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ADP Reports Fiscal 2006 Results; Provides Fiscal 2007 Guidance; Announces Plan to Spin-off Brokerage Services Business


Revenues Rise 11%, EPS from Continuing Operations Increases 25%;
Forecasting Revenue Growth of Approximately 10%, and 17% - 20% EPS Growth for Fiscal 2007

-ROSELAND, New Jersey -- August 2, 2006 -- Automatic Data Processing, Inc. (NYSE:ADP) reported 11% revenue growth, to $8.9 billion, and $1.85 earnings per share from continuing operations for the fiscal year ended June 30, 2006Arthur F. Weinbach, chairman and chief executive officer, announced today. On an “as reported” basis, including stock compensation expense in fiscal 2006 and not in fiscal 2005, pretax and net earnings from continuing operations grew 9% and 7%, respectively, and diluted earnings per share from continuing operations increased 9%, from $1.69 per share a year ago on fewer shares outstanding. On a comparable basis, including stock compensation expense in both fiscal 2006 and 2005, pretax and net earnings from continuing operations each grew 23%, and diluted earnings per share from continuing operations increased 25%, from $1.48 per share a year ago on fewer shares outstanding. Selling expenses related to the extraordinary Employer Services’ fourth quarter new business sales growth decreased earnings per share by about $0.01. During the fiscal year ADP acquired over 29 million shares of its stock for treasury for approximately $1.3 billion. Cash and marketable securities balances were $2.7 billion at June 30, 2006. Cash flows from operations reflect continued strength at over $1.8 billion for the year.

For the fourth quarter of fiscal 2006, revenues were $2.5 billion, an increase of 14% compared with $2.2 billion for the fourth quarter of fiscal 2005, and earnings per share from continuing operations were $0.44. On an “as reported” basis, including stock compensation expense in the fiscal 2006 fourth quarter and not in the fiscal 2005 fourth quarter, pretax and net earnings from continuing operations grew 7% and 1%, respectively, and diluted earnings per share from continuing operations increased 5%, from $0.42 per share a year ago on fewer shares outstanding. On a comparable basis, including stock compensation expense in the fourth quarter of both fiscal 2006 and 2005, pretax and net earnings increased 19% and 15%, respectively. Diluted earnings per share increased 19% from $0.37 per share a year ago on fewer shares outstanding. As anticipated, during the fourth quarter, ADP increased its share repurchases, acquiring over 17 million shares of its stock for treasury for approximately $800 million.

Commenting on the results, Mr. Weinbach said, "Our results this year were terrific. Employer Services’ revenues increased 10% for both the fourth quarter and for the year. In the United States, revenues from our traditional payroll and payroll tax filing business grew 7%, and beyond payroll revenues grew 15% for both the fourth quarter and for the year. New business sales in the quarter, which reflect annualized recurring revenues anticipated from new orders, grew 24% in the U.S. and 28% worldwide. Sales were particularly strong in Major Accounts Services, National Account Services, TotalSource(R), and GlobalView(SM). This sales growth exceeded our expectations and represented the strongest quarterly sales growth in nearly nine years. Based on this exceptionally strong sales growth, selling expenses were also higher than expected in the fourth quarter, resulting in pretax margin improvement of 90 basis points for the year, which is slightly lower than our previous expectation of a 100 basis point improvement. We ended the year with new business sales growth of nearly 13% in the U.S. and 13% worldwide. Client retention in the U.S. improved to a new record level for the year. The number of employees on our clients’ payrolls in the U.S. increased 2.5% in the fourth quarter and 2.4% for the year.

"Brokerage Services’ revenues increased 13% for the fourth quarter and 10% for the year driven primarily by our investor communications business. Beyond beneficial products’ revenue growth of 27% in the quarter was driven primarily by increases in postage, transaction reporting and fulfillment. Beneficial proxy and interim communications’ revenues increased 8% for the fourth quarter primarily due to stock record growth and timing of mailings. Beyond beneficial products’ revenues were strong with 21% growth for the year, and revenues from beneficial proxy and interim communications grew 7% for the year. Back office revenues grew 6% for the fourth quarter and 1% for the year. As anticipated, Brokerage Services’ pretax margin improved 40 basis points for the year primarily from leveraging increased trade volumes as well as from cost containment measures. Securities Clearing and Outsourcing Services’ (SCOS) revenues of $22.5 million and $80.6 million for the fourth quarter and for the year, respectively, were in line with our expectations. SCOS sales and sales pipeline continue to be strong and ahead of our expectations.

"Dealer Services’ revenues increased 21% for the quarter and 14% for the year, primarily due to the acquisition of UK-based Kerridge Computer Company Ltd. as internal revenue growth was 2% and 4% for the fourth quarter and for the year, respectively. Dealer Services’ pretax margin declined 90 basis points for the year primarily due to the integration of Kerridge, including fourth quarter integration expenses of approximately $2 million relating to migrating clients to Kerridge’s Autoline product and re-branding of marketing materials, and $2.8 million incurred in the fourth quarter to adjust our resource levels in North America as we streamline our cost structure.

"Interest on client funds grew 29% over last year’s fourth quarter, to $156 million due to a 9% increase in average client funds balances and higher interest rates. For the year, client funds interest income increased 30% to $550 million due to nearly 11% growth in average balances and an improvement of 62 basis points to a portfolio yield of about 4.1%.

“We exited fiscal 2006 with a position of strength and I am very proud of where ADP is today,” concluded Mr. Weinbach.

Sale of Claims Services:

On April 13, 2006, ADP completed the sale of its Claims Services business with annual revenues of approximately $415 million. Net cash from the transaction was approximately $760 million. Claims Services’ revenues and pretax earnings are not included in revenues or pretax earnings from continuing operations for all periods in fiscal 2006 and 2005. The results of operations for this business are reported within discontinued operations in the current and prior year periods. Fiscal 2006 fourth quarter discontinued operations include the one-time pretax gain from this transaction of $561 million, or $453 million after tax, reflecting final closing adjustments.

Fiscal 2007 guidance:

“ADP moved into fiscal 2007 with continued momentum and good economic conditions,” commented Gary C. Butler, president and chief operating officer and CEO-elect. “Our guidance for fiscal 2007 includes Brokerage Services Group for the full year, and does not include any one-time expenses anticipated in connection with the Brokerage Services Group spin-off discussed below. Our guidance for fiscal 2007 is for approximately 10% revenue growth and 17% - 20% earnings per share growth, up from $1.85 earnings per share from continuing operations reported in fiscal 2006. We are anticipating pretax margin expansion of about 100 basis points in each of our businesses. Our plans reflect strong momentum in Employer Services, with about 11% revenue growth in the U.S. and 10% worldwide, double-digit new business sales growth and continued improvement in client retention. We anticipate 4% - 5% revenue growth in Brokerage Services, and 12% - 13% revenue growth in Dealer Services for fiscal 2007. Interest income on client funds is anticipated to grow approximately 20% based on expected growth of nearly 10% in client funds balances and an improvement of 40 basis points in the overall average interest rate earned on our client funds portfolio to 4.5%. Our interest assumptions are based on current futures contracts and yield curves.”

Spin-off of Brokerage Services:

ADP’s Board of Directors has approved a plan to spin-off the Brokerage Services Group business, comprised of Brokerage Services and Securities Clearing and Outsourcing Services, into an independent publicly traded company through a tax-free spin-off of 100% of Brokerage Services Group to ADP shareholders. In conjunction with the spin-off, the new Brokerage Services Group entity is expected to distribute approximately $500 - $700 million to ADP in the form of a tax-free dividend. The spin-off is subject to required regulatory approvals and reviews. ADP expects to complete the spin-off before the end of fiscal 2007.

Commenting on the transaction, Mr. Butler continued, "Fit and focus is the underlying theme of this transaction. The brokerage industry has changed in recent years, and while still attractive in terms of long-term growth opportunities, as part of ADP, the growth profile of Brokerage Services Group is below the potential that we believe exists in Employer Services and Dealer Services. We believe that ADP’s shareholders, clients and associates will benefit from a more concentrated focus by each management team on its own core business, each with different operating models, long-term strategic growth plans, and industry appropriate capital deployment. ADP’s efforts and commitment will be concentrated on the Employer Services and Dealer Services businesses, and my focus will be on increasing shareholder value by accelerating revenue growth in conjunction with margin expansion.

"Brokerage Services Group is a market leader in providing integrated outsourcing solutions to the financial services industry. With nearly $2 billion in revenues and good profitability, 4,000 associates, strong cash flows, a highly-recurring revenue model, good long-term growth prospects, an international presence, and deep relationships with the world’s leading financial institutions, we expect Brokerage Services Group will be a strong and viable stand-alone public company. Art Weinbach, who as you know is retiring as CEO of ADP on August 31, 2006, will assume the role of chairman of the new public company once the spin-off is complete. Both Rich Daly and John Hogan, who are currently co-presidents of Brokerage Services Group, will be joining Art on the management team to lead Brokerage Services Group as a stand-alone company. Rich will assume the role of CEO and John will become COO.

Capital Allocation:

"Over time, we anticipate returning an increased level of excess cash to shareholders, including the one-time cash dividend from Brokerage Services Group to ADP, by increasing dividends and/or share buybacks, depending on market conditions and acquisition funding requirements. We will make our recommendation for the 2007 dividend increase to the Board at the November meeting, which is our normal timing to review the ADP dividend policy. We anticipate ADP’s dividend increase before the spin-off to be in-line with or higher than the 2006 increase of 19%. After the spin-off, ADP will maintain the 2007 dividend at the same dollar amount as before the spin-off.

“This is an exciting time for ADP, and I am optimistic about our future growth opportunities,” Mr. Butler concluded.

An analyst conference call will be held today, Wednesday, August 2 at 10:00 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 and click on the webcast icon. The presentation will be available to download and print approximately 60 minutes before the webcast at the ADP Investor Information home page at ADP’s news releases, current financial information, SEC filings and Investor Relations presentations are accessible at the same website.

ADP, with nearly $9 billion in revenues and more than 570,000 clients worldwide, is one of the largest providers of a broad range of premier, mission-critical, cost-effective transaction processing and information-based business solutions.

This release and other written or oral statements made from time to time by ADP may contain “forward-lookingstatements” 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, employee benefits and registered clearing agencies and broker-dealers; overall market and economic conditions, including interest rate and foreign currency trends; competitive conditions; stock market activity; 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. In addition, the proposed spin-off of the Brokerage Services Group is subject to inherent risks and uncertainties, including: risks that the spin-off will not be consummated; increased demands on our management team to accomplish the spin-off; significant transaction costs; risks of changes in our credit rating and risks from changes in results of operations of our three principal business units. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.


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