ADP CEO seeks return to stronger growth

The biggest goal at Automatic Data Processing, Inc., which processes pay for one of every six private sector workers in the United States, is returning to the growth of the past.

The company had enjoyed 166 consecutive quarters of earnings-per-share growth until the third quarter of 2003, when low interest rates and an economic dip ended its streak. Gary Butler, who joined the company 31 years ago as a payroll salesman in Atlanta and became CEO in August, is working to bring back the growth _ and the company's share price, which has lagged the wider market.

Butler's predecessor as CEO, Art Weinbach, had the job for ten years and was only the fourth chief executive since the company went public 45 years ago. ADP prides itself on steadiness; it's one of only six U.S. companies outside the financial sector with a AAA bond rating.

ADP, based in Roseland, N.J., began in 1949 when its founder, an accountant and the son of a mill worker, looked at the automated silk mills in Paterson, N.J. and applied the same model to accounting processes. The company has grown from one client and $2,000 in revenue its first year to $8.8 billion in revenue for fiscal 2006, which ended June 30.

What follows are edited excerpts from a recent Associated Press interview with Butler, who is also the company's president:

AP: What do you see as the company's biggest growth opportunities?

Butler: Beyond pure international expansion; outsourcing of administrative functions and HR self service.

ADP is the co-employer for 15,000 small companies in the U.S. The worksite employer tells its people what to do; we do everything else _ help with recruiting, worker's comp insurance, legal advice. We provide the entire compliance bundle.

ADP gets seven, eight, 10 times the revenue we would if we were just doing payroll. The client gets peace of mind. You can never hire a human resources executive or a controller to provide you that kind of advice. That's one of the fastest growing services we have today.

Our biggest challenge there is not the leads, but doing the proper underwriting. If I'm your co-employer and you're a bad worker's compensation risk and you've got people falling off roofs and running over people with lawnmowers, I don't want you on my worker's comp policy. If you have a tainted health care history, my suppliers of health care are not going to be interested in underwriting you on our health care policy.

Q: The company earned $549.8 million in interest on funds held for employer services clients in 2006. As electronic transfers increase and money moves faster, how will that affect ADP's interest revenue from the money it holds?

A: We have, on average, $13 billion to $14 billion of float in our system. That comes from a combination of direct deposit and ADP checks. (If) I'm your payroll company, I impound your funds for the amount of your payroll, and then I put that on an ADP instrument that is cashable at most banks. And I have (withholdings for) all the taxes for 22,000 tax jurisdictions across the United States.

Average direct deposit, we sit on for three-quarters of a day. You can't get it any faster. The average check, we sit on for four or five days, in terms of float.

And the taxes go all over the map, from overnight for federal withholding to state unemployment, which can be held as long as a quarter.

The reality is, a lot of what we do will not be affected, because it's already one day with federal withholding or it's already a large portion of direct deposit. We have, over time, seen the states move from "write me a check" to "wire me the money." We've seen a gradual loss of float, particularly in some of the states.

Q: ADP is a cash-rich company. Are you looking to make acquisitions?

A: We used to have four businesses and we looked long and hard we looked for that fifth and sixth leg. Every time we would find one, it always cost too much money. We reached the decision that we will be a much stronger company and return far greater value to our shareholders by being a more focused company, which is why we spun off our claims business and why we're doing a tax-free spin of our brokerage business.

We have no interest in large, dilutive, multiyear acquisitions. I've learned to never say never, because there could be something at the right price that is accretive within a year. But I haven't seen too many of those in my 30-plus years in this business.

Q: ADP's pension expense more than doubled in two years, going from $16.4 million in 2004 to $34.5 million in 2006. What's your outlook for the company's pension program? Do you have any plans to freeze pensions or change benefits for future employees?

A: I don't anticipate any dramatic increases in pension expense in the upcoming years, beyond the normal course of business. We have pretty conservative assumptions in our pension plan and don't try to use our pension investments as a form of earnings, like some companies have done and it's a pretty sacrosanct area within ADP. We have no plans to freeze our pension plans.

Q: The company began paying you an annual perquisite allowance of $125,000 in July. That's on top of a base salary of $850,000 and a target bonus of at least $1.2 million. What's the business case for the perquisite allowance?

A: The business case for this is there are certain things that are required, whether it's entertainment, whether it's a personal trip at the end of business trip. A great example is, I have a place in Hilton Head. I'm in Miami at our Professional Employer Organization, I'm in Atlanta at our national account sales unit _ it's a bad use of my time to fly to Atlanta, fly back to Newark on a commercial flight and fly back to Hilton Head. So I'd rather pay the company for the personal use of that airplane between Atlanta and Hilton Head. And it's for use for exactly those kinds of things, which will make me more effective in terms of properly utilizing my time.