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, 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
- -----------------------------------------------------------------------
(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 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 December 31, 2003 there were 589,910,642 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: 2003 2002 2003 2002
---- ---- ---- ----
Revenues, other than interest
on funds held for clients
and PEO revenues $1,636,333 $1,510,396 $3,168,722 $2,986,820
Interest on funds held for
clients 82,202 87,762 165,136 177,627
PEO revenues (A) 108,865 84,837 213,819 165,233
---------- ---------- ---------- ----------
TOTAL REVENUES 1,827,400 1,682,995 3,547,677 3,329,680
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses 810,300 702,716 1,604,541 1,411,184
Selling, general, and
administrative expenses 459,293 402,005 886,171 849,958
Systems development and
programming costs 133,125 121,380 264,879 241,278
Depreciation and amortization 73,609 68,699 148,335 136,383
Other income, net (14,067) (35,255) (32,659) (72,973)
---------- ---------- ---------- ----------
TOTAL EXPENSES 1,462,260 1,259,545 2,871,267 2,565,830
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 365,140 423,450 676,410 763,850
Provision for income taxes 136,560 161,760 252,980 291,760
---------- ---------- ---------- ----------
NET EARNINGS $ 228,580 $ 261,690 $ 423,430 $ 472,090
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.39 $ 0.44 $ 0.71 $ 0.78
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.38 $ 0.43 $ 0.71 $ 0.78
========== ========== ========== ==========
Basic average shares
outstanding 591,685 598,064 593,264 602,418
========== ========== ========== ==========
Diluted average shares
outstanding 597,624 604,791 599,242 608,783
========== ========== ========== ==========
Dividends per common share $ 0.1400 $ 0.1200 $ 0.2600 $ 0.2350
========== ========== ========== ==========
(A) Net of pass-through costs of $1,037,864 and $873,488 for the three
months ended December 31, 2003 and 2002, respectively, and $1,949,433
and $1,636,867 for the six months ended December 31, 2003 and 2002,
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,
2003 2003
------------- ------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 835,630 $ 1,410,218
Short-term marketable securities 559,161 595,166
Accounts receivable, net 982,726 1,005,833
Other current assets 568,735 664,284
----------- ------------
Total current assets 2,946,252 3,675,501
Long-term marketable securities 854,481 338,959
Long-term receivables 172,875 180,354
Property, plant and equipment, net 607,336 614,701
Other assets 680,751 565,385
Goodwill 1,980,189 1,981,131
Intangible assets, net 654,499 669,891
----------- ------------
Total assets before funds held for clients 7,896,383 8,025,922
Funds held for clients 16,803,740 11,807,749
----------- ------------
Total assets $24,700,123 $ 19,833,671
=========== ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 137,802 $ 173,988
Accrued expenses and other liabilities 1,309,740 1,609,665
Income taxes payable 217,754 215,130
----------- ------------
Total current liabilities 1,665,296 1,998,783
Long-term debt 84,585 84,674
Other liabilities 318,938 270,267
Deferred income taxes 262,401 320,796
Deferred revenues 420,098 338,763
----------- ------------
Total liabilities before client funds
obligations 2,751,318 3,013,283
Client funds obligations 16,574,392 11,448,915
----------- ------------
Total liabilities 19,325,710 14,462,198
Shareholders' equity:
Common stock, $0.10 par value:
authorized 1,000,000 shares; issued 638,702
shares 63,870 63,870
Capital in excess of par value 166,870 211,339
Retained earnings 6,982,368 6,710,863
Treasury stock, at cost: 48,792 and 43,863
shares, respectively (1,940,489) (1,773,418)
Accumulated other comprehensive income 101,794 158,819
----------- ------------
Total shareholders' equity 5,374,413 5,371,473
----------- ------------
Total liabilities and shareholders' equity $24,700,123 $ 19,833,671
=========== ============
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,
2003 2002
---------- ----------
Cash Flows from Operating Activities:
- -------------------------------------
Net earnings $ 423,430 $ 472,090
Adjustments to reconcile net earnings to net cash
flows provided by operating activities:
Expenses not requiring outlay of cash 287,813 170,481
Changes in operating net assets (154,701) (26,159)
---------- ----------
Net cash flows provided by operating activities 556,542 616,412
---------- ----------
Cash Flows from Investing Activities:
- -------------------------------------
Purchases of marketable securities (3,574,698) (1,697,556)
Proceeds from sale of marketable securities 2,741,261 2,095,677
Net purchases of client fund money market
securities (4,965,783) (618,834)
Net change in client funds obligations 5,125,477 710,534
Capital expenditures (78,017) (56,936)
Additions to intangibles (45,247) (44,396)
Acquisitions of businesses, net of cash acquired (2,363) (38,928)
Proceeds from sale of businesses 2,049 -
Other 5,308 3,616
---------- ----------
Net cash flows (used in) provided by
investing activities (792,013) 353,177
---------- ----------
Cash Flows from Financing Activities:
- -------------------------------------
Proceeds from short-term borrowings 217 766
Payments of debt (985) (826)
Proceeds from stock purchase plan and exercises
of stock options 75,259 64,419
Repurchases of common stock (270,602) (719,840)
Dividends paid (143,006) (141,436)
---------- ----------
Net cash flows used in financing activities (339,117) (796,917)
---------- ----------
Net change in cash and cash equivalents (574,588) 172,672
Cash and cash equivalents, beginning of period 1,410,218 798,810
---------- ----------
Cash and cash equivalents, end of period $ 835,630 $ 971,482
========== ==========
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. 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
and six months ended December 31, 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 did not have a material
impact on the Consolidated Financial Statements.
Note 3. Earnings Per Share (EPS)
For the periods ended December 31, 2003
-------------------------------------------------------
Three months ended Six months ended
-------------------------- -------------------------
Net Average Net Average
Earnings Shares EPS Earnings Shares EPS
-------- ------- --- -------- ------- ---
Basic $228,580 591,685 $0.39 $423,430 593,264 $0.71
Effect of zero coupon
subordinated notes 491 1,598 817 1,602
Effect of stock
options - 4,341 - 4,376
-------- ------- -------- -------
Diluted $229,071 597,624 $0.38 $424,247 599,242 $0.71
======== ======= ===== ======== ======= ======
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
======== ======= ===== ======== ======= ======
Options to purchase 45.8 million and 36.9 million shares of common stock for the
three months ended December 31, 2003 and 2002, respectively, and 49.9 million
and 37.0 million shares of common stock for the six months ended December 31,
2003 and 2002, respectively, were excluded from the calculation of diluted
earnings per share because their exercise prices exceeded the average market
price of outstanding common shares for the period and were therefore
antidilutive.
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 Six Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net earnings, as reported $228,580 $261,690 $423,430 $472,090
Deduct: Total stock-based employee
compensation expense determined
using the fair value based method
for all awards, net of related
tax effects (25,099) (30,917) (52,182) (65,342)
-------- -------- -------- --------
Pro forma net earnings $203,481 $230,773 $371,248 $406,748
======== ======== ======== ========
Earnings per share:
Basic - as reported $0.39 $0.44 $0.71 $0.78
===== ===== ===== =====
Basic - pro forma $0.34 $0.39 $0.63 $0.68
===== ===== ===== =====
Diluted - as reported $0.38 $0.43 $0.71 $0.78
===== ===== ===== =====
Diluted - pro forma $0.34 $0.38 $0.62 $0.67
===== ===== ===== =====
Note 5. Other Income, net
Three months ended Six months ended
December 31, December 31,
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income on corporate
funds $(23,642) $(34,348) $(45,742) $(74,052)
Interest expense 5,351 7,478 10,001 15,454
Realized gains on available-
for-sale securities (2,181) (9,689) (5,441) (16,592)
Realized losses on available-
for-sale securities 6,405 1,304 8,523 2,217
-------- -------- -------- --------
Other income, net $(14,067) $(35,255) $(32,659) $(72,973)
======== ======== ======== ========
Proceeds from the sale of available-for-sale securities were $1.8 billion and
$1.1 billion for the three months ended December 31, 2003 and 2002,
respectively, and $2.7 billion and $2.1 billion for the six months ended
December 31, 2003 and 2002, respectively.
Note 6. Comprehensive Income
Three months ended Six months ended
December 31, December 31,
------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings $228,580 $261,690 $423,430 $472,090
Other comprehensive income:
Foreign currency translation
adjustments 89,448 30,723 25,790 39,673
Unrealized (losses) gains on
available-for-sale securities,
net (35,773) (5,337) (82,815) 96,368
-------- -------- -------- --------
Total comprehensive income $282,255 $287,076 $366,405 $608,131
======== ======== ======== ========
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 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 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 Six Months Ended
December 31, December 31,
------------------- -----------------
2003 2002 2003 2002
------- ------ ------ ------
Employer Services $1,159 $1,064 $2,269 $2,072
Brokerage Services 340 319 653 677
Dealer Services 218 201 429 397
Other 125 137 236 252
Reconciling items:
Foreign exchange 11 (33) 8 (65)
Client fund interest (26) (5) (47) (3)
------ ------ ------ ------
Total revenues $1,827 $1,683 $3,548 $3,330
====== ====== ====== ======
Earnings Before Income Taxes
------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -----------------
2003 2002 2003 2002
------ ------ ------ -----
Employer Services $ 263 $ 268 $ 469 $ 481
Brokerage Services 32 33 53 90
Dealer Services 37 35 69 64
Other 25 67 65 83
Reconciling items:
Foreign exchange 2 (5) 2 (9)
Client fund interest (26) (5) (47) (3)
Cost of capital
charge 32 30 65 58
------ ------ ------ -----
Total earnings before
income taxes $ 365 $ 423 $ 676 $ 764
====== ====== ====== =====
Note 8: Corporate Investments and Funds Held for Clients
December 31, 2003 June 30, 2003
------------------------ -------------------------
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
Money market securities
and other cash equivalents:
Corporate investments $ 835,630 $ 835,630 $ 1,410,218 $1,410,218
Funds held for clients 7,573,861 7,573,861 2,865,957 2,865,957
----------- ---------- ----------- ----------
Total money market
securities and other
cash equivalents 8,409,491 8,409,491 4,276,175 4,276,175
----------- ----------- ----------- -----------
Available-for-sale
securities:
Corporate investments 1,401,754 1,413,642 917,026 934,125
Funds held for clients 9,000,531 9,229,879 8,582,958 8,941,792
----------- ----------- ----------- -----------
Total available-for-sale
securities 10,402,285 10,643,521 9,499,984 9,875,917
----------- ----------- ----------- -----------
Total corporate investments
and funds held for
clients $18,811,776 $19,053,012 $13,776,159 $14,152,092
=========== =========== =========== ===========
All of the Company's marketable securities are considered to be
"available-for-sale" at December 31, 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 six months ended December 31, 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 1,365 1,368 - 276 3,009
Sale of business (1,315) - - - (1,315)
Cumulative
translation
adjustments 7,993 216 36 332 8,577
Other (4,758) (6,455) - - (11,213)
---------- -------- -------- -------- ----------
Balance as of
December 31, 2003 $1,290,413 $361,904 $215,170 $112,702 $1,980,189
========== ======== ======== ======== ==========
Components of intangible assets are as follows:
December 31, June 30,
2003 2003
---------- ----------
Intangible assets:
Software licenses $ 609,504 $ 575,440
Customer contracts and lists 543,293 538,673
Other intangibles 423,114 415,986
---------- ----------
1,575,911 1,530,099
Less accumulated amortization (921,412) (860,208)
---------- ----------
Intangible assets, net $ 654,499 $ 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 (3
years for software licenses, 14 years for customer contracts and lists and 12
years for other). Amortization of intangibles totaled $33.8 million and $27.4
million for the three months ended December 31, 2003 and 2002, respectively, and
totaled $68.1 million and $54.7 million for the six months ended December 31,
2003 and 2002, respectively. Estimated amortization expenses of the Company's
existing intangible assets over the remaining six months of fiscal year 2004 and
the succeeding five fiscal years is as follows:
Amount
------
2004 $ 67,299
2005 113,961
2006 78,028
2007 58,033
2008 54,074
2009 39,439
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 December 31, 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. In November 2003, the Company
increased the aggregate maturity value of commercial paper available under the
program to $4.5 billion. 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 December 31, 2003 and 2002, there was no commercial paper
outstanding. For the three months ended December 31, 2003 and 2002, the Company
had average borrowings of $1.4 billion and $1.3 billion, respectively, at an
effective weighted average interest rate of 1.0% and 1.5%, respectively. For the
six months ended December 31, 2003 and 2002, the Company had average borrowings
of $1.3 billion at an effective weighted average interest rate of 1.0% and 1.6%,
respectively. The weighted average maturity of the Company's commercial paper
during the quarter and six months ended December 31, 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 December 31, 2003 and 2002,
there were no outstanding repurchase agreements. For the three months ended
December 31, 2003 and 2002, the Company had an average outstanding balance of
$20.2 million and $4.9 million, respectively, at an average interest rate of
2.2% and 2.8%, respectively. For the six months ended December 31, 2003 and
2002, the Company had an average outstanding balance of $13.7 million and $6.6
million, respectively, at an average interest rate of 2.2% 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 OPERATION
-----------------------------------------------------------------------
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 contract
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 $2.0 billion of goodwill as of December 31, 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
consolidated results of earnings.
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
consolidated financial statements.
RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ----------------------
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
Total revenues $1,827 $1,683 9% $3,548 $3,330 7%
----------------------- ----------------------
Total expenses $1,462 $1,260 16% $2,872 $2,566 12%
----------------------- ----------------------
Earnings before income
taxes $ 365 $ 423 (14)% $ 676 $ 764 (11)%
Margin 20.0% 25.2% 19.1% 22.9%
------------------------- -----------------------
Provision for income
taxes $ 136 $ 161 (16)% $ 253 $ 292 (13)%
Effective tax rate 37.4% 38.2% 37.4% 38.2%
------------------------- -----------------------
Net earnings $ 229 $ 262 (13)% $ 423 $ 472 (10)%
Diluted earnings per
share $ 0.38 $ 0.43 (12)% $ 0.71 $ 0.78 (9)%
----------------------- -----------------------
Our consolidated revenues for the quarter ended December 31, 2003 increased 9%
to $1.8 billion, primarily due to an increase in Employer Services of 9% to $1.2
billion, an increase in Brokerage Services of 7% to $340 million and an increase
at Dealer Services of 8% to $218 million. Interest income from funds held for
clients decreased 6%, due to lower investment yields, despite higher average
client fund balances during the period. Our average daily client fund balances
were approximately $9.7 billion compared with $8.0 billion for the same quarter
last year. Our revenues excluding the impact of acquisitions, primarily
ProBusiness Solutions, grew 6% compared with the second quarter last year.
Year-to-date consolidated revenues increased 7% to $3.5 billion primarily due to
increases in Employer Services of 9% to $2.3 billion and Dealer Services of 8%
to $429 million. These increases were offset by a decrease in Brokerage Services
revenues of 4% to $653 million and a decrease in interest income from funds held
for clients of 7%, or $12 million, compared to the prior year.
Earnings before income taxes decreased 14% to $365 million for the quarter and
decreased 11% to $676 million for the year-to-date period, driven primarily by
decreases in Employer Services and Brokerage Services and a decrease in
investment yields during the periods. Employer Services' earnings before income
taxes declined 2% for the quarter and 3% for the year-to-date period due to
previously announced incremental investments in our products and employer of
choice initiatives and the integration of acquisitions completed during fiscal
year 2003, specifically ProBusiness Solutions which was acquired in June 2003.
Brokerage Services earnings before income taxes declined 3% to $32 million for
the quarter and 41% to $53 million for the year-to-date period due to the
declines in revenues in the trade processing business, caused primarily by
continued industry consolidations. Earnings before income taxes during the
second quarter in Brokerage Services improved compared to the first quarter of
fiscal 2004, due to significant increases in investor communications activity,
particularly non-proxy mutual fund mailings as well as higher trading activity
in the back office transaction processing business. Other income declined $21
million during the quarter and $40 million for the year-to-date period due to
lower yields on investments during the current periods.
For the quarter and year-to-date, the effective income tax rate decreased from
38.2% 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 13% to $229 million from $262 million and
decreased 10% to $423 million from $472 million for the year-to-date period,
reflecting the decrease in earnings before income taxes, slightly offset by a
lower effective tax rate, during the current periods. Diluted earnings per share
for the quarter decreased 12% to $0.38 per share from $0.43 per share and
decreased 9% to $0.71 per share from $0.78 per share for the year-to-date
period. The decrease in diluted earnings per share in both periods reflects the
decrease in net earnings, partially offset by fewer shares outstanding due to
share repurchases throughout fiscal year 2003 which continued into the second
quarter of 2004.
ANALYSIS OF BUSINESS SEGMENTS
REVENUES
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
2003 2002 Change 2003 2002 Change
------ ------ ------ ------ ------ ------
Employer Services $1,159 $1,064 9% $2,269 $2,072 9%
Brokerage Services 340 319 7 653 677 (4)
Dealer Services 218 201 8 429 397 8
Other 125 137 (9) 236 252 (7)
Reconciling items
Foreign exchange 11 (33) 8 (65)
Client fund interest (26) (5) (47) (3)
------ ------ ------ ------
Total revenues $1,827 $1,683 9% $3,548 $3,330 7%
====== ====== ====== ======
EARNINGS BEFORE INCOME TAXES
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ------------------------
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
Employer Services $ 263 $ 268 (2)% $ 469 $ 481 (3)%
Brokerage Services 32 33 (3) 53 90 (41)
Dealer Services 37 35 6 69 64 7
Other 25 67 (63) 65 83 (21)
Reconciling items
Foreign exchange 2 (5) 2 (9)
Client fund interest (26) (5) (47) (3)
Cost of capital
charge 32 30 65 58
------ ------ ------ ------
Total earnings before
income taxes $ 365 $ 423 (14)% $ 676 $ 764 (11)%
====== ====== ====== ======
Revenues in our Employer Services business increased 9% for both the quarter and
the year-to-date period as compared to the prior year. Internal revenue growth
was approximately 5% for the quarter and the year-to-date period. Employer
Services continues to grow primarily due to increases in our traditional U.S.
payroll and tax businesses of approximately 9% for the quarter and year-to-date,
and strong growth of approximately 15% for the quarter and 17% year-to-date in
our beyond payroll products, including our Professional Employer Organization
business. Client retention continues to be strong over last year's record
retention levels, improving 0.5% for the quarter and 0.7% for the year-to-date
period. Pays per control, which represents the number of employees on our
clients' payrolls, remained flat for the quarter and year-to-date period in
North America. Pays per control in our European businesses is still declining,
with individual countries ranging from flat to down 3% compared to last year.
New business sales increased 2% for the quarter, which is our first quarterly
increase since the first quarter of fiscal 2003. Earnings before income taxes in
Employer Services decreased 2% for the quarter and 3% year-to-date due primarily
to our previously announced incremental investments in our products and employee
retention initiatives, and the integration of acquisitions completed during
fiscal 2003.
Brokerage Services revenues increased 7% for the quarter and declined 4% for the
year-to-date period ended December 31, 2003. The 7% increase in revenues during
the second quarter compares to a 13% decrease during the first quarter of fiscal
year 2004. The increase in revenue for the quarter ended December 31, 2003 was
primarily due to an increase in certain investor communication activity,
particularly non-proxy mutual fund mailings due to the increased communications
related to the recent mutual fund industry regulatory oversight. Revenues from
investor communications activity increased as pieces delivered in the quarter
rose 22% from 133 million to 161 million. Year-to-date pieces delivered
increased 6% from 288 million to 306 million. The increase in revenues was
offset by the decline in trade processing revenues for the quarter and
year-to-date period despite a 1% increase in average trades per day during the
quarter ended December 31, 2003. The year-to-date average trades per day are
down 6% from 1.36 million to 1.28 million. Revenues per trade have declined 9%
for the quarter and year to date period, which reflects the effects of the
continuing industry consolidation offset by higher retail versus institutional
mix of trades. Earnings before income taxes declined 3% for the quarter and 41%
for the year-to-date period ended December 31, 2003, due primarily to the
decline in trade processing revenues during the year.
Dealer Services' revenues increased 8% for both the quarter and year-to-date
periods ended December 31, 2003. 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 products, primarily Application Services
Provider (ASP) managed services, Networking, and Customer Relationship
Management. Earnings before income taxes for the quarter and year-to-date period
grew 6% and 7%, respectively, primarily due to the increased revenues. Earnings
growth for the quarter is slightly lower than the year-to-date revenue growth
rate due to the previously announced incremental investments in our products.
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 December 31, 2003,
we had cash and marketable securities of $2.2 billion. Shareholders' equity was
approximately $5.4 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 $423 million for the
six months ended December 31, 2003. Cash flows generated from operations of $557
million for the six months ended December 31, 2003 were down from $616 million
in the prior year, due primarily to a decrease in net earnings and a decrease in
working capital caused by the timing of certain cash activity.
Cash flows used in investing activities were $792 million for the six months
ended December 31, 2003 compared with cash flows provided by investing
activities of $353 million for the prior year. The fluctuation between periods
is primarily due to the timing of purchases and proceeds from sale of marketable
securities, net purchases of client fund money market securities and the net
change in client funds obligations.
Cash flows used in financing activities totaled $339 million for the six months
ended December 31, 2003 compared to $797 million in the prior year. The decrease
in cash used in financing is primarily due to lower repurchases of common stock
of approximately $449 million. We purchased approximately 7.1 million shares of
common stock at an average price per share of approximately $38 during the
period. As of December 31, 2003, we have remaining Board of Directors
authorization to purchase up to 36.4 million additional shares.
During the six months ended December 31, 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
earnings or cash flows.
Details regarding our combined corporate investments and funds held for clients
portfolios are as follows:
Three months ended Six months ended
December 31, December 31,
--------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Average investment balances
at cost:
Corporate investments $ 3,677.3 $ 3,465.5 $ 3,492.8 $ 3,596.4
Funds held for clients 9,736.5 7,997.3 9,494.7 7,813.3
--- ------ --------- --------- ---------
Total $ 13,413.8 $11,462.8 $12,987.5 $11,409.7
========== ========= ========= =========
Average interest rates earned
exclusive of realized gains
(losses) for the total
combined corporate investments
and funds held for clients'
portfolios (pre-tax) 3.2% 4.2% 3.3% 4.4%
Realized gains on available-
for-sale securities $ 2.2 $ 9.7 $ 5.4 $ 16.6
Realized losses on available-
for-sale securities (6.4) (1.3) (8.5) (2.2)
--------- -------- -------- --------
Net realized (losses) gains $ (4.2) $ 8.4 $ (3.1) $ 14.4
========= ======== ======== ========
December 31, June 30,
2003 2003
----------- ---------
Unrealized pre-tax gains on available-for-
sale securities, net $ 241.2 $ 375.9
Total available-for-sale securities $10,643.5 $ 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
December 31, 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. In November 2003, the Company increased the aggregate
maturity value of commercial paper available under the program to $4.5 billion.
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 December 31, 2003 and 2002,
there was no commercial paper outstanding. For the three months ended December
31, 2003 and 2002, the Company had average borrowings of $1.4 billion and $1.3
billion, respectively, at an effective weighted average interest rate of 1.0%
and 1.5%, respectively. For the six months ended December 31, 2003 and 2002, the
Company had average borrowings of $1.3 billion at an effective weighted average
interest rate of 1.0% and 1.6%, respectively. The weighted average maturity of
the Company's commercial paper during the three and six months ended December
31, 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 December 31, 2003 and 2002, there were no
outstanding repurchase agreements. For the three months ended December 31, 2003
the Company had an average outstanding balance of $20.2 million and $4.9
million, respectively, at an average interest rate of 2.2% and 2.8%,
respectively. For the six months ended December 31, 2003 and 2002, the Company
had an average outstanding balance of $13.7 million and $6.6 million,
respectively, at an average interest rate of 2.2% and 2.8%, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB) revised
Statement of Financial Accounting Standards No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132). SFAS 132 retains
the disclosure requirements of the original statement and requires additional
disclosures about the assets, obligations, cash flows and net periodic benefit
cost of defined benefits plans and other defined benefit postretirement plans.
The interim period disclosures required by SFAS 132 will be effective for the
Company for the quarter ended March 31, 2004. The annual financial statement
disclosures will be effective for the Company for the fiscal year ended June 30,
2004.
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 December 31, 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 December 31, 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 1. LEGAL PROCEEDINGS
Reference is made to the description in Item 3 of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2003 of the litigation involving
Universal Computer Systems, Inc., Universal Computer Consulting, Ltd., Universal
Computer Services, Inc. and Dealer Computer Services, Inc. (collectively,
"UCS"). On November 11, 2003, the arbitration panel appointed by the District
Court entered an Award in favor of the Company and its co-defendants. The Award
denied all relief to UCS. The Award has been affirmed and adopted by the
District Court as a final judgment of the Court. Plaintiffs have stated they
intend to appeal the judgment and have filed a motion for a new trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of the Stockholders was held on November 11, 2003.
There were present at the meeting, either in person or by proxy, holders of
493,276,704 common stockholders. 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 462,886,101 30,390,603
Leslie A. Brun 486,594,039 6,682,665
Gary C. Butler 486,449,600 6,827,104
Joseph A. Califano, Jr. 477,058,234 16,218,470
Leon G. Cooperman 479,548,519 13,728,185
Ann Dibble Jordan 479,574,690 13,702,014
Harvey M. Krueger 479,149,639 14,127,065
Frederic V. Malek 469,716,537 23,560,167
Henry Taub 486,367,527 6,909,177
Arthur F. Weinbach 484,312,082 8,964,622
Josh S. Weston 486,222,931 7,053,773
The results of the voting on the additional items indicated below was as
follows:
(a) To approve amendments to the Company's 2000 Key Employees' Stock Option
Plan to increase by 35,000,000 shares the number of shares of common
stock of the Company that may be acquired upon the exercise of options
that may be granted to participants under such plans and to permit
option grants to non-employee directors. The votes of the stockholders
on this ratification were as follows:
For Against Abstained Broker
----------- ----------- --------- ------
296,254,646 101,415,625 5,546,210 90,060,223
(b) To approve an amendment to the Company's Employee Savings-Stock
Purchase Plan to increase by 10,000,000 shares the number of shares of
common stock of the Company that may be acquired by employees under
such plan. The votes of the stockholders on this ratification were as
follows:
For Against Abstained Broker
----------- ---------- --------- ------
352,366,948 46,831,505 4,013,052 90,065,199
(c) To approve the Company's 2003 Director Stock Plan, which provides for
the grant of restricted stock units in lieu of the annual cash
retainer. The votes of the stockholders on this ratification were as
follows:
For Against Abstained Broker
----------- ---------- --------- ------
349,848,492 48,779,881 4,587,656 90,060,675
(d) To ratify the appointment of Deloitte & Touche LLP to serve as the
Company's independent certified public accountants for the fiscal year
that began on July 1, 2003. The votes of the stockholders on this
ratification were as follows:
For Against Abstained Broker
----------- ---------- --------- ------
471,198,274 18,840,317 3,238,113 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Exhibit
-------------- -------
10.4 2000 Stock Option Plan
10.5 Amended and Restated Employees' Savings-Stock Purchase
Plan
10.6 2003 Director Stock Plan
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 filed during the fiscal quarter ended December 31,
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: February 3, 2004 /s/ Karen E. Dykstra
----------------------
Karen E. Dykstra
Chief Financial Officer
----------------------
(Title)