded, processed, summarized, and reported.

No change in internal control over financial reporting during the three months ended September 30, 2026 materially affected, or was reasonably likely to materially affect, those controls.

ADP reported no material changes to the risk factors disclosed in its FY2026 Form 10-K for the year ended June 30, 2026. The section identifies no new or materially changed business risks.

Rule 10b5-1 trading arrangements

During the fiscal quarter ended September 30, 2026, 13 ADP executive officers and directors adopted trading arrangements intended to qualify for the affirmative defense under Rule 10b5-1(c). The arrangements cover a maximum of 189,596 securities. Sales may begin on January 4, 5, or 12, February 2, or September 2, 2027, and all arrangements end December 31, 2027.

The amounts may include common shares, options, restricted stock units (RSUs), and performance stock units (PSUs). RSU and PSU quantities are stated before tax withholding; PSU quantities assume target performance and include accrued dividend equivalents. Some securities are subject to limit orders that may not execute, and Rodriguez’s shares are held indirectly through a trust. These arrangements describe permitted future sales and do not indicate that any securities were sold.