Automatic Data Processing, Inc. (Nasdaq: ADP) reported revenues of $8.9 billion for the fiscal year ended June 30, 2010, Gary C. Butler, president and chief executive officer, announced today. Revenue growth of 1% included 0.8 percentage points from favorable foreign exchange rates. As reported, pretax earnings from continuing operations declined 2%, net earnings from continuing operations declined 9%, and diluted earnings per share from continuing operations of $2.40 declined 8% from $2.62 a year ago on fewer shares outstanding. Fiscal 2010 and fiscal 2009 included favorable tax items which reduced the provision for income taxes by $12.2 million and $120.0 million, respectively. Excluding the favorable tax items from both years, net earnings from continuing operations declined 1% and diluted earnings per share from continuing operations declined slightly to $2.37 from $2.38.
For the fourth quarter of fiscal 2010, revenues increased 4% to $2.2 billion compared with the fourth quarter of fiscal 2009. Revenue growth benefited 0.6 percentage points from favorable foreign exchange rates. As reported, pretax earnings from continuing operations declined 15%, net earnings from continuing operations declined 40%, and diluted earnings per share from continuing operations of $0.42 declined 39%, from $0.69 per share a year ago on fewer shares outstanding. Excluding last year’s fourth quarter favorable tax items of $120.0 million, net earnings from continuing operations declined 9%, and diluted earnings per share from continuing operations declined 7% to $0.42 from $0.45.
ADP acquired 11.7 million shares of its stock for treasury at a cost of about $485 million during the fourth quarter, and about 18.2 million shares at a cost of over $765 million during the fiscal year. Cash and marketable securities were $1.8 billion at June 30, 2010.
Fourth Quarter and Fiscal Year 2010 Discussion
Commenting on the results, Mr. Butler said, “Fiscal 2010 was a challenging year. As the global economy began to stabilize and recover, we increased our investments in sales and service as demand grew for ADP’s solutions. These investments pressured fourth quarter margins but will enable strong execution against our strategic growth program.
I am pleased that the trends in our key business metrics turned positive as we exited the year. As anticipated, fourth quarter new business sales growth for Employer Services and PEO Services was strong on an absolute and comparable basis. Pays per control turned slightly positive during the quarter, and client revenue retention also improved from a year ago. Dealer Services also exited the fiscal year with strong sales growth in the fourth quarter.
We signed two strategic acquisitions during the fourth quarter. These transactions have not yet closed and are therefore not included in our forecasts for fiscal 2011, but I am delighted that we have executed on this important part of ADP’s capital allocation strategy while continuing to return excess cash to our shareholders through continued dividends and share repurchases.
“Employer Services’ revenues grew 4% for the fourth quarter, nearly all organic, and were flat for the fiscal year. In the United States, revenues from our traditional payroll and payroll tax filing business grew slightly for the fourth quarter, and declined 4% for the year. Beyond payroll revenues grew 9% for the fourth quarter and 6% for the year. The number of employees on our clients' payrolls in the United States grew 0.3% for the fourth quarter and declined 3.4% for the year, as measured on a same-storesales basis for our clients on our Auto Pay platform. Worldwide client retention improved 1.6 and 0.4 percentage points for the quarter and full year, respectively. Employer Services’ pretax margin declined 290 basis points for the fourth quarter and 60 basis points for the year. The benefits from last year’s restructuring were offset by increased sales expense, investments in client service and product along with higher benefits and compensation expense.
“Combined Employer Services and PEO Services worldwide new business sales increased 25% for the quarter and 4% for the year. New business sales represent annualized recurring revenues anticipated from new orders, and were just over $1.0 billion for the year.
“PEO Services’ revenues increased 13% for the fourth quarter and 11% for the year, all organic. PEO Services’ pretax margin declined 40 basis points for the fourth quarter and 30 basis points for the year primarily due to higher pass-through costs and resulting overall price sensitivity. Average worksite employees paid by PEO Services increased 8.5% for the fourth quarter, and 5% for the year, to approximately 210,000 and 203,000, respectively.
“Dealer Services’ revenues were flat for the fourth quarter, down 1% organically, and declined 3% for the year, 4% organically. Dealer Services gained market share with continued strong competitive win rates. However, revenues were negatively impacted by the cumulative effect of ongoing dealership closings and lower international software license fee revenues. Dealer Services’ pretax margin declined 310 basis points for the fourth quarter and 60 basis points for the year. Lower headcount levels and other cost containment measures were offset in both the fourth quarter and full year by acquisition-related costs, increased sales expense, and higher benefits and compensation expense. Additionally, full-year pretax margin was negatively impacted by a first-quarter intangible asset impairment charge of $7 million relating to General Motors’ announced closure of its Saturn brand.
Interest on Funds Held for Clients, Interest Income on Corporate Funds, and Interest Expense
"The safety and liquidity 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 fourth quarter, interest on funds held for clients declined $7.0 million, or 4.8%, from $146.3 million to $139.3 million, due to a decline of 50 basis points in the average interest yield to 3.4%, partially offset by an increase of 9.2% in average client funds balances from $15.0 billion to $16.3 billion. Interest expense declined $1.7 million, or 49%, from $3.5 million to $1.8 million.
“For the fiscal year, interest on funds held for clients declined $67.0 million, or 11.0%, from $609.8 million to $542.8 million, due to a decline of 45 basis points in the average interest yield to 3.6%. Average client funds balances of $15.2 billion were flat with last year. Interest expense declined $24.7 million, or 74%, from $33.3 million to $8.6 million. The decline in interest expense was primarily due to a decline of 80 basis points in average commercial paper borrowing rates to 0.2%, and lower average daily commercial paper borrowings which decreased $0.3 billion, from $1.9 billion to $1.6 billion. We utilize our short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations in order to extend the maturities of our investment portfolio, thus averaging our way through an interest rate cycle.
Fiscal 2011 Forecast
“Our fiscal 2011 forecasts anticipate no changes in the current economic environment. We anticipate difficult expense and earnings comparisons during the first half of fiscal 2011, primarily as a result of increased sales and service investments which we began during the second half of fiscal 2010. Our current forecasts for fiscal 2011 are as follows:
• Total revenues – increase 1% to 3%
• Diluted earnings per share – increase 1% to 3%, compared with $2.37 earnings per share from continuing operations in fiscal 2010 which excludes favorable tax items
• Employer Services – revenue growth of 1% to 3%; pretax margin expansion of up to 50 basis points
• Pays per control – flat to up 0.5% for the year
• Client revenue retention – flat to up 0.4 percentage points
• PEO Services – low double-digit revenue growth; pretax margin decline due to increased benefits pass through revenues
• Employer Services and PEO Services new business sales – high single-digit growth compared to $1.0 billion sold in fiscal 2010
• Dealer Services – revenues and pretax margin flat to slightly up
"Interest on funds held for clients is expected to decline $25 to $30 million, or 5% to 6%, from $542.8 million in fiscal 2010. This is based on an approximate 30 basis point decline in the expected average interest yield to about 3.3%, and 2% to 3% growth in average client funds balances. The interest assumptions in our forecasts are based on Fed Funds futures contracts and forward yield curves as of July 27, 2010. 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 July 27, 2010 were used to forecast new purchase rates for the client extended and client long portfolios, respectively.
“We exited fiscal 2010 with strong sales momentum across our business segments. Growth in new business sales is the most important driver of future revenue growth and pretax margin expansion. ADP’s business model includes a high percentage of recurring revenues, healthy margins, strong and consistent cash flows and low capital expenditure requirements; this combined with a strong balance sheet and a AAA credit rating have enabled us to continually invest in our strategic growth program. I remain optimistic about ADP’s long-term growth opportunities," Mr. Butler concluded.
The schedules of quarterly and full-year revenue and pretax earnings by reportable segment for fiscal years 2008, 2009, and 2010 have been updated for the fourth quarter and full-year fiscal 2010 results and posted to the Investor Relations home page of our website under Financial Data.
An analyst conference call will be held today, Thursday, July 29 at 8:30 a.m. 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’s home page or ADP’s Investor Relations home page and click on the webcast icon. The presentation will be available to download and print about 60 minutes before the webcast at the ADP Investor Relations home page. ADP’s news releases, current financial information, SEC filings and Investor Relations presentations are accessible at the same website.
Automatic Data Processing, Inc. (ADP.com), with nearly $9 billion in revenues and about 570,000 clients, is one of the world's largest providers of business outsourcing solutions. Leveraging nearly 60 years of experience, ADP offers a wide range of HR, payroll, tax and benefits administration solutions from a single source. ADP's easy-to-use, cost-effective solutions for employers provide superior value to companies of all types and sizes. ADP is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine and recreational vehicle dealers throughout the world. For more information about ADP or to contact a local ADP sales office, reach us at 1.800.225.5237 or visit the company's Website.
This document and other written or oral statements made from time to time by ADP may contain "forwardlooking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like "expects," "assumes," "projects," "anticipates," "estimates," "we believe," "could be" and other words of similar meaning, are forward-looking statements. These statements are based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include: ADP's success in obtaining, retaining and selling additional services to clients; the pricing of products and services; changes in laws regulating payroll taxes, professional employer organizations and employee benefits; overall market and economic conditions, including interest rate and foreign currency trends; competitive conditions; auto sales and related industry changes; employment and wage levels; changes in technology; availability of skilled technical associates and the impact of new acquisitions and divestitures. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These risks and uncertainties, along with the risk factors discussed under "Item 1A. - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 should be considered in evaluating any forward-looking statements contained herein.