Automatic Data Processing, Inc. (Nasdaq: ADP) reported revenue growth of 12%, 7% organic, to $2.7 billion for the third fiscal quarter ended March 31, 2011, Gary C. Butler, president and chief executive officer, announced today. Pretax earnings from continuing operations increased 3% from a year ago. Net earnings from continuing operations increased 6%, which was positively impacted by a lower effective tax rate in the current quarter. Diluted earnings per share from continuing operations of $0.85 increased 8% from a year ago on fewer shares outstanding. ADP acquired over 3.8 million shares of its stock for treasury at a cost of nearly $175 million fiscal yearto- date. Cash and marketable securities were $1.7 billion at March 31, 2011.
Third Quarter Discussion
Commenting on the results, Mr. Butler said,“I am quite pleased with ADP’s third quarter results. We achieved strong new business sales growth for Employer Services and PEO Services, and client revenue retention during this critical calendar year-end period was very strong. Pays per control, PEO worksite employees, and client funds balances continued to increase as well. I am delighted with our acquisition activity, closing two additional transactions during the third quarter. In Dealer Services, it appears that the worst is behind us and the automotive marketplace continued to steadily recover.
“Employer Services’ revenues grew 9% for the third quarter, 7% organically. In the United States, revenues from our traditional payroll and payroll tax filing business grew 5% for the quarter. Beyond payroll revenues grew 15% for the quarter, assisted by acquisitions. The number of employees on our clients' payrolls in the United States grew 2.7% for the quarter, as measured on a same-store-sales basis for our clients on our Auto Pay platform. During this key retention period, worldwide client retention improved 1.9 percentage points for the quarter. Employer Services’ pretax margin declined 30 basis points for the quarter due to the negative impact from acquisition activity.
“Combined Employer Services and PEO Services worldwide new business sales grew 13% for the third quarter compared with a year ago. New business sales represent annualized recurring revenues anticipated from new orders.
“PEO Services’ revenues increased 18% for the third quarter, all organic. PEO Services’ pretax margin increased 50 basis points from a year ago. Pressure on the pretax margin from higher passthrough revenues were offset by the year-over-year impact of a one-time item in last year’s third quarter. Average worksite employees paid by PEO Services increased 13% for the third quarter, to approximately 233,000.
“Dealer Services’ revenues increased 29%, 3% organically, for the third quarter. Total revenues benefited primarily from the Cobalt acquisition closed in the first quarter. Dealer Services’ pretax margin declined 200 basis points from a year ago due to the negative impact of acquisition-related costs. Dealer Services continued to gain market share with strong competitive win rates.
Interest on Funds Held for Clients
"The safety, liquidity, and diversification of our clients’ funds are the foremost objectives of our investment strategy. Client funds are invested in accordance with ADP’s prudent and conservative investment guidelines and the credit quality of the investment portfolio is predominantly AAA/AA. “For the third quarter, interest on funds held for clients increased $0.7 million, or 0.5%, from $147.9 million to $148.6 million, due to an increase of 12% in average client funds balances, from $18.4 billion to $20.6 billion, partially offset by a decline of 30 basis points in the average interest yield to 2.9%.
Fiscal 2011 Forecast
“Our forecasts for fiscal 2011 assume no changes in the current economic environment and have been updated as follows, including the two new acquisitions closed in the quarter.
• Total revenues – excluding acquisitions closed to date during fiscal 2011, we anticipate about 6% revenue growth, up from our prior forecast of about 5% growth, due to positive results achieved during the third quarter. Including acquisitions closed to date during fiscal 2011, we anticipate about 10% revenue growth for the year, up from our prior forecast of about 9% growth.
• Diluted earnings per share – we anticipate 6% to 7% growth in earnings per share from continuing operations in fiscal 2011, compared with $2.37 earnings per share from continuing operations in fiscal 2010, which excludes favorable tax items, up from our prior forecast of about 5% growth. Acquisitions, including transaction and integration-related costs, are anticipated to be dilutive to pretax margins. The reportable segments’ results also include a cost of capital charge related to the funding of acquisitions which is eliminated in consolidation. We continue to anticipate no significant impact to diluted earnings per share from the acquisitions closed to date during fiscal 2011.
• Employer Services – excluding acquisitions closed to date during fiscal 2011, we anticipate 5% to 6% revenue growth, up from our prior forecast of about 5% growth, due to positive results achieved during the third quarter. Including acquisitions closed to date during fiscal 2011, we anticipate about 7% revenue growth, which is at the high end of our prior forecast of 6% to 7% growth. Excluding acquisitions closed to date during fiscal 2011, we continue to anticipate up to 50 basis points of pretax margin improvement. Updated for acquisitions closed during the third quarter of fiscal 2011, pretax margin is anticipated to be flat with a year ago, compared with our prior forecast of up to 20 basis points of pretax margin improvement.
o Pays per control – up about 2.5% compared with our prior forecast of up approximately 2.0%
o Client revenue retention – up approximately 1.0 percentage point, up from our prior forecast of up over 0.5 percentage point
• PEO Services – about 16% revenue growth, up from our prior forecast of about 15% growth, driven primarily by higher benefits pass through revenues. We continue to anticipate a decline in pretax margin due to increased benefits pass through revenues and the grow-over impact of last year’s $9 million favorable state unemployment tax settlement.
• Employer Services and PEO Services new business sales – continue to anticipate high single-digit growth in fiscal 2011, compared to $1.0 billion sold in fiscal 2010.
• Dealer Services – excluding acquisitions closed to date during fiscal 2011, we anticipate about 3% revenue growth, which is at the high end of our prior forecast of 2% to 3% revenue growth. Excluding acquisitions, we continue to anticipate at least 50 basis points of pretax margin improvement. Including acquisitions closed to date during fiscal 2011, we continue to anticipate revenue growth of over 20%. We anticipate a decline in pretax margin of 100 to 150 basis points, compared with our prior forecast of 150 to 200 basis points decline.
"Interest on funds held for clients is expected to be down about $5 million from $542.8 million in fiscal 2010. This is based on an approximate 30 to 40 basis point decline in the expected average interest yield to about 3.2% to 3.3%, partially offset by 9% to 10% growth in average client funds balances. This is updated from our previously forecasted decline of $15 to $20 million, or 3% to 4%, based on a 30 to 40 basis point decline in the average interest yield and growth in average client funds balances of 7% to 8%. The interest assumptions in our current forecasts are based on Fed Funds futures contracts and forward yield curves as of April 29, 2011. The Fed Funds futures contracts do not anticipate any changes during the fiscal year in the Fed Funds target rate. The three-and-a-half and five-year U.S. government agency rates based on the forward yield curves as of April 29, 2011 were used to forecast new purchase rates for the client extended and client long portfolios, respectively.
“I believe that the investments we continued to make over the last couple years were the right ones to broaden our solution set, expand our geographic presence, and strengthen ADP’s competitive position. ADP’s results are strong and I am confident in our ability to deliver strong revenue and earnings growth over our strategic planning horizon.” Mr. Butler concluded.
The schedules of quarterly and full-year revenue and pretax earnings by reportable segment for fiscal years 2009, 2010 and fiscal 2011 have been updated for the third quarter of fiscal 2011 and have been posted to the Investor Relations home page of our website under Financial Data.
An analyst conference call will be held today, Monday, May 2 at 4:30 pm. EDT. A live webcast of the call will be available to the public on a listen-only basis. To listen to the webcast and view the slide presentation, go to ADP.com, or ADP’s Investor Relations home pageand click on the webcast icon. The presentation will be available to download and print about 30 minutes before the webcast at the ADP Investor Relations home page.