10-QPeriod: Q1 FY2006

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q1 Ended Sep 30, 2005

Filed November 7, 2005For Securities:ADP

Summary

Automatic Data Processing, Inc. (ADP) reported a solid financial performance for the first quarter of fiscal year 2006 (ending September 30, 2005). Total revenues increased by 10% year-over-year to $2.05 billion, driven by broad-based growth across its key segments, notably Employer Services and Brokerage Services. Net earnings also saw a healthy increase of 6% to $220 million, translating to diluted earnings per share of $0.38, up from $0.35 in the prior year's comparable quarter. The company's financial position remains strong, with ample liquidity and a low debt-to-equity ratio, underscoring its operational stability and financial health. A notable change this quarter is the adoption of SFAS No. 123R, which impacts reported expenses due to the recognition of stock-based compensation, though the company provided adjusted figures to aid comparability.

Key Highlights

  • 1Total revenues increased 10% to $2.05 billion, driven by growth in Employer Services (+9%), Brokerage Services (+12%), and Dealer Services (+6%).
  • 2Net earnings rose 6% to $220 million, with diluted EPS improving to $0.38 from $0.35 year-over-year.
  • 3Employer Services, the largest segment, demonstrated strong performance with a 9% revenue increase, supported by new business, client retention, and growth in 'beyond payroll' products.
  • 4The company adopted SFAS No. 123R effective July 1, 2005, leading to the recognition of stock-based compensation expense, impacting reported expenses and net earnings compared to the prior year without this accounting change.
  • 5Interest income on funds held for clients increased significantly by 12% due to higher average client fund balances and rising interest rates.
  • 6ADP repurchased approximately 5.0 million shares of common stock during the quarter, continuing its share buyback program.
  • 7The company maintains a strong balance sheet with $1.94 billion in cash and marketable securities and a low long-term debt-to-equity ratio of 1.3%.

Frequently Asked Questions

Effective July 1, 2005, ADP adopted SFAS No. 123R, requiring the recognition of stock-based compensation expense. This resulted in an increase of $45.4 million in stock-based compensation expense for the quarter ended September 30, 2005, compared to $3.5 million in the prior year. While this increased reported expenses and reduced net earnings by $29.7 million (net of tax benefits) for the quarter, the company provided 'as adjusted' figures for the prior year to offer a comparable view of operational performance.

Employer Services, ADP's largest segment, saw a 9% revenue increase, driven by new business, client retention, and growth in 'beyond payroll' offerings like PEO and Time and Labor Management. Brokerage Services revenue grew 12%, boosted by investor communication activities. Dealer Services revenue increased 6%, supported by growth in its dealer business systems. The newly formed Securities Clearing and Outsourcing Services segment reported revenue of $17.7 million and a loss of $11.8 million before income taxes due to integration costs.

ADP maintains a strong liquidity position with $1.94 billion in cash and marketable securities as of September 30, 2005. The company has access to significant credit facilities totaling $5.0 billion and also utilizes a commercial paper program for short-term funding needs. Shareholder returns are supported by continued share repurchases, with approximately 5.0 million shares bought back in the quarter, and a steady dividend payment.

Interest income on funds held for Employer Services' clients increased significantly by 12% to $108.4 million. This was primarily driven by a 12% increase in average client fund balances to $11.4 billion and higher prevailing interest rates during the quarter. This growth positively contributed to overall revenue.