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 March 31, 2004 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 March 31, 2004 there were 590,468,033 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 Nine Months Ended
March 31, March 31,
--------------------- ----------------------
REVENUES: 2004 2003 2004 2003
---- ---- ---- ----
Revenues, other than interest
on funds held for clients
and PEO revenues $1,894,672 $1,704,454 $5,063,394 $4,691,274
Interest on funds held for
clients 96,531 99,108 261,667 276,735
PEO revenues (A) 130,232 102,216 344,051 267,449
---------- ---------- ---------- ----------
TOTAL REVENUES 2,121,435 1,905,778 5,669,112 5,235,458
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses 944,373 796,580 2,548,914 2,207,764
Selling, general, and
administrative expenses 487,410 412,793 1,373,581 1,262,751
Systems development and
programming costs 144,824 123,401 409,703 364,679
Depreciation and amortization 77,185 67,503 225,520 203,886
Other income, net (11,997) (27,499) (44,656) (100,472)
---------- ---------- ---------- ----------
TOTAL EXPENSES 1,641,795 1,372,778 4,513,062 3,938,608
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 479,640 533,000 1,156,050 1,296,850
Provision for income taxes 179,390 203,610 432,370 495,370
---------- ---------- ---------- ----------
NET EARNINGS $ 300,250 $ 329,390 $ 723,680 $ 801,480
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.51 $ 0.55 $ 1.22 $ 1.33
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.50 $ 0.54 $ 1.21 $ 1.32
========== ========== ========== ==========
Basic average shares
outstanding 591,210 600,217 592,575 601,737
========== ========== ========== ==========
Diluted average shares
outstanding 599,479 605,340 599,127 607,911
========== ========== ========== ==========
Dividends per common share $ 0.1400 $ 0.1200 $ 0.4000 $ 0.3550
========== ========== ========== ==========
(A) Net of pass-through costs of $1,136,832 and $904,391 for the three
months ended March 31, 2004 and 2003, respectively, and $3,086,265 and
$2,541,258 for the nine months ended March 31, 2004 and 2003,
respectively.
See notes to the consolidated financial statements.
Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
March 31, June 30,
Assets 2004 2003
- ------ ----------- -----------
Current assets:
Cash and cash equivalents $ 855,928 $ 1,410,218
Short-term marketable securities 369,930 595,166
Accounts receivable, net 1,086,229 1,005,833
Other current assets 524,484 664,284
----------- -----------
Total current assets 2,836,571 3,675,501
Long-term marketable securities 1,070,971 338,959
Long-term receivables 170,299 180,354
Property, plant and equipment, net 615,314 614,701
Other assets 710,695 565,385
Goodwill 2,161,301 1,981,131
Intangible assets, net 730,703 669,891
----------- -----------
Total assets before funds held for clients 8,295,854 8,025,922
Funds held for clients 17,129,627 11,807,749
----------- -----------
Total assets $25,425,481 $19,833,671
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 165,001 $ 173,988
Accrued expenses and other liabilities 1,412,001 1,609,665
Income taxes payable 250,079 215,130
----------- -----------
Total current liabilities 1,827,081 1,998,783
Long-term debt 82,049 84,674
Other liabilities 309,551 270,267
Deferred income taxes 295,289 320,796
Deferred revenue 426,482 338,763
----------- -----------
Total liabilities before client funds
obligations 2,940,452 3,013,283
Client funds obligations 16,860,331 11,448,915
----------- -----------
Total liabilities 19,800,783 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 93,662 211,339
Retained earnings 7,197,543 6,710,863
Treasury stock, at cost: 48,235 and 43,863
shares, respectively (1,887,842) (1,773,418)
Accumulated other comprehensive income 157,465 158,819
----------- -----------
Total shareholders' equity 5,624,698 5,371,473
----------- -----------
Total liabilities and shareholders' equity $25,425,481 $19,833,671
=========== ===========
See notes to the consolidated financial statements.
Automatic Data Processing, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
March 31,
2004 2003
-----------------------
Cash Flows From Operating Activities:
- -------------------------------------
Net earnings $ 723,680 $ 801,480
Adjustments to reconcile net earnings to net
cash flows provided by operating activities:
Expenses not requiring outlay of cash 427,663 276,464
Changes in operating net assets (19,377) 88,448
---------- ----------
Net cash flows provided by operating activities 1,131,966 1,166,392
---------- ----------
Cash Flows From Investing Activities:
- -------------------------------------
Purchases of marketable securities (5,978,737) (2,828,261)
Proceeds from sale of marketable securities 3,762,755 3,012,380
Net purchases of client fund money market
securities (3,867,491) (1,310,516)
Net change in client funds obligations 5,394,417 1,554,373
Capital expenditures (125,028) (85,164)
Additions to intangibles (111,036) (64,916)
Acquisitions of businesses, net of cash acquired (228,823) (99,759)
Proceeds from sale of businesses 5,294 -
Other 7,726 4,394
---------- ----------
Net cash flows (used in) provided by
investing activities (1,140,923) 182,531
---------- ----------
Cash Flows From Financing Activities:
- -------------------------------------
Proceeds from short-term borrowings 325 864
Payments of debt (1,201) (1,254)
Proceeds from stock purchase plan and exercises
of stock options 116,116 71,649
Repurchases of common stock (435,113) (817,104)
Dividends paid (225,460) (213,228)
---------- ----------
Net cash flows used in financing activities (545,333) (959,073)
---------- ----------
Net change in cash and cash equivalents (554,290) 389,850
Cash and cash equivalents, beginning of period 1,410,218 798,810
---------- ----------
Cash and cash equivalents, end of period $ 855,928 $1,188,660
========== ==========
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 nine months ended March 31, 2004 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.
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 (revised)
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 benefit plans and other defined benefit
postretirement plans. The interim period disclosures required by SFAS 132 are
effective for the Company for the third quarter ended March 31, 2004 and are
included in Note 11, herein. The annual financial statement disclosures will be
effective for the Company for the fiscal year ended June 30, 2004.
Note 3. Earnings Per Share (EPS)
For the periods ended March 31, 2004
----------------------------------------------------
Three Months Ended Nine Months Ended
------------------------ ------------------------
Net Average Net Average
Earnings Shares EPS Earnings Shares EPS
-------- ------- --- -------- ------- ---
Basic $300,250 591,210 $0.51 $723,680 592,575 $1.22
Effect of zero coupon
subordinated notes 322 1,548 1,140 1,585
Effect of stock
options - 6,721 - 4,967
-------- ------- -------- -------
Diluted $300,572 599,479 $0.50 $724,820 599,127 $1.21
======== ======= ===== ======== ======= =====
For the periods ended March 31, 2003
----------------------------------------------------
Three Months Ended Nine Months Ended
------------------------- ------------------------
Net Average Net Average
Earnings Shares EPS Earnings Shares EPS
-------- ------- --- -------- ------- ---
Basic $329,390 600,217 $0.55 $801,480 601,737 $1.33
Effect of zero coupon
subordinated notes 293 1,639 908 1,718
Effect of stock
options - 3,484 - 4,456
-------- ------- -------- -------
Diluted $329,683 605,340 $0.54 $802,388 607,911 $1.32
======== ======= ===== ======== ======= =====
Options to purchase 32.5 million and 41.1 million shares of common stock for the
three months ended March 31, 2004 and 2003, respectively, and 32.8 million and
40.5 million shares of common stock for the nine months ended March 31, 2004 and
2003, 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.
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 Nine Months Ended
March 31, March 31,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net earnings, as reported $300,250 $329,390 $723,680 $801,480
Deduct: Total stock-based employee
compensation expense determined
using the fair value based method
for all awards, net of related
tax effects (29,147) (28,851) (81,329) (93,722)
-------- -------- -------- --------
Pro forma net earnings $271,103 $300,539 $642,351 $707,758
======== ======== -------- --------
Earnings per share:
Basic - as reported $0.51 $0.55 $1.22 $1.33
===== ===== ===== =====
Basic - pro forma $0.46 $0.50 $1.08 $1.18
===== ===== ===== =====
Diluted - as reported $0.50 $0.54 $1.21 $1.32
===== ===== ===== =====
Diluted - pro forma $0.45 $0.50 $1.07 $1.17
===== ===== ===== =====
Note 5. Other Income, net
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income on corporate
funds $(13,521) $(21,529) $ (59,263) $ (95,581)
Interest expense 1,965 2,198 11,966 17,652
Realized gains on available-
for-sale securities (1,775) (9,365) (7,216) (25,957)
Realized losses on available-
for-sale securities 1,334 1,197 9,857 3,414
-------- -------- -------- ---------
Other income, net $(11,997) $(27,499) $ (44,656) $(100,472)
======== ======== ========= =========
Proceeds from sales of available-for-sale securities were $1.0 billion and $0.9
billion for the three months ended March 31, 2004 and 2003, respectively, and
$3.8 billion and $3.0 billion for the nine months ended March 31, 2004 and 2003,
respectively.
Note 6. Comprehensive Income
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings $300,250 $329,390 $723,680 $801,480
Other comprehensive income:
Foreign currency translation
adjustments 27,667 42,691 53,457 82,364
Unrealized gains(losses) on
available-for-sale securities,
net 28,004 (4,182) (54,811) 92,186
-------- -------- -------- --------
Total comprehensive income $355,921 $367,899 $722,326 $976,030
======== ======== ======== ========
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 Nine Months Ended
March 31, March 31,
------------------- ------------------
2004 2003 2004 2003
------ ------ ------ -------
Employer Services $1,366 $1,240 $3,635 $3,312
Brokerage Services 452 401 1,105 1,078
Dealer Services 226 209 655 605
Other 99 96 335 348
Reconciling items:
Foreign exchange 29 (21) 37 (86)
Client fund interest (51) (19) (98) (22)
----- ------ ------ ------
Total revenues $2,121 $1,906 $5,669 $5,235
====== ====== ====== ======
Earnings Before Income Taxes
-------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
------ ------ ------- --------
Employer Services $ 385 $ 411 $ 854 $ 892
Brokerage Services 68 45 121 134
Dealer Services 39 36 108 101
Other 2 40 67 123
Reconciling items:
Foreign exchange 3 (6) 5 (15)
Client fund interest (51) (19) (98) (22)
Cost of capital
charge 34 26 99 84
------ ------ ------ ------
Total earnings before
income taxes $ 480 $ 533 $1,156 $1,297
====== ====== ====== ======
Note 8. Corporate Investments and Funds Held for Clients
March 31, 2004 June 30, 2003
------------------------ ------------------------
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
Money market securities
and other cash equivalents:
Corporate investments $ 855,928 $ 855,928 $ 1,410,218 $ 1,410,218
Funds held for clients 6,592,536 6,592,536 2,865,957 2,865,957
----------- ---------- ----------- -----------
Total money market
securities and other
cash equivalents 7,448,464 7,448,464 4,276,175 4,276,175
----------- ----------- ----------- -----------
Available-for-sale
securities:
Corporate investments 1,424,225 1,440,901 917,026 934,125
Funds held for clients 10,267,795 10,537,091 8,582,958 8,941,792
----------- ----------- ----------- -----------
Total available-for-sale
securities 11,692,020 11,977,992 9,499,984 9,875,917
----------- ----------- ----------- -----------
Total corporate investments
and funds held for
clients $19,140,484 $19,426,456 $13,776,159 $14,152,092
=========== =========== =========== ===========
All of the Company's marketable securities are considered to be
"available-for-sale" at March 31, 2004 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 nine months ended March 31, 2004 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 8,804 1,514 78,747 81,975 171,040
Sales of businesses (1,315) - - (1,088) (2,403)
Cumulative
translation
adjustments 20,626 1,952 187 792 23,557
Other (5,569) (6,455) - - (12,024)
---------- -------- -------- -------- ----------
Balance as of
March 31, 2004 $1,309,674 $363,786 $294,068 $193,773 $2,161,301
========== ======== ======== ======== ==========
Components of intangible assets are as follows:
March 31, June 30,
2004 2003
---------- ----------
Intangible assets:
Software licenses $ 706,723 $ 575,440
Customer contracts and lists 581,859 538,673
Other intangibles 391,728 415,986
---------- ----------
1,680,310 1,530,099
Less accumulated amortization (949,607) (860,208)
---------- ----------
Intangible assets, net $ 730,703 $ 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 10 years (3
years for software licenses, 14 years for customer contracts and lists and 12
years for other). Amortization of intangibles totaled $36.5 million and $28.1
million for the three months ended March 31, 2004 and 2003, respectively, and
totaled $104.6 million and $82.8 million for the nine months ended March 31,
2004 and 2003, respectively. Estimated amortization expenses of the Company's
existing intangible assets over the remaining three months of fiscal year 2004
and the succeeding five fiscal years is as follows:
Amount
------
2004 $ 38,639
2005 139,386
2006 102,583
2007 81,386
2008 74,013
2009 48,506
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
by the Company 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 provide funding for general corporate purposes,
if necessary. The Company has had no borrowings through March 31, 2004 under the
credit agreement. The new $4.5 billion credit agreement expires in September
2004.
In April 2002, the Company initiated a U.S. 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 March 31, 2004 and 2003, there was no commercial paper
outstanding. For the three months ended March 31, 2004 and 2003, the Company had
average borrowings of $0.2 billion and $0.3 billion, respectively, at an
effective weighted average interest rate of 1.0% and 1.3%, respectively. For the
nine months ended March 31, 2004 and 2003, the Company had average borrowings of
$0.9 billion for both periods, 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 nine months ended March 31, 2004 was
less than two days for both periods.
The Company's U.S. and Canadian short-term funding requirements related to
client funds obligations are 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 March 31, 2004 and 2003, there were no
outstanding repurchase agreements. For the three months ended March 31, 2004 and
2003, the Company had an average outstanding balance of $35.2 million and $3.4
million, respectively, at an average interest rate of 1.9% and 3.0%,
respectively. For the nine months ended March 31, 2004 and 2003, the Company had
an average outstanding balance of $20.8 million and $5.5 million, respectively,
at an average interest rate of 2.1% and 2.8%, respectively.
Note 11. Pension Plans
The components of net pension expense were as follows:
Three months ended Nine months ended
March 31 March 31
--------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service Cost- benefits
earned during the period $ 5,743 $ 6,373 $ 17,230 $ 19,118
Interest cost on projected
benefits 8,422 7,803 25,267 23,408
Expected return on plan
assets (12,624) (12,628) (37,873) (37,882)
Net amortization and
deferral 2,549 307 7,646 922
-------- -------- -------- --------
Net pension expense $ 4,090 $ 1,855 $ 12,270 $ 5,566
======== ======== ======== ========
For the nine months ending March 31, 2004, the Company made contributions of
$56.3 million to the pension plans.
Note 12. 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 indemnification
arrangements entered into in the normal course of business. Historically, there
have been no material losses related to such guarantees or indemnification
arrangements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Tabular dollars are presented in millions, except per share amounts)
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 $2.2 billion of goodwill as of March 31, 2004.
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
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- ------------------------
2004 2003 Change 2004 2003 Change
---- ---- ------ ---- ---- ------
Total revenues $2,121 $1,906 11% $5,669 $5,235 8%
------------------------ -----------------------
Total expenses $1,641 $1,373 20% $4,513 $3,938 15%
------------------------ -----------------------
Earnings before income
taxes $ 480 $ 533 (10%) $1,156 $1,297 (11%)
Margin 22.6% 28.0% 20.4% 24.8%
----------------------- -----------------------
Provision for income
taxes $ 180 $ 204 (12%) $ 432 $ 496 (13%)
Effective tax rate 37.4% 38.2% 37.4% 38.2%
----------------------- -----------------------
Net earnings $ 300 $ 329 (9%) $ 724 $ 801 (10%)
Diluted earnings per
share $ 0.50 $ 0.54 (7%) $ 1.21 $ 1.32 (8%)
------------------------ -----------------------
Our consolidated revenues for the quarter ended March 31, 2004 increased 11% to
$2.1 billion, primarily due to an increase in Employer Services of 10% to $1.4
billion, an increase in Brokerage Services of 13% to $452 million and an
increase in Dealer Services of 8% to $226 million. Revenue growth for the
quarter was also favorably impacted by the fluctuations in the foreign currency
exchange rates. Interest income from funds held for clients decreased 3%, due to
lower investment yields, despite higher average client fund balances during the
period. Our average daily client fund balances were approximately $13.3 billion,
compared with $10.4 billion for the same quarter last year. Our revenues
excluding the impact of acquisitions, primarily ProBusiness Services, Inc., grew
8% compared with the third quarter last year.
Year-to-date consolidated revenues increased 8% to $5.7 billion primarily due to
increases in Employer Services of 10% to $3.6 billion, Dealer Services of 8% to
$655 million and Brokerage Services of 2% to $1.1 billion. Revenue growth for
the year-to-date period was also favorably impacted by the fluctuations in the
foreign currency exchange rates. These increases were offset by a decrease in
interest income from funds held for clients of 5%, or $15 million, compared to
the prior year, due to lower investment yields.
Earnings before income taxes decreased 10% to $479 million for the quarter
primarily due to a decrease in earnings before incomes taxes at Employer
Services and a decrease in investment yields during the period, offset by an
increase in earnings before income taxes at Brokerage Services. Earnings before
income taxes decreased 11% to $1.2 billion for the year-to-date period primarily
due to decreases in Employer Services and Brokerage Services and a decrease in
investment yields during the period. Employer Services' earnings before income
taxes declined 6% for the quarter and 4% for the year-to-date period due to
previously announced incremental investments in our products and services and
employer of choice initiatives and the integration of acquisitions completed
during fiscal year 2003, specifically ProBusiness Services Inc., which was
acquired in June 2003. Brokerage Services earnings before income taxes increased
50% to $68 million for the quarter on higher revenues driven by increased
investor communications activity, higher trade volume and higher retail versus
institutional mix. Brokerage Services earnings before income taxes decreased 10%
to $121 million for the year-to-date period due to the year-to-date decline in
revenues in the trade processing business, caused primarily by continued
industry consolidation. Other income declined $16 million during the quarter and
$56 million for the year-to-date period due to lower interest rates on corporate
funds and a decrease in the amount of realized gains on our available-for-sale
securities 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.
Net earnings for the quarter decreased 9% to $300 million from $329 million and
decreased 10% to $724 million from $801 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 7% to $0.50 per share from $0.54 per share and
decreased 8% to $1.21 per share from $1.32 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 third
quarter of 2004.
Analysis of Business Segments
Revenues
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
2004 2003 Change 2004 2003 Change
------ ------ ------ ------ ------ ------
Employer Services $1,366 $1,240 10% $3,635 $3,312 10%
Brokerage Services 452 401 13% 1,105 1,078 2%
Dealer Services 226 209 8% 655 605 8%
Other 99 96 4% 335 348 (4%)
Reconciling items:
Foreign exchange 29 (21) 37 (86)
Client fund interest (51) (19) (98) (22)
------ ------ ------ ------
Total revenues $2,121 $1,906 11% $5,669 $5,235 8%
====== ====== ====== ======
Earnings Before Income Taxes
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ------------------------
2004 2003 Change 2004 2003 Change
---- ---- ------ ------ ------ ------
Employer Services $385 $411 (6%) $ 854 $ 892 (4%)
Brokerage Services 68 45 50% 121 134 (10%)
Dealer Services 39 36 10% 108 101 8%
Other 2 40 (95%) 67 123 (45%)
Reconciling items:
Foreign exchange 3 (6) 5 (15)
Client fund interest (51) (19) (98) (22)
Cost of capital charge 34 26 99 84
------------ ----------------
Total earnings before
income taxes $480 $533 (10%) $1,156 $1,297 (11%)
============ ================
Revenues in our Employer Services business increased 10% for both the quarter
and the year-to-date period as compared to the prior year. Internal revenue
growth was approximately 6% for the quarter and 5% for 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 11% for the quarter
and 9% for the year-to-date period, and strong growth of approximately 16% 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, improving more than 1.5% for the quarter over last year's record
retention levels, and 1.0% for the year-to-date period. Pays per control, which
represents the number of employees on our clients' payrolls, increased 0.6% for
the quarter and 0.1% for the year-to-date period in the United States. Pays per
control in our European businesses is still declining, with individual countries
ranging from flat to down 2% compared to last year. New business sales, which
represents the annualized revenues anticipated from new sales orders, increased
10% for the quarter, which is our first double-digit quarterly increase in three
years. Earnings before income taxes in Employer Services decreased 6% for the
quarter and 4% year-to-date due primarily to our previously announced
incremental investments in our products and services and employer of choice
initiatives, and the integration of acquisitions, primarily ProBusiness
Services, Inc., completed during fiscal 2003.
Brokerage Services revenues increased 13% for the quarter and 2% for the
year-to-date period ended March 31, 2004. The increase in revenues for the
quarter and year-to-date period ended March 31, 2004 is primarily due to an
increase in certain investor communication activity, higher trade volume and
higher retail versus institutional mix of trades, offset by the decline in the
average revenue per trade. Year-to-date revenue growth was also impacted by
industry consolidation. Investor communications pieces delivered increased 25%
in the quarter from 217 million to 271 million and 14% for the year-to-date
period from 505 million to 577 million. The increase in the quarterly and
year-to-date investor communication activity primarily relates to the increase
in the amount of non-proxy mutual fund mailings related to the recent mutual
fund industry regulatory oversight. For the quarter, the average trades per day
increased 22% from 1.24 million to 1.52 million and the average revenue per
trade decreased 9%. For the year-to-date period, the average trades per day
increased 3% from 1.33 million to 1.36 million and the average revenue per trade
decreased 10%. The average revenue per trade is generally impacted by our client
mix and volume processed under tier pricing agreements. Earnings before income
taxes increased 50% for the quarter due to the increased scale on higher volumes
in our back office trading business. Earnings before income taxes for the
year-to-date period declined 10% primarily due to the year-to-date decline in
revenues of our back office business mainly due to the effects of industry
consolidation.
Dealer Services' revenues increased 8% for both the quarter and year-to-date
periods ended March 31, 2004. 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 10% and 8%, respectively, primarily due to the increased 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 March 31, 2004, we
had cash and marketable securities of $2.3 billion. Shareholders' equity was
approximately $5.6 billion and the ratio of long-term debt to equity was
approximately 1.5%.
Capital expenditures for fiscal year 2004 are expected to be approximately $190
to $200 million compared to $134 million in fiscal year 2003. The expected
amount of capital expenditures increased from the previous forecast of $175
million due to the decision to acquire versus lease a building in the fourth
quarter of fiscal 2004 for approximately $20 million.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of our liquidity is our net earnings of $724 million for the
nine months ended March 31, 2004. Cash flows generated from operations for the
nine months ended March 31, 2004 decreased $34 million from the prior year,
primarily due to a decrease in net earnings and a decrease in working capital
caused by the timing of certain cash funding activity.
Cash flows used in investing activities were $1.1 billion for the nine months
ended March 31, 2004 compared with cash flows provided by investing activities
of $0.2 billion 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. In addition, the Company acquired 5 businesses during
the year-to-date period ending March 31, 2004 for approximately $229 million,
net of cash acquired.
Cash flows used in financing activities totaled $545 million for the nine months
ended March 31, 2004 compared to $959 million in the prior year. The decrease in
cash used in financing is primarily due to lower repurchases of common stock of
approximately $382 million. We purchased approximately 10.9 million shares of
common stock at an average price per share of $39.74 during the nine months
ended March 31, 2004. As of March 31, 2004, we have remaining Board of Directors
authorization to purchase up to 32.5 million additional shares.
During the nine months ended March 31, 2004, approximately twenty-five 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 seventy-five 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.
Details regarding our combined corporate investments and funds held for clients
portfolios are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Average investment balances
at cost:
Corporate investments $ 2,494 $ 2,812 $ 3,166 $ 3,395
Funds held for clients 13,316 10,445 10,766 8,692
-------- ------- ------- -------
Total $ 15,810 $13,257 $13,932 $12,087
======== ======= ======= =======
Average interest rates earned
exclusive of realized gains
(losses) for the total
combined corporate investments
and funds held for clients'
portfolios (pre-tax) 2.9% 3.7% 3.1% 4.1%
Realized gains on available-
for-sale securities $ 1.8 $ 9.4 $ 7.2 $ 26.0
Realized losses on available-
for-sale securities (1.4) (1.2) (9.8) (3.4)
-------- ------- ------- -------
Net realized gains (losses) $ 0.4 $ 8.2 $ (2.6) $ 22.6
======== ======= ======= =======
March 31, June 30,
2004 2003
--------- ---------
Unrealized pre-tax gains on available-for-
sale securities $ 286.0 $ 375.9
Total available-for-sale securities $11,978.0 $ 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 next
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 by the Company 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 provide funding for general corporate purposes, if necessary. There have been
no borrowings through March 31, 2004 under the credit agreement. The new $4.5
billion credit agreement expires in September 2004.
In April 2002, we initiated a U.S. 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 March 31, 2004 and 2003,
there was no commercial paper outstanding. For the three months ended March 31,
2004 and 2003, the Company had average borrowings of $0.2 billion and $0.3
billion, respectively, at an effective weighted average interest rate of 1.0%
and 1.3%, respectively. For the nine months ended March 31, 2004 and 2003, the
Company had average borrowings of $0.9 billion for both periods, 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 nine
months ended March 31, 2004 was less than two days for both periods.
The Company's U.S. and Canadian short-term funding requirements related to
client funds obligations are 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 March 31, 2004 and 2003, there were no
outstanding repurchase agreements. For the three months ended March 31, 2004 and
2003, the Company had an average outstanding balance of $35.2 million and $3.4
million, respectively, at an average interest rate of 1.9% and 3.0%,
respectively. For the nine months ended March 31, 2004 and 2003, the Company had
an average outstanding balance of $20.8 million and $5.5 million, respectively,
at an average interest rate of 2.1% and 2.8%, respectively.
NEW ACCOUNTING PRONOUNCEMENT
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 (revised)
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 benefit plans and other defined benefit
postretirement plans. The interim period disclosures required by SFAS 132 are
effective for the Company for the third quarter ended March 31, 2004 and are
included in Note 11, herein. 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 March 31, 2004 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 March 31, 2004 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. On March 12, 2004, the
plaintiffs filed an appeal of the final judgment, which appeal is now pending
before the Texas Court of Appeals.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities (1)
(a) (b) (c) (d)
Total number of Maximum number
shares purchased of shares that
as part of the may yet be
publicly purchased
Total announced under the
number of Average common stock common stock
shares price paid repurchase repurchase
purchased per share (3) plan plan
Period
January 1, 2004 to 1,063,638 $41.80 1,000,000 35,404,700
January 31, 2004
February 1, 2004 to 1,361,200 $43.31 1,360,000 34,044,700
February 28, 2004
March 1, 2004 to 1,521,497 $41.86 1,521,000 32,523,700
--------- ---------
March 31, 2004
Total 3,946,335 (2) 3,881,000
(1) In March 2001, the Company received the Board of Directors' approval to
repurchase up to 50 million shares of the Company's common stock. In
November 2002, the Company received the Board of Directors' approval to
repurchase an additional 35 million shares of the Company's common stock.
There is no expiration date for the common stock repurchase plan.
(2) During 2004, pursuant to the terms of the Company's restricted stock
program, the Company (i) made repurchases of 63,638 shares during January
2004 and 497 shares during March 2004 at the then market value of the
shares in connection with the exercise by employees of their option under
such program to satisfy certain tax withholding requirements through the
delivery of shares to the Company instead of cash and (ii) made purchases
of 1,200 shares during February 2004 at a price of $.10 per share under
the terms of such program to repurchase stock granted to employees who
have left the Company.
(3) The average price per share does not include the repurchases described in
2(ii) of the proceeding footnote.
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 filed during the fiscal quarter ended March 31, 2004.
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: May 10, 2004 /s/ Karen E. Dykstra
--------------------
Karen E. Dykstra
Chief Financial Officer
-----------------------
(Title)