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 September 30, 2003 Commission File Number 1-5397
------------------ --------------
Automatic Data Processing, Inc.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-1467904
- --------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One ADP Boulevard, Roseland, New Jersey 07068
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (973) 974-5000
-----------------------
No change
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Former name, former address & former fiscal year, if changed since
last report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
X Yes No
- ---------------------------------- ----------------------------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
X Yes No
- ---------------------------------- ----------------------------
As of September 30, 2003 there were 594,438,170 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
September 30,
-------------------------
REVENUES: 2003 2002
---------- ----------
Revenues other than interest on funds
held for clients and PEO revenues $1,532,389 $1,476,424
Interest on funds held for clients 82,934 89,865
PEO revenues (A) 104,954 80,396
---------- ----------
Total revenues 1,720,277 1,646,685
---------- ----------
EXPENSES:
Operating expenses 794,241 708,468
Selling, general and administrative
expenses 426,878 447,953
Systems development and programming costs 131,754 119,898
Depreciation and amortization 74,726 67,684
Other income, net (18,592) (37,718)
---------- ----------
TOTAL EXPENSES 1,409,007 1,306,285
---------- ----------
EARNINGS BEFORE INCOME TAXES 311,270 340,400
Provision for income taxes 116,420 130,000
---------- ----------
NET EARNINGS $ 194,850 $ 210,400
========== ==========
BASIC EARNINGS PER SHARE $ 0.33 $ 0.35
========== ==========
DILUTED EARNINGS PER SHARE $ 0.32 $ 0.34
========== ==========
Basic average shares outstanding 594,843 606,814
========== ==========
Diluted average shares outstanding 600,849 612,517
========== ==========
Dividends per common share $ .1200 $ .1150
========== ==========
(A) Net of pass-through costs of $911,569 and $763,379, respectively.
See notes to the consolidated financial statements.
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
September 30, June 30,
2003 2003
----------- -----------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 1,351,711 $ 1,410,218
Short-term marketable securities 507,716 595,166
Accounts receivable, net 931,793 1,005,833
Other current assets 534,647 664,284
----------- -----------
Total current assets 3,325,867 3,675,501
Long-term marketable securities 457,743 338,959
Long-term receivables 173,190 180,354
Property, plant and equipment, net 604,504 614,701
Other assets 676,528 565,385
Goodwill 1,942,493 1,981,131
Intangible assets, net 648,454 669,891
----------- -----------
Total assets before funds held for clients 7,828,779 8,025,922
Funds held for clients 10,885,607 11,807,749
----------- -----------
Total assets $18,714,386 $19,833,671
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 149,354 $ 173,988
Accrued expenses and other liabilities 1,319,077 1,609,665
Income taxes payable 239,103 215,130
----------- -----------
Total current liabilities 1,707,534 1,998,783
Long-term debt 84,713 84,674
Other liabilities 291,960 270,267
Deferred income taxes 285,775 320,796
Deferred revenues 401,702 338,763
----------- -----------
Total liabilities before client funds
obligations 2,771,684 3,013,283
Client funds obligations 10,593,069 11,448,915
----------- -----------
Total liabilities 13,364,753 14,462,198
Shareholders' equity:
Common stock, $0.10 par value:
authorized 1,000,000 shares; issued 638,702
shares, respectively 63,870 63,870
Capital in excess of par value 180,838 211,339
Retained earnings 6,834,299 6,710,863
Treasury stock at cost: 44,264 and 43,863,
respectively (1,777,493) (1,773,418)
Accumulated other comprehensive income 48,119 158,819
------------ -----------
Total shareholders' equity 5,349,633 5,371,473
----------- -----------
Total liabilities and shareholders' equity $18,714,386 $19,833,671
=========== ===========
See notes to the consolidated financial statements.
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
September 30,
------------------------
2003 2002
---- ----
Cash Flows From Operating Activities:
- -------------------------------------
Net earnings $ 194,850 $ 210,400
Adjustments to reconcile net earnings to net
cash flows provided by operating activities:
Expenses not requiring outlay of cash 178,819 118,258
Changes in operating net assets (209,349) (91,870)
---------- ----------
Net cash flows provided by operating activities 164,320 236,788
---------- ----------
Cash Flows From Investing Activities:
- -------------------------------------
Purchases of marketable securities (1,440,879) (706,635)
Proceeds from sale of marketable securities 910,078 859,066
Net proceeds from client fund money market
securities 1,315,541 2,407,318
Net change in client funds obligations (855,846) (2,286,144)
Capital expenditures (37,731) (27,208)
Additions to intangibles (20,047) (31,333)
Acquisitions of businesses, net of cash acquired (645) (29,026)
Other 3,902 727
---------- ----------
Net cash flows (used in) provided by investing
activities (125,627) 186,765
---------- ----------
Cash Flows From Financing Activities:
- -------------------------------------
Proceeds from short-term borrowings 109 399
Payments of debt (441) (396)
Proceeds from stock purchase plan and exercises
of stock options 38,772 33,093
Repurchases of common stock (64,332) (640,318)
Dividends paid (71,308) (69,362)
---------- ----------
Net cash flows used in financing activities (97,200) (676,584)
---------- ----------
Net change in cash and cash equivalents (58,507) (253,031)
Cash and cash equivalents, beginning of period 1,410,218 798,810
---------- ----------
Cash and cash equivalents, end of period $1,351,711 $ 545,779
========== ==========
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)
Note 1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods. Adjustments are of a normal
recurring nature. Certain reclassifications have been made to the prior period
amounts to conform to the current period presentation. These unaudited
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and related notes of Automatic Data
Processing, Inc. and Subsidiaries (ADP or the Company) as of and for the year
ended June 30, 2003. The results of operations for the three months ended
September 30, 2003 may not be indicative of the results to be expected for the
year ending June 30, 2004.
Note 2. Adoption of New Accounting Pronouncements
In March 2003, the Emerging Issues Task Force (EITF) published Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables" (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it performs multiple revenue-generating activities and
how to determine whether such an arrangement involving multiple deliverables
contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this Issue is effective for revenue arrangements entered in
fiscal periods beginning after June 15, 2003. Accordingly, the Company has
adopted EITF 00-21 effective July 1, 2003. EITF 00-21 does not have a material
impact on the Consolidated Financial Statements.
Note 3. Earnings Per Share (EPS)
For the three months ended September 30,
----------------------------------------------------
2003 2002
------------------------ ------------------------
Net Average Net Average
Earnings Shares EPS Earnings Shares EPS
-------- ------ --- -------- ------ ---
Basic $194,850 594,843 $0.33 $210,400 606,814 $0.35
Effect of zero coupon
subordinated notes 327 1,606 313 1,797
Effect of stock
options - 4,400 - 3,906
-------- ------- -------- -------
Diluted $195,177 600,849 $0.32 $210,713 612,517 $0.34
======== ======= ===== ======== ======= =====
Note 4. Fair Value Accounting for Stock-Based Compensation
The Company accounts for its stock option and employee stock purchase plans
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations, as permitted by Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123). No
stock-based employee compensation expense related to the Company's stock option
and stock purchase plans is reflected in net earnings, as all options granted
under the stock option plans had an exercise price equal to the market value of
the underlying common stock on the date of grant, and for the stock purchase
plans the discount does not exceed fifteen percent.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
Three Months Ended
September 30,
2003 2002
-------- --------
Net earnings, as reported $194,850 $210,400
Deduct: Total stock-based employee
compensation expense determined
using the fair value based method
for all awards, net of related
tax effects (27,084) (34,190)
-------- --------
Pro forma net earnings $167,766 $176,210
======== ========
Earnings per share:
Basic - as reported $0.33 $0.35
===== =====
Basic - pro forma $0.28 $0.29
===== =====
Diluted - as reported $0.32 $0.34
===== =====
Diluted - pro forma $0.28 $0.29
===== =====
Note 5. Other Income, net
Three Months Ended
September 30,
2003 2002
-------- --------
Interest income on corporate
funds $(22,100) $(39,704)
Interest expense 4,651 7,976
Realized gains on available-
for-sale securities (3,260) (6,903)
Realized losses on available-
for-sale securities 2,117 913
-------- --------
Other income, net $(18,592) $(37,718)
======== ========
Proceeds from the sale of available-for-sale securities were $0.9 billion for
the three months ended September 30, 2003 and 2002.
Note 6. Comprehensive Income
Three Months Ended
September 30,
2003 2002
-------- --------
Net earnings $194,850 $210,400
Other comprehensive income:
Foreign currency translation
adjustments (63,658) 8,950
Unrealized gains(losses) on
available-for-sale securities,
net (47,042) 101,705
-------- --------
Total comprehensive income $ 84,150 $321,055
======== ========
Note 7. Interim Financial Data by Segment
Employer Services, Brokerage Services and Dealer Services are the Company's
largest business units. ADP evaluates the performance of its business units
based on 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 motivational 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 2004 budgeted foreign exchange rates. In addition, Employer
Services' prior year's revenues and earnings before income taxes were adjusted
to include interest earned on client funds credited at 4.5%. Prior to fiscal
year 2004, Employer Services was credited with interest earned on client funds
at 6.0%. Given the decline in interest rates over recent years, the standard
rate has been changed to 4.5%. "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 fiscal year 2004 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 4.5%. The business unit results also
include an internal 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.
Segment Results (In millions):
Revenues
-------------------
Three Months Ended
September 30,
-------------------
2003 2002
------ ------
Employer Services $1,110 $1,008
Brokerage Services 313 358
Dealer Services 211 195
Other 110 116
Reconciling items:
Foreign exchange (3) (32)
Client fund interest (21) 2
------ ------
Total revenues $1,720 $1,647
====== ======
Earnings Before
Income Taxes
------------------
Three Months Ended
September 30,
------------------
2003 2002
------ ------
Employer Services $ 206 $ 213
Brokerage Services 20 56
Dealer Services 32 30
Other 41 15
Reconciling items:
Foreign exchange - (4)
Client fund interest (21) 2
Cost of capital
charge 33 28
------ ------
Total earnings before
income taxes $ 311 $ 340
====== ======
Note 8. Corporate Investments and Funds Held for Clients
September 30, 2003 June 30, 2003
------------------------ -----------------------
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
Money market securities
and other cash
equivalents:
Corporate investments $ 1,351,711 $ 1,351,711 $ 1,410,218 $ 1,410,218
Funds held for clients 1,684,416 1,684,416 2,865,957 2,865,957
----------- ---------- ----------- -----------
Total money market
securities and other
cash equivalents 3,036,127 3,036,127 4,276,175 4,276,175
----------- ----------- ----------- -----------
Available-for-sale
securities:
Corporate investments 959,616 965,459 917,026 934,125
Funds held for clients 8,908,653 9,201,191 8,582,958 8,941,792
----------- ----------- ----------- -----------
Total available-for-sale
securities 9,868,269 10,166,650 9,499,984 9,875,917
----------- ----------- ----------- -----------
Total corporate investments
and funds held for
clients $12,904,396 $13,202,777 $13,776,159 $14,152,092
=========== =========== =========== ===========
All of the Company's marketable securities are considered to be
"available-for-sale" at September 30, 2003 and June 30, 2003 and, accordingly,
are carried on the Consolidated Balance Sheets at fair value.
Note 9. Goodwill and Intangible Assets, net
Changes in goodwill for the three months ended September 30, 2003 are as
follows:
Employer Brokerage Dealer
Services Services Services Other Total
---------- -------- -------- ----- -----
Balance as of
June 30, 2003 $1,287,128 $366,775 $215,134 $112,094 $1,981,131
Additions 823 400 - - 1,223
Sale of business (1,315) - - - (1,315)
Cumulative
translation
adjustments (21,020) (2,219) (278) (3,376) (26,893)
Other (5,198) (6,455) - - (11,653)
---------- -------- -------- -------- ----------
Balance as of
September 30, 2003 $1,260,418 $358,501 $214,856 $108,718 $1,942,493
========== ======== ======== ======== ==========
Components of intangible assets are as follows:
September 30, June 30,
2003 2003
---------- ----------
Intangible assets:
Software licenses $ 588,876 $ 575,440
Customer contracts and lists 525,069 538,673
Other 411,931 415,986
---------- ----------
1,525,876 1,530,099
Less accumulated amortization (877,422) (860,208)
---------- ----------
Intangible assets, net $ 648,454 $ 669,891
========== ==========
Other intangible assets consist primarily of purchased rights, covenants,
patents and trademarks (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, 14 years for customer contracts and lists and 14
years for other). Amortization of intangibles totaled $34.3 million and $27.3
million for the three months ended September 30, 2003 and 2002, respectively.
Estimated amortization expenses of the Company's existing intangible assets over
the remaining nine months of fiscal year 2004 and the succeeding five fiscal
years is as follows:
Amount
------
2004 $ 97,064
2005 107,252
2006 67,601
2007 56,936
2008 53,514
2009 39,418
Note 10. Short-term Financing
In September 2003, the Company entered into a new $4.5 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 through September 30, 2003 under the credit agreements. The
new $4.5 billion credit agreement expires in September 2004.
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. At September 30, 2003 and
2002, there was no commercial paper outstanding. For the three months ended
September 30, 2003 and 2002, the Company had average borrowings of $1.1 billion
and $1.3 billion, respectively, at an effective weighted average interest rate
of 1.0% and 1.8%, respectively. The weighted average maturity of the Company's
commercial paper during the three months ended September 30, 2003 was less than
two days.
The Company's short-term financing is sometimes obtained on a secured basis
through the use of repurchase agreements, which are collateralized principally
by government and government agency securities. These agreements generally have
terms ranging from overnight to up to ten days. At September 30, 2003 and 2002,
there were no outstanding repurchase agreements. For the three months ended
September 30, 2003 and 2002, the Company had an average outstanding balance of
$7.2 million and $8.3 million, respectively, at an average interest rate of 2.5%
and 2.8%, respectively.
Note 11. Commitments and Contingencies
It is not the Company's practice to enter into off-balance sheet arrangements.
However, in the normal course of business, the Company does enter into contracts
in which it makes representations and warranties that guarantee the performance
of the Company's products and services as well as other indemnifications entered
into in the normal course of business. Historically, there have been no material
losses related to such guarantees and indemnifications.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our 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 management to
make estimates, judgments and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses. We continually evaluate the
accounting policies and estimates used to prepare the consolidated financial
statements. The 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 our results of operations or financial position are discussed below.
Revenue Recognition. Our 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.
We also recognize 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.
The majority of our revenues are generated from a fee for service model (e.g.,
fixed-fee per transaction processed) in which revenue is recognized 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, our weighted average cost of capital and long-term growth
rates for our business. 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. We have approximately $1.9 billion of goodwill as of September 30, 2003.
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. We account 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 addressing the future tax
consequences of events that have been recognized in our financial statements or
tax returns (e.g., realization of deferred tax assets, results of IRS and other
tax authorities' examinations of our tax returns). Fluctuations in the actual
outcome of these future tax consequences could materially impact our financial
statements.
RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
September 30,
-----------------------
2003 2002 Change
---- ---- ------
Total revenues $1,720 $1,647 4%
-----------------------
Total expenses $1,409 $1,307 8%
Earnings before income
taxes $ 311 $ 340 (9%)
Margin 18.1% 20.7%
-----------------------
Provision for income
taxes $ 116 $ 130 (10%)
Effective tax rate 37.4% 38.2%
-----------------------
Net earnings $ 195 $ 210 (7%)
Diluted earnings per
share $ 0.32 $ 0.34 (6%)
----------------------
Our consolidated revenues for the quarter increased 4% to $1.7 billion,
primarily due to an increase in Employer Services of 10% to $1.1 billion and an
increase at Dealer Services of 8% to $211 million. These increases were offset
by a decrease in our Brokerage Services business of 13%, or $45 million.
Interest on funds held for clients decreased 8% due to lower interest yields,
despite higher average client balances during the period. Our revenue growth
continues to be impacted by the weakness in the overall economy, consolidation
in the financial services industry, decreased investor communications activity,
and lower interest rates.
Earnings before income taxes for the quarter decreased 9% to $311 million driven
by decreases in Employer Services and Brokerage Services compared to the prior
year. Employer Services' earnings before income taxes declined 3% due to
previously announced incremental investments in our products and employer of
choice initiatives as well as the integration of acquisitions completed during
fiscal year 2003. Brokerage Services declined 64% compared to prior year due to
the declines in revenues in the trade processing business, caused primarily by
industry consolidations, and lower investor communications activity,
particularly mutual fund mailings. Also contributing to the decline in
consolidated earnings before income taxes was a decrease in other income of
approximately $19 million due primarily to a decrease in interest income on
corporate funds.
For the quarter, the effective income tax rate decreased 0.8% to 37.4%,
primarily due to a favorable mix in income among foreign and state tax
jurisdictions, including the effect of the decline in the Canadian rate.
Net earnings for the quarter decreased 7% to $195 million from $210 million and
the related diluted earnings per share decreased 6% to $0.32 per share from
$0.34 per share. The decrease in net earnings primarily reflects the decrease in
earnings before income taxes slightly offset by a lower effective tax rate. The
decrease in diluted earnings per share reflects the decrease in net earnings,
partially offset by fewer shares outstanding due to share repurchases throughout
fiscal year 2003 which continued into the first quarter of 2004.
ANALYSIS OF BUSINESS SEGMENTS
REVENUES
(In millions)
Three Months Ended
September 30,
-----------------------
2003 2002 Change
---- ---- ------
Employer Services $1,110 $1,008 10%
Brokerage Services 313 358 (13%)
Dealer Services 211 195 8%
Other 110 116 (5%)
Reconciling items:
Foreign exchange (3) (32)
Client fund interest (21) 2
------ ------
Total revenues $1,720 $1,647 4%
====== ======
EARNINGS BEFORE INCOME TAXES
(In millions)
Three Months Ended
September 30,
--------------------
2003 2002 Change
---- ---- ------
Employer Services $206 $213 (3%)
Brokerage Services 20 56 (64%)
Dealer Services 32 30 9%
Other 41 15 173%
Reconciling items:
Foreign exchange - (4)
Client fund interest (21) 2
Cost of capital charge 33 28
---- ----
Total earnings before
income taxes $311 $340 (9%)
==== ====
Revenues in our Employer Services business increased 10% for the quarter to
$1.1 billion as compared to the prior year. Internal revenue growth was
approximately 5%. Despite the continued impact of the weak economy, Employer
Services continues to grow primarily due to increases in our traditional U.S.
payroll and tax businesses of approximately 8%, and strong growth of
approximately 19% in our beyond payroll products, including our Professional
Employer Organization business. Client retention continues to be strong,
improving slightly over last year's record levels. New business sales declined
4% and pays per control, which represents the number of employees on our
clients' payrolls, decreased less than .5% compared to last year. Earnings
before income taxes in Employer Services decreased 3% for the quarter due
primarily to our previously announced incremental investments in our products
and employee retention initiatives, and the integration of acquisitions
completed during 2003.
Brokerage Services revenues declined 13% for the quarter due to industry
consolidations, which impacted trades per day, and reduced discretionary
spending and investor communications activity. Trade processing revenues are
down due to a 13% decline in average trades per day from 1.43 million to 1.25
million. Revenues per trade also declined due to the change in the mix of retail
vs. institutional trades and industry consolidation. Revenues from investor
communications are down due to the decline in pieces delivered from 155 million
to 145 million. The decline in pieces is primarily due to delayed mutual fund
meetings and fewer interim communications. Earnings before income taxes declined
64% in the quarter primarily due to the decline in revenues, particularly in
trade processing and mutual fund mailings.
Dealer Services' revenues increased 8% in the quarter compared to the prior
year. Growth has been generated by strong client retention and increased
revenues in the traditional core business from strong system sales as well as
from new businesses, primarily Application Services Provider (ASP) managed
services, Networking, and Customer Relationship Management. Earnings before
income taxes for the quarter grew by 9% compared to the prior year due primarily
to the increase in revenues.
The prior year's business unit revenues and earnings before income taxes have
been adjusted to reflect updated fiscal year 2004 budgeted foreign exchange
rates. In addition, Employer Services' prior year's revenues and earnings before
income taxes were adjusted to include interest earned on client funds credited
at 4.5%. Prior to fiscal year 2004, Employer Services was credited with interest
earned on client funds at 6.0%. Given the decline in interest rates over recent
years, the standard rate has been changed to 4.5%. "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 2004 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 4.5%.
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.
FINANCIAL CONDITION
Our financial condition and balance sheet remain strong. At September 30, 2003,
we had cash and marketable securities of $2.3 billion. Shareholders' equity was
approximately $5.3 billion and the ratio of long-term debt to equity was
approximately 1.6%.
Capital expenditures for fiscal year 2004 are expected to be approximately $175
million compared to $134 million in fiscal year 2003.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of our liquidity is our net earnings of $195 million for the
quarter. Cash flows generated from operations of $164 million for the three
months ended September 30, 2003 were down from $237 million in the prior year,
due primarily to a decrease in working capital caused by the timing of certain
cash activity.
Cash flows used in investing activities totaled $126 million for the three
months ended September 30, 2003 and cash flows provided by investing activities
totaled $187 million for the three months ended September 30, 2002. The
fluctuation between periods is primarily due to the timing of purchases and
proceeds from sale of marketable securities, net proceeds from client fund money
market securities and the net change in client funds obligations.
Cash flows used in financing activities totaled $97 million for the three months
ended September 30, 2003 compared to $677 million in the prior year. The
decrease in cash used in financing is primarily due to lower repurchases of
common stock of approximately $576 million. We purchased approximately 1.7
million shares of common stock at an average price per share of approximately
$39 during the period. As of September 30, 2003, we have remaining Board of
Directors authorization to purchase up to 41.8 million additional shares.
During the three months ended September 30, 2003, approximately twenty percent
of our 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 percent of our investment portfolio was invested in
fixed-income securities, with varying maturities of less than ten years, which
are also subject to interest rate risk, including reinvestment risk. We have
historically had the ability to hold most of these investments until maturity
and therefore, fluctuations in interest rates have not had an adverse impact on
income or cash flows.
Details regarding our combined corporate investments and funds held for clients
portfolios are as follows:
Three Months Ended
(In millions) September 30,
---------------------
2003 2002
Average investment balances at cost:
Corporate investments $ 3,307.2 $ 3,807.9
Funds held for clients 9,252.8 7,628.7
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Total $12,560.0 $11,436.6
========= =========
Average interest rates earned
exclusive of realized gains/
(losses) on corporate investments
and funds held for clients (pre-tax) 3.4% 4.5%
Realized gains on available-
for-sale securities $ 3.2 $ 6.9
Realized losses on available-
for-sale securities (2.1) (0.9)
--------- ---------
Net realized gains $ 1.1 $ 6.0
========= =========
September 30, June 30,
2003 2003
Unrealized pre-tax gains on
available-for-sale securities $ 298.4 $ 375.9
Total available-for-sale securities $10,166.7 $ 9,875.9
The earnings impact of future interest rate changes is based on many factors,
which influence the return on our 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 estimated
average investment balances for fiscal year 2004 would result in approximately
an $11.0 million impact to earnings before income taxes over the twelve-month
period.
In September 2003, we entered into a new $4.5 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. We are 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. There have been no borrowings through
September 30, 2003 under the credit agreements. The new $4.5 billion credit
agreement expires in September 2004.
In April 2002, we 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 our discretion. Our 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. We use the commercial paper issuances as a primary
instrument to meet short-term funding requirements related to client funds
obligations. At September 30, 2003 and 2002, there was no commercial paper
outstanding. For the three months ended September 30, 2003 and 2002, the Company
had average borrowings of $1.1 billion and $1.3 billion, respectively, at an
effective weighted average interest rate of 1.0% and 1.8%, respectively. The
weighted average maturity of the Company's commercial paper during the three
months ended September 30, 2003 was less than two days.
Our short-term financing is sometimes obtained on a secured basis through the
use of repurchase agreements, which are collateralized principally by government
and government agency securities. These agreements generally have terms ranging
from overnight to up to ten days. At September 30, 2003 and 2002, there were no
outstanding repurchase agreements. For the three months ended September 30, 2003
we had an average outstanding balance of $7.2 million and $8.3 million,
respectively, at an average interest rate of 2.5% and 2.8%, respectively.
OTHER MATTERS
This report and other written or oral statements made from time to time by ADP
may contain "forward-looking 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,"
"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; 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. 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
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 the
Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures as of September 30, 2003 were
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 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission's rules and forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the quarter ended September 30, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Exhibit
-------------- -------
31.1 Certification by Arthur F. Weinbach pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934
31.2 Certification by Karen E. Dykstra pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934
32.1 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
32.2 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 during the fiscal quarter ended September 30, 2003.
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: November 5, 2003 /s/ Karen E. Dykstra
--------------------
Karen E. Dykstra
Chief Financial Officer
-----------------------
(Title)