How did the adoption of SFAS No. 123R impact the financial results?

The adoption of SFAS No. 123R, effective July 1, 2005, requires the recognition of stock-based compensation expense. This led to an increase in reported operating expenses, selling, general, and administrative expenses, and systems development costs. For the three months ended March 31, 2006, total stock-based compensation expense included in continuing operations was $41.9 million, compared to $3.2 million in the prior year. To provide a comparable view, the company provided 'as adjusted' figures which exclude this expense, showing a stronger operational performance on a comparative basis.

What is the significance of the sale of the Claims Services business?

ADP entered into a definitive agreement to sell its Claims Services business for $975 million in cash, which was completed on April 13, 2006. The company anticipates reporting a one-time pre-tax gain of approximately $600 million (or $480 million after tax) from this sale in the fourth quarter of fiscal 2006. This divestiture represents a strategic move to focus on core business areas.

How did the interest on funds held for clients affect the revenue and earnings?

Interest on funds held for Employer Services' clients increased to $166.2 million for the quarter, up from $124.5 million in the prior year. This increase was driven by a 10% rise in average client funds balances and higher interest rates. While this contributed to total revenue growth, the Employer Services segment itself is credited with interest at a standard rate of 4.5%, meaning its segment profit is not directly impacted by interest rate fluctuations. The difference between actual interest earned and the standard rate credited is a reconciling item.

What is the company's outlook and financial health based on this report?

The company demonstrates strong revenue growth and profitability, underpinned by solid client retention and expansion in key service areas. Its balance sheet remains robust with substantial cash and marketable securities and low debt. The planned divestiture of the Claims Services business suggests a strategic focus on its core offerings. The company's liquidity appears strong, supported by operating cash flows and available credit facilities.

ADP 10-Q Quarterly Report Q3 FY2006 — Revenue, Net Income, EPS

Summary

Automatic Data Processing, Inc. (ADP) reported solid financial results for the third quarter of fiscal year 2006, ending March 31, 2006. Total revenues increased by 10% to $2.44 billion, driven by robust growth across its key segments, particularly Employer Services and Dealer Services. Net earnings from continuing operations also saw a healthy increase of 11% to $355.5 million, with diluted earnings per share from continuing operations rising 13% to $0.61. The company continues to benefit from strong client retention and sales growth in its core services. Investors should note the significant impact of the adoption of SFAS No. 123R (Share-Based Payment) which resulted in increased stock-based compensation expenses. However, the company's "as adjusted" figures, which exclude this impact for comparative purposes, show even stronger underlying operational performance, with net earnings from continuing operations up 22% and diluted EPS up 24% for the quarter. The company also announced a definitive agreement to sell its Claims Services business, anticipating a substantial gain in the fourth quarter. Overall, ADP demonstrated continued revenue growth and profitability, supported by its diversified service offerings.

Key Highlights

1Total revenues grew 10% year-over-year to $2.44 billion, driven by strong performance in Employer Services (+9%), Brokerage Services (+6%), and Dealer Services (+21%).
2Net earnings from continuing operations increased 11% to $355.5 million, with diluted EPS from continuing operations rising 13% to $0.61.
3The company is experiencing strong client retention and sales growth, particularly in its Employer Services segment, with PEO revenues up 20% and "beyond payroll" revenues showing significant growth.
4Adoption of SFAS No. 123R led to higher stock-based compensation expenses, but 'as adjusted' figures show stronger underlying growth (22% EPS increase).
5ADP entered into an agreement to sell its Claims Services business for $975 million, expected to result in a significant pre-tax gain in Q4 FY2006.
6Consolidated balance sheet remains strong with $1.97 billion in cash and marketable securities and a low debt-to-equity ratio of 1.2%.

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q3 Ended Mar 31, 2006

Summary

Key Highlights

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