FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5397
AUTOMATIC
DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-1467904
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One ADP Boulevard, Roseland, New Jersey 07068
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: 973-974-5000
Securities registered pursuant to Section 12(b) of the Act:
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 Exchange
Liquid Yield Option Notes due 2012 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: NONE
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 (Section 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 _____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] 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 business day of the Registrant's most recently completed second fiscal quarter was approximately $25,860,350,486. On August 24, 2005 there were 578,425,694 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2005 Annual Report Parts I, II & IV to Stockholders. Portions of the Registrant's Proxy Statement for Annual Part III Meeting of Stockholders to be held on November 8, 2005. ________________________________________________________________________________ |
Part I
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 16 of the "Notes to Consolidated Financial Statements" contained in ADP's 2005 Annual Report to Stockholders, 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 Stockholders 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 human resource ("HR") information, payroll processing and benefit administration products and services, including traditional and Web-based outsourcing solutions, that assist over 518,000 employers in the United States, Canada, Europe, South America (primarily Brazil), Australia and Asia to 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 and accountants. In fiscal 2005, 86% of Employer Services' revenues were from the United States, 9% were from Europe, 4% were from Canada and 1% was from South America (primarily Brazil), Australia and Asia.
United States and Canada
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 the United States and Canada, Employer Services is comprised of the following groups: Small Business Services ("SBS") (primarily companies with fewer than 50 employees); Major Accounts Services (primarily companies with between 50 and 999 employees); and National Account 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 Services and National Account 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.
Through ADP Connection(R) (in the United States), and by using current product import capabilities (in Canada), 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 currently delivers stand-alone services such as payroll tax filing, check printing and distribution and year-end tax statements (i.e., form W-2) in the United States. In addition, in order to expand its presence in the small business client market, during fiscal 2005 ADP continued to develop with Microsoft(R) Corporation two new fully integrated ADP payroll solutions-ADP Payroll(SM) and ADP Total Payroll(SM)--that will be included within Microsoft(R) Office Small Business Accounting 2006, available only in the United States. ADP Payroll will offer users access to a
"do-it-yourself" solution similar to those that are available in the traditional software market and ADP Total Payroll will offer a full-featured payroll solution for those who prefer to fully outsource payroll processing. ADP expects these new offerings to be available for general distribution through Microsoft Office Small Business Accounting 2006 during fiscal 2006.
In order to address the growing business process outsourcing (BPO) market for clients seeking customized human resource information systems and benefit outsourcing solutions, ADP continued to roll out its integrated comprehensive outsourcing services (COS) solution that allows a client to outsource its HR, payroll, payroll administration, employee service center, benefits administration, and time and labor management functions to ADP.
In the United States and Canada, ADP provides payroll services that include the preparation of client employee paychecks and electronic direct deposits, along with supporting journals, summaries and management reports. In the United States, ADP also supplies the quarterly and annual social security, medicare and federal, state and local income tax withholding reports required to be filed by employers and employees, and analogous services are provided in the Canadian market.
ADP's Tax and Financial Services business in the United States and its money movement business in Canada process and collect federal, state, provincial and local payroll taxes on behalf of, and from, ADP clients and remit these taxes to the appropriate taxing authorities. ADP's Tax and Financial Services business in the United States and its money movement business in Canada are also responsible for the efficient movement of information and funds from clients to third parties through service offerings such as new hire reporting, ADP's TotalPay(R) payroll check (ADPCheck(TM)), full service direct deposit (FSDD) and, in conjunction with major bank partners, stored value payroll card (TotalPay(R) Card) products, and the collection and payment of wage garnishments. In the United States and Canada, these businesses support large, mid-sized and small clients and provide an electronic interface between approximately 401,000 ADP clients and over 2,000 federal, state, provincial and local tax agencies, from the Internal Revenue Service and Canada Revenue Agency, to local town governments. In fiscal 2005, ADP's Tax and Financial Services business in the United States and its money movement business in Canada together processed and delivered over 49 million year-end tax statements to its clients' employees (i.e., form W-2 in the United States and analogous statements in Canada) and approximately 40.5 million remittances and employer payroll tax returns, and moved approximately $885 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 benefit administration and outsourcing, applicant tracking, employee history and position control. ADP's Benefit Services provides benefit 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 the United States, ADP TotalSource(R), ADP's professional employer organization ("PEO") business, provides clients with comprehensive employment administration outsourcing solutions, including payroll, payroll tax filing, employee background checks, HR guidance, 401(k) plan administration, benefit administration, compliance services, workers' compensation insurance and supplemental benefits for employees. ADP TotalSource(R), the second largest PEO in the U.S. (based on the number of worksite employees), has 36 offices located in sixteen states and serves approximately 4,900 PEO clients and approximately 113,000 work-site employees in all 50 states.
ADP complements its payroll, payroll tax and HR services with additional employer services that include products such as time and labor management, pre-employment screening and selection services, substance abuse testing and unemployment compensation management. ADP's Tax Credit Services business provides job tax credit services that assist employers in the identification of, and filing for, special tax credits based on geography, demographics and other criteria.
Outside the United States and Canada
The continued increase in the number of multi-national companies makes payroll and human resource management services a global opportunity. In Europe, ADP is the leading provider of payroll processing (including full departmental outsourcing) and various human resource administration services. Employer Services is present in eight countries in Europe: France, Germany, Italy, the Netherlands, Poland, Spain, Switzerland and the United Kingdom. It also offers services in Ireland (from the United Kingdom) and in Portugal (from Spain). In South America (primarily Brazil), Australia and Asia, Employer Services provides full departmental outsourcing of payroll services. In fiscal 2005, ADP continued to expand its GlobalView(SM) offering, making it available in 18 countries. GlobalView is built on the mySAP(TM) ERP Human Capital Management and the SAP NetWeaver(TM) platform and offers multinational corporations an end-to-end outsourcing solution enabling standardized payroll processing and human resources administration.
Brokerage Services
Brokerage Services provides transaction processing services, desktop productivity
applications and investor communications solutions to the financial services
industry worldwide. Brokerage Services' 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) Internet delivery; personalized on-demand and offset financial printing;
statements, confirmations, fulfillment, content management, and imaging, archival,
and workflow solutions that enhance communications with investors; proxy distribution
and vote processing, regulatory mailings, tax reporting and corporate actions/reorganization
solutions that help clients meet regulatory and compliance needs; (iii) automated,
browser-based desktop productivity tools for financial consultants and back
office personnel; and (iv) 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; and publicly owned corporations. Brokerage Services provides securities transaction processing, printing and electronic distribution of shareholder communications and other services to clients that conduct business in more than 90 countries in North America, Europe, Asia and Australia. Brokerage Services also provides computerized proxy vote tabulation and shareholder communication, distribution and fulfillment services, including Web-enabled products and services. In fiscal 2005, ADP served approximately 13,000 United States publicly traded companies and 450 mutual funds and annuity companies with proxy services on behalf of more than 850 brokerage firms and banks.
Securities Clearing and Outsourcing Services
In fiscal 2005, ADP completed its acquisition of the U.S. Clearing and BrokerDealer Services divisions of Bank of America and created the Securities Clearing and Outsourcing Services segment. This acquisition furthered Brokerage Services' business process outsourcing strategy by positioning ADP to provide any brokerage firm, regardless of size, an appropriate range of outsourcing services to best
meet its individual needs on a single technology platform: service bureau, operations outsourcing, or correspondent clearing services.
Securities Clearing and Outsourcing Services provides clearing, custody, financing, securities lending, trade execution and outsourcing solutions to broker-dealers. Securities Clearing and Outsourcing Services derives revenues from commissions and service charges related to clearing and execution activities and from interest income on margin financing, client short selling activity, and uninvested balances. Securities Clearing and Outsourcing Services also extends margin loans directly to correspondents to finance their proprietary activity.
Securities transactions are effected for customers on either a cash or margin basis. In a margin transaction, Securities Clearing and Outsourcing Services extends credit to a customer for a portion of the purchase price of the security. Such credit is collateralized by securities in the customer's accounts in accordance with regulatory and internal requirements. Securities Clearing and Outsourcing Services receives income from interest charged on such loans. Securities Clearing and Outsourcing Services also borrows securities from banks and other broker-dealers to facilitate customer and proprietary short selling activity, and lends securities to broker-dealers and other trading entities to cover short sales and to complete transactions that require delivery of securities by settlement date.
Dealer Services
Dealer Services provides integrated dealer management systems (such a system is also known in the industry as a "DMS") and business solutions to automotive, heavy truck, and powersports (i.e., motorcycle, marine and recreational) vehicle retailers and manufacturers throughout North America and Europe. More than 19,500 automotive, heavy truck and powersports dealers use ADP's DMS, other software based solutions, networking solutions, data integration, consulting and/or marketing services.
Dealer Services offers its dealership clients a service product that includes computer hardware, hardware maintenance services, licensed software, software support, system design and network consulting services. Dealer Services also offers its clients Web-enabled business solutions, "front-end" dealership sales process and business development training services, consulting services, software products and customer relationship management solutions (CRM). 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 estimation and acquisition of vehicle registration and lien holder information. Dealer Services also offers an Application Service Provider (ASP) managed services solution to its dealership clients in which the clients license ADP's DMS and/or other software, and outsource all information technology management, computing and network infrastructure, technology decisions and system support to Dealer Services.
In fiscal 2005, ADP acquired Tesoft Automocion S.A., which provides dealer management systems to approximately 1,500 automotive dealers in Spain, Portugal and France. ADP also acquired AutoFuse, Inc., a web site development solutions company.
Claims Services
Claims Services offers integrated business solutions for clients in the property
insurance, auto collision repair and auto recycling industries. These solutions
help clients manage costs, improve efficiency and accelerate the claims review
and settlement process. Claims Services' products and services include (i) claims
management applications, such as automated collision repair estimating, total
loss vehicle valuation, first notice of loss, dispatch and assignment, claims
audit, claims payment, managed repair solutions and alternative parts locating,
that streamline the end-to-end claims process, (ii) body shop and auto recycler
management systems and auto recycler alternative parts locating solutions, (iii)
other applications, databases and management information tools and services
that enhance and optimize the claims process and
(iv) insurance broker risk management and insurance distribution services that
help clients create, update and manage insurance policies. In fiscal 2005, Claims
Services expanded its auto claims services into India, Russia, Eastern Europe
and Central America. It also acquired a majority interest in its Spanish licensee,
Audatex Espana, S.A.
Markets and Marketing Methods
ADP's services are offered broadly across North America and Europe. Some services within the Employer Services and Brokerage Services business units are also offered in Australia and Asia, and Employer Services and Claims Services also provides services in South America (primarily Brazil).
None of ADP's major business groups have a single homogenous client base or market. For example, Brokerage Services and Securities Clearing and Outsourcing Services serve 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 heavy truck, powersports (i.e., motorcycle, marine and recreational), 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 industry group is material to ADP's overall revenues.
ADP's businesses are not 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 2005, Employer Services continued to grow, primarily due to the increase in its United States payroll and payroll tax businesses, including new business started in the fiscal year, an increase in the number of employees on our clients' payrolls, strong growth in its "beyond payroll" products, and improved client retention; Brokerage Services grew as a consequence of the increased volume in its investor communication services resulting from an increase in the amount of holders of equities and an increase in mutual fund special communications; Dealer Services grew due to the revenues generated in fiscal 2005 from fiscal 2004 acquisitions and growth in its traditional businesses; and our investment income on our client funds increased due to the increase in our average client fund balances and higher interest rates.
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 590,000 clients. In fiscal 2005, 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 and because no sale is considered firm until it is installed and begins producing revenue. ADP receives sales orders in all of our businesses and is continuously in the process of performing implementation services for our clients. 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 Account Services or Dealer Services client with multiple deliverables.
ADP's average client retention is estimated at 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.
Systems Development and Programming
During the fiscal years ended June 30, 2005, 2004 and 2003, ADP invested $696 million, $704 million, and $604 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 44,000 persons as of June 30, 2005.
Item 2. Properties
ADP leases space for 22 of its principal processing centers. In addition, ADP leases numerous other operational offices and sales offices. All of these leases, which aggregate approximately 7,374,053 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 15 of its processing facilities, other operational offices and its corporate headquarters complex in Roseland, New Jersey, which aggregate approximately 3,574,365 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 tried before an arbitration panel in June 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 sought injunctive relief and damages of $56 million. On November 11, 2003, the arbitration panel appointed by the District Court entered an Award in favor of DSI and its co-defendants. The Award denied all relief to UCS. The Award has been affirmed and adopted by the District Court as a final judgment of the Court. On March 12, 2004, the plaintiffs filed an appeal of the final judgment, which appeal is now pending before the Texas Court of Appeals. The Registrant believes that the judgment of the District Court was correct and that the Registrant should prevail.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
See "Market Price, Dividend Data and Other" contained in the Registrant's 2005 Annual Report to Stockholders, which information is incorporated herein by reference. As of August 17, 2005, the Registrant had 40,337 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 January 24, 2005, the Registrant issued 12,452 shares of its Common Stock, with a market value of approximately $500,000, in respect of an earnout paid to a company related to 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.
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Total Number of
Shares Purchased as Maximum Number of
Part of the Publicly Shares that may yet
Announced Common be Purchased under
Total Number of Average Price Paid Stock Repurchase the Common Stock
Period Shares Purchased per Share (3) Plan (1) Repurchase Plan (1)
-------------------- ----------------- ------------------ -------------------- --------------------
April 1, 2005 to
April 30, 2005 444,610 $44.12 444,400 17,204,400
May 1, 2005 to
May 31, 2005 1,068,509 $44.11 1,050,000 16,154,400
June 1, 2005 to
June 30, 2005 2,573,044 $42.04 2,563,300 13,591,100
Total 4,086,163(2) 4,057,700
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(1) In March 2001, the Registrant received the Board of Directors' approval to repurchase up to 50 million shares of the Registrant's common stock. In November 2002, the Registrant received the Board of Directors' approval to repurchase an additional 35 million shares of the Registrant's common stock. There is no expiration date for the common stock repurchase plan.
(2) During 2005, pursuant to the terms of the Registrant's restricted stock program, the Registrant (i) made repurchases of 210 shares during April 2005, 3,509 shares during May 2005 and 744 shares during June 2005 at the then market value of the shares in connection with the exercise by employees of their option under such program to satisfy certain tax withholding requirements through the delivery of shares to the Registrant instead of cash and (ii)
made purchases of 15,000 shares during May 2005 and 9,000 shares during June 2005 at a price of $.10 per share under the terms of such program to repurchase stock granted to employees who have left the Registrant.
(3) The average price per share does not include the repurchases described in clause (ii) of the preceding footnote.
Item 6. Selected Financial Data
See "Selected Financial Data" contained in the Registrant's 2005 Annual Report to Stockholders, 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 of Financial Condition and Results of Operations" contained in the Registrant's 2005 Annual Report to Stockholders, which information is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Registrant's 2005 Annual Report to Stockholders, 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 fiscal years ended June 30, 2005 (see Note 17 of the "Notes to Consolidated Financial Statements" contained in ADP's 2005 Annual Report to Stockholders)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Attached as Exhibits 31.1 and 31.2 to this Form 10-K are certifications of ADP's Chief Executive Officer and Chief Financial Officer, which are required by Rule 13a-14(a) of the Securities Exchange Act of 1934. This "Controls and Procedures" section should be read in conjunction with such certifications and the Deloitte & Touche LLP attestation report on management's assessment of ADP's internal control over financial reporting that appears on page 47 of ADP's 2005 Annual Report to Stockholders and is hereby incorporated herein by reference.
Management's Evaluation of Disclosure Controls and Procedures
ADP carried out an evaluation, under the supervision and with the participation of ADP's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
ADP'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 ADP's disclosure controls and procedures as of June 30, 2005 were effective to ensure that information required to be disclosed by ADP 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.
Management's Report on Internal Control over Financial Reporting
It is the responsibility of Automatic Data Processing, Inc.'s ("ADP") management to establish and maintain effective internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is designed to provide reasonable assurance to ADP's management and board of directors regarding the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles.
ADP's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADP; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of ADP are being made only in accordance with authorizations of management and directors of ADP; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of ADP's assets that could have a material effect on the financial statements of ADP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management has performed an assessment of the effectiveness of ADP's internal control over financial reporting as of June 30, 2005 based upon criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that ADP's internal control over financial reporting was effective as of June 30, 2005.
Management has excluded from its assessment of internal control over financial reporting at June 30, 2005 its subsidiary, ADP Clearing and Outsourcing Services, Inc., which holds all the assets of the Securities Clearing and Outsourcing Services segment that was formed as a result of an acquisition on November 1, 2004. ADP Clearing and Outsourcing Services, Inc. represents 1% and 5% of ADP's consolidated total revenues and consolidated total assets, respectively, for the year ended June 30, 2005.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on management's assessment of internal control over financial reporting, which attestation report appears on page 47 of ADP's 2005 Annual Report to Stockholders.
Changes in Internal Control over Financial Reporting
There were no changes in ADP's internal control over financial reporting that occurred during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, ADP's internal control over financial reporting.
Item 9B. Other Information
None
Part III
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
--------------------- --- ------------------------ -------------
Steven J. Anenen 52 President, 1975
Dealer Services
James B. Benson 60 Vice President, General 1977
Counsel and Secretary
Richard C. Berke 60 Vice President, Human 1989
Resources
Gary C. Butler 58 President and Chief 1975
Operating Officer
Janice M. Colby 50 President, 2001
Claims Solutions Group
Raymond L. Colotti 59 Vice President and 1995
Treasurer
Richard J. Daly 52 Group President, 1989
Brokerage Services
Karen E. Dykstra 46 Vice President and 1981
Chief Financial Officer
John Hogan 57 Group President, 1993
Brokerage Services
Campbell B. Langdon 44 President, 2000
Tax, Financial and Time
Management Services
S. Michael Martone 57 Group President, Employer 1987
Services
Dan Sheldon 49 Vice President, 1984
Corporate Controller
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Jan Siegmund 41 Vice President, 1999
Strategic Development
George I. Stoeckert 57 President, Employer 1991
Services - International
Arthur F. Weinbach 62 Chairman and 1980
Chief Executive Officer
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Messrs. Benson, Berke, Butler, Colotti, Daly, Hogan, Martone and Weinbach have each been employed by ADP in senior executive positions for more than the past five years.
Steven J. Anenen joined ADP in 1975. Prior to his promotion to President, Dealer Services in 2004, he served as Senior Vice President, Dealer Services from 1998 to 2004.
Janice M. Colby joined ADP in 2001. Prior to her promotion to President, Claims Solutions Group in 2005, she served as President, Small Business Services Division, Employer Services from 2001 to 2005. From 1996 to 2001 she served as Vice President, Business Customer Care for AT&T Corporation.
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 and as Vice President and Controller from 1998 to 2001.
Campbell B. Langdon joined ADP in 2000 as Vice President, Strategic Development. In 2003, he was promoted to President, Tax, Financial and Time Management Services.
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.
Jan Siegmund joined ADP in 1999 as Vice President, Strategy. Prior to his promotion to Vice President, Strategic Development in 2004, he served as Senior Vice President of Strategic Development, Brokerage Services from 2000 to 2004.
George I. Stoeckert joined ADP in 1991. Prior to his promotion to President, Employer Services International in 2003, he served as President - Major Accounts Services 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.
Directors of the Registrant
See "Election of Directors" in the Proxy Statement for Registrant's 2005 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 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Code of Ethics
ADP has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The code of ethics may be viewed online on ADP's website at www.adp.com under "Ethics" in the "About ADP" section.
Audit Committee
See "Audit Committee Report" in the Proxy Statement for Registrant's 2005 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 2005 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 2005 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 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
See "Independent Registered Public Accounting Firms' Fees" in the Proxy Statement for Registrant's 2005 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a)1. Financial Statements
The following reports and consolidated financial statements of the Registrant contained in the Registrant's 2005 Annual Report to Stockholders are also included in Part II, Item 8:
Statements of Consolidated Earnings - years ended June 30, 2005, 2004 and 2003
Consolidated Balance Sheets - June 30, 2005 and 2004
Statements of Consolidated Stockholders' Equity - years ended June 30, 2005, 2004 and 2003
Statements of Consolidated Cash Flows - years ended June 30, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
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
-----------------
Report of Independent Registered
Public Accounting Firm 20
Schedule II - Valuation and Qualifying Accounts 21
|
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
16
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3.2 - Amended and Restated By-laws of the Registrant - incorporated
by reference to Exhibit 3.2 to Registrant's Current Report on
Form 8-K, dated August 11, 2005
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 April 28, 2005 between Automatic
Data Processing, Inc. and Arthur F. Weinbach - incorporated
by reference to Exhibit 10.1 to Registrant's Current Report
on Form 8-K, dated April 28, 2005 (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
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2004 (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)
|
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 Stock Option Plan - incorporated by reference to Exhibit
10.8 to Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 2004 (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)
10.12 - 2003 Director Stock Plan - incorporated by reference to
Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 2003 (Management
Compensatory Plan)
10.13 - Amended and Restated Employees' Savings-Stock Purchase Plan -
incorporated by reference to Exhibit 10.5 to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2003
10.14 - 364-Day Credit Agreement, dated as of June 29, 2005, among
Automatic Data Processing, Inc., the Lenders Party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of
America, N.A., as Syndication Agent, and Barclays Bank PLC,
BNP Paribas, Citicorp USA, Inc., Deutsche Bank Securities
Inc. and Wachovia Bank, National Association, as
Documentation Agents - incorporated by reference to Exhibit
10.14 to Registrant's Current Report on Form 8-K, dated June
29, 2005
10.15 - Five-Year Credit Agreement, dated as of June 30, 2004, among
Automatic Data Processing, Inc., the Lenders Party thereto,
JPMorgan Chase Bank, as Administrative Agent, J.P. Morgan
Europe Limited, as London Agent, JPMorgan Chase Bank, Toronto
Branch, as Canadian Agent, the Swingline Lenders, and Bank of
America, N.A., Barclays Bank PLC, BNP Paribas, Citibank,
N.A., Deutsche Bank Securities Inc. and Wachovia National
Association, as Co-Syndication Agents - incorporated by
reference to Exhibit 10.15 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2004
18
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10.16 - Five-Year Credit Agreement, dated as of June 29, 2005, among
Automatic Data Processing, Inc., the Lenders Party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of
America, N.A., as Syndication Agent, and Barclays Bank PLC,
BNP Paribas, Citicorp USA, Inc., Deutsche Bank Securities
Inc. and Wachovia Bank, National Association, as
Documentation Agents - incorporated by reference to Exhibit
10.16 to Registrant's Current Report on Form 8-K, dated June
29, 2005
10.17 - 2000 Stock Option Grant Agreement (Form for Employees) -
incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2004 (Management Compensatory Plan)
10.18 - 2000 Stock Option Grant Agreement (Form for French
Associates) - incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004 (Management Compensatory
Plan)
10.19 - 2000 Stock Option Grant Agreement (Form for Non-Employee
Directors) - incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004 (Management Compensatory
Plan)
10.20 - Directors Compensation Summary Sheet - incorporated by
reference to Exhibit 10.20 to Registrant's Current Report on
Form 8-K, dated August 11, 2005
13 - Pages 16 to 47 of the 2005 Annual Report to Stockholders
(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 - Consent of Independent Registered Public Accounting Firm
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
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders 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, 2005 and 2004, and for each of the three years in the period ended June 30, 2005, and have issued our report thereon dated August 17, 2005; such consolidated financial statements and report are included in your 2005 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Automatic Data Processing, Inc., listed at Item 15(a)2. 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 August 17, 2005 |
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, 2005:
Allowance for doubtful accounts:
Current $50,980 $17,964 $1,209(B) $(24,475)(A) $45,678
Long-term $8,578 $1,326 $ -- $ (1,732)(A) $8,172
Deferred tax valuation allowance $25,858 $7,821 $ -- $ (1,205)(E) $32,474
Year ended June 30, 2004:
Allowance for doubtful accounts:
Current $54,654 $15,656 $3,335(B) $(22,665)(A) $50,980
Long-term $11,103 $680 $ -- $ (3,205)(A) $8,578
Deferred tax valuation allowance $32,220 $2,953 $ -- $ (9,315)(D) $25,858
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
(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 goodwill.
(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 goodwill. The remaining portion reduced the current year provision for income taxes.
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SIGNATURES
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.
AUTOMATIC DATA PROCESSING,
INC.
(Registrant)
August 31, 2005 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 August 31, 2005
-------------------------- Officer and Director
(Arthur F. Weinbach) (Principal Executive Officer)
/s/ Karen E. Dykstra Chief Financial Officer August 31, 2005
-------------------------- (Principal Financial Officer
(Karen E. Dykstra) and Principal Accounting
Officer)
/s/ Gregory D. Brenneman Director August 31, 2005
-------------------------
(Gregory D. Brenneman)
/s/ Leslie A. Brun Director August 31, 2005
-------------------------
(Leslie A. Brun)
/s/ Gary C. Butler Director August 31, 2005
-------------------------
(Gary C. Butler)
/s/ Leon G. Cooperman Director August 31, 2005
-------------------------
(Leon G. Cooperman)
22
|
Signature Title Date --------- ----- ---- /s/ R. Glenn Hubbard Director August 31, 2005 ------------------------- (R. Glenn Hubbard) /s/ John P. Jones Director August 31, 2005 ------------------------- (John P. Jones) /s/ Ann Dibble Jordan Director August 31, 2005 ------------------------- (Ann Dibble Jordan) /s/ Harvey M. Krueger Director August 31, 2005 ------------------------- (Harvey M. Krueger) /s/ Frederic V. Malek Director August 31, 2005 ------------------------- (Frederic V. Malek) /s/ Henry Taub Director August 31, 2005 ------------------------- (Henry Taub) |
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
Selected Financial Data
(In millions, except per share amounts)
==================================================================================================================================
Years Ended June 30, 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 8,499.1 $ 7,754.9 $ 7,147.0 $ 7,004.3 $ 6,853.7
Earnings before income taxes $ 1,677.9 $ 1,494.5 $ 1,645.2 $ 1,787.0 $ 1,525.0
Net earnings $ 1,055.4 $ 935.6 $ 1,018.2 $ 1,100.8 $ 924.7
Pro forma net earnings* $ 971.7
--------------------------------------------------------------------------
Basic earnings per share $ 1.81 $ 1.58 $ 1.70 $ 1.78 $ 1.47
Diluted earnings per share $ 1.79 $ 1.56 $ 1.68 $ 1.75 $ 1.44
Pro forma basic earnings per share* $ 1.54
Pro forma diluted earnings per share* $ 1.51
Basic weighted average shares outstanding 583.2 591.7 600.1 618.9 629.0
Diluted weighted average shares outstanding 590.0 598.7 605.9 630.6 646.0
Cash dividends per share $ .6050 $ .5400 $ .4750 $ .4475 $ .3950
Return on equity 18.8% 17.3% 19.4% 22.4% 19.9%
--------------------------------------------------------------------------
At year end:
Cash, cash equivalents and marketable securities $ 2,119.1 $ 2,092.5 $ 2,344.3 $ 2,749.6 $ 2,597.0
Working capital $ 1,640.4 $ 993.2 $ 1,676.7 $ 1,406.2 $ 1,747.2
Total assets before funds held for clients $ 9,717.9 $ 8,217.0 $ 8,025.9 $ 7,051.3 $ 6,550.0
Total assets $27,615.4 $21,120.6 $19,833.7 $18,276.5 $17,889.1
Long-term debt $ 75.8 $ 76.2 $ 84.7 $ 90.6 $ 110.2
Stockholders' equity $ 5,783.8 $ 5,417.7 $ 5,371.5 $ 5,114.2 $ 4,701.0
==================================================================================================================================
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* 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.
See notes to consolidated financial statements.
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular dollars in millions, except per share amounts)
DESCRIPTION OF THE COMPANY AND BUSINESS SEGMENTS
Automatic Data Processing, Inc. ("ADP" or the "Company")
provides technology-based outsourcing solutions to employers, the brokerage
and financial services community and vehicle retailers and manufacturers. The
Company's reportable segments are: Employer Services, Brokerage Services, Dealer
Services, and Securities Clearing and Outsourcing Services. A brief description
of each segment's operations is provided below.
Employer Services
Employer Services offers a comprehensive range of human resource ("HR")
information, payroll processing and benefit administration products and services,
including traditional and Web-based outsourcing solutions, that assist over
518,000 employers in the United Sates, Canada, Europe, South America (primarily
Brazil), Australia and Asia to staff, manage, pay and retain their employees.
Employer Services categorizes its services between traditional payroll and payroll
tax and "beyond payroll." The traditional payroll and payroll tax
business represents the Company's core payroll processing and payroll tax filing
business. The "beyond payroll" business represents the products that
extend beyond the traditional payroll and payroll tax filing services, such
as the Professional Employer Organization ("PEO") business, TotalPay(R),
Time and Labor Management, and benefit and retirement administration. Within
Employer Services, the Company collects client funds and remits such funds to
tax authorities for payroll tax filing and payment services, and to employees
of payroll services clients.
Brokerage Services
Brokerage Services provides transaction processing services, desktop productivity
applications and investor communications services to the financial services
industry worldwide. Brokerage Services' 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) automated, browser-based desktop productivity
tools for financial consultants and back-office personnel; and (iv) integrated
delivery of multiple products and services through ADP's Global Processing Solution.
Dealer Services
Dealer Services provides integrated dealer management systems (such a system
is also known in the industry as a "DMS") and business solutions to
automotive, heavy truck and powersports (i.e., motorcycle, marine and recreational)
vehicle retailers and manufacturers throughout North America and Europe. More
than 19,500 automotive, heavy truck and powersports dealers use our DMS, other
software-based solutions, networking solutions, data integration, consulting
and/or marketing services.
Securities Clearing and Outsourcing Services On November 1, 2004, the Company acquired the U.S. Clearing and BrokerDealer Services divisions of Bank of America Corporation ("U.S. Clearing and BrokerDealer Business"), which provides third-party clearing operations, and formed the Securities Clearing and Outsourcing Services segment to report the results of the acquired business. The Securities Clearing and Outsourcing Services segment provides execution, clearing, and customer financing (such as margin lending), securities borrowing to facilitate customer short sales, and outsourcing services for a variety of clearing and custody-related functions. Our clients engage in either the retail or institutional brokerage business.
EXECUTIVE OVERVIEW
Consolidated revenues in fiscal 2005 grew 10%, to $8,499.1 million,
as compared to $7,754.9 million in fiscal 2004. Earnings before income taxes
and net earnings increased 12% and 13%, respectively. Diluted earnings per share
of $1.79 increased 15% from $1.56 per share in fiscal 2004 on fewer shares outstanding.
During fiscal 2005, we acquired 14.1 million of our shares for treasury for
$591.4 million. Operating cash flows were $1,433.4 million in fiscal 2005 as
compared to $1,385.4 million in fiscal 2004, and cash and marketable securities
were $2,119.1 million at June 30, 2005.
We had an excellent fiscal year that surpassed our expectations. Employer Services' revenues grew 8% for fiscal 2005. We credit Employer Services with interest revenues at a standard rate of 4.5%; therefore Employer Services' results are not influenced by changes in interest rates. During fiscal 2005, Employer Services grew average client funds balances 11% as a result of new business and growth in our existing client base. This resulted in an increase of interest revenues within Employer Services, which accounted for approximately 1% growth in Employer Services' revenues as compared to fiscal 2004. The key metrics in Employer Services were the strongest they have been in five years. New business sales growth was 13% and all market segments achieved double-digit growth, resulting in about $840 million of annualized recurring revenues anticipated from new orders. The number of employees on our clients' payrolls, "pays per control," increased in all market segments with nearly 2% overall growth in the United States, and client retention improved by 0.5 percentage points over last year's record level. Brokerage Services' revenues grew 5% for the fiscal year. Revenue growth was primarily from our investor communications business as the volume of pieces delivered increased 15%, driven by an increase in mutual fund meetings and special communications, as well as 6% stock record growth. Back-office average trades per day increased 7% for the fiscal year, but the volume increase was offset by a decline in average revenue per trade of 10%. Dealer Services' revenues grew 10% for fiscal 2005 due to the growth of our key products and the effect of acquisitions. Securities Clearing and Outsourcing Services' revenues were $61.5 million since its acquisition in November 2004, which was in line with our expectations.
As of July 1, 2005, using the modified prospective method, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, which requires the expensing of our stock compensation programs. The impact of adopting SFAS No. 123R is
expected to lower earnings per share by $0.18 to $0.19 in fiscal 2006 and would have lowered earnings per share in fiscal 2005 by $0.22. The lower dilution anticipated in fiscal 2006 is primarily driven by the reduction in the number of options granted to associates, which began in fiscal 2005.
Our fiscal 2006 guidance is high single-digit revenue growth and earnings per share growth of 15% to 20%, assuming stock compensation was expensed in fiscal 2005. Excluding stock compensation expense in both periods, we anticipate growth in earnings per share would have been 12% to 15%.
Our fiscal 2006 earnings per share ("EPS") guidance is summarized as follows:
--------------------------------------------------------------------------------
Year-Over-Year
Years Ended June 30, 2005 2006 (F) Growth (F)
--------------------------------------------------------------------------------
Diluted EPS, as reported $1.79
Less: Pro forma EPS impact
of stock compensation expense 0.22
Diluted EPS, assuming stock
compensation expensed in =====
both periods $1.57(P) $1.81-$1.88 15%-20%
================================================================================
Diluted EPS, assuming stock
compensation not expensed in
either period $1.79 $2.00-$2.06(P) 12%-15%
================================================================================
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(F) Forecast (P) Pro forma
Our plans reflect strong momentum in Employer Services, with about 9% revenue growth, double-digit new business sales growth (annualized recurring revenue from new orders) and continued improvement in client retention. Within both Brokerage Services and Dealer Services, our revenue forecast is in the mid single-digit growth range. We are anticipating at least 1% margin improvement in each of our businesses. Our consolidated revenue for interest earned on client funds is anticipated to grow over 20% to approximately $500 million. Our forecast is based on an improvement of over 30 basis points in the overall yield in the client funds portfolio, which is expected to contribute about $40 million in fiscal 2006, and expected growth of 9% in client funds balances due to the growth in net new business and intrinsic growth from our existing clients.
RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS
Years Ended June 30, Change
-------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
-------------------------------------------------------------------------------------
Total revenues $8,499.1 $7,754.9 $7,147.0 10% 9% 2%
Total expenses $6,821.2 $6,260.4 $5,501.8 9% 14% 5%
-------------------------------------------------------------
Earnings before
income taxes $1,677.9 $1,494.5 $1,645.2 12% (9)% (8)%
Margin 19.7% 19.3% 23.0%
-------------------------------------------------------------
Provision for
income taxes $ 622.5 $ 558.9 $ 627.0 11% (11)% (9)%
Effective tax rate 37.1% 37.4% 38.1%
-------------------------------------------------------------
Net earnings $1,055.4 $ 935.6 $1,018.2 13% (8)% (8)%
Diluted earnings
per share $ 1.79 $ 1.56 $ 1.68 15% (7)% (4)%
=====================================================================================
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Fiscal 2005 Compared to Fiscal 2004
Revenues
Our consolidated revenues for fiscal 2005 grew 10%, to $8,499.1 million, as
compared to the prior fiscal year primarily due to increases in Employer Services
of 8%, or $387.0 million, to $5,199.9 million, Brokerage Services of 5%, or
$83.8 million, to $1,749.8 million, Dealer Services of 10%, or $90.0 million,
to $979.8 million, as well as $61.5 million from our Securities Clearing and
Outsourcing Services segment. Our consolidated revenues, excluding the impact
of acquisitions and divestitures, grew 9% in fiscal 2005 as compared to the
prior fiscal year. Revenue growth for fiscal 2005 was also favorably impacted
by $113.2 million, or 1.5%, due to fluctuations in foreign currency exchange
rates.
Our consolidated revenues for fiscal 2005 include interest on funds held for Employer Services' clients of $421.4 million, as compared to $355.4 million in the prior fiscal year. The increase in the consolidated interest earned on funds held for Employer Services' clients was primarily due to the increase of 11% in our average client funds balances in fiscal 2005 to $12.3 billion as a result of Employer Services' new business and growth in our existing client base. We credit Employer Services with interest revenues at a standard rate of 4.5%; therefore Employer Services' results are not influenced by changes in interest rates. The difference between the 4.5% standard rate allocation to Employer Services and the actual interest earned is a reconciling item that reduces revenues by $126.4 million and $140.5 million in fiscal 2005 and 2004, respectively, to eliminate this allocation in consolidation.
Expenses
Our consolidated expenses for fiscal 2005 increased by $560.8 million, from
$6,260.4 million to $6,821.2 million. The increase in our consolidated expenses
is primarily due to the increase in operating expenses associated with the growth
of our revenues, including the additional expenses associated with acquisitions.
In addition, consolidated expenses increased by $92.0 million, or 1.5%, due
to fluctuations in foreign currency exchange rates. Our consolidated expenses
did not increase comparably with our revenue primarily due to the leveraging
of our increasing revenues within our Employer Services and Brokerage Services
businesses. Operating expenses increased by $444.1 million, or 13%, primarily
due to the increase in operating personnel to support the revenue growth. In
addition, our operating expenses grew at a faster rate than revenue primarily
due to the higher growth rates of our PEO business and investor communications
activity, which both have pass-through costs. The pass-through costs for these
two services were $999.6 million in fiscal 2005, as compared to $862.6 million
in fiscal 2004. Selling, general and administrative expenses increased by $53.8
million, to $1,957.1 million, primarily due to the increase in sales personnel
in our Employer Services and Dealer Services businesses to support the revenue
growth. Systems development and programming costs increased by $42.9 million,
to $624.1 million, due to continued investments in sustaining our products,
primarily in our Employer Services business, and the maintenance of our existing
technology throughout all of our businesses. In addition, other income, net
decreased $22.4 million primarily due to the
increase in interest expense of $16.3 million, which resulted from higher interest rates on our short-term financing arrangements and an increase of $20.9 million in net realized losses on our available-for-sale securities.
Earnings Before Income Taxes
Earnings before income taxes increased by $183.4 million, or 12%, to $1,677.9
million during fiscal 2005 due to the increase in revenues and expenses discussed
above.
Provision for Income Taxes
Our effective tax rate for fiscal 2005 was 37.1%, as compared to 37.4% for fiscal
2004. The decrease in the effective tax rate was primarily attributable to a
favorable mix in income among tax jurisdictions.
Net Earnings
Net earnings for fiscal 2005 increased by 13%, to $1,055.4 million, from $935.6
million, and the related diluted earnings per share increased 15%, to $1.79.
The increase in net earnings for fiscal 2005 reflects the increase in earnings
before income taxes and the impact of the lower effective tax rate. The increase
in diluted earnings per share for fiscal 2005 reflects the increase in net earnings
and the impact of fewer shares outstanding due to the repurchase of 14.1 million
shares during fiscal 2005 and 15.8 million shares during fiscal 2004.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Our consolidated revenues for fiscal 2004 grew 9%, to $7,754.9 million, primarily
due to increases in Employer Services of 10%, to $4,812.9 million, Brokerage
Services of 3%, to $1,666.0 million, and Dealer Services of 9%, to $889.8 million.
Our consolidated revenues, excluding the impact of acquisitions and divestitures,
grew 6% in fiscal 2004 as compared to the prior fiscal year. Revenue growth
for fiscal 2004 was also favorably impacted by $144.1 million, or 2%, due to
fluctuations in foreign currency exchange rates.
Our fiscal 2004 consolidated revenues include interest on funds held for Employer Services' clients of $355.4 million, as compared to $368.7 million in fiscal 2003. The decrease in the consolidated interest earned on funds held for Employer Services' clients was primarily due to the decrease in interest rates in fiscal 2004, offset by the increase of 24% in our average client funds balances in fiscal 2004 to $11.1 billion. We credit Employer Services with interest revenues at a standard rate of 4.5%; therefore Employer Services' results are not influenced by changes in interest rates. The difference between the 4.5% standard rate allocation to Employer Services and the actual interest earned was a reconciling item that reduced revenues by $140.5 million and $41.2 million in fiscal 2004 and 2003, respectively, to eliminate this allocation in consolidation.
Expenses
Our consolidated expenses for fiscal 2004 increased by $758.6 million, from
$5,501.8 million to $6,260.4 million. The increase in our consolidated expenses
was primarily due to the increase in operating expenses associated with the
growth of our revenues, including the additional expenses related to acquisitions,
and expenses relating to our incremental investments of $170.4 million. The
incremental investments were targeted at revenue growth opportunities as well
as costs to scale back or exit lower growth areas. These expenses consisted
primarily of $45.0 million of Employer of Choice initiatives (mostly associate
compensation), $35.1 million of expenses relating to our salesforce (mostly
additional salesforce, training, sales meetings and marketing expenses), $30.4
million of severance and facility exit costs, and expenses relating to maintaining
our products and services. In addition, consolidated expenses increased by $114.9
million, or 2%, due to fluctuations in foreign currency exchange rates. Operating
expenses increased by $428.7 million, or 14%, primarily due to the increase
in consolidated revenues. Selling, general and administrative expenses increased
by $145.0 million, to $1,903.3 million, primarily due to the additional compensation
expenses incurred relating to our Employer of Choice initiatives and the additional
salesforce added during fiscal 2004. Systems development and programming costs
increased by $82.0 million, to $581.2 million, due to continued investments
in sustaining our products, primarily in our Employer Services business, and
the maintenance of our existing technology throughout all of our businesses.
Depreciation and amortization expenses increased by $32.1 million, to $306.8
million, due to an increase in amortization of intangible assets primarily from
the increase in software licenses acquired with our fiscal 2004 and fiscal 2003
acquisitions. In addition, other income, net decreased $70.8 million due to
a decline in interest income on corporate funds of $39.5 million resulting from
lower investment yields and the net realized losses of $7.6 million in fiscal
2004, as compared to the net realized gains of $29.5 million in fiscal 2003
on our available-for-sale securities.
Earnings Before Income Taxes
Earnings before income taxes decreased by $150.7 million, or 9%, to $1,494.5
million for fiscal 2004 primarily due to the investment spending relating to
our Employer of Choice initiatives, investments in our salesforce and costs
to sustain our products and services, which impacted all of our business segments,
the integration of certain fiscal 2003 acquisitions, and a decrease in investment
income on funds held for Employer Services' clients and corporate funds of $90.0
million, primarily due to the lower interest rates during fiscal 2004.
Provision for Income Taxes
Our effective tax rate for fiscal 2004 was 37.4%, as compared to 38.1% for fiscal
2003. The decrease in the effective tax rate was attributable to a favorable
mix in income among tax jurisdictions and favorable settlements of state income
tax examinations.
Net Earnings
Fiscal 2004 net earnings decreased 8%, to $935.6 million, from $1,018.2 million
and the related diluted earnings per share decreased 7%, to $1.56. The decrease
in net earnings 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 15.8 million shares in fiscal 2004 and 27.4 million
shares in fiscal 2003.
ANALYSIS OF REPORTABLE
SEGMENTS
Revenues
Years Ended June 30, Change
-------------------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
-------------------------------------------------------------------------------------------------
Employer Services $5,199.9 $4,812.9 $4,393.6 8% 10% 5%
Brokerage Services 1,749.8 1,666.0 1,611.9 5 3 (9)
Dealer Services 979.8 889.8 814.1 10 9 11
Securities Clearing
and Outsourcing
Services 61.5 -- -- -- -- --
Other 481.8 477.5 461.9 1 3 --
Reconciling items:
Foreign exchange 152.7 49.2 (93.3) -- -- --
Client funds
interest (126.4) (140.5) (41.2) -- -- --
--------------------------------------------------------------------
Total revenues $8,499.1 $7,754.9 $7,147.0 10% 9% 2%
=================================================================================================
|
Earnings Before Income Taxes
Years Ended June 30, Change
-------------------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
-------------------------------------------------------------------------------------------------
Employer Services $1,143.8 $ 994.1 $1,070.0 15% (7)% 8%
Brokerage Services 294.3 244.6 232.0 20 5 (35)
Dealer Services 142.8 143.4 135.7 -- 6 14
Securities Clearing
and Outsourcing
Services (23.6) -- -- -- -- --
Other 73.1 111.4 153.8 (34) (28) (11)
Reconciling items:
Foreign exchange 29.4 7.2 (14.1) -- -- --
Client funds
interest (126.4) (140.5) (41.2) -- -- --
Cost of capital
charge 144.5 134.3 109.0 -- -- --
--------------------------------------------------------------------
Total earnings before
income taxes $1,677.9 $1,494.5 $1,645.2 12% (9)% (8)%
=================================================================================================
|
Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are charged to the reportable segments based on management's responsibility for the applicable costs. As a result, various income and expense items, including certain non-recurring gains and losses, are recorded at the corporate level.
The fiscal 2004 and 2003 reportable segments' revenues and earnings before income taxes have been adjusted to reflect updated fiscal 2005 budgeted foreign exchange rates. This adjustment is made for management purposes so that the reportable segments' revenues are presented on a consistent basis without the impact of fluctuations in foreign currency exchange rates. This adjustment is a reconciling item to revenues and earnings before income taxes in order to eliminate the adjustment in consolidation.
In addition, Employer Services' fiscal 2003 revenues and earnings before income taxes were adjusted to include interest income earned on funds held for Employer Services' clients at a standard rate of 4.5%. Prior to fiscal 2004, Employer Services was credited with interest earned on client funds at 6.0%. Given the decline in interest rates, the standard rate was changed to 4.5%. This allocation is made for management reasons so that the Employer Services' results are presented on a consistent basis without the impact of fluctuations in interest rates. This allocation is a reconciling item to our reportable segments' revenues and earnings before income taxes to eliminate the allocation in consolidation.
The reportable segments' results also include a cost of capital charge related to the funding of acquisitions and other investments. This charge is a reconciling item to earnings before income taxes to eliminate the charge in consolidation.
Employer Services
Fiscal 2005 Compared to Fiscal 2004
Revenues
Employer Services' revenues increased 8% in fiscal 2005 as compared to fiscal
2004 primarily due to new business started in fiscal 2005, a pricing increase
of approximately 2%, an increase in the number of employees on our clients'
payrolls in the United States, strong client retention, and an increase in client
funds balances. Internal revenue growth, which represents revenue growth excluding
the impact of acquisitions and divestitures, was approximately 8% for fiscal
2005. New business sales, which represents the annualized recurring revenues
anticipated from sales orders to new and existing clients, grew 13% to approximately
$840 million for fiscal 2005 due to the increased growth in the salesforce and
its productivity. The number of employees on our clients' payrolls, "pays
per control," increased approximately 1.9% for fiscal 2005 in the United
States. This employment metric is based upon actual results of over 125,000
payrolls across a broad range of U.S. geographies ranging from small to very
large businesses. Our client retention in the United States improved by 0.5
percentage points from the record retention levels in fiscal 2004 primarily
due to our continued investment and commitment to client service.
Interest income was credited to Employer Services at a standard rate of 4.5% so the results of the business were not influenced by changes in interest rates. In fiscal 2005, interest income increased due to the growth in the average client funds balances as a result of increased Employer Services' new business and growth in our existing client base as compared to fiscal 2004. The average client funds balance was $12.3 billion during fiscal 2005 as compared to $11.1 billion for the prior fiscal year, representing an increase of 11% for fiscal 2005.
Revenues from our "beyond payroll" products continued to grow at a faster rate than the traditional payroll and payroll tax revenues. Our Professional Employer Organization ("PEO") revenues grew 24%, to $577.0 million, during fiscal 2005 primarily due to 21% growth in the number of PEO worksite employees and additional pass-through benefits. In addition, "beyond payroll" revenues grew due to a 13% increase in revenues from our TotalPay(R) Services and a 22% increase in revenues from our Time and Labor Management Services, both due to the increase in the number of clients utilizing these services.
Earnings Before Income Taxes
Earnings before income taxes increased 15%, from $994.1 million to $1,143.8
million, for fiscal 2005 primarily due to the increase in revenues. Our operating
expenses and selling, general and administrative expenses increased due to the
increase in operating and sales personnel to support the revenue growth. In
addition, the increase in operating expenses exceeded our revenue growth due
to the higher growth in our PEO business, which includes pass-through costs
associated with the services. Our PEO revenues grew 24%, to $577.0 million,
and pass-through operating expenses related to benefits and workers' compensation
costs grew 25% to $424.9 million, in fiscal 2005. The increase in PEO operating
expenses was partially offset by efficiencies of scale in operating expenses
in our Employer Services business. Our systems development and programming costs
increased due to the continued maintenance of our products and services to comply
with statutory requirements and to support our revenue growth. Our total expenses
at Employer Services did not increase comparably with our revenue primarily
due to the leveraging of our increasing revenues, which has resulted in improved
margins for our services. This was primarily due to the increase in the efficiency
of our sales personnel, which resulted in a decline of our selling expenses
as a percentage of new business sales in fiscal 2005 as compared to fiscal 2004.
In addition, earnings before income taxes increased approximately $17.1 million during fiscal 2005 as a result of the completion of the integration of certain acquisitions, primarily ProBusiness Services, Inc., in the prior fiscal year.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Employer Services' revenues increased 10% in fiscal 2004 primarily due to revenues
from fiscal 2003 acquisitions, strong client retention, new business started
in fiscal 2004, price increases and interest earned on client funds balances.
Internal revenue growth, which represents revenue growth excluding the impact
of acquisitions and divestitures, was approximately 5% for fiscal 2004. Our
client retention in the United States was excellent, improving almost one percentage
point from record retention levels in fiscal 2003. New business sales increased
6% to approximately $740 million in fiscal 2004.
Interest income was credited to Employer Services at a standard rate of 4.5% so that the results of the business were not influenced by changes in interest rates. The average client funds balance was $11.1 billion during fiscal 2004, representing an increase of 24%, of which about one-half was related to the June 2003 acquisition of ProBusiness Services, Inc.
Revenues from our "beyond payroll" products grew at a faster rate than the traditional payroll and payroll tax revenues. Our PEO revenues grew 28%, to $467.0 million, in fiscal 2004 primarily due to 10% growth in the number of PEO worksite employees and additional pass-through benefits and workers' compensation costs. In addition, "beyond payroll" revenues increased due to an increased number of clients utilizing services, such as Time and Labor Management and TotalPay(R) Services.
Earnings Before Income Taxes
Earnings before income taxes in Employer Services decreased 7% for fiscal 2004
as compared to fiscal 2003 primarily due to our investment spending related
to our Employer of Choice initiatives, investments in our salesforce and costs
to sustain our products and services totaling approximately $138.0 million.
In addition, earnings before income taxes declined approximately 3% as a result
of the integration of certain fiscal 2003 acquisitions. These decreases were
offset by the increase in earnings before income taxes of approximately 9% as
a result of the revenue growth and operating efficiencies.
Brokerage Services
Fiscal 2005 Compared to Fiscal 2004
Revenues
Brokerage Services' revenues increased 5% for fiscal 2005 as compared to fiscal
2004 due to an increase in certain investor communications activity, offset
by the decrease in our back-office services revenue. Revenues from investor
communications for fiscal 2005 increased by 9%, to $1,313.1 million, primarily
due to increases in the volume of our proxy and interim communications services,
as well as increases in our distribution services revenues. Our proxy and interim
communications pieces delivered increased 15%, from 865 million to 995 million,
for fiscal 2005 as compared to fiscal 2004. The increase in the fiscal 2005
proxy and interim communications activity resulted from more holders of equities,
increased activity related to additional mutual fund meetings, and more mutual
fund special communications. Stock record growth, which is a measure of how
many stockholders own a security compared to the prior year and a key factor
in the number of pieces delivered, increased 6% in fiscal 2005. Our distribution
services revenues increased due to new business growth for post-sale mutual
fund services. In addition, there was an increased demand for our services for
the consolidation or electronic delivery of proxies, which increased our service
fee revenues, but lowered our postage revenues.
Our back-office trade processing revenues decreased by 2%, to $334.6 million, for fiscal 2005 due to a number of factors. The average revenue per trade declined 10% for fiscal 2005 primarily due to our client mix, which was driven by the increase in electronic retail trades and volume processed under tiered pricing agreements. In addition, the acquisition of the U.S. Clearing and BrokerDealer Business, which was previously a customer of Brokerage Services, reduced revenues by approximately $14 million, as the back-office services previously provided to such third party became an internal (intercompany) service. These decreases were offset by an increase in the average trades per day of 7%, from 1.4 million in fiscal 2004 to 1.5 million in fiscal 2005. Average trades per day increased primarily due to net new business sales and growth in our existing client base.
Earnings Before Income Taxes
Earnings before income taxes increased $49.7 million, to $294.3 million, for
fiscal 2005 primarily due to the increased revenues in our investor communications
activities and improved margins for our back-office services. With the increase
in volume of our
investor communications, we were able to leverage our expense structure to improve our margins associated with such services. In addition, earnings before income taxes were favorably impacted by an increase in our services to consolidate or electronically deliver proxies, which is a higher margin service. The margin on our back-office services improved due to the continued alignment of our operating expenses to the lower back-office revenues. Earnings before income taxes also increased approximately $9.7 million during fiscal 2005 as a result of the elimination of unprofitable business lines and alignment of our cost structure in our underperforming businesses that occurred during fiscal 2004.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Brokerage Services' revenues increased 3% for fiscal 2004 as compared to fiscal
2003 primarily due to an increase in certain investor communications activity
offset by continued industry consolidations, which reduced our trade processing
revenues. Revenues from investor communications increased by $82.9 million,
or 7%, to $1,210.6 million in fiscal 2004 primarily due to increases in the
volume of our proxy and interim communications services, as well as our distribution
services for confirmations, statements, and pre- and post-sale mutual fund documents.
Our proxy and interim communications pieces delivered increased 15%, from 755
million in fiscal 2003 to 865 million in fiscal 2004, stemming from more holders
of equities and incremental activity from recent mutual fund industry regulatory
activity. Stock record growth increased 4% in fiscal 2004. Our distribution
services' revenue increased $39.1 million primarily due to the increase in the
amount of pre- and post-sale mutual fund pieces delivered. Our back-office trade
processing revenues declined by $12.4 million, to $343.1 million, in fiscal
2004 primarily due to an 11% decline in the average revenue per trade. The average
revenue per trade was primarily impacted by industry consolidations, our client
mix, and volume processed under tiered pricing agreements. The decline in the
average revenue per trade was partially offset by an increase in average trades
per day of 6%, from 1.3 million in fiscal 2003 to 1.4 million in fiscal 2004,
primarily due to net new business sales and growth in our existing client base.
Earnings Before Income Taxes
Earnings before income taxes increased 5% in fiscal 2004 primarily due to our
cost containment efforts in our underperforming businesses and increased revenues
in our investor communications activities. Our ability to eliminate unprofitable
business lines and properly align our cost structure with the slower growth
levels of our underperforming businesses contributed approximately $19.4 million
to earnings before income taxes. These increases were offset by the decline
in earnings before income taxes from our trade processing services, primarily
due to industry consolidations. In addition, our earnings before income taxes
were negatively impacted by our incremental investments in our products and
services and Employer of Choice initiatives that totaled approximately $14.0
million during fiscal 2004.
Dealer Services
Fiscal 2005 Compared to Fiscal 2004
Revenues
Dealer Services' revenues increased 10% for fiscal 2005 as compared to fiscal
2004. Internal revenue growth was approximately 6% for fiscal 2005. Revenues
increased for our dealer business systems in North America by $93.2 million,
to $811.0 million, for fiscal 2005 primarily due to growth in our key products
and the effect of acquisitions. The growth in our key products was primarily
driven by the increased users for Application Service Provider ("ASP")
managed services, increased Credit Check installations, new network installations
and increased market penetration of our Customer Relationship Management ("CRM")
product. In addition, our revenue growth was impacted by our continued strong
client retention.
Earnings Before Income Taxes
Earnings before income taxes decreased slightly from $143.4 million in fiscal
2004 to $142.8 million in fiscal 2005 primarily due to the additional sales
expenses relating to headcount additions to generate the current revenue growth
and additional implementation expenses to support the new sales contracts awarded
during fiscal 2005 for two of the largest dealership groups in the United States.
In addition, earnings before income taxes were negatively impacted by the integration
costs of acquisitions that occurred during the fourth quarter of fiscal 2004.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Dealer Services' revenues increased 9% in fiscal 2004 as compared to fiscal
2003. Internal revenue growth was approximately 8% for fiscal 2004. Revenues
increased 8% for our dealer business systems in North America, to $717.8 million,
due to new product growth in our traditional core businesses. The new product
growth accounted for approximately 60% of the increase in revenue for fiscal
2004 and is primarily driven by increased users for ASP managed services, new
network installations, and strong market acceptance of our CRM product.
Earnings Before Income Taxes
Earnings before income taxes grew 6% in fiscal 2004 primarily due to the increase
in revenues of our traditional core business, which contributed approximately
15% to earnings before income taxes. These increases were partially offset by
our incremental investments in our products and services and Employer of Choice
initiatives which totaled approximately $10.0 million during fiscal 2004.
Securities Clearing and Outsourcing Services Fiscal 2005 Compared to Fiscal
2004
Revenues
On November 1, 2004, the Company formed the Securities Clearing and Outsourcing
Services segment upon the acquisition of the U.S. Clearing and BrokerDealer
Business. Revenues for Securities Clearing and Outsourcing Services were $61.5
million
from November 1, 2004 to June 30, 2005. Average customer margin balances were $955.1 million and the average number of trades cleared per day were 23 thousand from November 1, 2004 to June 30, 2005.
Loss Before Income Taxes
Loss before income taxes was $23.6 million from November 1, 2004 to June 30,
2005 due to the current alignment of the cost structure associated with the
revenues of the segment as well as the integration costs incurred since the
acquisition of the business.
Other
The primary components of "Other" are Claims Services, miscellaneous
processing services, and corporate allocations and expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES
Our financial condition and balance sheet remain strong. At June 30, 2005, cash
and marketable securities were $2,119.1 million. Stockholders' equity was $5,783.8
million at June 30, 2005 and the return on average equity for fiscal 2005 was
18.8%. The ratio of long-term debt-to-equity was 1.3% at June 30, 2005.
At June 30, 2005, working capital was $1,640.4 million, as compared to $993.2 million at June 30, 2004. The increase in working capital arose primarily as a result of the change in the mix of marketable securities from long-term to short-term and the acquisition of the U.S. Clearing and BrokerDealer Business.
Our principal sources of liquidity are derived from cash generated through operations and our cash and marketable securities on hand. We also have the ability to generate cash through our financing arrangements under our U.S. short-term commercial paper program and our U.S. and Canadian short-term repurchase agreements. In addition, we have three unsecured revolving credit agreements that allow us to borrow up to $5.0 billion in the aggregate. Our short-term commercial paper program and repurchase agreements are utilized as the primary instruments to meet short-term funding requirements related to client funds obligations. Our revolving credit agreements are in place to provide additional liquidity, if needed. We have never had borrowings under the revolving credit agreements. The Company believes that the internally generated cash flows and financing arrangements are adequate to support business operations and capital expenditures.
During fiscal 2005, we acquired the U.S. Clearing and BrokerDealer Business and formed the Securities Clearing and Outsourcing Services segment to report the results of the acquired business. The Securities Clearing and Outsourcing Services segment provides third-party clearing operations in the regulated broker-dealer industry. The cash flows from operations from this business differ from that of our other businesses because the broker-dealer third-party clearing activities utilize payables to finance their business activities and the regulations associated with the broker-dealer industry require cash or securities to be segregated for the exclusive benefit of customers in certain circumstances based on regulatory calculations driven by customers' balances. As a result, management analyzes cash flows provided from operating activities of the Securities Clearing and Outsourcing Services segment separately from all other businesses. Management's view of the net cash flows provided by operating activities is as follows:
================================================================================
Years Ended June 30, 2005 2004 2003
--------------------------------------------------------------------------------
Net cash flows provided by operating
activities for all businesses, excluding
the Securities Clearing and
Outsourcing Services segment $1,626.4 $1,385.4 $1,505.0
Net cash flows used in operating
activities for the Securities Clearing
and Outsourcing Services segment (193.0) -- --
-------------------------------
Net cash flows provided by operating
activities, as reported $1,433.4 $1,385.4 $1,505.0
================================================================================
|
Net cash flows provided by operating activities for all businesses, excluding the Securities Clearing and Outsourcing Services segment, were $1,626.4 million in fiscal 2005, as compared to $1,385.4 million in fiscal 2004. This increase was primarily due to the increase in net earnings for all businesses, excluding the Securities Clearing and Outsourcing Services segment, of $130.4 million and the increase in accounts payable and accrued expenses primarily due to the timing of income tax payments made during fiscal 2005 as compared to fiscal 2004.
Net cash flows used in operating activities for the Securities Clearing and Outsourcing Services segment were $193.0 million from November 1, 2004 to June 30, 2005. The net cash flows used in operating activities primarily resulted from the segregation of $179.8 million of securities deposited with clearing organizations or segregated for the exclusive benefit of our Securities Clearing and Outsourcing Services' customers to meet regulatory requirements. In addition, securities clearing payables decreased due to the increase in securities clearing activities of the segment.
Cash flows used in investing activities in fiscal 2005 totaled $437.9 million,