Delaware 22-1467904
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One ADP Boulevard, Roseland, New Jersey 07068
(Address of principal executive offices) (Zip Code)
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Name of each exchange on
Title of each class which registered
Common Stock, $.10 Par Value New York Stock Exchange
(voting) Chicago Stock Exchange
Pacific Stock Exchange
Liquid Yield Option Notes due 2012 New York Stock Exchange
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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 12 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. Yes x No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No _____
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of the last trading day of the Registrant's most recently completed second fiscal quarter was approximately $23,534,103,946. On August 31, 2003, there were 594,883,230 shares of Common Stock outstanding.
Portions of the Registrant's 2003 Annual Report to Shareholders.Parts I, II
& IV Portions of the Registrant's Proxy Statement for Annual Meeting
of Stockholders to be held on November 11, 2003. Part III
Item 1. Business
Automatic Data Processing, Inc., incorporated in Delaware in 1961 (together with its subsidiaries "ADP" or the "Registrant"), is one of the largest providers of computerized transaction processing, data communication and information services in the world. For financial information by segment and by geographic area, see Note 13 of the "Notes to Consolidated Financial Statements" contained in ADP's 2003 Annual Report to Shareholders, which information is incorporated herein by reference. The Registrant's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, Proxy Statement for its Annual Meeting of Stockholders and Annual Report to Shareholders are made available, free of charge, on its website at www.adp.com as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission. The following summary describes ADP's activities.
Employer Services
Employer Services offers a comprehensive range of payroll processing, human resource ("HR") and benefits administration products and services, including traditional and Web-based outsourcing solutions that help over 460,000 employers in North America, Europe, South America (primarily Brazil), Australia and Asia staff, manage, pay and retain their employees. Employer Services markets these products and services through its direct marketing sales force and, on a limited basis, through indirect sales channels, such as marketing relationships with banks, accountants and online companies. In fiscal 2003, 90% of Employer Services' revenues were from North America, 9% were from Europe and 1% was from South America (primarily Brazil), Australia and Asia.
Employer Services' approach to the market is to match a client's needs with the product that will best meet expectations. To facilitate this approach, in North America, Employer Services is comprised of the following groups: Small Business Services (which was previously known as Emerging Business Services) ("SBS") (primarily companies with fewer than 50 employees); Major Accounts (primarily companies with between 50 and 999 employees); and National Accounts Services (primarily companies with 1,000 or more employees).
SBS processes payroll for smaller companies and provides them with leading solutions, including a range of value-added services that are specifically designed for small business clients. Major Accounts and National Accounts Services offer a full suite of best-of-breed employer services solutions, including full database and other functional integration between payroll and HR for clients ranging from mid-sized through many of the world's largest corporations. In fiscal 2003, ADP expanded its presence in its National Accounts Services market through its acquisition of ProBusiness Services, Inc., a provider of comprehensive payroll, tax filing and HR processing services to large companies in the United States.
In some cases, ADP provides system solutions for its clients' entire human resource, payroll and benefits needs. Through ADP Connection(R), ADP can enable its largest clients to interface their major enterprise resource planning applications with ADP's outsourced payroll services. For those companies that choose to process these applications in-house, ADP delivers stand-alone services such as payroll tax filing, check printing and distribution and year-end tax statements (i.e., W-2s). Other large clients rely on ADP to design and deliver customized human resource information systems and benefits outsourcing solutions.
The ADP Financial and Compliance Services business (which was previously known as ADP Tax and Financial Services) processes and collects federal, state and local payroll taxes on behalf of, and from, ADP clients and remits such taxes to the appropriate taxing authorities. The ADP Financial and Compliance Services business is also responsible for the efficient movement of funds and information from clients to third parties through service offerings such as new hire reporting, ADP's TotalPay(TM) payroll check (ADPCheck(TM)), full service direct deposit (FSDD) and, in conjunction with major bank partners, stored value payroll card (TotalPay Card) products and the collection and payment of wage garnishments. The ADP Financial and Compliance Services business supports large, mid-sized and small clients. It provides an electronic interface between approximately 364,000 ADP clients in the United States and Canada and about 2,000 federal, state, provincial and local tax agencies, from the Internal Revenue Service to local town governments. In fiscal 2003, the ADP Financial and Compliance Services business printed and delivered approximately 38 million year-end tax statements in North America and moved over $620 billion in client funds to taxing authorities and its clients' employees via electronic transfer, direct deposit and ADPCheck.
ADP's HR services, by interfacing with a client's payroll database, provide comprehensive HR recordkeeping services, including benefits administration and outsourcing, applicant tracking, employee history and position control. ADP's Benefits Services provides benefits administration across all market segments, including management of the open enrollment of benefits, COBRA and flexible spending account administration, Section 529 College Savings Plan administrative services and 401(k) recordkeeping. In fiscal 2003, ADP greatly expanded its retirement services business through its acquisition of the retirement services recordkeeping operations of Scudder Investments, making ADP the 4th largest recordkeeper of retirement plans in the United States (based on number of plans).
ADP TotalSource, ADP's professional employer organization ("PEO") business, provides clients with comprehensive employment administration outsourcing solutions, including payroll, tax filing, employee background checks, HR guidance, 401(k) plan administration, benefits administration, regulatory compliance services, workers' compensation insurance and supplemental benefits for employees. ADP TotalSource, the second largest PEO in the U.S. (based on the number of worksite employees), has 29 offices located in fifteen states and serves over 3,800 PEO clients and over 85,000 work-site employees in all 50 states.
ADP complements its payroll and HR services with additional employer services that include products such as time and labor management, pre-employment screening and selection services and unemployment compensation management. In fiscal 2003, ADP expanded its service offerings by acquiring the assets of the SMS companies, leading providers of job tax credit services that assist employers in the identification of, and filing for, special tax credits based on geography, demographics and other criteria.
During fiscal 2003, ADP continued the process of Web-enabling existing product offerings, while at the same time creating new products expressly designed for the Internet. ADP's Internet offerings now include its EasyPayNet(sm) Web-based payroll solution for SBS clients, Pay eXpert(R) Web-based payroll solution for Major Accounts clients and its PayForce(sm) Web-based payroll solution and Enterprise HRMS integrated HR, payroll and benefits solution for National Accounts Services clients, all of which feature Web-based employer self-service capabilities. Further, during fiscal 2003, ADP continued its rollout of its new TotalChoice(sm) Solutions Web-based payroll solution, a fully-integrated, Web-native human resource and payroll management solution hosted by ADP that was originally launched in fiscal 2002. For benefits administration, ADP offers Benefits eXpert(sm), a Web-based benefits administration and employee self-service solution that allows mid-sized companies in Major Accounts to manage more efficiently their employees' health and welfare benefits. For large clients, ADP Benefit Services offers a Web-based COBRA administrative solution, as well as employee self-service applications for open-enrollment, flexible spending account administration and other employee-administered benefit options.
The continued increase in the number of multi-national companies makes payroll and human resource management services a global opportunity. In fiscal 2003, ADP increased payroll sales to multi-national employers throughout Europe by nearly 36% over the previous fiscal year.
Brokerage Services
Brokerage Services provides transaction processing systems, desktop productivity applications and investor communications services to the financial services industry worldwide. ADP's products and services include: (i) global order entry, trade processing and settlement systems that enable firms to trade virtually any financial instrument, in any market, at any time; (ii) full-service investor communications services including: electronic delivery and Web solutions; workflow services; financial, offset, and on-demand printing; proxy distribution and vote processing; householding; regulatory mailings; fulfillment; and customized communications; (iii) real-time order entry and processing services for Web-based brokerage firms; (iv) automated, browser-based desktop productivity tools for financial consultants and back office personnel; and (v) integrated delivery of multiple products and services through ADP's Global Processing Solution.
Brokerage Services serves a large client base in the financial services industry, including: retail and institutional brokerage firms; global banks; mutual funds; annuity companies; institutional investors; specialty trading firms; clearing firms; hedge funds; and publicly owned corporations. Brokerage Services provides securities transaction processing, printing and electronic distribution of shareholder communications and other services to clients in more than 25 countries in North America, Europe, Asia, South America and Australia. Brokerage Services also provides computerized proxy vote tabulation and shareholder communication, distribution and fulfillment services, including Web-enabled products and services. ADP served approximately 14,000 publicly traded companies and 450 mutual funds and annuity companies with proxy services on behalf of more than 800 brokerage firms and banks in fiscal 2003. In fiscal 2003, Brokerage Services received ISO 9001:2000 certification, an international standard for the highest quality, for its vote processing, production operations, print operations and client services systems.
In fiscal 2003, Brokerage Services acquired the assets of Vantra Group, Inc., a leading provider of specialized Web-based solutions to brokerage clients; all of the capital stock of Power Securities Systems, Inc., a leading back-office software provider for niche market firms; and all of the capital stock of Dataphile Software, Ltd., a leading provider of real-time, straight-through-processing solutions for brokerage firms and mutual fund securities dealers in Canada.
Dealer Services provides integrated dealer management computer systems (such a system is also known in the industry as a "DMS") and other business performance solutions to automotive retailers and their manufacturers throughout North America and Europe. More than 16,000 automobile and truck dealers and more than 30 manufacturers use ADP's DMS, networking solutions, data integration, consulting and/or marketing services.
Dealer Services offers its dealership clients a service solution that includes computer hardware, hardware maintenance services, licensed software, software support, system design and network consulting services. Dealer Services also offers its clients "front-end" dealership sales process and business development training services, consulting services, software products and customer relationship management solutions. Clients use an ADP DMS to manage business activities such as accounting, inventory, factory communications, scheduling, vehicle financing, insurance, sales and service. Dealer Services also designs, establishes and maintains communications networks for its dealership clients that allow interactive communications among multiple site locations (for larger dealers), as well as links between franchised dealers and their vehicle manufacturer franchisors. These networks are used for activities such as new vehicle ordering and status inquiry, warranty submission and validation, parts and vehicle locating, dealership customer credit application submission and decisioning, vehicle repair estimating and obtaining vehicle registration and lien holder information. Dealer Services also offers an Application Service Provider Managed Services solution to its dealership clients pursuant to which such clients outsource all information technology management, computing and network infrastructure, technology decisions and system support to Dealer Services.
Claims Services
Claims Services offers integrated business solutions for clients in the property and casualty insurance, auto collision repair and auto recycling industries. These products help clients manage costs and improve efficiency and accelerate the claims review and settlement process. These products and services include (i) claims management applications such as automated repair estimating, total loss vehicle valuation, first notice of loss, dispatch and assignment, claims audit, parts exchange and workflow applications that streamline the end-to-end claims process, (ii) body shop and auto recycler management systems and (iii) other applications, databases and services that enhance and optimize the claims process.
Markets and Marketing Methods
All of ADP's services are offered broadly across North America and Europe. Some employer services and brokerage services are also offered in South America (primarily Brazil), Australia and Asia.
None of ADP's major business groups have a single homogenous client base or market. For example, Brokerage Services serves a large client base in the financial services industry including retail and institutional firms, banks and individual non-brokerage corporations. Dealer Services primarily serves automobile dealers, but also serves truck and agricultural equipment dealers, auto repair shops, used car lots, state departments of motor vehicles and manufacturers of automobiles, trucks and agricultural equipment. Claims Services has many clients who are insurance companies, but it also provides services to automobile manufacturers, body repair shops, salvage yards, distributors of new and used automobile parts and other non-insurance clients. Employer Services has clients from a large variety of industries and markets. Within this client base are concentrations of clients in specific industries. Employer Services also sells to auto dealers, brokerage clients and insurance clients. While concentrations of clients exist, no one client or business group is material to ADP's overall revenues.
None of ADP's businesses are overly sensitive to price changes. Economic conditions among selected clients and groups of clients may and do have a temporary impact on demand for ADP's services. In fiscal 2003, despite the continued impact of weak economic conditions, Employer Services continued to grow, primarily due to the increase in its North America payroll and tax businesses, including strong growth in its "beyond payroll" products and in its PEO business, and improved client retention; in Brokerage Services, weakness in the brokerage and financial services industry reduced Brokerage Services' primarily volume-based back-office processing and investor communications activities; and interest rates in the U.S. continued to decline over the last fiscal year, significantly impacting interest earnings on our client and corporate funds.
ADP enjoys a leadership position in each of its major service offerings and does not believe any major service or business unit in ADP is subject to unique market risk.
Competition
The computing services industry is highly competitive. ADP knows of no reliable statistics by which it can determine the number of its competitors, but it believes that it is one of the largest providers of computerized transaction processing, data communication and information services in the world.
ADP's competitors include other independent computing services companies, divisions of diversified enterprises and banks. Another competitive factor in the computing services industry is the in-house computing function, whereby a company installs and operates its own computing systems.
Competition in the computing services industry is primarily based on service responsiveness, product quality and price. ADP believes that it is very competitive in each of these areas and that there are no material negative factors impacting ADP's competitive position in the computing services industry. No one competitor or group of competitors is dominant in the computing services industry.
Clients and Client Contracts
ADP provides its services to approximately 500,000 clients. In fiscal 2003, no single client or group of affiliated clients accounted for revenues in excess of 2% of annual consolidated revenues.
ADP has no material "backlog" because the period between the time a client agrees to use ADP's services and the time the service begins is generally very short. Depending on the service agreement and/or the size of the client, the installation or conversion period for new clients could vary from a short period of time (up to two weeks) for an SBS client to a longer period (generally six to twelve months) for a National Accounts Services or Dealer Services client with multiple deliverables.
ADP's average client retention is more than 8 years in Employer Services and is 10 or more years in Brokerage Services and Dealer Services, and does not vary significantly from period to period.
ADP's services are provided under written price quotations or service agreements having varying terms and conditions. No one price quotation or service agreement is material to ADP. Discounts, rebates and promotions offered by ADP to clients are not material.
During the fiscal years ended June 30, 2003, 2002 and 2001, ADP invested $604 million, $535 million and $584 million, respectively, in systems development and programming, migration to new computing technologies and the development of new products and maintenance of our existing technologies, including purchases of new software and software licenses.
Product Development
ADP continually upgrades, enhances and expands its existing products and services. Generally, no new product or service has a significant effect on ADP's revenues or negatively impacts its existing products and services, and ADP's products and services have a significant remaining life cycle.
Licenses
ADP is the licensee under a number of agreements for computer programs and databases. ADP's business is not dependent upon a single license or group of licenses. Third-party licenses, patents, trademarks and franchises are not material to ADP's business as a whole.
Number of Employees
ADP employed approximately 41,000 persons as of June 30, 2003.
Item 2. Properties
ADP leases space for 24 of its principal processing centers. In addition, ADP leases numerous other operational offices and sales offices. All of these leases, which aggregate approximately 7,100,000 square feet in North America, Europe, South America (primarily Brazil), Asia, Australia and South Africa, expire at various times up to the year 2018. ADP owns 14 of its processing facilities, other operational offices and its corporate headquarters complex in Roseland, New Jersey, which aggregate approximately 3,000,000 square feet. None of ADP's owned facilities is subject to any material encumbrances. ADP believes its facilities are currently adequate for their intended purposes and are adequately maintained.
Item 3. Legal Proceedings
In the normal course of business, the Registrant is subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, the Registrant believes it has valid defenses with respect to the legal matters pending against it and the Registrant believes that the ultimate resolution of these matters will not have a material adverse impact on its financial condition, results of operations or cash flows. Among the various claims and litigation pending against the Registrant is the following:
The Registrant and its indirect wholly-owned subsidiaries Dealer Solutions, L.L.C. and Dealer Solutions Holdings, Inc. ("DSI") are named as defendants in a lawsuit filed on March 4, 1999 in the 133rd Judicial District Court of Harris County, Texas by Universal Computer Systems, Inc., Universal Computer Consulting, Ltd., Universal Computer Services, Inc., and Dealer Computer Services, Inc. (collectively, "UCS"), which lawsuit has since been referred by the District Court to arbitration and was tried before an arbitration panel in June 2003 with a final decision expected in October 2003. This lawsuit alleges trade secret violations by DSI in the creation by DSI of the CARMan automobile dealership software product and misappropriation of those trade secrets by the Registrant through its acquisition of DSI. UCS is seeking injunctive relief and damages of $56 million. The Registrant believes it has valid defenses with respect to the above matter and should prevail.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
See "Market Price, Dividend Data and Other" contained in the Registrant's 2003 Annual Report to Shareholders, which information is incorporated herein by reference. As of August 31, 2003, the Registrant had 36,439 registered holders of its Common Stock, par value $.10 per share. The Registrant's Common Stock is traded on the New York, Chicago and Pacific Stock Exchanges.
On February 11, 2003, the Registrant issued 9,430 shares of its Common Stock
in respect of an earnout paid to a company in accordance with an asset purchase
agreement dated November 30, 2000 pursuant to which the Registrant acquired
substantially all of the assets of such company. The Registrant issued the foregoing
shares of Common Stock without registration under the Securities Act of 1933,
as amended, in reliance upon the exemption therefrom set forth in
Section 4(2) of such Act relating to sales by an issuer not involving a public
offering.
Item 6. Selected Financial Data
See "Selected Financial Data" contained in the Registrant's 2003 Annual Report to Shareholders, which information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
See "Management's Discussion and Analysis" contained in the Registrant's 2003 Annual Report to Shareholders, which information is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See "Management's Discussion and Analysis - Liquidity and Capital Resources" contained in the Registrant's 2003 Annual Report to Shareholders, which information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements described in Item 15(a)1. hereof are incorporated herein.
The following supplementary data is incorporated herein by reference:
Quarterly Financial Results (unaudited) for the two years ended June 30, 2003 (see Note 14 of the "Notes to Consolidated Financial Statements" contained in ADP's 2003 Annual Report to Shareholders)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
The Registrant carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Registrant'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 Registrant's disclosure controls and procedures as of June 30, 2003 were effective to ensure that information required to be disclosed by the Registrant 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 Registrant's internal control over financial reporting that occurred during the quarter ended June 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Registrant
The executive officers of the Registrant, their ages, positions and the period during which they have been employed by ADP are as follows:
Employed by
Name Age Position ADP Since
-------------------- --- -------------------------- ----------
John D. Barfitt 50 Vice President 1979
James B. Benson 58 Vice President, General 1977
Counsel and Secretary
Richard C. Berke 58 Vice President, Human 1989
Resources
Gary C. Butler 56 President and Chief 1975
Operating Officer
Raymond L. Colotti 57 Vice President and 1995
Treasurer
Richard J. Daly 50 Group President, 1989
Brokerage Services
G. Harry Durity 56 Vice President, 1994
Worldwide Business
Development
Karen E. Dykstra 44 Chief Financial Officer 1981
Russell P. Fradin 48 Group President, 1996
Employer Services
Eugene A. Hall 47 President,
Employer Services -
Major Accounts Division 1998
John Hogan 55 Group President, 1993
Brokerage Services
Campbell Langdon 42 President,
Tax, Financial and Time
Management Services 2000
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S. Michael Martone 55 Group President, Dealer 1987
Services
Peter Op de Beeck 47 President, 1998
Claims Solutions Group
Dan Sheldon 47 Vice President, 1984
Corporate Controller
George I. Stoeckert 55 President, Employer 1991
Services - International
Arthur F. Weinbach 60 Chairman and 1980
Chief Executive Officer
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Messrs. Benson, Berke, Butler, Daly, Durity, Fradin, Hall, Hogan, Martone and Weinbach have each been employed by ADP in senior executive positions for more than the past five years.
John D. Barfitt joined ADP in 1979. He is a Vice President. He served as President, Employer Services -International from 2000 to 2003, President, Claims Services at ADP from 1998 to 2000 and Senior Vice President - Automotive Claims Services at ADP from 1996 to 1998.
Raymond L. Colotti joined ADP in 1995. Prior to his promotion to Vice President and Treasurer in 1997, he served as President of ADP Atlantic, Inc. and its related companies from 1995 to 1997.
Karen E. Dykstra joined ADP in 1981. Prior to her promotion to Chief Financial Officer in 2003, she served as Vice President, Finance from 2001 to 2003, Vice President and Controller from 1998 to 2001 and Assistant Corporate Controller from 1996 to 1998.
Campbell Langdon joined ADP in 2000 as Vice President, Strategic Development. In 2003, he was promoted to President, Tax, Financial and Time Management Services. Prior to joining ADP, he was a partner of McKinsey & Company and had been associated with that firm for 11 years.
Peter Op de Beeck joined ADP in 1998 as Managing Director of Claims Solutions Group's Audatex. In 2001, he became President of ADP Claims Solutions Group. Prior to joining ADP, he was Chairman and Chief Executive Officer of Online Internet from 1996 to 1998.
Dan Sheldon joined ADP in 1984. Prior to his promotion to Vice President, Corporate Controller in 2003, he served as Chief Financial Officer of Brokerage Services from 2001 to 2003 and Chief Financial Officer of Dealer Services from 1996 to 2001.
George I. Stoeckert joined ADP in 1991. Prior to his promotion to President, Employer Services International in 2003, he served as President - Major Accounts Division, Employer Services from 1995 to 2003.
Each of ADP's executive officers is elected for a term of one year and until their successors are chosen and qualified or until their death, resignation or removal.
See "Election of Directors" in the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
See "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Item 11. Executive Compensation
See "Compensation of Executive Officers" and "Election of Directors" in the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See "Election of Directors - Security Ownership of Certain Beneficial Owners and Managers" and "Compensation of Executive Officers - Equity Compensation Plan Information" in the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See "Compensation of Executive Officers - Certain Transactions" in the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
See "Independent Auditors' Fees" in the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Financial Statements
The following reports and consolidated financial statements of the Registrant contained in the Registrant's 2003 Annual Report to Shareholders are also included in Part II, Item 8:
Statements of Consolidated Earnings - years ended June 30, 2003, 2002 and 2001
Statements of Consolidated Shareholders' Equity - years ended June 30, 2003, 2002 and 2001
Statements of Consolidated Cash Flows - years ended June 30, 2003, 2002 and 2001
Financial information of the Registrant is omitted because the Registrant is primarily a holding company. The Registrant's subsidiaries, which are listed on Exhibit 21 attached hereto, are wholly owned.
2. Financial Statement Schedules
Page in Form 10-K
Independent Auditors' Report on Schedule 17
Schedule II - Valuation and Qualifying Accounts 18
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All other Schedules have been omitted because they are inapplicable or are not required or the information is included elsewhere in the financial statements or notes thereto.
3. Exhibits
The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit in the list below:
3.1 - Amended and Restated Certificate of Incorporation
dated November 11, 1998 - incorporated by reference
to Exhibit 3.1 to Registrant's Registration Statement
No. 333-72023 on Form S-4 filed with the Commission
on February 9, 1999
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3.2 - Amended and Restated By-laws of the Registrant -
incorporated by reference to Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002
4 - Indenture dated as of February 20, 1992 between
Automatic Data Processing, Inc. and Bankers Trust
Company, as trustee, regarding the Liquid Yield
Option Notes due 2012 of the Registrant -
incorporated by reference to Exhibit (4)-#1 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992
10.1 - Letter Agreement dated as of August 13, 2001
between Automatic Data Processing, Inc. and
Arthur F. Weinbach - incorporated by reference to
Exhibit 10.1 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001
(Management Contract)
10.2 - Letter Agreement dated September 14, 1998 between
Automatic Data Processing, Inc. and Gary Butler -
incorporated by reference to Exhibit 10.2 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 (Management
Contract)
10.3 - Key Employees' Restricted Stock Plan -
incorporated by reference to Registrant's
Registration Statement No. 33-25290 on Form S-8
(Management Compensatory Plan)
10.4 - Supplemental Officers' Retirement Plan, as
amended - incorporated by reference to Exhibit
10.4 to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2002
(Management Compensatory Plan)
10.5 - 1989 Non-Employee Director Stock Option Plan -
incorporated by reference to Exhibit
10(iii)(A)-#7 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1990
(Management Compensatory Plan)
10.5(a) - Amendment to 1989 Non-Employee Director Stock
Option Plan - incorporated by reference to
Exhibit 10(6)(a) to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997
(Management Compensatory Plan)
10.6 - 1990 Key Employees' Stock Option Plan -
incorporated by reference to Exhibit
10(iii)(A)-#8 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1990
(Management Compensatory Plan)
10.6(a) - Amendment to 1990 Key Employees' Stock Option
Plan - incorporated by reference to Exhibit
10(7)(a) to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1997
(Management Compensatory Plan)
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10.7 - 1994 Directors' Pension Arrangement -
incorporated by reference to Exhibit
10(iii)(A)-#10 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994
(Management Compensatory Plan)
10.8 - 2000 Key Employees' Stock Option Plan, as amended
- incorporated by reference to Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002 (Management
Compensatory Plan)
10.9 - 2001 Executive Incentive Compensation Plan -
incorporated by reference to Exhibit 10.9 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001 (Management
Compensatory Plan)
10.10 - Change in Control Severance Plan for Corporate
Officers - incorporated by reference to Exhibit
10.3 to Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2001
(Management Compensatory Plan)
10.11 - Employees' Saving-Stock Option Plan -
incorporated by reference to Registrant's
Registration Statement No. 333-10281 on Form S-8
(Management Compensatory Plan)
13 - Pages 16 to 39 of the 2003 Annual Report to
Shareholders (with the exception of the pages
incorporated by reference herein, the Annual
Report is not a part of this filing)
21 - Subsidiaries of the Registrant
23 - Independent Auditors' Consent
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
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(b) Reports on Form 8-K during the fiscal quarter ended June 30, 2003
A Form 8-K was filed on April 17, 2003 under Items 9 and 12 of
Form 8-K, announcing the Registrant's financial results for the third fiscal
quarter ended March 31, 2003.
To the Board of Directors
and Shareholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the consolidated financial statements of Automatic Data Processing, Inc. and subsidiaries (the "Company") as of June 30, 2003 and 2002, and for each of the three years in the period ended June 30, 2003, and have issued our report thereon dated July 28, 2003; such consolidated financial statements and report are included in your 2003 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Automatic Data Processing, Inc., listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP ------------------------- New York, New York July 28, 2003 |
AUTOMATIC DATA PROCESSING, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- ---------
Additions
------------------------------
(1) (2)
Charged
to
Balance at Charged to other Balance at
beginning costs and accounts- Deductions- end of
of period expenses describe describe period
--------- --------- --------- ---------- ----------
Year ended June 30, 2003:
Allowance for doubtful accounts:
Current $52,873 $17,588 $ 712 (B) $(16,519) (A) $54,654
Long-term $16,019 $ 1,534 $ -- $ (6,450) (A) $11,103
Deferred tax valuation allowance $40,140 $ 5,318 $ 899 (C) $(14,137) (E) $32,220
Year ended June 30, 2002:
Allowance for doubtful accounts:
Current $41,996 $27,703 $ 743 (B) $(17,569) (A) $52,873
Long-term $16,666 $ 1,176 $ -- $ (1,823) (A) $16,019
Deferred tax valuation allowance $41,930 $ 3,179 $ 313 (C) $ (5,282) (D) $40,140
Year ended June 30, 2001:
Allowance for doubtful accounts:
Current $48,448 $16,431 $ 114 (B) $(22,997) (A) $41,996
Long-term $16,946 $ 1,369 $ -- $ (1,649) (A) $16,666
Deferred tax valuation allowance $43,700 $ 6,145 $ (165)(C) $ (7,750) (D) $41,930
|
(A) Doubtful accounts written off, less recoveries on accounts previously
written off.
(B) Acquired in purchase transactions.
(C) Related to foreign exchange fluctuation. (D) Related to the net deferred
tax assets recorded in purchase accounting. The recognition of this allowance
is allocated to reduce the excess purchase price over the net assets acquired.
(E) A portion of this allowance is related to the net deferred tax assets recorded
in purchase accounting, the recognition of which is allocated to reduce the
excess purchase price over the net assets acquired. The remaining portion reduced
the current year provision for income taxes.
Pursuant to the requirements of Section 13 or 15(d) 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.
September 12, 2003 By: /s/ Arthur F. Weinbach
---------------------------
Arthur F. Weinbach
Chairman and
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Arthur F. Weinbach Chairman, Chief Executive September 12, 2003
--------------------------------- Officer and Director
(Arthur F. Weinbach) (Principal Executive Officer)
/s/ Karen E. Dykstra Chief Financial Officer September 12, 2003
--------------------------------- (Principal Financial Officer)
(Karen E. Dykstra)
/s/ Gregory D. Brenneman Director September 12, 2003
---------------------------------
(Gregory D. Brenneman)
/s/ Leslie A. Brun Director September 12, 2003
---------------------------------
(Leslie A. Brun)
/s/ Gary C. Butler Director September 12, 2003
---------------------------------
(Gary C. Butler)
/s/ Joseph A. Califano, Jr. Director September 12, 2003
---------------------------------
(Joseph A. Califano, Jr.)
/s/ Leon G. Cooperman Director September 12, 2003
---------------------------------
(Leon G. Cooperman)
|
Signature Title Date
--------- ----- ----
/s/ Ann Dibble Jordan Director September 12, 2003
---------------------------------
(Ann Dibble Jordan)
Director September __, 2003
---------------------------------
(Harvey M. Krueger)
Director September __, 2003
---------------------------------
(Frederic V. Malek)
/s/ Henry Taub Director September 12, 2003
---------------------------------
(Henry Taub)
/s/ Laurence A. Tisch Director September 12, 2003
---------------------------------
(Laurence A. Tisch)
/s/ Josh S. Weston Director September 12, 2003
---------------------------------
(Josh S. Weston)
|
(In thousands, except per share amounts) Years ended June 30, 2003 2002 2001 2000 1999 ---------------------------------------------------------------------------------------------- Total revenues $ 7,147,017 $ 7,004,263 $ 6,853,652 $ 6,168,432 $ 5,455,707 Earnings before income taxes $ 1,645,200 $ 1,786,970 $ 1,525,010 $ 1,289,600 $ 1,084,500 Net earnings $ 1,018,150 $ 1,100,770 $ 924,720 $ 840,800 $ 696,840 Pro forma net earnings* $ 971,680 $ 881,890 $ 739,260 ---------------------------------------------------------------------------------------------- Basic earnings per share $ 1.70 $ 1.78 $ 1.47 $ 1.34 $ 1.13 Diluted earnings per share $ 1.68 $ 1.75 $ 1.44 $ 1.31 $ 1.10 Pro forma basic earnings per share* $ 1.54 $ 1.41 $ 1.20 Pro forma diluted earnings per share* $ 1.51 $ 1.37 $ 1.17 Basic average shares outstanding 600,071 618,857 629,035 626,766 615,630 Diluted average shares outstanding 605,917 630,579 645,989 646,098 636,892 Cash dividends per share $ .4750 $ .4475 $ .3950 $ .3388 $ .2950 Return on equity 19.4% 22.4% 19.9% 19.7% 18.7% ---------------------------------------------------------------------------------------------- At year end: Cash, cash equivalents and marketable securities $ 2,344,343 $ 2,749,583 $ 2,596,964 $ 2,452,549 $ 2,169,040 Working capital $ 1,676,718 $ 1,406,155 $ 1,747,187 $ 1,767,784 $ 907,864 Total assets before funds held for clients $ 8,025,922 $ 7,051,251 $ 6,549,980 $ 6,429,927 $ 5,824,820 Total assets $19,833,671 $18,276,522 $17,889,090 $16,850,816 $12,839,553 Long-term debt $ 84,674 $ 90,648 $ 110,227 $ 132,017 $ 145,765 Shareholders' equity $ 5,371,473 $ 5,114,205 $ 4,700,997 $ 4,582,818 $ 4,007,941 ---------------------------------------------------------------------------------------------- |
*Pro forma net earnings and earnings per share reflect the impact relating to the July 1, 2001 adoption of Statement of Financial Accounting Standards No. 142, which eliminated goodwill amortization.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below.
Revenue Recognition. Our revenues are primarily attributable to fees for providing services (e.g., Employer Services' payroll processing fees and Brokerage Services' trade processing fees) as well as investment income on payroll funds, tax filing funds and other Employer Services client- related funds. We typically enter into agreements for a fixed fee per transaction (e.g., number of payees). Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectibility is reasonably assured. Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned.
We also recognize revenues associated with the sale of software systems and associated software licenses. For a majority of our software sales arrangements, which provide hardware, software licenses, installation and post customer support, revenues are recognized ratably over the software license term as objective evidence of the fair values of the individual elements in the sales arrangement does not exist.
The majority of our revenues are generated from a fee for service model (e.g., fixed-fee per transaction processed) in which revenue is recognized when the related services have been rendered under written price quotations or service agreements having stipulated terms and conditions which do not require management to make any significant judgments or assumptions regarding any potential uncertainties.
Goodwill. We review the carrying value of all our goodwill in accordance with Statement of Financial Accounting Standards (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 businesses. 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 that is not impaired, based on our impairment testing as of June 30, 2003. Given the significance of our goodwill, an adverse change to the fair value could result in an impairment charge, which could be material to our financial statements.
Income taxes. We account for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes," which establishes financial
accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of
taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that
have been recognized in an entity's financial statements or tax returns.
Judgment is required in addressing the future tax consequences of events
that have been recognized in our financial statements or tax returns
(e.g., realization of deferred tax assets, results of IRS and other tax
authorities' examinations of our tax returns). Fluctuations in the
actual outcome of these future tax consequences could materially impact
our financial statements.
RESULTS OF OPERATIONS ANALYSIS OF CONSOLIDATED OPERATIONS
(In millions, except per share amounts)
Years Ended June 30, Change
----------------------- --------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Total revenues $7,147 $7,004 $6,854 2% 2% 11%
----------------------- --------------------
Total expenses $5,502 $5,217 $5,329 5% (2%) 9%
----------------------- --------------------
Earnings before income
taxes $1,645 $1,787 $1,525 (8%) 17% 18%
Margin 23.0% 25.5% 22.3%
----------------------- --------------------
Provision for income
taxes $ 627 $ 686 $ 600 (9%) 14% 34%
Effective tax rate 38.1% 38.4% 39.4%
----------------------- --------------------
Net earnings $1,018 $1,101 $ 925 (8%) 19% 10%
Diluted earnings per
share $ 1.68 $ 1.75 $ 1.44 (4%) 22% 10%
----------------------- --------------------
|
2003
Our consolidated revenues grew 2% to $7.1 billion in fiscal 2003,
primarily due to an increase in Employer Services of 5% to $4.4 billion
and an increase in Dealer Services of 12% to $788 million. These
increases were offset by a decrease in our Brokerage Services business of
9%, or $165 million. Interest income on client funds decreased due to
lower interest yields, despite 7% growth in our average client balances
during the year to $8.9 billion. The average interest rate earned on
both client funds and corporate funds, exclusive of realized
gains/(losses) in fiscal 2003 was 3.9% compared to 4.9% in fiscal 2002.
Our revenue growth was impacted primarily by continued weak economic
conditions impacting our Employer Services and Brokerage Services
businesses and our interest income.
Earnings before income taxes in fiscal 2003 decreased 8% to $1.6 billion as total expenses grew at a faster rate than revenues. This decrease primarily reflects the 35% decrease in earnings before income taxes in Brokerage Services. While we have focused on cost containment initiatives throughout the fiscal years ended June 30, 2002 and 2003 in order to bring our expense structure in line with our slower revenue growth, our Brokerage Services' cost reductions did not offset the 9% decline in revenues in this business. In March 2003, we announced plans to reduce costs in underperforming or non-strategic businesses. Selling, general and administrative expenses grew 9% to $1.8 billion and include approximately $60 million of incremental restructuring charges relating to exiting of certain businesses and cost reduction efforts in certain slow growth businesses, most of which occurred in the fourth quarter of 2003. The restructuring is primarily severance costs, including charges to exit our medical claims business within Claims Services and a small payroll business servicing primarily government agencies, separate from our core payroll business, in the United Kingdom. Operating expenses increased 4% to $3.1 billion, primarily driven by revenue growth in Employer Services and Dealer Services. Systems development and programming costs increased 5% to $499 million due to continued investment in our products, primarily in our Employer Services business, and the maintenance of our existing technology throughout all of our businesses. Depreciation and amortization expense decreased 2% to $275 million due to a decrease in capital expenditures of approximately $12 million in fiscal 2003 and $40 million in fiscal 2002. Other income for the year increased to $127 million, or 12%, from the prior year due to an increase in our net realized gains associated with our investment portfolio of $13.1 million.
Our effective tax rate for fiscal 2003 was 38.1%, a decrease of 0.3% from fiscal 2002. The decrease is attributable to a favorable mix in income among tax jurisdictions.
Fiscal 2003 net earnings decreased 8% to $1.0 billion and the related diluted earnings per share decreased 4% to $1.68. The decrease in net earnings primarily reflects the decrease in earnings before income taxes, slightly offset by a lower effective tax rate. The decrease in diluted earnings per share reflects the decrease in net earnings, partially offset by fewer shares outstanding due to the repurchase of approximately 27.4 million shares for approximately $940 million during the year and the lower impact of stock options on dilution during fiscal 2003. The total share repurchases in fiscal 2003 is a reflection of our confidence in the long-term growth prospects of our businesses.
For fiscal 2004, we are forecasting mid-single digit revenue growth and diluted earnings per share of $1.50 - $1.60. This reflects our anticipation of the ongoing impact of the continued weak economy on Employer Services and Brokerage Services, and lower interest rates, causing a decline in interest income on corporate and client funds of $60 - $80 million from 2003. We expect to invest an incremental $90 - $100 million in our highest growth opportunities, primarily in Employer Services. We also expect to spend $40 - $45 million on our Employer of Choice initiatives aimed at retaining our quality associates.
2002
In fiscal 2002, our consolidated revenues increased 2% to $7.0 billion
compared to fiscal 2001. The increase was primarily due to an increase
in Employer Services of 5% to $4.2 billion offset by a decrease in
interest income. Interest income decreased due to lower interest
yields, despite higher average client fund balances. Revenue growth in
fiscal 2002 was impacted by weak economic conditions resulting in slower
sales, lower client retention and fewer employees on our clients'
payrolls in our Employer Services business and reductions in
discretionary spending in the financial services industry, particularly
in research and implementation services.
Fiscal 2002 earnings before income taxes increased 17% to $1.8 billion, primarily due to growth in revenue, declines in selling, general and administrative expenses and systems development and programming costs and a significant increase in other income. Operating expenses increased 2% to $3.0 billion compared to fiscal 2001 primarily driven by revenue growth in Employer Services, Brokerage Services and Dealer Services. Selling, general and administrative expenses decreased 4% to $1.6 billion as a result of our cost containment initiatives during the year, to bring our expense structure in line with our slower revenue growth. Systems development and programming costs decreased 8% to $475 million as a result of our cost containment initiatives during the year, primarily related to the maintenance of existing applications, while funding of investments in new products continued. Depreciation and amortization expense decreased 13% to $279 million compared to the prior year due to the adoption of SFAS No. 142 which resulted in the elimination of goodwill amortization. Other income increased 58% to $114 million, primarily due to the $90 million write-off of our investment in Bridge Information Systems, Inc. (Bridge) in fiscal 2001 which was a non-cash, non-recurring write-off of our total investment in Bridge offset by a $45 million decrease in interest income attributable to a 1.3% decrease in the average interest rates earned on corporate funds in fiscal 2002.
Our effective tax rate for fiscal 2002 was 38.4%, a decrease of 1% from fiscal 2001. The decrease in the effective tax rate was primarily due to the impact of adopting SFAS No. 142 and the resulting elimination of goodwill amortization expense in fiscal 2002. Adjusting fiscal 2001 for the pro forma impact of SFAS No. 142, the effective income tax rate was 38.5%.
Net earnings in fiscal 2002 increased 19% to $1.1 billion and the related diluted earnings per share increased 22% to $1.75. The increase in net earnings primarily reflected the increase in earnings before income taxes. The increase in diluted earnings per share primarily reflected the increase in net earnings, as well as fewer shares outstanding due to the repurchase of 17.4 million shares during fiscal 2002.
ANALYSIS OF BUSINESS SEGMENTS
REVENUES
Years Ended June 30, Change
---------------------------- --------------------------
(In millions) 2003 2002 2001 2003 2002 2001
---------------------------- --------------------------
Employer Services $4,401 $4,180 $3,964 5% 5% 12%
Brokerage Services 1,593 1,758 1,742 (9) 1 19
Dealer Services 788 706 683 12 3 (4)
Other 420 425 412 (1) 4 7
Reconciling items:
Foreign exchange 119 8 23 - - -
Client fund interest (174) (73) 30 - - -
---------------------------- --------------------------
Total revenues $7,147 $7,004 $6,854 2% 2% 11%
============================ ==========================
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EARNINGS BEFORE INCOME TAXES
Years Ended June 30, Change
----------------------- --------------------------
(In millions) 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Employer Services $1,193 $1,110 $ 937 7% 18% 21%
Brokerage Services 230 354 332 (35) 7 (1)
Dealer Services 132 116 99 14 17 (12)
Other 143 157 60 (9) 162 84
Reconciling items:
Foreign exchange 12 1 3 - - -
Client fund interest (174) (73) 30 - - -
Cost of capital charge 109 122 64 - - -
----------------------- --------------------------
Total earnings before
income taxes $1,645 $1,787 $1,525 (8%) 17% 18%
======================= ==========================
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MAJOR BUSINESS UNITS
Certain revenues and expenses are charged to the business units at a standard rate for management and motivational reasons. Other costs are recorded based on management responsibility. As a result, various income and expense items, including certain non-recurring gains and losses, are recorded at the corporate level and certain shared costs are not allocated. The prior years' business unit revenues and earnings before income taxes have been adjusted to reflect fiscal 2003 budgeted foreign exchange rates.
EMPLOYER SERVICES
Employer Services' revenues grew 5% in fiscal 2003. Despite the continued negative impacts of the weak economy, Employer Services continued to grow primarily due to the increases in our North America payroll and tax businesses, as well as strong growth in our beyond payroll products including our Professional Employer Organization (PEO) business. Client retention improved 1% from the prior year, however, new business sales declined 2% for the year and pays per control, which represents the number of employees on our clients' payrolls, also decreased 1% for the year. Employer Services' revenues include interest earned on collected but not yet remitted funds held for clients at a standard rate of 6%, or $543 million, an increase of 7% over fiscal 2002. Earnings before income taxes grew 7% as a result of increased revenues and our continued cost containment efforts.
On June 20, 2003, we acquired all of the outstanding shares of ProBusiness Services, Inc. for cash of approximately $517 million, net of cash acquired. ProBusiness Services, Inc., which has become a part of our Employer Services segment, is expected to generate approximately $150 million in revenue in fiscal 2004.
In fiscal 2002, Employer Services' revenues grew 5%, compared to 12% in 2001. Revenue growth was impacted by weak economic conditions, which resulted in slower sales, lower client retention due primarily to bankruptcies, and fewer pays per control. Employer Services' revenues shown above include interest earned on collected but not yet remitted funds held for clients at a standard rate of 6%, or $505 million, an increase of 3% over fiscal 2001. Earnings before income taxes grew 18% as a result of increased revenues and continued cost containment efforts.
BROKERAGE SERVICES
Brokerage Services' revenues declined 9% in fiscal 2003 when compared to fiscal 2002 primarily due to continued industry consolidations which impact trades per day, reduced discretionary spending and reduced mutual fund and equity proxy mailings. Trade processing revenues declined due to a 13% decline in trades per day from 1.5 million in fiscal 2002 to 1.3 million in fiscal 2003. Revenue per trade also declined due to the change in the mix of retail vs. institutional trades, industry consolidations and pricing pressures. Proxy revenues declined due to a 6% decline in pieces delivered from 806 million in fiscal 2002 to 754 million in fiscal 2003. Stock record growth, which is a measure of how many shareholders own a security compared with the prior year and a key factor in the number of pieces delivered, decreased 1% in fiscal 2003 as compared to 10% growth in fiscal 2002. Earnings before income taxes declined 35% primarily due to the decline in revenues. We have continued to focus on cost reductions in our under-performing businesses in order to properly align our cost structure with the slower growth levels.
In fiscal 2002, revenues increased 1% compared to 19% in fiscal 2001. Excluding acquisitions, revenues would have decreased 4% primarily due to consolidations within the financial services industry affecting trade volumes and lower revenue per trade due to pricing pressures. A reduction in discretionary spending in the financial services industry, particularly in research and implementation services also contributed to the decline in fiscal 2002 revenue growth. Earnings before income taxes increased 7% as a result of operating efficiencies, the impact of our cost containment initiatives and the transition of the proxy mailings and voting process to electronic delivery.
DEALER SERVICES
Dealer Services' revenues increased 12% in fiscal 2003 when compared to fiscal 2002. Excluding acquisitions, revenue growth increased approximately 8%. Revenue growth was generated by strong client retention and increased revenues in the traditional core business as well as from new services, primarily Application Service Provider (ASP) managed services, Networking and Computer Vehicle Registration. Sales of our Customer Relationship Management Systems continue to be strong. Earnings before income taxes grew 14% as a result of increased revenues and continued cost containment efforts.
Fiscal 2002 revenues increased 3% compared to fiscal 2001. This revenue growth compares to a 4% revenue decline in fiscal 2001. Earnings before income taxes grew 17% due to operating efficiencies and cost containment efforts, offset by investments in new products and acquisitions.
OTHER
The primary components of "Other" revenues are Claims Services, miscellaneous processing services and corporate expenses.
Reconciling items for revenues and earnings before income taxes include foreign exchange differences between the actual and the fiscal year 2003 budgeted foreign exchange rates and the adjustment for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services at a standard rate of 6%.
The business unit results also include 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.
FINANCIAL CONDITION
Our financial condition and balance sheet remain exceptionally strong. At June 30, 2003, cash and marketable securities approximated $2.3 billion. Shareholders' equity was approximately $5.4 billion and return on average equity for the year was over 19%. The ratio of long-term debt to equity at June 30, 2003 was 1.6%.
In fiscal 2003, zero coupon convertible subordinated notes were converted to 0.5 million shares of common stock.
On June 20, 2003, we purchased ProBusiness Services, Inc. for a total of approximately $517 million, net of cash acquired, of which $351 million was paid as of June 30, 2003 and the remaining $166 million will be paid as former ProBusiness shareholders tender their shares. We also acquired ten other businesses during 2003 for approximately $118 million, net of cash acquired. The cost of acquisitions in 2002 and 2001 aggregated $232 million (including $12 million in common stock) and $75 million, respectively. The cash used in all of our acquisitions was generated from our cash flows from operations. See Note 3 to the Consolidated Financial Statements for more information regarding acquisitions.
Capital expenditures during 2003 were $134 million following investments of $146 million in 2002 and $185 million in 2001. Capital expenditures in fiscal 2004 should approximate $150 to $175 million.
The following table provides a summary of our contractual obligations as
of June 30, 2003:
Payments due by period
----------------------------------------------------
(In thousands) Less than 1-3 3-5 More than
Contractual Obligations 1 year years years 5 years Total
----------------------- ----------------------------------------------------
Debt Obligations (1) $ 825 $ 574 $ 1,017 $ 83,083 $ 85,499
Operating Lease Obligations (2) 296,258 366,042 168,298 99,057 929,655
Purchase Obligations (3) 40,109 19,817 6,394 101 66,421
-------- -------- -------- -------- ----------
Total $337,192 $386,433 $175,709 $182,241 $1,081,575
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(1) These amounts are included in our Consolidated Balance Sheets. See Note 7 to the Consolidated Financial Statements for additional information about our debt and related matters.
(2) Included in these amounts are various facilities and equipment leases, and software license agreements. We enter into operating leases in the normal course of business relating to facilities and equipment. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts and if we enter into additional operating lease agreements.
(3) Purchase obligations primarily relate to maintenance agreements on our software, equipment and other assets.
It is not our business practice to enter into off-balance sheet arrangements. However, in the normal course of business, we do enter into contracts in which we make certain representations and warranties that guarantee the performance of our products and services as well as other indemnifications in the normal course of business. There have historically been no material losses related to such guarantees and indemnifications and we do not expect there to be any in the future.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of our liquidity is our net earnings of $1.0 billion in fiscal 2003. Cash flows generated from operations were approximately $1.6 billion for the year ended June 30, 2003, supporting our strong cash position. This amount compares to cash flows from operations of $1.5 billion in fiscal 2002 and 2001.
Cash flows provided by investing activities in fiscal 2003 totaled $177 million compared to cash flows used in investing activities in fiscal 2002 of approximately $1.1 billion. This fluctuation between periods is primarily due to the timing of purchases and proceeds of marketable securities and client fund money market securities, the net change in client funds obligations and an increase in acquisitions in fiscal 2003.
Cash flows used in financing activities in fiscal 2003 totaled $1.1 billion compared to $928 million in fiscal 2002. This increase reflects higher repurchases of common stock of approximately $63 million and lower proceeds from stock purchase plan and exercises of stock options of approximately $135 million. In fiscal 2003, we purchased approximately 27.4 million shares of common stock at an average price per share of approximately $34. As of June 30, 2003, we had remaining Board of Directors' authorization to purchase up to 43.5 million additional shares.
During fiscal 2003, approximately twenty percent of our overall investment portfolio was invested in cash and cash equivalents, which are therefore impacted almost immediately by changes in short-term interest rates. The other eighty percent of our investment portfolio was invested in fixed-income securities, with varying maturities of less than ten years, which are also subject to interest rate risk including reinvestment risk. We have historically had the ability to hold most of these investments until maturity, and therefore, fluctuations in interest rates have not had an adverse impact on income or cash flows.
Details regarding our corporate investments and funds held for clients
are as follows:
---------------------------------------------------------------------------------
(In millions)
YEARS ENDED JUNE 30: 2003 2002 2001
--------- --------- ---------
Average investment balances at cost:
Corporate investments $ 3,374.4 $ 2,752.3 $ 2,598.9
Funds held for clients 8,936.8 8,376.6 8,188.6
---------- ---------- ---------
Total $12,311.2 $11,128.9 $10,787.5
========== ========== =========
Average interest rates earned exclusive
of realized gains/(losses) on corporate
investments and funds held for clients 3.9% 4.9% 6.2%
========== ========== =========
Realized gains on available-for-sale
securities $ 34.5 $ 22.7 $ 15.0
========== ========== =========
Realized losses on available-for-sale
securities $ (4.9) $ (6.2) $ (92.6)*
========== ========== =========
AS OF JUNE 30:
Unrealized pre-tax gains on available-for-
sale securities $ 375.9 $ 208.8 $ 140.2
========== ========== =========
Total available-for-sale securities $ 9,875.9 $ 9,856.4 $ 7,729.4
========== ========== =========
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*Includes a $90 million ($54 million after-tax) non-cash, non-recurring write-off of our investment in Bridge Information Systems, Inc. See Note 2 to the Consolidated Financial Statements.
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 amount of invested funds and 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 in fiscal 2004 would result in approximately an $11.0 million impact to earnings before income taxes over the twelve-month period.
In October 2002, we entered into a new $4.0 billion unsecured revolving credit agreement with certain financial institutions, replacing an existing $4.0 billion credit agreement. The interest rate applicable to the borrowings is tied to LIBOR or prime rate depending on the notification provided to the syndicated financial institutions prior to borrowing. 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 June 30, 2003 under the credit agreement, which expires in October 2003.
In April 2002, we initiated a short-term commercial paper program providing for the issuance of up to $ 4.0 billion in aggregate maturity value of commercial paper at our discretion. Our commercial paper program is rated A-l+ 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 financing requirements related to client funds obligations. At June 30, 2003 and 2002, there was no commercial paper outstanding. For the year ended June 30, 2003, we had average borrowings of $879 million at an effective weighted average interest rate of 1.5%. From the inception of the commercial paper program in April 2002 through the fiscal year ended June 30, 2002, we had average borrowings of $667 million at an effective weighted average interest rate of 1.8%.
Our short-term financing is sometimes obtained on a secured basis through the use of repurchase agreements, which are collateralized principally by U.S. government securities. These agreements generally have terms ranging from overnight up to ten days. At June 30, 2003 and 2002, there were no outstanding repurchase agreements. For the fiscal years ended June 30, 2003 and 2002, we had average outstanding borrowings of $6 million and $361 million, respectively, at an average interest rate of 3.0% and 2.6%, respectively.
In June 2003, we formed a new wholly-owned subsidiary, ADP Indemnity, Inc. The primary purpose of this subsidiary is to provide workers' compensation insurance coverage for our PEO worksite employees. This insurance was previously provided by a third party. At June 30, 2003, ADP Indemnity, Inc. had a cash balance of approximately $62.1 million to cover potential future insurance claims.
MARKET PRICE, DIVIDEND DATA AND OTHER
The market price of our common stock (symbol: ADP) based on New York Stock Exchange composite transactions and cash dividends per share declared during the past two years have been:
------------------------------------------------------------------
Price Per Share
---------------------- Dividends
Fiscal 2003 quarter ended High Low Per Share
---------------------- ---------
June 30 $36.08 $30.80 $ .1200
March 31 $40.81 $27.24 $ .1200
December 31 $45.96 $33.76 $ .1200
September 30 $43.75 $31.15 $ .1150
------------------------------------------------------------------
Fiscal 2002 quarter ended
June 30 $58.00 $42.35 $ .1150
March 31 $59.53 $51.00 $ .1150
December 31 $60.37 $46.70 $ .1150
September 30 $53.97 $41.00 $ .1025
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|
As of June 30, 2003, there were approximately 35,884 holders of record of our common stock. Approximately 316,607 additional holders have their stock in "street name."
NEW ACCOUNTING PRONOUNCEMENTS
In March 2003, the Emerging Issues Task Force (EITF) published EITF 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 EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Accordingly, we have adopted EITF 00-21 effective July 1, 2003. We do not expect EITF 00-21 to have a material impact on our Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
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.
Automatic Data Processing, Inc. and Subsidiaries
--------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Years Ended June 30, 2003 2002 2001
---------- ---------- ----------
Revenues other than interest on funds held for clients
and PEO revenues $6,412,059 $6,305,206 $6,100,112
Interest on funds held for clients 368,727 431,236 518,956
PEO revenues(A) 366,231 267,821 234,584
---------- ---------- ----------
Total revenues 7,147,017 7,004,263 6,853,652
---------- ---------- ----------
Operating expenses 3,096,719 2,970,645 2,900,124
Selling, general and administrative expenses 1,758,353 1,606,690 1,665,447
Systems development and programming costs 499,192 474,843 514,279
Depreciation and amortization 274,682 279,077 320,856
Other income, net (127,129) (113,962) (72,064)
---------- ---------- ----------
5,501,817 5,217,293 5,328,642
---------- ---------- ----------
Earnings before income taxes 1,645,200 1,786,970 1,525,010
Provision for income taxes 627,050 686,200 600,290
---------- ---------- ----------
Net earnings $1,018,150 $1,100,770 $ 924,720
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share $ 1.70 $ 1.78 $ 1.47
---------- ---------- ----------
Diluted earnings per share $ 1.68 $ 1.75 $ 1.44
---------- ---------- ----------
Basic average shares outstanding 600,071 618,857 629,035
---------- ---------- ----------
Diluted average shares outstanding 605,917 630,579 645,989
========== ========== ==========
--------------------------------------------------------------------------------------------
|
(A) Net of pass-through costs of $3,462,783, $2,648,321 and $2,446,768, respectively.
See notes to consolidated financial statements.
Consolidated Balance Sheets
Automatic Data Processing, Inc. and Subsidiaries
-----------------------------------------------------------------------------
(In thousands, except per share amounts)
June 30, 2003 2002
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 1,410,218 $ 798,810
Short-term marketable securities 595,166 677,005
Accounts receivable, net 1,005,833 1,045,170
Other current assets 664,284 296,272
----------- -----------
Total current assets 3,675,501 2,817,257
Long-term marketable securities 338,959 1,273,768
Long-term receivables 180,354 192,769
Property, plant and equipment:
Land and buildings 477,682 458,478
Data processing equipment 780,044 696,829
Furniture, leaseholds and other 603,451 540,217
----------- -----------
1,861,177 1,695,524
Less accumulated depreciation (1,246,476) (1,099,073)
----------- -----------
614,701 596,451
Other assets 565,385 293,808
Goodwill 1,981,131 1,375,654
Intangible assets, net 669,891 501,544
----------- -----------
Total assets before funds held for clients 8,025,922 7,051,251
Funds held for clients 11,807,749 11,225,271
----------- -----------
Total assets $19,833,671 $18,276,522
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 173,988 $ 148,694
Accrued expenses and other current liabilities 1,609,665 1,035,389
Income taxes payable 215,130 227,019
----------- -----------
Total current liabilities 1,998,783 1,411,102
Long-term debt 84,674 90,648
Other liabilities 270,267 233,671
Deferred income taxes 320,796 237,633
Deferred revenues 338,763 138,893
----------- -----------
Total liabilities before client funds obligations 3,013,283 2,111,947
Client funds obligations 11,448,915 11,050,370
----------- -----------
Total liabilities 14,462,198 13,162,317
----------- -----------
Shareholders' equity:
Preferred stock, $1.00 par value:
Authorized, 300 shares; issued, none -- --
Common stock, $.10 par value:
Authorized, 1,000,000 shares; issued,
638,702 shares at June 30, 2003 and 2002 63,870 63,870
Capital in excess of par value 211,339 333,371
Retained earnings 6,710,863 5,977,318
Treasury stock - at cost: 43,863 and 22,385
shares, respectively (1,773,418) (1,142,041)
Accumulated other comprehensive income (loss) 158,819 (118,313)
----------- -----------
Total shareholders' equity 5,371,473 5,114,205
----------- -----------
Total liabilities and shareholders' equity $19,833,671 $18,276,522
=========== ===========
|
Automatic Data Processing, Inc. and Subsidiaries
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Capital in Other
------------------- Excess of Retained Treasury Comprehensive Comprehensive
(In thousands, except per share amounts) Shares Amount Par Value Earnings Stock Income Income (Loss)
------------------------------------------------------------------------------------------
Balance at June 30, 2000 631,443 $63,144 $402,767 $4,477,141 $ (130,800) $(229,434)
Net earnings -- -- -- 924,720 -- $ 924,720 --
Currency translation adjustments (80,816) (80,816)
Unrealized net gain on securities, net
of tax 77,286 77,286
----------
Comprehensive income $ 921,190
----------
----------
Employee stock plans and
related tax benefits 6,878 688 163,464 -- 187,058
Treasury stock acquired (16,558 shares) -- -- -- -- (935,064)
Acquisitions (22 shares) -- -- 234 -- 839
Debt conversion (1,303 shares) 381 38 (12,538) -- 40,723
Dividends ($.3950 per share) -- -- -- (248,453) --
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 638,702 63,870 553,927 5,153,408 (837,244) (232,964)
Net earnings -- -- -- 1,100,770 -- $1,100,770 --
Currency translation adjustments 73,504 73,504
Unrealized net gain on securities, net
of tax 41,147 41,147
----------
Comprehensive income $1,215,421
----------
----------
Employee stock plans and
related tax benefits -- -- (197,083) -- 515,729
Treasury stock acquired (17,412 shares) -- -- -- -- (875,449)
Acquisitions (226 shares) -- -- (423) -- 12,848
Debt conversion (705 shares) -- -- (23,050) -- 42,075
Dividends ($.4475 per share) -- -- -- (276,860) --
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 638,702 63,870 333,371 5,977,318 (1,142,041) (118,313)
Net earnings -- -- -- 1,018,150 -- $1,018,150 --
Currency translation adjustments 174,046 174,046
Unrealized net gain on securities, net
of tax 108,562 108,562
Minimum pension liability adjustment,
net of tax (5,476) (5,476)
----------
Comprehensive income $1,295,282
----------
----------
Employee stock plans and
related tax benefits -- -- (103,593) -- 268,938
Treasury stock acquired (27,413 shares) -- -- -- -- (938,545)
Acquisitions (294 shares) -- -- (3,056) -- 14,883
Debt conversion (462 shares) -- -- (15,383) -- 23,347
Dividends ($.4750 per share) -- -- -- (284,605) --
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 638,702 $63,870 $211,339 $6,710,863 $(1,773,418) $ 158,819
======= ======= ======== ========== =========== =========
|
See notes to consolidated financial statements.
Statements of Consolidated Cash Flows
Automatic Data Processing, Inc. and Subsidiaries
------------------------------------------------------------------------------------------------------
(In thousands)
Years Ended June 30, 2003 2002 2001
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,018,150 $ 1,100,770 $ 924,720
Adjustments to reconcile net earnings to net cash flows
provided by operating activities:
Depreciation and amortization 274,682 279,077 320,856
Write-off of investment in Bridge Information Systems, Inc. - - 90,000
Deferred income taxes (15,775) 8,680 29,450
Increase in receivables and other assets (94,422) (73,511) (70,699)
Increase in accounts payable and accrued expenses 287,174 138,141 182,634
Other 95,280 78,547 14,063
----------- ----------- -----------
Net cash flows provided by operating activities 1,565,089 1,531,704 1,491,024
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (3,451,554) (6,243,228) (6,864,707)
Proceeds from sale of marketable securities 4,014,300 4,167,028 3,087,406
Net proceeds from client fund money market securities 1,501,286 1,645,908 2,891,273
Net change in client funds obligations (967,797) (188,484) 818,082
Capital expenditures (133,758) (145,621) (185,406)
Additions to intangibles (144,728) (109,799) (97,448)
Acquisitions of businesses, net of cash acquired (651,320) (219,783) (73,667)
Disposals of businesses 4,035 7,200 900
Other 6,609 6,286 (32,267)
----------- ----------- -----------
Net cash flows provided by (used in) investing activities 177,073 (1,080,493) (455,834)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of debt (1,384) (3,919) (48,567)
Proceeds from issuance of notes 964 358 26,435
Repurchases of common stock (938,545) (875,449) (935,064)
Proceeds from stock purchase plan and exercises of stock
options 92,816 228,113 218,178
Dividends paid (284,605) (276,860) (248,453)
----------- ----------- -----------
Net cash flows used in financing activities (1,130,754) (927,757) (987,471)
----------- ----------- -----------
Net change in cash and cash equivalents 611,408 (476,546) 47,719
Cash and cash equivalents, at beginning of period 798,810 1,275,356 1,227,637
----------- ----------- -----------
Cash and cash equivalents, at end of period $ 1,410,218 $ 798,810 $ 1,275,356
----------- ----------- -----------
----------- ----------- -----------
------------------------------------------------------------------------------------------------------
|
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Years ended June 30, 2003, 2002 and 2001
(Unless otherwise noted, amounts in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. CONSOLIDATION AND BASIS OF PREPARATION. The consolidated financial statements include the financial results of Automatic Data Processing, Inc. and its majority-owned subsidiaries (the "Company" or "ADP"). Intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
B. REVENUE RECOGNITION.
A majority of the Company's revenues are attributable to fees for providing services (e.g., Employer Services' payroll processing fees and Brokerage Services' trade processing fees) as well as investment income on payroll funds, tax filing funds and other Employer Services' client-related funds. The Company typically enters into agreements for a fixed fee per transaction (e.g., number of payees). Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectibility is reasonably assured. Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned.
The Company also recognizes revenues associated with the sale of software systems and associated software licenses. For a majority of the Company's software sales arrangements, which provide hardware, software licenses, installation and post customer support, revenues are recognized ratably over the software license term as objective evidence of the fair values of the individual elements in the sales arrangement does not exist. As part of the sale of software systems, the Company recognizes revenues from the sale of hardware, which is recorded net of the associated costs.
Postage fees for client mailings are included in revenues and the associated postage expenses are included in operating expenses. Professional Employer Organization (PEO) service revenues are included in revenues and are reported net of direct costs billed and incurred for PEO worksite employees, which primarily include payroll wages and payroll taxes.
C. CASH AND CASH EQUIVALENTS. Highly-liquid investments with a maturity of ninety days or less at the time of purchase are considered cash equivalents.
D. INVESTMENTS. Corporate investments and funds held for clients at June
30, 2003 and 2002.
2003 2002
Cost Fair Value Cost Fair Value
----------- ------------ ----------- -----------
Money market securities
and other cash
equivalents:
Corporate investments $ 1,410,218 $ 1,410,218 $ 798,810 $ 798,810
Funds held for clients 2,865,957 2,865,957 3,319,646 3,319,646
----------- ----------- ----------- -----------
Total money market
securities and other
cash equivalents 4,276,175 4,276,175 4,118,456 4,118,456
----------- ----------- ----------- -----------
Available-for-sale
securities:
Corporate investments 917,026 934,125 1,916,896 1,950,773
Funds held for clients 8,582,958 8,941,792 7,730,724 7,905,625
----------- ----------- ----------- -----------
Total available-for-sale
securities 9,499,984 9,875,917 9,647,620 9,856,398
----------- ----------- ----------- -----------
Total corporate investments
and funds held for
clients $13,776,159 $14,152,092 $13,766,076 $13,974,854
=========== =========== =========== ===========
|
All of the Company's marketable securities are considered to be "available-for-sale" at June 30, 2003 and, accordingly, are carried on the Consolidated Balance Sheets at fair value.
Expected maturities of available-for-sale securities for both corporate investments and funds held for clients at June 30, 2003 are as follows:
Maturity Dates:
Due in one year or less $2,732,443
Due after one year through two years 3,402,876
Due after two years through three years 1,882,764
Due after three years through four years 779,654
Due after four years through ten years 1,078,180
---------
Total available-for-sale securities $9,875,917
==========
|
E. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements.
The estimated useful lives of assets are primarily as follows:
-------------------------------------------------------------------------------- Data processing equipment 2 to 3 years -------------------------------------------------------------------------------- Buildings 20 to 40 years -------------------------------------------------------------------------------- Furniture and fixtures 3 to 7 years -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- |
F. GOODWILL AND INTANGIBLES. In July 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142), which requires that goodwill no longer be amortized, but instead tested for impairment at least annually at the reporting unit level. If impairment is indicated, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Intangible assets with finite lives continue to be amortized primarily on the straight-line basis over their estimated useful lives. Prior to fiscal 2002, the Company amortized goodwill over periods from 10 to 40 years. Proforma net income and diluted earnings per share for the year ended June 30, 2001, would have been $972 million and $1.51, respectively, had the Company applied the non-amortization methodology of SFAS No. 142.
G. FOREIGN CURRENCY TRANSLATION. The net assets of the Company's foreign subsidiaries are translated into U.S. dollars based on exchange rates in effect at the end of each period, and revenues and expenses are translated at average exchange rates during the periods. Currency transaction gains or losses, which are included in the results of operations, are immaterial for all periods presented. Gains or losses from balance sheet translation are included in accumulated other comprehensive income on the balance sheet.
H. EARNINGS PER SHARE (EPS). The calculations of basic and diluted EPS
are as follows:
--------------------------------------------------------------------------------
Effect of
Zero Coupon Effect of
Subordinated Stock
Years ended June 30, Basic Notes Options Diluted
--------------------------------------------------------------------------------
2003
Net earnings $1,018,150 $ 1,207 $ -- $1,019,357
Average shares 600,071 1,693 4,153 605,917
EPS $ 1.70 $ 1.68
--------------------------------------------------------------------------------
2002
Net earnings $1,100,770 $ 1,611 $ -- $1,102,381
Average shares 618,857 2,352 9,370 630,579
EPS $ 1.78 $ 1.75
--------------------------------------------------------------------------------
2001
Net earnings $ 924,720 $ 2,340 $ -- $ 927,060
Average shares 629,035 3,472 13,482 645,989
EPS $ 1.47 $ 1.44
--------------------------------------------------------------------------------
|
I. INTERNAL USE SOFTWARE. The Company capitalizes certain costs associated with computer software developed or obtained for internal use in accordance with the provisions of Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company's policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, ADP also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities. Capitalized costs related to computer software developed or obtained for internal use are amortized over a three- to five-year period on a straight-line basis.
J. COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The Company capitalizes certain costs of computer software to be sold, leased or otherwise marketed in accordance with the provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company's policy provides for the capitalization of all software production costs upon reaching technological feasibility for a specific product. Technological feasibility is attained when software products have a completed working model whose consistency with the overall product design has been confirmed by testing. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. The establishment of technological feasibility requires considerable judgment by management and in many instances is only attained a short time prior to the general release of the software. Upon the general release of the software product to customers, capitalization ceases and such costs are amortized over a three-year period on a straight-line basis. Maintenance-related costs are expensed as incurred.
K. FAIR VALUE ACCOUNTING FOR STOCK PLANS. In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"(SFAS No. 148) which amends SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and requires disclosures in annual and interim financial statements of the effects of stock-based compensation as reflected below.
The Company continues to account for its stock option and employee stock purchase plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. 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 plan 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.
Years ended June 30, 2003 2002 2001
-------------------- ---- ---- ----
Net earnings, as reported $1,018,150 $1,100,770 $924,720
Deduct: Total stock-based employee
compensation expense determined
using the fair value-based method
for all awards, net of related
tax effects (123,062) (120,010) (106,628)
---------- ---------- --- |