10-QPeriod: Q1 FY2007

AUTOMATIC DATA PROCESSING INC Quarterly Report for Q1 Ended Sep 30, 2006

Filed November 9, 2006For Securities:ADP

Summary

Automatic Data Processing, Inc. (ADP) reported strong top-line growth for the first quarter of fiscal year 2007, with total revenues increasing by 15% to $2.22 billion compared to the prior year. This growth was driven by solid performance across its key segments, particularly Employer Services and Brokerage Services. Net earnings from continuing operations rose by 25% to $257.5 million, leading to a 31% increase in diluted earnings per share from continuing operations to $0.46. The company also announced plans to spin off its Brokerage Services Group into an independent publicly traded company, which is expected to be completed before the end of fiscal year 2007. This strategic move aims to streamline operations and allow each entity to focus on its respective growth opportunities. Financially, ADP continues to demonstrate robust operational cash flow and maintains a strong balance sheet, with significant cash and marketable securities.

Key Highlights

  • 1Total revenues increased by 15% year-over-year to $2.22 billion, driven by growth across all major segments.
  • 2Net earnings from continuing operations grew by 25% to $257.5 million, and diluted EPS from continuing operations increased by 31% to $0.46.
  • 3The company announced its plan to spin off the Brokerage Services Group, expected to be completed by the end of fiscal year 2007.
  • 4Employer Services segment revenue grew by 12%, with 'beyond payroll' products like PEO and Time and Labor Management showing particularly strong performance.
  • 5Brokerage Services segment revenue increased by 16%, fueled by growth in investor communication activities and 'beyond beneficial' products.
  • 6Consolidated operating expenses increased by 20%, partly due to investments in sales and implementation personnel and higher pass-through costs in the PEO business.
  • 7ADP repurchased approximately 12.6 million shares of its common stock during the quarter, reflecting a commitment to returning capital to shareholders.

Frequently Asked Questions

The spin-off of the Brokerage Services Group is intended to allow both the remaining ADP business and the new independent company to focus more effectively on their respective core markets and strategic priorities. This move is expected to unlock value by enabling each entity to pursue growth opportunities tailored to their specific industries and customer bases.

Employer Services revenue grew by 12%, driven by new business sales, an increase in client payrolls, strong retention, price increases, and higher client fund balances. 'Beyond payroll' products, such as Professional Employer Organization (PEO) services and Time and Labor Management, demonstrated particularly strong growth, outpacing traditional payroll and payroll tax services.

ADP actively returns capital to shareholders through share repurchases and dividends. During the quarter, the company repurchased approximately 12.6 million shares of its common stock. The company also has significant authorization remaining for future share repurchases and maintains a consistent dividend payout.

The spin-off is subject to regulatory approvals and market conditions. Potential impacts include increased demands on management resources, significant transaction costs estimated between $45-$55 million for fiscal 2007, and potential changes to ADP's credit rating. The company also faces inherent risks associated with concentrating on its core services post-separation.