SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2002 Commission File Number 1-5397
------------------- --------
Automatic Data Processing, Inc.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-1467904
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One ADP Boulevard, Roseland, New Jersey 07068
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (973) 974-5000
--------------------------
No change Former name, former address & former fiscal year, if changed since
last report.
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed with the commission and (2) has
been subject to the filing requirements for at least the past 90 days.
X Yes No
- ---------------------------------- ----------------------------
As of December 31, 2002 there were 599,595,005 common shares outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
REVENUES: 2002 2001 2002 2001
---- ---- ---- ----
Revenues, other than interest
on funds held for clients
and PEO revenues $1,510,396 $1,508,922 $2,986,820 $2,942,398
Interest on funds held for
clients 87,762 110,072 177,627 223,260
PEO revenues (A) 84,837 62,034 165,233 123,253
---------- ---------- ---------- ----------
TOTAL REVENUES 1,682,995 1,681,028 3,329,680 3,288,911
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses 702,716 691,970 1,411,184 1,368,322
Selling, general, and
administrative
expenses 402,005 393,558 849,958 850,119
Systems development and
programming costs 121,380 117,540 241,278 233,369
Depreciation and amortization 68,699 68,449 136,383 137,912
Other income, net (35,255) (20,389) (72,973) (50,911)
---------- ---------- ---------- ----------
TOTAL EXPENSES 1,259,545 1,251,128 2,565,830 2,538,811
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 423,450 429,900 763,850 750,100
Provision for income taxes 161,760 165,300 291,760 288,900
---------- ---------- ---------- ----------
NET EARNINGS $ 261,690 $ 264,600 $ 472,090 $ 461,200
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.44 $ 0.43 $ 0.78 $ 0.75
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.43 $ 0.42 $ 0.78 $ 0.73
========== ========== ========== ==========
Dividends per common share $ 0.1200 $ 0.1150 $ 0.2350 $ 0.2175
========== ========== ========== ==========
(A) Net of pass-through costs of $873,488 and $649,939 for the three months
ended December 31, 2002 and 2001, respectively, and $1,636,867 and $1,246,401
for the six months ended December 31, 2002 and 2001, respectively.
See notes to the consolidated financial statements.
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
December 31, June 30,
Assets 2002 2002
- ------ ----------- -----------
Current assets:
Cash and cash equivalents $ 971,482 $ 798,810
Short-term marketable securities 593,023 677,005
Accounts receivable, net 988,865 1,045,170
Other current assets 339,984 296,272
----------- -----------
Total current assets 2,893,354 2,817,257
Long-term marketable securities 897,402 1,273,768
Long-term receivables 175,037 192,769
Property, plant and equipment:
Land and buildings 456,510 458,478
Data processing equipment 734,789 696,829
Furniture, leaseholds and other 561,537 540,217
----------- -----------
1,752,836 1,695,524
Less accumulated depreciation (1,183,728) (1,099,073)
----------- -----------
569,108 596,451
Other assets 432,808 293,808
Goodwill 1,444,615 1,375,654
Intangible assets, net 509,300 501,544
----------- -----------
Total assets before funds held for clients 6,921,624 7,051,251
Funds held for clients 12,081,319 11,225,271
----------- -----------
Total assets $19,002,943 $18,276,522
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 126,505 $ 148,694
Accrued expenses & other liabilities 1,039,919 1,035,389
Income taxes payable 170,456 227,019
----------- -----------
Total current liabilities 1,336,880 1,411,102
Long-term debt 82,446 90,648
Other liabilities 262,216 233,671
Deferred income taxes 337,413 237,633
Deferred revenue 243,975 138,893
----------- -----------
Total liabilities before client funds
obligations 2,262,930 2,111,947
Client funds obligations 11,760,904 11,050,370
----------- -----------
Total liabilities 14,023,834 13,162,317
Shareholders' equity:
Common stock, par value $0.10 per share:
authorized 1,000,000 shares; issued 638,702
shares, respectively 63,870 63,870
Capital in excess of par value 254,001 333,371
Retained earnings 6,307,973 5,977,318
Treasury stock, at cost: 39,108 and 22,385
shares, respectively (1,664,463) (1,142,041)
Accumulated other comprehensive income (loss) 17,728 (118,313)
----------- -----------
Total shareholders' equity 4,979,109 5,114,205
----------- -----------
Total liabilities and shareholders' equity $19,002,943 $18,276,522
=========== ===========
See notes to the consolidated financial statements.
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
December 31,
2002 2001
---------- ----------
Cash Flows from Operating Activities
- ------------------------------------
Net earnings $ 472,090 $ 461,200
Adjustments to reconcile net earnings
to net cash flows provided by operating
activities:
Expenses not requiring outlay of cash 170,481 188,909
Changes in operating net assets (26,159) 62,188
---------- ----------
Net cash flows provided by operating activities 616,412 712,297
---------- ----------
Cash Flows from Investing Activities
- ------------------------------------
Purchases of marketable securities (1,697,556) (2,058,862)
Proceeds from sale of marketable securities 2,095,677 1,125,255
Net (purchases) proceeds of client fund
money market securities (618,834) 1,352,586
Net change in client funds obligations 710,534 (411,144)
Capital expenditures (56,936) (65,515)
Additions to intangibles (44,396) (47,601)
Acquisitions of businesses, net of cash acquired (38,928) (122,274)
Other 3,616 6,381
---------- ----------
Net cash flows provided by (used in)
investing activities 353,177 (221,174)
---------- ----------
Cash Flows from Financing Activities
- ------------------------------------
Net proceeds from short-term borrowings 766 49,803
Payments of debt (826) (3,299)
Proceeds from exercise of stock options 64,419 107,661
Repurchases of common stock (719,840) (459,143)
Dividends paid (141,436) (134,534)
---------- ----------
Net cash flows used in financing activities (796,917) (439,512)
---------- ----------
Net increase in cash and cash equivalents 172,672 51,611
Cash and cash equivalents, beginning of period 798,810 1,275,356
---------- ----------
Cash and cash equivalents, end of period $ 971,482 $1,326,967
========== ==========
See notes to the consolidated financial statements.
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, amounts in thousands, except per share amounts)
(Unaudited)
The information furnished herein reflects all adjustments, which are in the
opinion of management, necessary for a fair presentation of the results for the
interim periods. Adjustments are of a normal recurring nature. These
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and related notes of Automatic Data
Processing, Inc. (ADP or the Company) as of and for the year ended June 30,
2002. The results of operations for the three and six months ended December 31,
2002 may not be indicative of the results to be expected for the year ending
June 30, 2003.
Note 1. Significant Accounting Policies (Supplemental to the Notes to the
Consolidated Financial Statements as of and for the year ended June 30, 2002)
A. Revenue Recognition. A majority of the Company's revenues are attributable to
fees for providing services (e.g., Employer Services' payroll processing fees
and Brokerage Services' trade processing fees) as well as investment income on
payroll funds, tax filing funds and other Employer Services client related
funds. The Company typically enters into agreements for a fixed fee per
transaction (e.g., number of payees). Fees associated with services are
recognized in the period services are rendered and earned under service
arrangements with clients where service fees are fixed or determinable and
collectibility is reasonably assured. Interest income on collected but not yet
remitted funds held for clients is recognized in revenues as earned.
The Company also recognizes revenues associated with the sale of software
systems and associated software licenses. For a majority of the Company's
software sales arrangements, which provide hardware, software licenses,
installation and post customer support, revenues are recognized ratably over the
software license term as objective evidence of the fair values of the individual
elements in the sales arrangement does not exist. For the remainder of sales of
software systems, revenues are recognized when the objective evidence of the
fair values of the individual elements of a sales arrangement containing
hardware, software license, implementation, conversion and post-implementation
services can be objectively determined. The amounts and timing of revenue
recognition are determined for each element in an arrangement. As part of the
sale of software systems, the Company recognizes revenue from the sale of
hardware, which is recorded net of the associated costs.
Postage fees for client mailings are included in revenues and the associated
postage expenses are included in operating expenses. Professional Employer
Organization (PEO) service revenues are included in revenues and are reported
net of direct costs billed and incurred for PEO worksite employees, which
primarily include payroll wages and payroll taxes.
B. Internal Use Software. The Company capitalizes certain costs associated with
computer software developed or obtained for internal use in accordance with the
provisions of Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The Company's policy
provides for the capitalization of external direct costs of materials and
services associated with developing or obtaining internal use computer software.
In addition, ADP also capitalizes certain payroll and payroll related costs for
employees who are directly associated with internal-use computer software
projects.
The amount of capitalizable payroll costs with respect to these employees is
limited to the time directly spent on such projects. Costs associated with
preliminary project stage activities, training, maintenance and all other post
implementation stage activities are expensed as incurred. The Company also
expenses internal costs related to minor upgrades and enhancements, as it is
impractical to separate these costs from normal maintenance activities.
Capitalized costs related to computer software developed or obtained for
internal use are amortized over a three-year period on a straight-line basis.
C. Computer Software to be Sold, Leased or otherwise Marketed. The Company
capitalizes certain costs of computer software to be sold, leased or otherwise
marketed in accordance with the provisions of Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed". ADP's policy provides for the capitalization of
all software production costs upon reaching technological feasibility for a
specific product. Technological feasibility is attained when software products
have a completed working model whose consistency with the overall product design
has been confirmed by testing. Costs incurred prior to the establishment of
technological feasibility are expensed as incurred. The establishment of
technological feasibility requires considerable judgment by management and in
many instances is only attained a short time prior to the general release of the
software. Upon the general release of the software product to customers,
capitalization ceases and such costs are amortized over a three-year period on a
straight-line basis. Maintenance related costs are expensed as incurred.
Note 2. Earnings Per Share (EPS)
For the periods ended December 31, 2002
-------------------------------------------------------
Three months ended Six months ended
-------------------------- -------------------------
Net Average Net Average
Earnings Shares EPS Earnings Shares EPS
-------- ------- ----- -------- ------- -----
Basic $261,690 598,064 $0.44 $472,090 602,418 $0.78
Effect of zero coupon
subordinated notes 302 1,717 615 1,757
Effect of stock
options - 5,010 - 4,608
-------- ------- -------- -------
Diluted $261,992 604,791 $0.43 $472,705 608,783 $0.78
======== ======= ===== ======== ======= ======
For the periods ended December 31, 2001
-------------------------------------------------------
Three months ended Six months ended
-------------------------- -------------------------
Net Average Net Average
Earnings Shares EPS Earnings Shares EPS
-------- ------- ----- -------- ------- -----
Basic $264,600 617,335 $0.43 $461,200 618,957 $0.75
Effect of zero coupon
subordinated notes 403 2,410 879 2,556
Effect of stock
options - 10,492 - 9,988
-------- ------- -------- -------
Diluted $265,003 630,237 $0.42 $462,079 631,501 $0.73
======== ======= ===== ======== ======= ======
Note 3. Other Income, net
Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Interest income on corporate
funds $(34,348) $(24,280) $(74,052) $(57,825)
Interest expense 7,478 6,351 15,454 13,368
Realized gains on available-
for-sale securities (9,689) (3,236) (16,592) (7,316)
Realized losses on available-
for-sale securities 1,304 776 2,217 862
-------- -------- -------- --------
Total other income, net $(35,255) $(20,389) $(72,973) $(50,911)
======== ======== ======== ========
Proceeds from the sale of available-for-sale securities were $1.1 billion and
$0.5 billion for the three months ended December 31, 2002 and 2001,
respectively, and $2.1 billion and $1.1 billion for the six months ended
December 31, 2002 and 2001, respectively.
Note 4. Comprehensive Income
Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Net earnings $261,690 $264,600 $472,090 $461,200
Other comprehensive income:
Foreign currency translation
adjustment 30,723 9,016 39,673 47,418
Unrealized gains(losses) on
available-for-sale securities,
net (5,337) (41,442) 96,368 34,942
-------- -------- -------- --------
Total comprehensive income $287,076 $232,174 $608,131 $543,560
======== ======== ======== ========
Note 5. Interim Financial Data by Segment
Employer Services, Brokerage Services and Dealer Services are the Company's
largest business units. ADP evaluates performance of its business units based on
recurring operating results before interest on corporate funds, foreign currency
gains and losses and income taxes. Certain revenues and expenses are charged to
business units at a standard rate for management and motivation reasons. Other
costs are recorded based on management responsibility. Prior year's business
unit revenues and earnings before income taxes have been adjusted to reflect
updated fiscal year 2003 budgeted foreign exchange rates. "Other" consists
primarily of Claims Services, miscellaneous processing services and corporate.
Reconciling items for revenues and earnings before income taxes include foreign
exchange differences between the actual foreign exchange rates and the 2003
budgeted foreign exchange rates and the adjustment for the difference between
actual interest income earned on invested funds held for clients and interest
credited to Employer Services at a standard rate of 6%. The business unit
results also include a cost of capital charge related to the funding of
acquisitions and other investments. This charge is eliminated in consolidation
and as such represents a reconciling item to earnings before income taxes.
Business Segment Results:
(In millions) Revenues
------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Employer Services $1,063 $1,025 $2,072 $1,996
Brokerage Services 315 365 669 725
Dealer Services 195 174 385 349
Other 127 123 232 225
Reconciling items
Foreign exchange 17 2 33 4
Client fund interest (34) (8) (61) (10)
------ ------ ------ ------
Total revenues $1,683 $1,681 $3,330 $3,289
====== ====== ====== ======
(In millions) Earnings Before Income Taxes
------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -----------------
2002 2001 2002 2001
------ ------ ------ -----
Employer Services $ 296 $ 274 $ 536 $ 489
Brokerage Services 33 63 89 130
Dealer Services 34 30 63 57
Other 63 43 77 29
Reconciling items
Foreign exchange 1 - 2 -
Client fund interest (34) (8) (61) (10)
Cost of capital
charge 30 28 58 55
------ ------ ------ -----
Total earnings before
income taxes $ 423 $ 430 $ 764 $ 750
====== ====== ====== =====
Note 6: Corporate Investments and Funds Held for Clients
December 31, 2002 June 30, 2002
Cost Fair Value Cost Fair Value
---------- ---------- ----------- -----------
Money market securities
and other cash
equivalents:
Corporate investments $ 971,482 $ 971,482 $ 798,810 $ 798,810
Funds held for clients 3,951,646 3,951,646 3,319,646 3,319,646
----------- ---------- ----------- -----------
Total money market
securities and other
cash equivalents 4,923,128 4,923,128 4,118,456 4,118,456
----------- ----------- ----------- -----------
Available-for-sale
securities:
Corporate investments 1,441,446 1,490,425 1,916,896 1,950,773
Funds held for clients 7,809,259 8,129,673 7,730,724 7,905,625
----------- ----------- ----------- -----------
Total available-for-sale
securities 9,250,705 9,620,098 9,647,620 9,856,398
----------- ----------- ----------- -----------
Total corporate investments
and funds held for
clients $14,173,833 $14,543,226 $13,766,076 $13,974,854
=========== =========== =========== ===========
All of the Company's marketable securities are considered to be
"available-for-sale" at December 31, 2002 and June 30, 2002 and accordingly are
carried on the Consolidated Balance Sheets at fair value.
Note 7. Goodwill and Intangible Assets, net
Changes in goodwill for the six months ended December 31, 2002 are as follows:
Employer Brokerage Dealer
Services Services Services Other Total
-------- -------- -------- -------- ----------
Balance as of
June 30, 2002 $751,451 $348,960 $182,642 $ 92,601 $1,375,654
Additions 16,223 6,177 17,735 9,680 49,815
Cumulative
translation
adjustments 15,570 336 269 2,971 19,146
-------- -------- -------- -------- ----------
Balance as of
December 31, 2002 $783,244 $355,473 $200,646 $105,252 $1,444,615
======== ======== ======== ======== ==========
Components of intangible assets are as follows:
December 31, June 30,
2002 2002
---------- ----------
Intangible assets:
Software licenses $ 498,716 $ 462,474
Customer contracts and lists 387,556 360,268
Other intangibles 410,129 398,495
---------- ----------
1,296,401 1,221,237
Less accumulated amortization (787,101) (719,693)
---------- ----------
Intangible assets, net $ 509,300 $ 501,544
========== ==========
Other intangible assets consist primarily of purchased rights, covenants and
patents (acquired directly or through acquisitions). All of the intangible
assets have finite lives and as such are subject to amortization. The
weighted-average remaining useful life of the intangible assets is 11 years (2
years for software licenses, 17 years for customer contracts and lists and 14
years for other). Amortization of intangibles totaled $27.4 million and $27.6
million for the three months ended December 31, 2002 and 2001, respectively, and
totaled $54.7 million and $54.0 million for the six months ended December 31,
2002 and 2001, respectively. Estimated amortization expense of our existing
intangible assets over the remaining six months of fiscal 2003 and the
succeeding five fiscal years is as follows:
Amount
------
2003 $ 56,214
2004 86,035
2005 53,046
2006 30,658
2007 25,145
2008 20,071
Note 8. Short-term Financing
In October 2002, the Company entered into a new $4.0 billion unsecured revolving
credit agreement with certain financial institutions, replacing an existing $4.0
billion credit agreement. The interest rate applicable to the borrowings is tied
to LIBOR or prime rate depending on the notification provided to the syndicated
financial institutions prior to borrowing. The Company is also required to pay a
facility fee on the credit agreement. The primary uses of the credit facility
are to provide liquidity to the unsecured commercial paper program and to fund
normal business operations, if necessary. The Company has had no borrowings to
date under the credit agreement, which expires in October 2003.
In April 2002, the Company initiated a short-term commercial paper program
providing for the issuance of up to $4.0 billion in aggregate maturity value of
commercial paper at the Company's discretion. The Company's commercial paper
program is rated A-1+ by Standard and Poor's and Prime 1 by Moody's. These
ratings denote the highest quality investment grade securities. Maturities of
commercial paper can range from overnight to 270 days. The Company uses the
commercial paper issuances as a primary instrument to meet short-term funding
requirements related to client funds obligations. For the three and six-month
periods ended December 31, 2002, the Company had average borrowings of $1.3
billion, at an effective weighted average interest rate of 1.5% and 1.6%,
respectively. There was no commercial paper outstanding at December 31, 2002.
Note 9. Commitments and Contingencies
In the normal course of business, the Company enters into contracts in which it
makes representations and warranties that guarantee the performance of ADP's
products and counter-party risk as well as other indemnifications entered into
in the normal course of business. Historically, there have been no material
losses related to such guarantees.
Note 10. Subsequent Event
On January 5, 2003, the Company entered into a definitive agreement to acquire
all of the outstanding shares of ProBusiness Services, Inc. (ProBusiness) for
$17.00 per common share. The transaction will be consummated in cash and is
valued at approximately $500 million. The transaction is subject to ProBusiness
shareholder approval and regulatory review.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATION
- --------------------
Critical Accounting Policies
The Company's Consolidated Financial Statements and accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company's management to make estimates, judgments, and assumptions that
affect reported amounts of assets, liabilities, revenues and expenses. The
Company continually evaluates the accounting policies and estimates used to
prepare the consolidated financial statements. The Company's estimates are based
on historical experience and assumptions believed to be reasonable under current
facts and circumstances. Actual amounts and results could differ from these
estimates made by management. Certain accounting policies that require
significant management estimates and are deemed critical to the Company's
results of operations or financial position are discussed below.
Revenue Recognition. The Company's revenues are primarily attributable to fees
for providing services (e.g., Employer Services' payroll processing fees and
Brokerage Services' trade processing fees) as well as investment income on
payroll funds, tax filing funds and other Employer Services client related
funds. We typically enter into agreements for a fixed fee per transaction (e.g.,
number of payees). Fees associated with services are recognized in the period
services are rendered and earned under service arrangements with clients where
service fees are fixed or determinable and collectibility is reasonably assured.
Interest income on collected but not yet remitted funds held for clients is
recognized in revenues as earned.
The Company also recognizes revenues associated with the sale of software
systems and associated software licenses. For a majority of our software sales
arrangements, which provide hardware, software licenses, installation and post
customer support, revenues are recognized ratably over the software license term
as objective evidence of the fair values of the individual elements in the sales
arrangement does not exist. For the remainder of sales of software systems,
revenues are recognized when the objective evidence of the fair values of the
individual elements of a sales arrangement containing hardware, software
license, implementation, conversion and post-implementation services can be
objectively determined. The amounts and timing of revenue recognition are
determined for each element in an arrangement.
The majority of the Company's revenues are generated from a fee for service
model (e.g., fixed-fee per transaction processed) in which the Company
recognizes revenue when the related services have been rendered under written
price quotations or service agreements having stipulated terms and conditions
which do not require management to make any significant judgments or assumptions
regarding any potential uncertainties.
Goodwill. We review the carrying value of all our goodwill in accordance with
Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other
Intangible Assets," by comparing the carrying value of our reporting units to
their fair values. We are required to perform this comparison at least annually
or more frequently if circumstances indicate possible impairment. When
determining fair value, we utilize various assumptions, including projections of
future cash flows. Any significant adverse changes in key assumptions about our
businesses and their prospects or an adverse change in market conditions may
cause a change in the estimation of fair value and could result in an impairment
charge. Given the significance of our goodwill, an adverse change to the fair
value could result in an impairment charge, which could be material to our
financial statements.
Income taxes. The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes," which establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity's financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns (e.g., realization of deferred tax assets). Fluctuations in the
actual outcome of these future tax consequences could materially impact our
financial statements.
RESULTS OF OPERATIONS
Revenues and earnings per share again reached record levels during the quarter
and six-month period ended December 31, 2002. Consolidated revenues for the
latest quarter of approximately $1.7 billion increased 0.1% from the prior year
comparable quarter. For the six-month period, revenues have increased 1.2% over
the prior year six-month period. Employer Services' revenues grew at 4.0% for
both the quarter and six months, and Dealer Services experienced double-digit
revenue growth of 12% and 10% for the quarter and six-month period,
respectively. Brokerage Services' revenues declined 14% for the quarter and
declined 8.0% for the six-month period. Revenue growth for the three and
six-month periods were impacted primarily by the continued weak conditions in
the overall economy, lower comparable interest rates and weakness in the
brokerage industry.
Operating expenses increased 1.6% and 3.1% for the three and six-month periods
respectively, compared to the prior year. Operating expenses for both periods
fluctuated generally with revenues, except at Brokerage Services where the
percentage decrease in operating expenses was lower than the percentage decrease
in revenue. For the quarter, selling, general and administrative expenses
increased 2.1% over the prior year driven by the growth in Dealer Services.
Selling, general, and administrative expenses were flat for the six-month period
compared to the prior year reflecting both ADP's overall growth level and cost
containment efforts.
Relative to prior year periods, systems development and programming costs
increased 3.3% and 3.4% for the three and six-month periods as ADP continues to
focus on developing and improving its products, and maintaining its existing
systems. Depreciation and amortization expense increased 0.4% in the quarter and
decreased 1.1% for the six-month period reflecting a curtailment of capital
expenditures compared to last year.
Other income in the quarter increased by $15 million over the prior year and by
$22 million for the six-month period compared to prior year due mainly to
increased interest on corporate funds. An increase in the corporate fund
portfolio's duration and average balance offset a decline in interest rates.
Earnings before income taxes for the quarter decreased 1.5% to $423 million from
$430 million in the prior year quarter. Earnings before income taxes for the
six-month period increased 1.8% to $764 million from $750 million in the prior
year six-month period.
The effective income tax rate was 38.2% of earnings before income taxes in the
current quarter and in the six-month period compared to 38.5% in the prior year
quarter and six-month period. The decrease in the effective income tax rate was
due to several factors, primarily a favorable mix in income among tax
jurisdictions and the utilization of additional tax credits.
As a result of the above-mentioned items, net earnings for the quarter decreased
1.1% to $262 million from $265 million in the prior year quarter. Net earnings
for the six-month period increased 2.4% to $472 million from $461 million in the
prior year six-month period.
Diluted earnings per share for the quarter and six-month period, on fewer shares
outstanding due to share repurchases, increased to $0.43 from $0.42, and $0.78
from $0.73, respectively.
Revenues and percentage changes in revenues by ADP's business segments for the
three and six months ended December 31, 2002 and 2001 are shown below:
(In millions) Revenues
------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
Employer Services $1,063 $1,025 $2,072 $1,996
Brokerage Services 315 365 669 725
Dealer Services 195 174 385 349
Other 127 123 232 225
Reconciling items
Foreign exchange 17 2 33 4
Client fund interest (34) (8) (61) (10)
------ ------ ------ ------
Total revenues $1,683 $1,681 $3,330 $3,289
====== ====== ====== ======
Percentage Changes in Revenues
-----------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
2002 2001 2002 2001
----- ---- ---- ----
Employer Services 4% 5% 4% 7%
Brokerage Services (14) (1) (8) -
Dealer Services 12 3 10 4
Other 3 19 3 11
Total revenues 0% 3% 1% 4%
Earnings before income taxes and the corresponding percentage changes by ADP
business segments for the three and six months ended December 31, 2002 and 2001
are shown below:
(In millions) Earnings Before Income Taxes
------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
Employer Services $ 296 $ 274 $ 536 $ 489
Brokerage Services 33 63 89 130
Dealer Services 34 30 63 57
Other 63 43 77 29
Reconciling items
Foreign exchange 1 - 2 -
Client fund interest (34) (8) (61) (10)
Cost of capital
charge 30 28 58 55
------ ------ ------ ------
Total earnings before
income taxes $ 423 $ 430 $ 764 $ 750
====== ====== ====== ======
Percentage Changes in
Earnings Before Income Taxes
-----------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
2002 2001 2002 2001
----- ---- ----- ----
Employer Services 8% 22% 10% 22%
Brokerage Services (48) 3 (32) 3
Dealer Services 12 11 11 11
Other 46 (26) 164 (26)
Total earnings before
income taxes (2)% 11% 2% 11%
Revenue growth in Employer Services was 4.0% for both the quarter and six-month
periods as compared to the prior year. Although impacted by the continued weak
economy, revenues increased primarily from new business and an improvement of
better than 1 percentage point in client retention for the quarter relative to
the prior year quarter. For the six-month period, client retention increased
approximately 1 percentage point compared to last year. The international
segment experienced a decline in revenues of 3.7% for the quarter and 1.6% for
the six-month period. New business sales declined 2.0% in the quarter, but have
increased 1.0% for the six-month period. Earnings before income taxes increased
by 8.0% for the quarter and 10% for the six-month period as a result of
increased revenue and continued cost containment.
Relative to prior year, Brokerage Services' revenues declined by 14% for the
quarter and 8.0% for the six-month period. Continued industry consolidations,
lower retail trading volume and reduced discretionary spending in the financial
services industry impacted Brokerage Services' results. In addition, the number
of mailings and the postage per mailing declined. Earnings before income taxes
in our Brokerage segment declined 48% in the quarter and 32% for the six-month
period. There was a more significant decline in Earnings before income taxes in
Brokerage Services' Investor Communications and Processing Services Divisions in
the three-months ended December 31, 2002 than in the three months ended
September 30, 2002.
Dealer Services' revenue growth was 12% in the quarter over the prior year and
10% for the six-month period. Growth for both periods has been generated by
acquisitions, strong client retention, and increased revenues in the traditional
core business as well as from new businesses, primarily Application Service
Provider (ASP) managed services, Networking and Computer Vehicle Registration.
Sales of our Customer Relationship Management Systems continue to be strong.
Earnings before income taxes for the quarter grew by 12% relative to the prior
year and by 11% for the six-month period.
The prior year's business unit revenues and earnings before income taxes have
been adjusted to reflect updated fiscal year 2003 budgeted foreign exchange
rates. "Other" consists primarily of Claims Services, miscellaneous processing
services and corporate.
Reconciling items for revenues and earnings before income taxes include foreign
exchange differences between the actual and the fiscal year 2003 budgeted
foreign exchange rates and the adjustment for the difference between actual
interest income earned on invested funds held for clients and interest credited
to Employer Services at a standard rate of 6%.
The business unit results also include a cost of capital charge related to the
funding of acquisitions and other investments. This charge is eliminated in
consolidation and as such represents a reconciling item to earnings before
income taxes.
In fiscal 2003, ADP is forecasting another record year of both revenue and
diluted earnings per share growth in the low single-digits over fiscal 2002 full
year results.
FINANCIAL CONDITION
The Company's financial condition and balance sheet remain strong. At December
31, 2002, the Company had cash and marketable securities of $2.5 billion.
Shareholders' equity was approximately $5.0 billion and the ratio of long-term
debt to equity was approximately 2%.
Capital expenditures for fiscal year 2003 are expected to approximate $160
million compared to $146 million in fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operations were $616.4 million for the six months
ended December 31, 2002 compared to $712.3 million for the six months ended
December 31, 2001. The decrease in cash provided from operations was primarily
attributable to the discretionary funding of employee benefit plans, offset in
part by the increase in net earnings.
Cash flows provided by investing activities totaled $353.2 million for the
six-month period ended December 31, 2002 primarily as a result of the net change
in client funds obligations, partially offset by the net purchases of marketable
securities, acquisitions of businesses and capital expenditures during the
period.
Cash flows used in financing activities during the six-month period ended
December 31, 2002 totaled $796.9 million. The Company purchased approximately
20.5 million shares of common stock at an average price per share of
approximately $35 during the period. On November 12, 2002, the Board of
Directors authorized the purchase of an additional 35 million shares of common
stock and as of December 31, 2002, the Company has remaining Board of Directors
authorization to purchase up to 50.4 million additional shares.
During the six month period ended December 31, 2002, approximately fifteen
percent of the Company's overall investment portfolio was invested in cash and
cash equivalents, which are impacted almost immediately by changes in short-term
interest rates. The other eighty-five percent of the Company's investment
portfolio was invested in fixed-income securities, with varying maturities up to
ten years, which are also subject to interest rate risk, including reinvestment
risk. The Company has historically had the ability to hold these investments
until maturity and therefore, fluctuations in interest rates have not had an
adverse impact on income or cash flows.
Details regarding the Company's combined corporate investments and funds held
for clients portfolios are as follows:
Three months ended Six months ended
December 31, December 31,
------------------- --------------------
(In millions) 2002 2001 2002 2001
---- ---- ---- ----
Average investment balances
at cost:
Corporate investments $ 3,465.5 $ 3,073.4 $ 3,596.4 $ 3,033.7
Funds held for clients 7,997.3 7,807.7 7,813.3 7,710.7
--------- --------- --------- ---------
Total $11,462.8 $10,881.1 $11,409.7 $10,744.4
========= ========= ========= =========
Average interest rates earned
exclusive of realized gains
(losses) for the total
combined corporate investments
and funds held for clients'
portfolios (pre-tax) 4.2% 5.1% 4.4% 5.3%
Realized gains on available-
for-sale securities $ 9.7 $ 3.2 $ 16.6 $ 7.3
Realized losses on available-
for-sale securities (1.3) (0.7) (2.2) (0.8)
--------- -------- -------- --------
Net realized gains $ 8.4 $ 2.5 $ 14.4 $ 6.5
========= ======== ======== ========
December 31, June 30,
2002 2002
------------ -----------
Unrealized pre-tax gains on available-for-
sale securities $ 369.4 $ 208.8
Total available-for-sale securities $ 9,620.1 $ 9,856.4
The earnings impact of future interest rate changes is based on many factors,
which influence the return on the Company's portfolio. These factors include,
among others, the overall portfolio mix between short-term and long-term
investments. This mix varies during the year and is impacted by daily interest
rate changes. A hypothetical change in interest rates of 25 basis points applied
to the average projected investment balances for fiscal 2003 would result in
approximately a $9 million impact to earnings before income taxes over the
twelve-month period.
In October 2002, the Company entered into a new $4.0 billion unsecured revolving
credit agreement with certain financial institutions, replacing an existing $4.0
billion credit agreement. The interest rate applicable to the borrowings is tied
to LIBOR or prime rate depending on the notification provided to the syndicated
financial institutions prior to borrowing. The Company is also required to pay a
facility fee on the credit agreement. The primary uses of the credit facility
are to provide liquidity to the unsecured commercial paper program and to fund
normal business operations, if necessary. The Company has had no borrowings to
date under the credit agreement, which expires in October 2003.
In April 2002, the Company initiated a short-term commercial paper program
providing for the issuance of up to $4.0 billion in aggregate maturity value of
commercial paper at any given time. The Company's commercial paper program is
rated A-1+ by Standard and Poor's and Prime 1 by Moody's. These ratings denote
the highest quality investment grade securities. Maturities of commercial paper
can range from overnight to 270 days. The Company uses the commercial paper
issuances as a primary instrument to meet short-term funding requirements
related to client funds obligations. For the three and six- month periods ended
December 31, 2002, the Company had average borrowings of $1.3 billion at an
effective weighted average interest rate of 1.5% and 1.6%, respectively. There
was no commercial paper outstanding at December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure"(SFAS 148) which amends Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and requires more prominent and more frequent disclosures
in the financial statements of the effects of stock-based compensation. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for interim periods
beginning after December 15, 2002. The Company will provide the required interim
and annual disclosures beginning in the quarter ended March 31, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" which elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
face value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company has provided information regarding commitments and contingencies
relating to guarantees in note 9 to the consolidated financial statements
included herein.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146), which nullifies Emerging Issues Task Force Issue No. 94-3 (EITF 94-3),
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost as defined in EITF 94-3 was recognized at the date of
an entity's commitment to an exit plan. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS 146 may affect the timing of the recognition of future exit and
disposal costs.
RECENT DEVELOPMENT
On January 5, 2003, the Company entered into a definitive agreement to acquire
all of the outstanding shares of ProBusiness Services, Inc. (ProBusiness) for
$17.00 per common share. The transaction will be consummated in cash and is
valued at approximately $500 million. The transaction is subject to ProBusiness
shareholder approval and regulatory review.
OTHER MATTERS
This report contains "forward-looking statements" based on management's
expectations and assumptions and are subject to risks and uncertainties that may
cause actual results to differ from those expressed. Factors that could cause
differences include, but are not limited to: ADP's success in obtaining,
retaining and selling additional services to clients; the pricing of products
and services; changes in laws regulating payroll taxes and employee benefits;
overall economic trends, including interest rate and foreign currency trends;
stock market activity; auto sales and related industry changes; employment
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-14 and 15d-14 under the Securities and
Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these disclosure controls,
subsequent to the date of this evaluation.
PART II. OTHER INFORMATION
Except as noted below, all other items are either inapplicable or would result
in negative responses and, therefore, have been omitted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of the Shareholders was held on November 12, 2002.
There were present at the meeting, either in person or by proxy, holders of
518,452,424 common shareholders. The following members were elected to the
Company's Board of Directors to hold office for the ensuing year. The votes cast
for each director were as follows:
Nominee For Withheld
- ------- --- --------
Gregory D. Brenneman 511,680,600 6,771,824
Gary C. Butler 511,735,116 6,717,308
Joseph A. Califano, Jr. 490,849,980 27,602,444
Leon G. Cooperman 493,355,979 25,096,445
George H. Heilmeier 511,815,914 6,636,510
Ann Dibble Jordan 492,986,928 25,465,496
Harvey M. Krueger 509,396,025 9,056,399
Frederic V. Malek 511,314,820 7,137,604
Henry Taub 511,624,423 6,828,001
Laurence A. Tisch 511,241,695 7,210,729
Arthur F. Weinbach 509,554,957 8,897,467
Josh S. Weston 511,533,317 6,919,107
The results of the voting on the additional items indicated below was as
follows:
(a) To ratify the appointment of Deloitte & Touche LLP to serve as the
Company's independent certified public accountants for the fiscal year
begun on July 1, 2002. The votes of the shareholders on this
ratification were as follows:
For Against Abstained Broker
----------- ---------- --------- ------
478,824,228 35,997,959 3,618,062 12,175
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Exhibit
------------- -------
99.1 Certification by Arthur F. Weinbach pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification by Karen E. Dykstra pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTOMATIC DATA PROCESSING, INC.
-------------------------------
(Registrant)
Date: January 31, 2003 /s/ Karen E. Dykstra
-----------------------
Karen E. Dykstra
Chief Financial Officer
------------------------
(Title)
CERTIFICATIONS
I, Arthur F. Weinbach, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Automatic Data
Processing, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 31, 2003
/s/ Arthur F. Weinbach
- ------------------------
Arthur F. Weinbach
Chief Executive Officer
I, Karen E. Dykstra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Automatic Data
Processing, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 31, 2003
/s/ Karen E. Dykstra
- -----------------------
Karen E. Dykstra
Chief Financial Officer