UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| Delaware | 22-1467904 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| One ADP Boulevard, Roseland, New Jersey | 07068 |
| (Address of principal executive offices) | (Zip Code) |
| 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 |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ x ] No [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [ x ]
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 (§229.405) 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ x ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the 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 $ 23,216,032,643 . On August 22 , 2008 there were 508,864,299 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
| Portions of the Registrant’s Proxy Statement for Annual Meeting of Stockholders to be held on November 11, 2008. |
Part III |
Part I
Item 1. Business
Automatic Data Processing, Inc., incorporated in Delaware in 1961 (together with its subsidiaries “ADP” or the “Company”), is one of the world’s largest providers of business outsourcing solutions. Leveraging nearly 60 years of experience, ADP offers a wide range of HR, payroll, tax and benefits administration solutions from a single source. ADP is also a leading provider of integrated computing solutions to automotive, heavy truck, motorcycle, marine and recreational vehicle dealers throughout the world. For financial information by segment and by geographic area, see Note 18 of the “Notes to Consolidated Financial Statements” contained in this Form 10-K. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, the Proxy Statement for its Annual Meeting of Stockholders and its 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, tax and benefits administration products and services, including traditional and Web-based outsourcing solutions, that assist approximately 560,000 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 salesforce and, on a limited basis, through indirect sales channels, such as marketing relationships with banks and accountants, among others. In fiscal 2008, 82% of Employer Services’ revenues were from the United States, 11% were from Europe, 5% were from Canada and 2% were from South America (primarily Brazil), Australia and Asia.
United States
Employer Services’ approach to the market is to match a client’s needs with the services and products that will best meet expectations. To facilitate this approach, in the United States, Employer Services is comprised of the following groups: Small Business Services (SBS) (serving primarily organizations with fewer than 50 employees); Major Account Services (serving primarily organizations with between 50 and 999 employees); and National Account Services (serving primarily organizations with 1,000 or more employees).
SBS processes payroll for smaller clients and provides them with market leading solutions, including a range of value-added services that are specifically designed for small business clients. Major Account Services and National Account Services offer a full suite of best-of-breed employer services solutions for clients ranging from mid-size through many of the world’s largest corporations.
ADP enables its largest clients to interface their major enterprise resource planning (ERP) applications with ADP’s outsourced payroll services. For those organizations that choose to process payroll in-house, ADP delivers stand-alone services such as payroll tax filing, check printing and distribution, year-end tax statements ( i.e ., form W-2), wage garnishment services, health and welfare administration and flexible spending account (FSA) administration.
In order to address the growing business process outsourcing (BPO) market for clients seeking human resource information systems and benefit outsourcing solutions, ADP offers its integrated comprehensive outsourcing services (COS) solution that allows larger clients to outsource HR, payroll, payroll administration, employee service center, benefits administration, and time and labor management functions to ADP. ADP also offers ADP Resource ® , an integrated, flexible HR and payroll service offering that provides a menu of optional services, such as 401(k), FSA and a comprehensive Pay-by-Pay ® workers’ compensation payment program.
ADP provides payroll services that include the preparation of client employee paychecks and electronic direct deposits, along with supporting journals, summaries and management reports. 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.
2
ADP’s Added Value Services division (formerly the Tax, Retirement, Insurance and Pre-Employment Services division) includes the following businesses: Tax and Financial Services, Retirement Services, Insurance Services and Pre-Employment Services. These businesses primarily support SBS, Major Account Services and/or National Account Services, and their services are sold through those businesses, as well as dedicated salesforces and marketing arrangements with alliance partners.
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Tax and Financial Services processes and collects federal, state and local payroll taxes on behalf of, and from, ADP clients and remits these taxes to the appropriate taxing authorities. This business is also responsible for the efficient movement of information and funds from clients to third parties through service offerings such as new hire reporting, TotalPay ® payroll check (ADPCheck™), full service direct deposit (FSDD) and stored value payroll card (TotalPay ® Card) products, and the collection and payment of wage garnishments. Tax and Financial Services also offers wage verification and sales and use tax services. This business provides an electronic interface between ADP clients and over 2,200 federal, state and local tax agencies, from the Internal Revenue Service to local governments. In fiscal 2008, Tax and Financial Services in the United States processed and delivered over 52 million year-end tax statements ( i.e. , form W-2) to its clients’ employees and over 40.8 million employer payroll tax returns and deposits, and moved over $1 trillion in client funds to taxing authorities and its clients’ employees via electronic transfer, direct deposit and ADPCheck.
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Retirement Services provides recordkeeping and/or related administrative services with respect to various types of retirement (primarily 401(k) and SIMPLE IRA) plans, deferred compensation plans and “premium only” cafeteria plans.
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Insurance Services provides a comprehensive Pay-by-Pay workers’ compensation payment program and, through Automatic Data Processing Insurance Agency, Inc., offers workers compensation and group health insurance to small and mid-size clients.
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Pre-Employment Services includes three categories of services: Applicant Management Services, Screening and Selection Services, and Tax Credit Services. Applicant Management Services provides employers with a web-based solution to manage their talent throughout their lifecycle. Screening and Selection Services provides background checks, reference verifications and an HR help desk. Tax Credit Services provides job tax credit services that assist employers in the identification of, and filing for, federal, state and local tax credits and other incentives based on geography, demographics and other criteria, and includes negotiation of incentive packages with applicable governmental agencies.
ADP’s HR services provide solutions from pre-hire to retire, including talent acquisition through employee HR recordkeeping and compliance management. ADP’s Benefit Services business provides benefits administration across all market segments, including management of the open enrollment of benefits, COBRA and FSA administration. ADP’s Time and Labor Management services business provides solutions for employers to capture, calculate and report employee time and attendance.
International
Employer Services has a growing presence outside of the United States, where it offers solutions on the basis of both geographic and specific client business needs. ADP offers in-country “best of breed” payroll and human resource outsourcing solutions to small and large clients alike in over a dozen countries outside of the United States. In each of Canada and Europe, ADP is the leading provider of payroll processing (including full departmental outsourcing) and human resource administration services. Within Europe, Employer Services has business operations supporting its in-country solutions in eight countries: 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, ADP provides traditional service bureau payroll and also offers full departmental outsourcing of payroll services. ADP also offers wage and tax collection and remittance services in Canada and the United Kingdom.
3
There is a steadily increasing demand from multinational companies for global payroll and human resource management services. In fiscal 2008, ADP continued to expand its GlobalView ® offering, making it available in 37 countries. GlobalView is built on the SAP ® ERP Human Capital Management and the SAP NetWeaver ® platform and offers multinational and global companies an end-to-end outsourcing solution enabling standardized payroll processing and human resource administration. As of the end of fiscal 2008, 78 clients had contracted for GlobalView services, with approximately 390,000 employees being processed. Upon completing the implementation for all these clients, ADP expects to be providing GlobalView services to nearly one million employees in 46 different countries. In fiscal 2007, ADP established a wholly foreign owned entity in Shanghai, China, to serve the needs of multinational companies with operations in China.
Professional Employer Organization Services
In the United States, ADP’s TotalSource ® , ADP’s professional employer organization (PEO) business, provides clients with comprehensive employment administration outsourcing solutions through a co-employment relationship, including payroll, payroll tax filing, HR guidance, 401(k) plan administration, benefits administration, compliance services, health and workers’ compensation coverage and other supplemental benefits for employees. ADP’s TotalSource is the largest PEO in the United States based on the number of total paid worksite employees. ADP’s TotalSource has 46 offices located in 19 states and serves approximately 188,000 worksite employees in all 50 states.
Dealer Services
Dealer Services provides integrated dealer management systems (such a system is also known in the industry as a “DMS”) and other business management solutions to automotive, heavy truck, motorcycle, marine and recreational vehicle (RV) retailers in North America, Europe, South Africa and the Asia Pacific region. Over 25,000 automotive, heavy truck, motorcycle, marine and RV retailers in over 60 countries use ADP’s DMS products, other software applications, networking solutions, data integration, consulting and/or digital marketing services.
Clients use ADP’s DMS products to manage core business activities such as accounting, inventory management, factory communications, appointment scheduling, vehicle financing and insurance, sales and service. In addition to its DMS products, Dealer Services offers its clients a full suite of additional integrated applications to address each department and functional area of the dealership, including Customer Relationship Management (CRM) applications, front-end sales and marketing solutions, and an IP Telephony phone system fully-integrated into the DMS to help dealerships drive sales processes and business development initiatives. Dealer Services also provides its dealership clients computer hardware, hardware maintenance services, software support, system design and network consulting services.
Dealer Services also designs, establishes and maintains communications networks for its dealership clients that allow interactive communications among multiple site locations 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 decision-making, vehicle repair estimation and acquisition of vehicle registration and lien holder information.
All of Dealer Services’ solutions are supported by comprehensive training offerings and business process consulting services. ADP’s DMS and other software products are available as “on-site” applications installed at the dealership or as application service provider (ASP) managed services solutions (in which clients outsource their information technology management activities to Dealer Services).
Markets and Marketing Methods
Employer Services offers services in the United States, Canada, Europe, South America (primarily Brazil), Australia and Asia. Dealer Services has offerings in North America, Europe, South Africa and the Asia Pacific region. PEO Services are offered in the United States.
4
None of ADP’s major business groups have a single homogenous client base or market. Employer Services and PEO Services have clients from a large variety of industries and markets. Within this client base are concentrations of clients in specific industries. Dealer Services primarily serves automobile dealers, which in turn may be dependent on a relatively small number of automobile manufacturers, but also serves heavy truck and powersports ( i.e ., motorcycle, marine and recreational) dealers, auto repair shops, used car lots, state departments of motor vehicles and manufacturers of automobiles and trucks. Employer Services also sells to automobile dealers. 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, although economic conditions among selected clients and groups of clients may and do have a temporary impact on demand for ADP’s services. In fiscal 2008, Employer Services continued to grow, primarily due to new business started in the period, an increase in the number of employees on our clients’ payrolls, the impact of price increases and an increase in average client funds balances; Dealer Services grew due to both internal revenue growth and growth from acquisitions; and PEO Services grew primarily due to an increase in the average number of worksite employees and higher administrative revenues as a result of an increase in the average number of worksite employees.
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 industries in which ADP operates are 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 business outsourcing solutions in the world. Employer Services and PEO Services compete with other independent business outsourcing companies, companies providing enterprise resource planning services, software companies and financial institutions. Captive in-house functions, whereby a company installs and operates its own business processing systems, are another competitive factor in the industries in which Employer Services and PEO Services operate. Dealer Services’ competitors include full service DMS providers such as The Reynolds & Reynolds Company, Dealer Services’ largest DMS competitor in the United States and Canada, and companies providing applications and services that compete with Dealer Services’ non-DMS applications and services.
Competition in ADP’s industries 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.
Clients and Client Contracts
ADP provides its services to over 585,000 clients. In fiscal 2008, no single client or group of affiliated clients accounted for revenues in excess of 2% of annual consolidated revenues.
Our business is typically characterized by long-term customer relationships that result in recurring revenue. ADP 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, and in some cases may exceed two years for a large GlobalView client or other large, complicated implementation. Although we monitor sales that have not yet been billed or installed, we do not view this metric as material in light of the recurring nature of our business. This is not a reported number, but it is used by management as a planning tool relating to resources needed to install services, and a means of assessing our performance against the installation timing expectations of our clients.
ADP’s average client retention is estimated at more than 10 years in Employer Services, more than 5 years in PEO Services and 10 or more years in Dealer Services, and has not varied significantly from period to period.
5
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, 2008, 2007 and 2006, ADP invested $611 million, $609 million and $551 million, respectively, from continuing operations, 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 significant remaining life cycles.
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 47,000 persons as of June 30, 2008.
6
Item 1A. Risk Factors
Our businesses routinely encounter and address risks, some of which may cause our future results to be different than we currently anticipate. Risk factors described below represent our current view of some of the most important risks facing our businesses and are important to understanding our business. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations , Quantitative and Qualitative Disclosures About Market Risk and the consolidated financial statements and related notes included in this Form 10-K. This discussion includes a number of forward-looking statements. You should refer to the description of the qualifications and limitations on forward-looking statements in the first paragraph under Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K. Unless otherwise indicated or the context otherwise requires, reference in this section to “we,” “ours,” “us” or similar terms means ADP, together with its subsidiaries. The level of importance of each of the following risks may vary from time to time.
Changes in laws and regulations may decrease our revenues and earnings
Portions of ADP’s business are subject to governmental regulations. Changes in governmental regulations may decrease our revenues and earnings and may require us to change the manner in which we conduct some of the aspects of our business. For example, a change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to government authorities would adversely impact interest income from investing funds that we collect from clients but have not yet remitted to the applicable taxing authorities or client employees, thus reducing our revenues and income from this source.
Security and privacy breaches may hurt our business
We store electronically personal information about our clients and employees of our clients. In addition, our retirement services systems maintain investor account information for retirement plans. There is no guarantee that the systems and procedures that we maintain to protect against unauthorized access to such information are adequate to protect against all security breaches. Any significant violations of data privacy could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and the growth of our business could be materially adversely affected.
Our systems may be subject to disruptions that could adversely affect our business and reputation
Many of our businesses are highly dependent on our ability to process, on a daily basis, a large number of complicated transactions. We rely heavily on our payroll, financial, accounting and other data processing systems. If any of these systems fail to operate properly or become disabled even for a brief period of time, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention or damage to our reputation. We have disaster recovery plans in place to protect our businesses against natural disasters, security breaches, military or terrorist actions, power or communication failures or similar events. Despite our preparations, in the event of a catastrophic occurrence, our disaster recovery plans may not be successful in preventing the loss of customer data, service interruptions, disruptions to our operations, or damage to our important facilities.
If we fail to adapt our technology to meet customer needs and preferences, the demand for our services may diminish
Our businesses operate in industries that are subject to rapid technological advances and changing customer needs and preferences. In order to remain competitive and responsive to customer demands, we continually upgrade, enhance and expand our existing products and services. If we fail to respond successfully to the technology challenges, the demand for our services may diminish.
Political and economic factors may adversely affect our business and financial results
Trade, monetary and fiscal policies, and political and economic conditions may substantially change. When there is a slowdown in the economy, employment levels and interest rates may decrease with a corresponding impact on our businesses. Customers may react to worsening conditions by reducing their spending on payroll and other outsourcing services or renegotiating their contracts with us. If any of these circumstances remain in effect for an extended period of time, there could be a material adverse effect on our financial results.
7
Change in our credit ratings could adversely impact our operations and lower our profitability
The major credit rating agencies periodically evaluate our creditworthiness and have consistently given us their highest long-term debt and commercial paper ratings. Failure to maintain high credit ratings on long-term and short-term debt could increase our cost of borrowing, reduce our ability to obtain intra-day borrowing required by our Employer Services business, and ultimately reduce our client interest revenue.
We may be unable to attract and retain qualified personnel
Our ability to grow and provide our customers with competitive services is partially dependent on our ability to attract and retain highly motivated people with the skills to serve our customers. Competition for skilled employees in the outsourcing and other markets in which we operate is intense and if we are unable to attract and retain highly skilled and motivated personnel, expected results from our operations may suffer.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
ADP owns 45 of its processing centers, other operational offices, sales offices and its corporate headquarters complex in Roseland, New Jersey, which aggregate approximately 4,110,251 square feet. None of ADP’s owned facilities is subject to any material encumbrances. ADP leases space for some of its processing centers, other operational offices and sales offices. All of these leases, which aggregate approximately 6,063,665 square feet in North America, Europe, South America (primarily Brazil), Asia, Australia and South Africa, expire at various times up to the year 2036. 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 Company is subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, the Company believes it has valid defenses with respect to the legal matters pending against it and the Company 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.
Item 4. Submission of Matters to a Vote of Security Holders
None
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Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for the Registrant’s Common Equity
The principal market for the Company’s common stock (symbol: ADP) is the New York Stock Exchange. The following table sets forth the reported high and low sales prices of the Company’s common stock based on the NYSE composite transactions, and the cash dividends per share of common stock declared, during the past two fiscal years. As of June 30, 2008, there were 41,011 holders of record of the Company’s common stock. As of such date, 274,146 additional holders held their common stock in “street name.”
| Price Per Share | Dividends | |||||
| High | Low | Per Share | ||||
| Fiscal 2008 quarter ended: | ||||||
| June 30 | $45.23 | $41.25 | $0.290 | |||
| March 31 | $44.66 | $37.74 | $0.290 | |||
| December 31 | $49.81 | $44.25 | $0.290 | |||
| September 30 | $49.38 | $43.91 | $0.230 | |||
| Fiscal 2007 quarter ended: | ||||||
| June 30 | $50.30 | $43.89 | $0.230 | |||
| March 31 | $51.50 | $46.85 | $0.230 | |||
| December 31 | $49.94 | $46.26 | $0.230 | |||
| September 30 | $48.30 | $42.50 | $0.185 | |||
On March 30, 2007, ADP completed the spin-off of its former Brokerage Services Group business. In the table above, market prices include the value of the Brokerage Services Group business through the date of the spin-off.
9
Issuer Purchases of Equity Securities
| (a) | (b) | (c) | (d) | |
| Total Number | ||||
| of Shares | Maximum | |||
| Purchased as Part | Number of Shares | |||
| of the Publicly | that may yet be | |||
| Announced | Purchased under | |||
| Common Stock | the Common | |||
| Total Number of | Average Price | Repurchase Plan | Stock Repurchase | |
| Period | Shares Purchased (1) | Paid per Share (2) | (3) | Plan (3) |
| April 1, 2008 to | ||||
| April 30, 2008 | 501,500 | $43.55 | 500,000 | 19,930,740 |
| May 1, 2008 to | ||||
| May 31, 2008 | 3,956,501 | $43.17 | 3,956,000 | 15,974,740 |
| June 1, 2008 to | ||||
| June 30, 2008 | 5,130,800 | $42.75 | 5,130,800 | 10,843,940 |
| Total | 9,588,801 | 9,586,800 |
(1) Pursuant to the terms of the Company’s restricted stock program, the Company made purchases of 1,500 shares during April 2008 and 501 shares during May 2008 at a price of $.10 per share under the terms of such program to repurchase stock granted to employees who have left the Company.
(2) The average price per share does not include the repurchases described in the preceding footnote.
(3) In March 2001, the Company received the Board of Directors’ approval to repurchase up to 50 million shares of the Company’s common stock. In November 2002, November 2005 and August 2006, the Company received the Board of Directors’ approval to repurchase an additional 35 million, 50 million and 50 million shares, respectively, of the Company’s common stock. There is no expiration date for the common stock repurchase plan.
10
Performance Graph
The following graph compares the cumulative return on the Company’s common stock (a) for the most recent five years with the cumulative return on the S&P 500 Index, a Peer Group Index (b) and an Old Peer Group Index (c) , assuming an initial investment of $100 on June 30, 2003, with all dividends reinvested.
(a) On March 30, 2007, the Company completed the spin-off of its former Brokerage Services Group business, comprised of Brokerage Services and Securities Clearing and Outsourcing Services, into an independent publicly traded company called Broadridge Financial Solutions, Inc. The cumulative returns of the Company’s common stock have been adjusted to reflect the spin-off.
(b) The Peer Group Index is comprised of the following companies:
| Administaff, Inc. | Intuit Inc. | |
| Computer Sciences Corporation | Paychex, Inc. | |
| Gevity HR, Inc. | The Ultimate Software Group, Inc. | |
| Global Payments Inc. | Total System Services, Inc. | |
| Hewitt Associates, Inc. | The Western Union Company |
(c) The Old Peer Group Index is comprised of the following companies:
| Ceridian Corporation | First Data Corporation | |
| Computer Sciences Corporation | Paychex, Inc. | |
| Electronic Data Systems Corporation | Total System Services, Inc. |
The components of the Peer Group Index were changed because the common stock of three of the companies in the Old Peer Group Index is no longer publicly traded.
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Item 6. Selected Financial Data
The following selected financial data is derived from our consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Quantitative and Qualitative Disclosures About Market Risk included in this Form 10-K.
| (Dollars and shares in millions, except per share amounts) | ||||||||||||||||||||
| Years ended June 30, | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
| Total revenues | $ | 8,776.5 | $ | 7,800.0 | $ | 6,835.6 | $ | 6,131.3 | $ | 5,575.7 | ||||||||||
| Total costs of revenues | $ | 4,680.1 | $ | 4,087.3 | $ | 3,603.7 | $ | 3,165.3 | $ | 2,794.7 | ||||||||||
| Gross profit | $ | 4,096.4 | $ | 3,712.7 | $ | 3,231.9 | $ | 2,966.0 | $ | 2,781.0 | ||||||||||
| Earnings from continuing operations before income taxes | $ | 1,812.0 | $ | 1,623.5 | $ | 1,361.2 | $ | 1,237.8 | $ | 1,117.8 | ||||||||||
| Net earnings from continuing operations | $ | 1,161.7 | $ | 1,021.2 | $ | 841.9 | $ | 780.6 | $ | 702.4 | ||||||||||
| Basic earnings per share from continuing operations | $ | 2.23 | $ | 1.86 | $ | 1.46 | $ | 1.34 | $ | 1.19 | ||||||||||
| Diluted earnings per share from continuing operations | $ | 2.20 | $ | 1.83 | $ | 1.45 | $ | 1.32 | $ | 1.18 | ||||||||||
| Basic weighted average shares outstanding | 521.5 | 549.7 | 574.8 | 583.2 | 591.7 | |||||||||||||||
| Diluted weighted average shares outstanding | 527.2 | 557.9 | 580.3 | 590.0 | 598.7 | |||||||||||||||
| Cash dividends declared per share | $ | 1.1000 | $ | 0.8750 | $ | 0.7100 | $ | 0.6050 | $ | 0.5400 | ||||||||||
| Adjusted return on equity (Note 1) | 27.5 | % | 23.7 | % | 17.4 | % | 15.5 | % | 13.8 | % | ||||||||||
| Return on equity from continuing operations (Note 2) | 22.7 | % | 18.3 | % | 14.3 | % | 13.9 | % | 13.0 | % | ||||||||||
| At year end: | ||||||||||||||||||||
| Cash, cash equivalents and marketable securities | $ | 1,660.3 | $ | 1,884.6 | $ | 2,461.3 | $ | 1,716.0 | $ | 1,918.2 | ||||||||||
| Total assets | $ | 23,734.4 | $ | 26,648.9 | $ | 27,490.1 | $ | 27,615.4 | $ | 21,120.6 | ||||||||||
| Long-term debt | $ | 52.1 | $ | 43.5 | $ | 74.3 | $ | 75.7 | $ | 76.2 | ||||||||||
| Stockholders’ equity | $ | 5,087.2 | $ | 5,147.9 | $ | 6,011.6 | $ | 5,783.9 | $ | 5,417.7 | ||||||||||
Note 1. U.S. GAAP requires net earnings of discontinued operations to be displayed separately in the Statements of Consolidated Earnings, and therefore we believe it is appropriate to disclose adjusted return on equity, excluding the effects of discontinued operations. Adjusted return on equity represents a non-GAAP measure used by management to evaluate the results of the business. The numerator of net earnings that is used in our calculation of adjusted return on equity excludes net earnings from discontinued operations. The denominator of adjusted return on equity excludes the average cumulative net earnings from discontinued operations for each of the five years since fiscal 2004 for which such returns are presented, as well as the equity impact of the spin-off of the Brokerage Services Group business, which was classified as a discontinued operation. As a result, adjusted return on equity, excluding the effects of discontinued operations has been calculated as net earnings from continuing operations divided by average stockholders’ equity, excluding the effects of discontinued operations as noted below.
| (In millions) | |||||||||||||||
| Years ended June 30, | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||
| Average total stockholders' equity | $ | 5,117.5 | $ | 5,579.8 | $ | 5,897.7 | $ | 5,600.7 | $ | 5,394.6 | |||||
| Less: | |||||||||||||||
| Cumulative effect of discontinued operations | 894.7 | 1,266.3 | 1,069.1 | 575.6 | 321.6 | ||||||||||
| Average total equity, excluding effects of discontinued operations | $ | 4,222.8 | $ | 4,313.5 | $ | 4,828.6 | $ | 5,025.1 | $ | 5,073.0 | |||||
Note 2. Return on equity from continuing operations has been calculated as net earnings from continuing operations divided by average total stockholders’ equity.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report and other written or oral statements made from time to time by ADP may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include: ADP’s success in obtaining, retaining and selling additional services to clients; the pricing of services and products; changes in laws regulating payroll taxes, professional employer organizations and employee benefits; overall market and economic conditions, including interest rate and foreign currency trends; competitive conditions; auto sales and related industry changes; employment and wage levels; changes in technology; availability of skilled technical associates and the impact of new acquisitions and divestitures. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These risks and uncertainties, along with the risk factors discussed above under “Item 1A.-Risk Factors,” should be considered in evaluating any forward-looking statements contained herein.
DESCRIPTION OF THE COMPANY AND BUSINESS SEGMENTS
ADP is one of the world’s largest providers of business outsourcing solutions. Leveraging nearly 60 years of experience, ADP offers a wide range of human resource (“HR”) , payroll, tax and benefits administration solutions from a single source. ADP is also a leading provider of integrated computing solutions to automotive, heavy truck, motorcycle, marine and recreational vehicle dealers throughout the world. The Company’s reportable segments are: Employer Services, PEO Services and Dealer Services. A brief description of each segment’s operations is provided below.
Employer Services
Employer Services offers a comprehensive range of HR information, payroll processing, tax and benefits administration services and products, including traditional and Web-based outsourcing solutions, that assist approximately 560,000 employers in the United States, Canada, Europe, South America (primarily Brazil), Australia and Asia to staff, manage, pay and retain their employees. Employer Services 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 services that extend beyond the traditional payroll and payroll tax filing services, such as 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.
PEO Services
PEO Services provides over 5,100 small and medium sized businesses with comprehensive employment administration outsourcing solutions through a co-employment relationship, including payroll, payroll tax filing, HR guidance, 401(k) plan administration, benefits administration, compliance services, health and workers’ compensation coverage and other supplemental benefits for employees.
Dealer Services
Dealer Services provides integrated dealer management systems (such a system is also known in the industry as a “DMS”) and other business management solutions to automotive, heavy truck, motorcycle, marine and recreational vehicle (“RV”) retailers in North America, Europe, South Africa and the Asia Pacific region. Over 25,000 automotive, heavy truck, motorcycle, marine and RV retailers in over 60 countries use our DMS products, other software applications, networking solutions, data integration, consulting and/or digital marketing services.
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EXECUTIVE OVERVIEW
We reported strong results in each of our business segments during the fiscal year ended June 30, 2008 (“fiscal 2008”). Consolidated revenues from continuing operations in fiscal 2008 grew 13%, to $8,776.5 million, as compared to $7,800.0 million in the fiscal year ended June 30, 2007 (“fiscal 2007”). Earnings from continuing operations before income taxes and net earnings from continuing operations increased 12% and 14%, respectively. Diluted earnings per share from continuing operations increased 20%, to $2.20 in fiscal 2008, from $1.83 per share in fiscal 2007, on fewer weighted average diluted shares outstanding.
Employer Services’ revenues increased 9% and PEO Services revenues increased 20% in fiscal 2008. Employer Services’ and PEO Services’ new business sales, which represent annualized recurring revenues anticipated from sales orders to new and existing clients, grew 8% worldwide, to approximately $1,142.8 million in fiscal 2008. In fiscal 2008, we grew average client funds balances 6.6 % as a result of new business and growth in our existing client base . The number of employees on our clients’ payrolls, “pays per control,” increased 1.3% in fiscal 2008. This employment metric represents over 141,000 payrolls of small to large businesses and reflects a broad range of U.S. geographic regions. Client retention improved 0.2 percentage points worldwide over last year’s record level. PEO Services’ revenues grew 20% in fiscal 2008 due to an 18% increase in the average number of worksite employees. Dealer Services’ revenues grew 9% in fiscal 2008 due to internal revenue growth and the effect of acquisitions.
In light of the challenging economic environment during fiscal 2008, we are especially pleased with the performance of our investment portfolio and the investment choices we made throughout the year. Our investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages or home equity loans, collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), credit default swaps, asset-backed commercial paper, auction rate securities, structured investment vehicles or non-investment-grade securities. We mitigate credit risk by investing in only investment-grade bonds. We own senior tranches of AAA fixed rate credit card, auto loan and other asset-backed securities, whose trusts predominately contain prime collateral. All collateral on asset-backed securities is performing as expected. ADP owns senior debt directly issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). We do not own subordinated debt, preferred stock or common stock of either of these agencies. ADP also owns mortgage pass-through securities that are guaranteed by Fannie Mae or Freddie Mac. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations.
Our product set and global breadth, depth and reach in the marketplace have never been stronger. During fiscal 2008 and fiscal 2007, the Company took efforts to divest certain non-strategic, slow-growing businesses. This allowed us to set our focus on our businesses that have strong underlying growth attributes and that operate in large, under-penetrated markets. We completed the tax-free spin-off of our former Brokerage Services Group business on March 30, 2007 into an independent publicly traded company called Broadridge Financial Solutions, Inc. We made the decision to spin-off this business for several reasons. First, we determined that the growth potential of the Brokerage Services Group business, while part of ADP, was expected to be lower than that of our other businesses. Further, the Brokerage Services Group business had operating models and long-term growth plans that were different than those of our other businesses. The spin-off allowed more concentrated focus by each management team on its own respective core business, which is expected to be more beneficial to each company’s stockholders, clients and associates.
In addition, during fiscal 2007, we divested Sandy Corporation, which was previously reported in our Dealer Services segment. During fiscal 2008, we finalized the sale of our Travel Clearing business, which was previously reported in our Other segment. We divested Sandy Corporation and Travel Clearing because they were non-strategic businesses that did not complement our other businesses. Moreover, the growth potential of these businesses was also believed to be slower than that of our other businesses.
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These transactions, along with our cash flows from operating activities, have allowed us to continue to focus on the objective of returning excess cash to our stockholders through our share buyback program and our cash dividends to stockholders. Subsequent to the completion of these transactions, the new ADP is a more focused company, which we believe has excellent growth potential for revenue and pretax earnings.
Our financial condition and balance sheet remain solid with cash and marketable securities of $1,660.3 million at June 30, 2008. Our net cash flows provided by operating activities were $1,772.2 million in fiscal 2008, as compared to $1,298.0 million in fiscal 2007. This increase exceeded our expectations due to the timing of certain collections of accounts receivable and the timing of payments of certain accruals.
RECLASSIFICATIONS WITHIN CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF CONSOLIDATED CASH FLOWS
The Company has reclassified funds held for clients and client funds obligations that had been previously presented outside of current assets and current liabilities, respectively, within the Consolidated Balance Sheets, to current assets and current liabilities, respectively, for all periods presented. Additionally, the Company has reclassified the net increase (decrease) in client funds obligations in the Statements of Consolidated Cash Flows from investing activities to financing activities for all periods presented.
RESULTS OF
Fiscal 2008 Compared to Fiscal 2007
(Dollars in millions, except per share amounts)
| Years ended June 30, | Change | |||||||||
| 2008 | 2007 | 2008 vs 2007 | ||||||||
| Total revenues | $ | 8,776.5 | $ | 7,800.0 | 13% | |||||
| Costs of revenues: | ||||||||||
| Operating expenses | 3,915.7 | 3,392.3 | 15% | |||||||
| Systems development and programming costs | 525.9 | 486.1 | 8% | |||||||
| Depreciation and amortization | 238.5 | 208.9 | 14% | |||||||
| Total cost of revenues | 4,680.1 | 4,087.3 | 15% | |||||||
| Selling, general and administrative expenses | 2,370.4 | 2,206.2 | 7% | |||||||
| Interest expense | 80.5 | 94.9 | (15)% | |||||||
| Total expenses | 7,131.0 | 6,388.4 | 12% | |||||||
| Other income, net | 166.5 | 211.9 | (21)% | |||||||
| Earnings from continuing operations before income taxes | $ | 1,812.0 | $ | 1,623.5 | 12% | |||||
| Margin | 21 | % | 21 | % | ||||||
| Provision for income taxes | $ | 650.3 | $ | 602.3 | 8% | |||||
| Effective tax rate | 35.9 | % | 37.1 | % | ||||||
| Net earnings from continuing operations | $ | 1,161.7 | $ | 1,021.2 | 14% | |||||
| Diluted earnings per share from continuing operations | $ | 2.20 | $ | 1.83 | 20% | |||||
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Total Revenues
Our consolidated revenues in fiscal 2008 grew 13%, to $8,776.5 million, due to increases in Employer Services of 9%, or $535.4 million, to $6,243.1 million, PEO Services of 20%, or $175.7 million, to $1,060.5 million, and Dealer Services of 9%, or $107.0 million, to $1,364.3 million. Our consolidated internal revenue growth, which represents revenue growth excluding the impact of acquisitions and divestitures, was 11% in fiscal 2008. Revenue growth was favorably impacted by $167.8 million, or 2%, due to fluctuations in foreign currency exchange rates.
Our consolidated revenues in fiscal 2008 include interest on funds held for clients of $684.5 million as compared to $653.6 million in fiscal 2007. The increase in the consolidated interest earned on funds held for clients resulted from the increase of 6.6% in our average client funds balances to $15.7 billion, offset by the decrease in the average interest rate earned to 4.4% in fiscal 2008 as compared to 4.5% in fiscal 2007.
Total Expenses
Our consolidated expenses increased $742.6 million, to $7,131.0 million in fiscal 2008, from $6,388.4 million in fiscal 2007. The increase in our consolidated expenses is due to the increase in our revenues, higher pass-through costs associated with our PEO business, an increase in our salesforce and implementation personnel, and higher expenses associated with Employer Services’ new business sales and implementation. In addition, consolidated expenses increased $142.1 million, or 2%, in fiscal 2008 due to fluctuations in foreign currency exchange rates.
Our total costs of revenues increased $592.8 million, to $4,680.1 million in fiscal 2008, from $4,087.3 million in fiscal 2007, due to increases in our operating expenses. Operating expenses increased $523.4 million, or 15%, in fiscal 2008 due to the increase in revenues described above, including the increases in PEO services, which has pass-through costs that are re-billable. The pass-through costs were $763.0 million and $640.7 million in fiscal 2008 and 2007, respectively. The increase in operating expenses is also due to an increase of approximately $131.7 million relating to compensation expenses associated with implementation and service personnel in Employer Services. Operating expenses also increased approximately $28.0 million due to the operating costs of our newly acquired businesses and approximately $73.6 million due to foreign currency fluctuations. Systems development and programming costs increased $39.8 million, or 8%, in fiscal 2008 compared to fiscal 2007 due to an increase in expenses of $5.1 million for our newly acquired businesses. Systems development and programming expenses also increased approximately $15.0 million due to foreign currency fluctuations. In addition, depreciation and amortization expenses increased $29.6 million, or 14%, in fiscal 2008 compared to fiscal 2007 due to increased amortization expenses of $10.2 million resulting from the intangible assets acquired with new businesses and the purchases of software and software licenses in fiscal 2008.
Selling, general and administrative expenses increased $164.2 million, or 7%, in fiscal 2008 as compared to fiscal 2007, which was attributable to the increase in salesforce personnel to support our new domestic business sales in Employer Services. This increase in salesforce personnel resulted in an increase of approximately $32.0 million of expenses. Selling , general and administrative expenses also increased approximately $34.5 million due to the selling, general and administrative costs of our newly acquired businesses and approximately $48.8 million due to foreign currency fluctuations. These increases were partially offset by a decrease in stock-based compensation expense of $8.0 million.
Interest expense decreased $14.4 million in fiscal 2008 as a result of lower average borrowings and lower average interest rates on our short-term commercial paper program. In fiscal 2008 and 2007, the Company’s average borrowings under the commercial paper program were $1.4 billion and $1.5 billion, respectively, at weighted average interest rates of 4.2% and 5.3%, respectively.
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Other Income, net
Other income, net, decreased $45.4 million in fiscal 2008 as compared to fiscal 2007. The Company recorded a gain on the sale of a building in fiscal 2008 of $16.0 million and a gain on the sale of a minority investment during fiscal 2007 of $38.6 million. Other income, net, also decreased $9.6 million due to net realized losses on available-for-sale securities of $1.3 million in fiscal 2008 as compared to net realized gains on available-for-sale securities of $8.3 million in fiscal 2007. Lastly, interest income on corporate funds decreased $15.5 million as a result of lower average daily balances and lower interest rates. Average daily balances declined from $3.6 billion in fiscal 2007 to $3.4 billion in fiscal 2008 due to the use of corporate funds for repurchases of common stock during fiscal 2008. The average interest rate earned on our corporate funds decreased from 4.6% in fiscal 2007 to 4.4% in fiscal 2008.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $188.5 million, or 12%, from $1,623.5 million in fiscal 2007 to $1,812.0 million in fiscal 2008 due to the increase in revenues and corresponding expenses discussed above. Overall margin of 21% in fiscal 2008 was unchanged from fiscal 2007.
Provision for Income Taxes
The effective tax rate in fiscal 2008 was 35.9%, as compared to 37.1% in fiscal 2007. The decrease in the effective tax rate is due to a favorable mix in income among state tax jurisdictions, as well as tax rate decreases in certain foreign tax jurisdictions. Additionally, during fiscal 2008 we recorded a reduction in the provision for income taxes of $12.4 million, which was related to the settlement of a state tax matter. This decreased the effective tax rate by approximately 0.7 percentage points in fiscal 2008. These decreases were partially offset by an increase in the provision for income taxes relating to the recording of the interest liability associated with unrecognized tax benefits as required under Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”). This increased the effective tax rate by approximately 0.6 percentage points in fiscal 2008.
Net Earnings from Continuing Operations and Diluted Earnings per Share from Continuing Operations
Net earnings from continuing operations increased 14%, to $1,161.7 million, for fiscal 2008, from $1,021.2 million in fiscal 2007, and the related diluted earnings per share from continuing operations increased 20%, to $2.20, in fiscal 2008. The increase in net earnings from continuing operations in fiscal 2008 reflects the increase in earnings from continuing operations before income taxes and a lower effective tax rate. These increases were offset by the decline in other income, net, of $45.4 million in fiscal 2008. This decrease was a result of lower transactional gains reported in fiscal 2008 of $22.6 million, lower net realized gains/losses on available-for-sale securities of $9.6 million and lower interest income on corporate funds of $15.5 million. The decrease in transactional gains in fiscal 2008 of $22.6 million was a result of a gain on the sale of a building of $16.0 million during fiscal 2008 and a gain on the sale of a minority investment of $38.6 million during fiscal 2007. The decrease in interest income on corporate funds was a result of lower average daily balances and lower interest rates. Average daily balances declined from $3.6 billion in fiscal 2007 to $3.4 billion in fiscal 2008 due to the use of corporate funds for repurchases of common stock during fiscal 2008. The average interest rate earned on our corporate funds decreased from 4.6% in fiscal 2007 to 4.4% in fiscal 2008.
The increase in diluted earnings per share from continuing operations in fiscal 2008 reflects the increase in net earnings from continuing operations and the impact of fewer weighted average diluted shares outstanding due to the repurchase of 32.9 million shares in fiscal 2008 and 40.2 million shares in fiscal 2007.
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Fiscal 2007 Compared to Fiscal 2006
(Dollars in millions, except per share amounts)
| Years ended June 30, | Change | |||||||||
| 2007 | 2006 | 2007 vs 2006 | ||||||||
| Total revenues | $ | 7,800.0 | $ | 6,835.6 | 14% | |||||
| Costs of revenues: | ||||||||||
| Operating expenses | 3,392.3 | 2,970.5 | 14% | |||||||
| Systems development and programming costs | 486.1 | 472.3 | 3% | |||||||
| Depreciation and amortization | 208.9 | 160.9 | 30% | |||||||
| Total cost of revenues | 4,087.3 | 3,603.7 | 13% | |||||||
| Selling, general and administrative expenses | 2,206.2 | 1,933.7 | 14% | |||||||
| Interest expense | 94.9 | 72.8 | 30% | |||||||
| Total expenses | 6,388.4 | 5,610.2 | 14% | |||||||
| Other income, net | 211.9 | 135.8 | 56% | |||||||
| Earnings from continuing operations before income taxes | $ | 1,623.5 | $ | 1,361.2 | 19% | |||||
| Margin | 21 | % | 20 | % | ||||||
| Provision for income taxes | $ | 602.3 | $ | 519.3 | 16% | |||||
| Effective tax rate | 37.1 | % | 38.2 | % | ||||||
| Net earnings from continuing operations | $ | 1,021.2 | $ | 841.9 | 21% | |||||
| Diluted earnings per share from continuing operations | $ | 1.83 | $ | 1.45 | 26% | |||||
Total Revenues
Our consolidated revenues in fiscal 2007 grew 14%, to $7,800.0, million due to increases in Employer Services of 11%, or $545.1 million, to $5,707.7 million, PEO Services of 26%, or $181.1 million, to $884.8 million, and Dealer Services of 15%, or $159.6 million, to $1,257.3 million. Our consolidated revenues, excluding the impact of acquisitions and divestitures, grew 12% in fiscal 2007 as compared to the prior year. Revenue growth was also favorably impacted by $81.1 million, or 1%, due to fluctuations in foreign currency rates.
Our consolidated revenues in fiscal 2007 include interest on funds held for clients of $653.6 million as compared to $549.8 million in the prior year. The increase in the consolidated interest earned on funds held for clients resulted from the increase of 8% in our average client funds balances to $14.7 billion, as well as the increase in the average interest rate earned to approximately 4.5% in fiscal 2007 as compared to 4.1% in the fiscal year ended June 30, 2006 (“fiscal 2006”).
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Total Expenses
Our consolidated expenses increased $778.2 million, from $5,610.2 million in fiscal 2006, to $6,388.4 million in fiscal 2007. The percentage increase in our consolidated expenses was proportionate to the increase in our revenues. Additionally, the increase was due to higher pass-through costs associated with our PEO business revenues, which have pass-through operating expenses, an increase in our salesforce and implementation personnel, higher expenses associated with our Employer Services’ new business sales and implementation and the impact of acquisitions. Consolidated expenses also increased $79.8 million, or 1%, due to fluctuations in foreign currency exchange rates.
Our total costs of revenues increased $483.6 million, to $4,087.3 million in fiscal 2007, from $3,603.7 million in fiscal 2006, due to increases in our operating expenses. Operating expenses increased $421.8 million due to the increase in revenues described above, including the increases in PEO revenues, which have pass-through costs that are re-billable, and higher compensation expenses associated with additional implementation and service personnel. The pass-through costs for our PEO revenues were $640.7 million in fiscal 2007, as compared to $511.0 million in fiscal 2006. In addition, operating expenses in fiscal 2007 increased approximately $136.0 million as a result of higher compensation expenses associated with additional implementation and service personnel, including approximately $47.0 million of spending on new business opportunities in Employer Services and PEO Services. Our new business opportunities relate to our Human Resource Business Process Outsourcing (“HR BPO”) opportunities, which focus on the outsourcing of integrated multiple processes – such as payroll, HR, and benefits administration. This spending was targeted at expanding our Comprehensive Outsourcing Services (“COS”) product for larger employers, our PEO Services business, our ADP Resource ® product, which is an integrated, flexible HR and payroll-based service offering, and GlobalView ® , which is our outsourcing offering for multi-national and global organizations. Lastly, our operating expenses increased $30.0 million due to fluctuations in foreign currency rates and increased approximately $64.6 million due to the operating costs of new businesses acquired. Systems development and programming costs increased $20.4 million due to the increase in headcount and the additional expenses associated with our new businesses acquired and increased $6.1 million due to fluctuations in foreign currency exchange rates. These increases in systems development and programming costs were offset by lower compensation expenses of approximately $16.0 million associated with the increased resources at our off-shore locations and smartshoring facilities. In addition, depreciation and amortization expenses increased $48.0 million due to increased amortization expenses of $28.2 million resulting from the intangible assets acquired with new businesses and the purchases of software and software licenses in fiscal 2007. In addition, depreciation and amortization expenses increased due to fiscal 2006 capital expenditures of approximately $100 million related to the consolidation of our data center facilities.
Selling, general and administrative expenses increased $272.5 million, to $2,206.2 million in fiscal 2007, due to higher selling expenses in Employer Services and PEO Services, which resulted in an increase in expenses of approximately $97.5 million and $18.3 million, respectively. The $97.5 million increase in expenses in Employer Services included approximately $13 million for expenses relating to our HR BPO opportunities discussed above. Selling, general and administrative expenses also increased approximately $73.8 million due to the selling, general and administrative expenses related to our business acquisitions in fiscal 2007 and increased $20.1 million due to fluctuations in foreign currency rates. Additionally, we had an increase in restructuring charges of $21.5 million, which primarily related to severance.
Interest expense increased $22.1 million in fiscal 2007 as a result of higher average borrowings and higher interest rates on our short-term commercial paper program. In fiscal 2007 and 2006, the Company’s average borrowings under the commercial paper program were $1.5 billion and $1.4 billion, respectively, at a weighted average interest rate of 5.3% and 4.1%, respectively.
Other Income, net
Other income, net, increased $76.1 million in fiscal 2007 due to a gain of $38.6 million on the sale of a minority investment, an increase of $7.5 million of realized gains on our available-for-sale securities and a decrease of $5.4 million of realized losses on our available-for-sale securities. Additionally, other income, net, included an increase in interest income on corporate funds of $24.6 million as a result of the higher average interest rates earned on our corporate balances, which increased to 4.6% in fiscal 2007 as compared to 4.0% in the prior year and our average corporate balances increased to $3.6 billion in fiscal 2007 as compared to $3.5 billion in the prior year.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $262.3 million, or 19%, to $1,623.5 million in fiscal 2007 due to the increase in revenues and expenses discussed above. Overall margin increased from 20% in fiscal 2006 to 21% in fiscal 2007.
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Provision for Income Taxes
The effective tax rate in fiscal 2007 was 37.1%, as compared to 38.2% in fiscal 2006. The decrease in the effective tax rate is attributable to a favorable mix in income among tax jurisdictions and to $10.0 million of income tax expense recorded in fiscal 2006 for the repatriation in fiscal 2006 of approximately $250.0 million of eligible dividends from non-U.S. subsidiaries.
Net Earnings from Continuing Operations and Diluted Earnings per Share from Continuing Operations
Net earnings from continuing operations in fiscal 2007 increased 21%, to $1,021.2 million, from $841.9 million in fiscal 2006, and the related diluted earnings per share from continuing operations increased 26%, to $1.83. The diluted earnings per share from continuing operations of $1.83 includes a net one-time gain of approximately $20.3 million, net of taxes, from the sale of a Dealer Services non-core minority investment, offset by restructuring charges, which was accretive to diluted earnings per share from continuing operations by approximately $0.03 per share. The increase in net earnings from continuing operations in fiscal 2007 reflects the increase in earnings from continuing operations before income taxes as a result of increased revenues offset by expenses and a lower effective tax rate. The increase in diluted earnings per share from continuing operations in fiscal 2007 reflects the increase in net earnings from continuing operations and the impact of fewer shares outstanding due to the repurchase of 40.2 million shares in fiscal 2007 and 29.6 million shares in fiscal 2006.
ANALYSIS OF REPORTABLE SEGMENTS
Revenues
| (Dollars in millions) | ||||||||||||||||
| Years ended June 30, | Change | |||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | ||||||||||||
| Employer Services | $ | 6,243.1 | $ | 5,707.7 | $ | 5,162.6 | 9% | 11% | ||||||||
| PEO Services | 1,060.5 | 884.8 | 703.7 | 20% | 26% | |||||||||||
| Dealer Services | 1,364.3 | 1,257.3 | 1,097.7 | 9% | 15% | |||||||||||
| Other | 4.9 | (1.5 | ) | 36.9 | 100+% | (100)+% | ||||||||||
| Reconciling items: | ||||||||||||||||
| Foreign exchange | 118.7 | (45.4 | ) | (108.5 | ) | |||||||||||
| Client funds interest | (15.0 | ) | (2.9 | ) | (56.8 | ) | ||||||||||
| Total revenues | $ | 8,776.5 | $ | 7,800.0 | $ | 6,835.6 | 13% | 14% | ||||||||
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Earnings from Continuing Operations before Income Taxes
| (Dollars in millions) | |||||||||||||||||
| Years ended June 30, | Change | ||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | |||||||||||||
| Employer Services | $ | 1,601.4 | $ | 1,412.4 | $ | 1,259.3 | 13 | % | 12 | % | |||||||
| PEO Services | 104.9 | 80.4 | 54.9 | 30 | % | 46 | % | ||||||||||
| Dealer Services | 232.0 | 204.4 | 159.7 | 14 | % | 28 | % | ||||||||||
| Other | (238.9 | ) | (177.0 | ) | (143.9 | ) | (35 | )% | (23 | )% | |||||||
| Reconciling items: | |||||||||||||||||
| Foreign exchange | 15.9 | (7.1 | ) | (12.1 | ) | ||||||||||||
| Client funds interest | (15.1 | ) | (2.9 | ) | (56.8 | ) | |||||||||||
| Cost of capital charge | 111.8 | 113.3 | 100.1 | ||||||||||||||
| Total earnings from continuing operations before income taxes | $ | 1,812.0 | $ | 1,623.5 | $ | 1,361.2 | 12 | % | 19 | % | |||||||
The fiscal 2007 and 2006 reportable segments’ revenues and earnings from continuing operations before income taxes have been adjusted to reflect updated fiscal 2008 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 from continuing operations before income taxes and results in the elimination of this adjustment in consolidation.
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. Lastly, various income and expense items, including certain non-recurring gains and losses and stock-based compensation expenses of $123.6 million, $130.5 million and $142.7 million in fiscal 2008, 2007 and 2006, respectively, are recorded in “Other.”
In addition, the reconciling items include an adjustment for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services and PEO Services at a standard rate of 4.5%. This allocation is made for management reasons so that the reportable segments’ 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 from continuing operations before income taxes and results in the elimination of this adjustment in consolidation.
Finally, the reportable segments’ results include a cost of capital charge related to the funding of acquisitions and other investments. This charge is a reconciling item to earnings from continuing operations before income taxes and results in the elimination of this charge in consolidation.
Employer Services
Fiscal 2008 Compared to Fiscal 2007
Revenues
Employer Services' revenues increased 9% in fiscal 2008 due to new business started in the period, an increase in the number of employees on our clients’ payrolls, the impact of price increases, which contributed approximately 2% to our revenue growth, and an increase in average client funds balances, which increased interest revenues. Internal revenue growth, which represents revenue growth excluding the impact of acquisitions and divestitures, was approximately 8% for fiscal 2008. Revenue from our traditional payroll and payroll tax filing business grew 7%. The number of employees on our clients’ payrolls, “pays per control,” in the United States increased 1.3% in fiscal 2008. This employment metric represents over 141,000 payrolls of small to large businesses and reflects a broad range of U.S. geographic regions. Our worldwide client retention increased 0.2 percentage points in fiscal 2008, as compared to fiscal 2007. Revenues from our “beyond payroll” services, excluding PEO Services, which is a separate reportable segment, increased 16% in fiscal 2008 due to an increase in our Time and Labor Management services revenues of 17% and due to the impact of business acquisitions. The increase in revenues related to our Time and Labor Management services was due to an increase in the number of clients utilizing these services.
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We credit Employer Services with interest on client funds at a standard rate of 4.5%; therefore, Employer Services’ results are not influenced by changes in interest rates. Interest on client funds recorded within the Employer Services segment increased $41.4 million in fiscal 2008, which accounted for 1% growth in Employer Services’ revenues. This increase was due to the increase in the average client funds balances as a result of new business started in the period, growth in our existing client base and growth in wages. The average client funds balances were $15.5 billion in fiscal 2008 and $14.6 billion in fiscal 2007, representing an increase of 6.4%.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $189.0 million, or 13%, to $1,601.4 million in fiscal 2008. Earnings from continuing operations before income taxes for fiscal 2008 grew at a faster rate than revenues due to the improvement in margins for our services resulting from the leveraging of our expense structure with increased revenues. This was offset, in part, by higher compensation expenses of $131.7 million for implementation and service personnel, as well as higher selling expenses of $38.0 million attributable to the increase in salesforce personnel in Employer Services. Lastly, our expenses increased by approximately $42.2 million as a result of acquisitions of businesses in Employer Services.
Fiscal 2007 Compared to Fiscal 2006
Revenues
Employer Services’ revenues increased $545.1 million, or 11%, to $5,707.7 million in fiscal 2007 due to new business started in the period, an increase in the number of employees on our clients’ payrolls in the United States, increased client retention, the impact of price increases, which contributed approximately 2% to our revenue growth, and an increase in client funds balances, which increased interest revenues. Internal revenue growth was approximately 9% for fiscal 2007. Revenue from our traditional payroll and payroll tax filing business grew 9%. The number of employees on our clients’ payrolls, “pays per control,” increased 2.3% in the United States . Our worldwide client retention improved 0.1 percentage point over last year’s record level. Revenues from our “beyond payroll” services, excluding PEO Services , increased 18% in fiscal 2007 due to an increase in our Time and Labor Management services revenues of 22%, as well as the impact of certain business acquisitions in fiscal 2007. The increase in revenues related to our Time and Labor Management services was due to an increase in the number of clients utilizing these services.
We credit Employer Services with interest on client funds at a standard rate of 4.5%; therefore, Employer Services’ results are not influenced by changes in interest rates. Interest on client funds recorded within the Employer Services segment increased $48.8 million in fiscal 2007, which represented 1% growth in Employer Services’ revenues, due to the increase in the average client funds balances as a result of increased Employer Services’ new business and growth in our existing client base. The average client funds balances were $14.6 billion in fiscal 2007 as compared to $13.5 billion in fiscal 2006, an increase of 8%.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $153.1 million, or 12%, to $1,412.4 million, in fiscal 2007. Earnings from continuing operations before income taxes in fiscal 2007 grew at a faster rate than revenues due to the improvement in margins for our services from the leveraging of our expense structure with the increased revenues. This was offset, in part, by higher operating expenses from the increase of approximately $226.5 million in compensation expenses for implementation, service and salesforce personnel, and spending on new business opportunities related to our HR BPO offerings of approximately $7 million. This spending on new business opportunities was targeted at expanding our COS product for larger employers and our ADP Resource ® product, as well as our GlobalView ® product, which is our outsourcing offering for multi-national and global organizations. Lastly, earnings from continuing operations before income taxes were negatively impacted by approximately $8.4 million related to six acquisitions made in fiscal 2007.
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PEO Services
Fiscal 2008 Compared to Fiscal 2007
Revenues
PEO Services’ revenues increased 20% in fiscal 2008 due to an 18% increase in the average number of worksite employees. The increase in the average number of worksite employees was due to new client sales and the net increase in the number of worksite employees at existing clients. Additionally, benefits related revenues, which are billed to our clients and have an equal amount of cost in operating expenses, increased $115.8 million, or 23%, due to the increase in the average number of worksite employees, as well as increases in health care costs. Administrative revenues, which represent the fees for our services that are billed based upon a percentage of wages related to worksite employees, increased $29.4 million, or 17%, due to the increase in the number of average worksite employees and price increases.
We credit PEO Services with interest on client funds at a standard rate of 4.5%; therefore, PEO Services’ results are not influenced by changes in interest rates. Interest on client funds recorded within the PEO Services segment increased $1.7 million in fiscal 2008 due to the increase in the average client funds balances as a result of increased PEO Services’ new business and growth in our existing client base. The average client funds balances were $0.2 billion in fiscal 2008 and $0.1 billion in fiscal 2007.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $24.5 million, or 30%, to $104.9 million in fiscal 2008. This increase was primarily attributable to the increase in revenues described above, net of the related cost of providing benefits and workers compensation coverage and payment of state unemployment taxes for worksite employees, which are included in costs of revenues. This increase was partially offset by an increase in our operating costs and selling expenses. In fiscal 2008, our cost of providing benefits to worksite employees increased $116.1 million over fiscal 2007. Our expenses associated with new business sales increased $12.2 million as a result of growth in our salesforce and an increase in sales over fiscal 2007. In addition, the costs of providing our services increased $14.0 million in fiscal 2008.
Fiscal 2007 Compared to Fiscal 2006
Revenues
PEO Services’ revenues increased $181.1 million, or 26%, to $884.8 million in fiscal 2007. The increase in revenues was primarily due to a 22% increase in the average number of worksite employees in fiscal 2007. The increase in the average number of worksite employees was due to new client sales, improved client retention and the net increase in the number of worksite employees at existing clients. Additionally, benefit related revenues increased $112.5 million, or 29%, due to the increase in the average number of worksite employees in fiscal 2007, as well as increases in health care costs, which were passed on to clients. Administrative revenues increased $33.8 million in fiscal 2007, or 24%, due to the increase in the number of average worksite employees and price increases, which are based upon a percentage of the salaries related to worksite employees.
We credit PEO Services with interest on client funds at a standard rate of 4.5%; therefore, PEO Services’ results are not influenced by changes in interest rates. Interest on client funds recorded within the PEO Services segment increased $1.2 million in fiscal 2007, due to the increase in the average client funds balances as a result of increased PEO Services’ new business and growth in our existing client base. The average client funds balances were $0.1 billion in both fiscal 2007 and 2006.
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Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $25.5 million, or 46%, to $80.4 million in fiscal 2007. This increase was primarily attributable to the increase in revenues described above, net of the related cost of providing benefits and workers compensation coverage and payment of state unemployment taxes for worksite employees, which are included in costs of revenues, and contributed to a $52.1 million increase in our earnings from continuing operations in fiscal 2007 as compared to fiscal 2006. This increase was primarily attributable to 22% growth in the average number of worksite employees, price increases, and improvement in margins on the workers compensation and state unemployment components of PEO Services’ offering. The increase in earnings from continuing operations before income taxes of $52.1 million was partially offset by an increase in our cost of services of $9.8 million in fiscal 2007 as compared to fiscal 2006. In addition, our expenses associated with new business sales increased $12.2 million in fiscal 2007, primarily as a result of growth in our salesforce and an increase in sales over fiscal 2006 of 14%. Lastly, selling, general and administrative expenses increased $4.6 million primarily as a result of the growth in the business.
Dealer Services
Fiscal 2008 Compared to Fiscal 2007
Revenues
Dealer Services' revenues increased $107.0 million, or 9%, to $1,364.3 million in fiscal 2008. The increase in revenues in fiscal 2008 was driven by both internal revenue growth and by acquisitions. Internal revenue growth, which represents the revenue growth excluding the impact of acquisitions and divestitures, was approximately 6% in both fiscal 2008 and fiscal 2007. Revenues increased for our dealer business systems in North America by $59.1 million, to $1,012.9 million in fiscal 2008 due to growth in our key products. The growth in our key products was driven by the increased users for Application Service Provider (“ASP”) managed services, growth in our Digital Marketing strategic initiatives, increased Credit Check and Computerized Vehicle Registration (“CVR”) transaction volume, and new network and hosted IP telephony installations. In addition, revenues increased $39.9 million due to business acquisitions in the fourth quarter of the fiscal year 2007 as well as in fiscal 2008.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $27.6 million, or 14%, to $232.0 million in fiscal 2008 due to the increase in revenues of our dealer business systems and contributions from recent acquisitions. These increases were offset by an increase in operating expenses as a result of an increase in headcount to support new business sales and the timing of installations during the year. Lastly, our expenses increased by approximately $37.0 million as a result of acquisitions of businesses during fiscal 2008.
Fiscal 2007 Compared to Fiscal 2006
Revenues
Dealer Services’ revenues increased $159.6 million, or 15%, to $1,257.3 million in fiscal 2007. The increase in revenues in fiscal 2007 was driven by both internal revenue growth and by acquisitions. Revenues increased for our dealer business systems in North America by $74.3 million, to $953.8 million, due to growth in our key services. The growth in our key services was driven by the increased users for ASP managed services, increased Credit Check and CVR transaction volume, new network installations and increased market penetration of our Digital Marketing services. Internal revenue growth was approximately 6% for fiscal 2007.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $44.7 million, to $204.4 million, in fiscal 2007, due to the increases in revenues of our dealer business systems and contributions from recent acquisitions. Overall margin improved to 16% in fiscal 2007, from 15% in fiscal 2006, driven by growth in the international market due to the acquisition of Kerridge Computer Company Ltd. in fiscal 2006 and cost savings achieved from the integration of Kerridge in fiscal 2007. Lastly, earnings from continuing operations before income taxes also improved as a result of a decline in restructuring expenses of $5.6 million, which represented the expenses recorded in fiscal 2006 relating to the integration of Kerridge.
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Other
The primary components of “Other” are miscellaneous processing services, and corporate allocations and expenses, including stock-based compensation expense reported in net earnings from continuing operations of $123.6 million, $130.5 million and $142.7 million in fiscal 2008, 2007 and 2006, respectively. Additionally, certain non-recurring gains and losses, including a gain on the sale of a building of $16.0 million in fiscal 2008 and a gain of $38.6 million on the sale of a minority interest investment in fiscal 2007, are included in “Other.”
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our financial condition and balance sheet remain strong. At June 30, 2008, cash and marketable securities were $1,660.3 million. The ratio of long-term debt-to-equity was 1.0% at June 30, 2008. At June 30, 2008, working capital from continuing operations before funds held for clients and client funds obligations was $1,343.1 million, as compared to $1,534.8 million at June 30, 2007. This fluctuation is due to a decrease in cash and short-term marketable securities of $232.7 million.
Our principal sources of liquidity are derived from cash generated through operations and through 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 $6.0 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.
On March 30, 2007, we completed the tax free spin-off of our former Brokerage Services Group business, comprised of our former Brokerage Services and Securities Clearing and Outsourcing Services segments, into an independent publicly traded company called Broadridge Financial Solutions, Inc (“Broadridge”). As a result of the spin-off, ADP stockholders of record on March 23, 2007 (the “record date”) received one share of Broadridge common stock with a par value $0.01 per share, for every four shares of ADP common stock held by them on the record date and cash for any fractional shares of Broadridge common stock. We have classified the results of operations of the spun-off business as discontinued operations for all periods presented. Additionally, on March 30, 2007, we recorded a decrease to retained earnings of $1,125.2 million for the non-cash reduction in net assets of the Brokerage Services Group business related to the spin-off, offset by an increase to retained earnings of $690.0 million related to the cash dividend received from Broadridge as part of the spin-off.
In February 2007, we notified holders of our zero coupon convertible subordinated notes that we would redeem all the notes that were outstanding as of the end of the business day on March 19, 2007 (the “redemption date”). Prior to the redemption date, notes with a face value of approximately $39 million were converted into approximately one million shares of the Company’s common stock. We subsequently redeemed the remaining 352 notes outstanding as of the redemption date at a redemption price of $775 for each note, representing the accrued value of each note at the time of the redemption.
Net cash flows provided by operating activities were $1,772.2 million in fiscal 2008, as compared to $1,298.0 million in fiscal 2007. The increase was due to a $97.0 million increase in net earnings compared to the prior year. In addition, the increase was due to a $132.5 million increase in accrued expenses and other liabilities due to an increase in payroll and payroll-related accruals due to the timing of payments and a $289.8 million decrease in accounts receivable due to improvement in the collections of our accounts receivable and the collection in fiscal 2008 of a large direct debit receivable that was outstanding at June 30, 2007. The increases in cash provided were offset by a $31.2 million increase in our pension plan contributions.
Net cash flows provided by investing activities in fiscal 2008 totaled $2,613.9 million, as compared to $276.9 million used in fiscal 2007. This increase to funds provided was due to a net decrease in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations of $4,717.6 million, a decrease in cash paid for intangibles of $53.4 million and a decrease in net cash paid for acquisitions of $349.6 million. Additionally, proceeds received from the sale of businesses increased by $95.2 million. These increases in cash provided were partially offset by the change in net purchases/proceeds from our marketable securities of $1,657.5 million, the $38.6 million of proceeds from the sale of a minority investment during fiscal 2007 and the $660.1 million of net dividends received from Broadridge during fiscal 2007.
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Cash flows used in financing in fiscal 2008 totaled $5,270.7 million as compared to $1,176.7 million in fiscal 2007. The increase in cash flows used was due to a $4,188.0 million decrease in client funds obligations and a $87.6 million increase in the amount of dividends paid in fiscal 2008 compared to fiscal 2007. Additionally, there was a decrease in proceeds from stock purchase plan and exercises of stock options of $104.5 million. The increase in cash flows used was offset by a decrease in cash paid for the repurchases of common stock of $395.6 million. We purchased 32.9 million shares of our common stock at an average price per share of $44.44 during fiscal 2008. As of June 30, 2008, we had remaining Board of Director’s authorization to purchase up to 10.8 million additional shares. In August 2008, the Company received the Board of Directors’ approval to purchase up to 50 million additional shares of the Company’s common stock.
In June 2008, we entered into a $2.25 billion, 364-day credit agreement with a group of lenders. The 364-day facility replaced the Company’s prior $1.75 billion 364-day facility. We also have a $1.5 billion credit facility and a $2.25 billion credit facility that mature in June 2010 and June 2011, respectively. The five-year facilities contain accordion features under which the aggregate commitments can each be increased by $500 million, subject to the availability of additional commitments. The interest rate applicable to the borrowings is tied to LIBOR or prime rate depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing. We are also required to pay facility fees on the credit agreements. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and to provide funding for general corporate purposes, if necessary. There were no borrowings through June 30, 2008 under the credit agreements.
We maintained a U.S. short-term commercial paper program, which provided for the issuance of up to $5.5 billion in aggregate maturity value of commercial paper at the Company’s discretion. In July 2008, we increased the U.S. short-term commercial paper program to provide for the issuance of up to $6.0 billion in aggregate maturity value. Our commercial paper program is rated A-1+ by Standard and Poor’s and Prime-1 by Moody’s. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At June 30, 2008 and 2007, there was no commercial paper outstanding. In fiscal 2008 and 2007, the Company’s average borrowings were $1.4 billion and $1.5 billion, respectively, at a weighted average interest rate of 4.2% and 5.3%, respectively. The weighted average maturity of the Company’s commercial paper was less than two days in both fiscal 2008 and fiscal 2007.
Our U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities. These agreements generally have terms ranging from overnight to up to five business days. At June 30, 2008, we had an $11.8 million obligation outstanding related to reverse repurchase agreements. The term of the reverse repurchase transaction matured on July 2, 2008 and the outstanding obligation was repaid. At June 30, 2007, there were no outstanding obligations under reverse repurchase agreements. In fiscal 2008 and 2007, the Company had average outstanding balances under reverse repurchase agreements of $360.4 million and $141.6 million, respectively, at a weighted average interest rate of 3.4% and 4.4%, respectively.
Capital expenditures for continuing operations in fiscal 2008 were $186.4 million, as compared to $169.7 million in fiscal 2007 and $252.8 million in fiscal 2006. The capital expenditures in fiscal 2008 related to data center and other facility improvements to support our operations. We expect capital expenditures in fiscal 2009 to be approximately $220 million.
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The following table provides a summary of our contractual obligations as of June 30, 2008:
(In millions)
Payments due by period
Less
than
1-3
3-5
More
than
Contractual Obligations
1 year
years
years
5 years
Unknown
Total
Debt Obligations (1)
$
2.7
$
5.6
$
28.7
$
17.8
$
-
$
54.8
Operating Lease and Software
License Obligations (2)
252.9
400.0
199.6
50.8
-
903.3
Purchase Obligations (3)
107.7
121.7
79.9
-
-
309.3
Obligations related to Unrecognized Tax Benefits (4)
80.0
-
-
-
324.2
404.2
Other long-term liabilities reflected
on our
Consolidated Balance Sheets:
Compensation and Benefits (5)
29.5
119.1
69.7
99.6
34.8
352.7
Total
$
472.8
$
646.4
$
377.9
$
168.2
$
359.0
$
2,024.3
| (1) These amounts represent the principal repayments of our debt and are included on our Consolidated Balance Sheets. See Note 11 to the consolidated financial statements for additional information about our debt and related matters. The estimated interest payments due by corresponding period above are $2.2 million, $4.5 million, $4.0 million, and $7.1 million, respectively, which have been excluded. |
| (2) Included in these amounts are various facilities and equipment leases and software license agreements. We enter into operating leases in the normal course of business relating to facilities and equipment, as well as the licensing of software. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts or if we enter into additional operating lease agreements. |
| (3) Purchase obligations primarily relate to purchase and maintenance agreements on our software, equipment and other assets. |
| (4) We made the determination that net cash payments expected to be paid within the next 12 months, related to unrecognized tax benefits of $404.2 million at June 30, 2008, may be up to $80 million. The Company is unable to make reasonably reliable estimates as to the period beyond the next 12 months in which cash payments related to unrecognized tax benefits are expected to be paid. |
| (5) Compensation and benefits primarily relates to amounts associated with our employee benefit plans and other compensation arrangements. |
In addition to the obligations quantified in the table above, we had obligations for the remittance of funds relating to our payroll and payroll tax filing services. As of June 30, 2008, the obligations relating to these matters, which are expected to be paid in fiscal 2009, total $15,294.7 million and were recorded in client funds obligations on our Consolidated Balance Sheets. We had $15,418.9 million of cash and marketable securities that have been impounded from our clients to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as of June 30, 2008.
The Company’s wholly-owned subsidiary, ADP Indemnity, Inc., provides workers’ compensation and employer liability insurance coverage for our PEO worksite employees. We have secured specific per occurrence and aggregate stop loss reinsurance from third-party carriers that cap losses that reach a certain level in each policy year. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability for the PEO business. In both fiscal 2008 and 2007, we received premiums of $51.4 million. In fiscal 2008 and 2007, we paid claims of $38.1 million and $27.4 million, respectively. At June 30, 2008, our cash and marketable securities included balances totaling approximately $189.1 million to cover the actuarially-estimated cost of workers’ compensation claims for the policy years that the PEO worksite employees were covered by ADP Indemnity, Inc.
In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the performance of our services and products. We do not expect any material losses related to such representations and warranties.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, short-term marketable securities, and long-term marketable securities) and client funds assets (funds that have been collected from clients but not yet remitted to the applicable tax authorities or client employees).
In order to provide more cost-effective liquidity and maximize our interest income, we utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. In these instances, a portion of this portfolio is considered and reported within the corporate investment balances in order to reflect the pure client funds assets and related obligations. Interest income on the corporate investment portion of the portfolio is reported in other income, net on our Statements of Consolidated Earnings.
Our corporate investments are invested in cash equivalents and highly liquid, investment grade securities. These assets are available for repurchases of common stock for treasury and/or acquisitions, as well as other corporate operating purposes. All of our short-term and long-term marketable securities are classified as available-for-sale securities.
Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary goals. Consistent with those goals, we also seek to maximize interest income and to minimize the volatility of interest income. Client funds assets are invested in highly liquid, investment-grade marketable securities with a maximum maturity of 10 years at time of purchase and money market securities and other cash equivalents. At June 30, 2008, approximately 87% of the available-for-sale securities categorized as U.S. Treasury and direct obligations of U.S. government agencies was invested in senior debt directly issued by the Federal Home Loan Banks, Fannie Mae and Freddie Mac.
We have established credit quality, maturity, and exposure limits for our investments. The minimum allowed credit rating for fixed income securities is BBB and for asset-backed and mortgage-backed securities is AAA. The maximum maturity at time of purchase for a BBB-rated security is 5 years, for a single A-rated securities is 7 years, and for AA-rated and AAA-rated securities is 10 years. Commercial paper must be rated A1/P1 and, for time deposits, banks must have a Financial Strength Rating of C or better.
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Details regarding our overall investment portfolio are as follows:
| (Dollars in millions) | ||||||||||||
| Years ended June 30, | 2008 | 2007 | 2006 | |||||||||
| Average investment balances at cost: | ||||||||||||
| Corporate investments | $ | 3,387.0 | $ | 3,556.8 | $ | 3,487.8 | ||||||
| Funds held for clients | 15,654.3 | 14,682.9 | 13,566.2 | |||||||||
| Total | $ | 19,041.3 | $ | 18,239.7 | $ | 17,054.0 | ||||||
| Average interest rates earned exclusive of | ||||||||||||
| realized gains/ (losses) on: | ||||||||||||
| Corporate investments | 4.4 | % | 4.6 | % | 4.0 | % | ||||||
| Funds held for clients | 4.4 | % | 4.5 | % | 4.1 | % | ||||||
| Total | 4.4 | % | 4.5 | % | 4.0 | % | ||||||
| Realized gains on available-for-sale securities | $ | 10.1 | $ | 20.8 | $ | 13.3 | ||||||
| Realized losses on available-for-sale securities | (11.4 | ) | (12.5 | ) | (17.9 | ) | ||||||
| Net realized (losses)/ gains | $ | (1.3 | ) | $ | 8.3 | $ | (4.6 | ) | ||||
| As of June 30: | ||||||||||||
| Net unrealized pre-tax gains/ (losses) on | ||||||||||||
| available-for-sale securities | $ | 142.1 | $ | (184.9 | ) | $ | (312.9 | ) | ||||
| Total available-for-sale securities at fair value | $ | 15,066.4 | $ | 13,369.4 | $ | 13,612.8 | ||||||
In fiscal 2008, approximately 25% of our overall investment portfolio was invested in cash and cash equivalents and, therefore, was impacted by changes in short-term interest rates. The other 75% of our investment portfolio was invested in fixed-income securities, with varying maturities of 10 years or less, which were also subject to interest rate risk including reinvestment risk.
Factors that influence the earnings impact of the interest rate changes include, among others, the amount of invested funds and the overall portfolio mix between short-term and long-term investments. This mix varies and is impacted by daily interest rate changes. A hypothetical change in both short-term interest rates ( e.g. , overnight interest rates or the Fed Funds rates) and intermediate-term interest rates of 25 basis points applied to the estimated fiscal 2009 average investment balances and any related borrowings would result in approximately a $7 million impact to earnings before income taxes over a twelve-month period. A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated fiscal 2009 average short-term investment balances and any related short-term borrowings would result in approximately a $3 million impact to earnings before income taxes over a twelve-month period.
The Company is exposed to credit risk in connection with our available-for-sale securities through the possible inability of the borrowers to meet the terms of the securities. The Company limits credit risk by investing in AAA and AA rated securities, as rated by Moody’s, Standard & Poor’s, and for Canadian securities, Dominion Bond Rating Service. At June 30, 2008, approximately 90% of our available-for-sale securities held AAA or AA ratings. In addition, we also limit amounts that can be invested in any security other than U.S. and Canadian government or government agency securities.
The Company is exposed to market risk from changes in foreign currency exchange rates that could impact its financial position, results of operations and cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading purposes.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, a Company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with provisions of this FSP. We are currently evaluating the impact, if any, that the adoption of FSP EITF 03-6-1 will have on our consolidated results of operations or financial condition.
In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles . SFAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not anticipate the adoption of SFAS No. 162 will have a material impact on our results of operations, cash flows or financial condition.
In April 2008, the FASB issued FSP FAS 142-3, “ Determination of the Useful Life of Intangible Assets ” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Asset. FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are currently evaluating the impact that the adoption of FSP FAS 142-3 will have on our consolidated results of operations, cash flows or financial condition.
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not anticipate the adoption of SFAS No. 161 will have a material impact on our results of operations, cash flows or financial condition.
In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any controlling interest in the business and the goodwill acquired. SFAS No. 141R further requires that acquisition-related costs and costs associated with restructuring or exiting activities of an acquired entity will be expensed as incurred. SFAS No. 141R also establishes disclosure requirements that will require disclosure on the nature and financial effects of the business combination. SFAS No. 141R will impact business combinations for the Company that may be completed on or after July 1, 2009. We cannot anticipate whether the adoption of SFAS No. 141R will have a material impact on our results of operations and financial condition as the impact is solely dependent on whether we enter into any business combinations after July 1, 2009 and the terms of such transactions.
In March 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards." EITF 06-11 requires companies to recognize, as an increase to additional paid-in capital, the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. We do not expect EITF 06-11 to have a material impact on our consolidated results of operations or cash flows.
30
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. This statement provides companies with an option to measure selected financial assets and liabilities at fair value. We have not elected to measure such selected financial assets and liabilities at fair value. As such, we do not expect the adoption of SFAS No. 159 to have a material impact on our consolidated results of operations, cash flows or financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated results of operations, cash flows or financial condition.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below.
Revenue Recognition . Our revenues are primarily attributable to fees for providing services ( e.g. , Employer Services’ payroll processing fees) as well as investment income on payroll funds, payroll tax filing funds and other Employer Services’ client-related funds. We enter into agreements for a fixed fee per transaction ( e.g. , number of payees or number of payrolls processed). Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectibility is reasonably assured. Our service fees are determined based on written price quotations or service agreements having stipulated terms and conditions that do not require management to make any significant judgments or assumptions regarding any potential uncertainties. Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.
We also recognize revenues associated with the sale of software systems and associated software licenses (e.g. Dealer Services’ dealer management systems). For a majority of our software sales arrangements, which provide hardware, software licenses, installation and post-contract customer support, revenues are recognized ratably over the software license term as vendor-specific objective evidence of the fair values of the individual elements in the sales arrangement does not exist. Changes to the elements in an arrangement and the ability to establish vendor-specific objective evidence for those elements could affect the timing of the revenue recognition.
We assess collectibility of our revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. We do not believe that a change in our assumptions utilized in the collectibility determination would result in a material change to revenues as no single customer accounts for a significant portion of our revenues.
Goodwill . We account for goodwill and other intangible assets with indefinite useful lives in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at least annually at the reporting unit level. We perform this impairment test by first comparing the fair value of our reporting units to their carrying amount. If an indicator of impairment exists based upon comparing the fair value of our reporting units to their carrying amount, we would then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any. We use discounted cash flows to determine fair values. When available and as appropriate, comparative market multiples are used to corroborate discounted cash flow results. We had $2,426.7 million of goodwill as of June 30, 2008. Given the significance of our goodwill, an adverse change to the fair value could result in an impairment charge, which could be material to our consolidated earnings.
31
Income Taxes. We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns ( e.g. , realization of deferred tax assets, changes in tax laws or interpretations thereof). In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.
We adopted the provisions of FIN 48 on July 1, 2007. FIN 48 prescribes a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Specifically, it clarifies that an entity’s tax benefits must be “more likely than not” of being sustained assuming that position will be examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If the position drops below the “more likely than not” standard, the benefit can no longer be recognized. Assumptions, judgment and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard could materially impact our consolidated financial statements.
Stock-Based Compensation. SFAS No. 123R requires the measurement of stock-based compensation expense based on the fair value of the award on the date of grant. We determine the fair value of stock options issued by using a binominal option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of our stock price and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. Determining these assumptions is subjective and complex, and therefore, a change in the assumptions utilized could impact the calculation of the fair value of our stock options.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures About Market Risk” under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the accompanying consolidated balance sheets of Automatic Data Processing, Inc. and subsidiaries (the "Company") as of June 30, 2008 and 2007, and the related statements of consolidated earnings, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a) 2. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Automatic Data Processing, Inc. and subsidiaries as of June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, 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.
As discussed in Notes 1 and 14 to the consolidated financial statements, in 2008 the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109,” effective July 1, 2007.
In addition, as discussed in Notes 13 and 17 to the consolidated financial statements, in 2007 the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R),” effective June 30, 2007 and Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” effective July 1, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2008 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29, 2008, expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche
LLP
New York, New York
August 29,
2008
33
Statements of Consolidated
Earnings
(In millions, except per
share amounts)
| Years ended June 30, | 2008 | 2007 | 2006 | |||||||||
| REVENUES: | ||||||||||||
| Revenues, other than interest on funds | ||||||||||||
| held for clients and PEO revenues | $ | 7,038.9 | $ | 6,267.4 | $ | 5,582.1 | ||||||
| Interest on funds held for clients | 684.5 | 653.6 | 549.8 | |||||||||
| PEO revenues (A) | 1,053.1 | 879.0 | 703.7 | |||||||||
| TOTAL REVENUES | 8,776.5 | 7,800.0 | 6,835.6 | |||||||||
| EXPENSES: | ||||||||||||
| Costs of revenues | ||||||||||||
| Operating expenses | 3,915.7 | 3,392.3 | 2,970.5 | |||||||||
| Systems development and programming costs | 525.9 | 486.1 | 472.3 | |||||||||
| Depreciation and amortization | 238.5 | 208.9 | 160.9 | |||||||||
| TOTAL COSTS OF REVENUES | 4,680.1 | 4,087.3 | 3,603.7 | |||||||||
| Selling, general and administrative expenses | 2,370.4 | 2,206.2 | 1,933.7 | |||||||||
| Interest expense | 80.5 | 94.9 | 72.8 | |||||||||
| TOTAL EXPENSES | 7,131.0 | 6,388.4 | 5,610.2 | |||||||||
| Other income, net | (166.5 | ) | (211.9 | ) | (135.8 | ) | ||||||
| EARNINGS FROM CONTINUING OPERATIONS | ||||||||||||
| BEFORE INCOME TAXES | 1,812.0 | 1,623.5 | 1,361.2 | |||||||||
| Provision for income taxes | 650.3 | 602.3 | 519.3 | |||||||||
| NET EARNINGS FROM CONTINUING OPERATIONS | 1,161.7 | 1,021.2 | 841.9 | |||||||||
| Earnings from discontinued operations, net of provision | ||||||||||||
| for income taxes of $23.2, $110.6 and $274.5 for the fiscal | ||||||||||||
| years ended June 30, 2008, 2007 and 2006, respectively | 74.0 | 117.5 | 712.1 | |||||||||
| NET EARNINGS | $ | 1,235.7 | $ | 1,138.7 | $ | 1,554.0 | ||||||
| Basic earnings per share from continuing operations | $ | 2.23 | $ | 1.86 | $ | 1.46 | ||||||
| Basic earnings per share from discontinued operations | 0.14 | 0.21 | 1.24 | |||||||||
| BASIC EARNINGS PER SHARE | $ | 2.37 | $ | 2.07 | $ | 2.70 | ||||||
| Diluted earnings per share from continuing operations | $ | 2.20 | $ | 1.83 | $ | 1.45 | ||||||
| Diluted earnings per share from discontinued operations | 0.14 | 0.21 | 1.23 | |||||||||
| DILUTED EARNINGS PER SHARE | $ | 2.34 | $ | 2.04 | $ | 2.68 | ||||||
| Basic weighted average shares outstanding | 521.5 | 549.7 | 574.8 | |||||||||
| Diluted weighted average shares outstanding | 527.2 | 557.9 | 580.3 | |||||||||
(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $11,247.4, $9,082.5 and $6,977.0, respectively.
See notes to consolidated financial statements.
34
Consolidated Balance
Sheets
(In millions, except per share
amounts)
| June 30, | 2008 | 2007 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 917.5 | $ | 1,746.1 | ||||
| Short-term marketable securities | 666.3 | 70.4 | ||||||
| Accounts receivable, net | 1,034.6 | 1,041.9 | ||||||
| Other current assets | 771.6 | 448.1 | ||||||
| Assets of discontinued operations | - | 57.7 | ||||||
| Total current assets before funds held for clients | 3,390.0 | 3,364.2 | ||||||
| Funds held for clients | 15,418.9 | 18,489.2 | ||||||
| Total current assets | 18,808.9 | 21,853.4 | ||||||
| Long-term marketable securities (A) | 76.5 | 68.1 | ||||||
| Long-term receivables, net | 234.0 | 226.5 | ||||||
| Property, plant and equipment, net | 742.9 | 723.8 | ||||||
| Other assets | 808.3 | 735.5 | ||||||
| Goodwill | 2,426.7 | 2,353.6 | ||||||
| Intangible assets, net | 637.1 | 688.0 | ||||||
| Total assets | $ | 23,734.4 | $ | 26,648.9 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 126.9 | $ | 125.9 | ||||
| Accrued expenses and other current liabilities | 668.1 | 703.4 | ||||||
| Accrued payroll and payroll related expenses | 479.4 | 402.6 | ||||||
| Dividends payable | 145.7 | 122.0 | ||||||
| Short-term deferred revenues | 356.1 | 299.1 | ||||||
| Obligation under reverse repurchase agreement | 11.8 | - | ||||||
| Income taxes payable | 258.9 | 118.7 | ||||||
| Liabilities of discontinued operations | - | 19.1 | ||||||
| Total current liabilities before client funds obligations | 2,046.9 | 1,790.8 | ||||||
| Client funds obligations | 15,294.7 | 18,673.0 | ||||||
| Total current liabilities | 17,341.6 | 20,463.8 | ||||||
| Long-term debt | 52.1 | 43.5 | ||||||
| Other liabilities | 587.9 | 390.5 | ||||||
| Deferred income taxes | 170.0 | 127.7 | ||||||
| Long-term deferred revenues | 495.6 | 475.5 | ||||||
| Total liabilities | 18,647.2 | 21,501.0 | ||||||
| Commitments and contingencies (Note 15) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $1.00 par value: Authorized, 0.3 shares; issued, none | - | - | ||||||
| Common stock, $0.10 par value: Authorized, 1,000.0 shares; issued, 638.7 shares at June 30, 2008 and 2007; | ||||||||
| outstanding, 510.3 and 535.8 shares at June 30, 2008 and 2007, respectively | 63.9 | 63.9 | ||||||
| Capital in excess of par value | 522.0 | 351.8 | ||||||
| Retained earnings | 10,029.8 | 9,378.5 | ||||||
| Treasury stock - at cost: 128.4 and 102.9 shares at June 30, 2008 and 2007, respectively | (5,804.7 | ) | (4,612.9 | ) | ||||
| Accumulated other comprehensive income (loss) | 276.2 | (33.4 | ) | |||||
| Total stockholders' equity | 5,087.2 | 5,147.9 | ||||||
| Total liabilities and stockholders' equity | $ | 23,734.4 | $ | 26,648.9 | ||||
(A) As of June 30, 2008, long-term marketable securities include $11.7 of securities that have been pledged as collateral under the Company’s reverse repurchase agreement (see Note 10).
See notes to consolidated financial statements.
35
Statements of Consolidated Stockholders’
Equity
(In millions, except per share
amounts)
| Accumulated | ||||||||||||||||||||||||||||
| Capital in | Other | |||||||||||||||||||||||||||
| Common Stock | Excess of | Deferred | Retained | Treasury | Comprehensive | Comprehensive | ||||||||||||||||||||||
| Shares | Amount | Par Value | Compensation | Earnings | Stock | Income | Income (Loss) | |||||||||||||||||||||
| Balance at June 30, 2005 | 638.7 | $ | 63.9 | $ | - | $ | (13.3 | ) | $ | 7,966.0 | $ | (2,246.8 | ) | $ | 14.1 | |||||||||||||
| Net earnings | - | - | - | - | 1,554.0 | - | $ | 1,554.0 | - | |||||||||||||||||||
| Foreign currency translation adjustments | 80.2 | 80.2 | ||||||||||||||||||||||||||
| Unrealized net loss on securities, net of tax | (221.0 | ) | (221.0 | ) | ||||||||||||||||||||||||
| Minimum pension liability adjustment, net of tax | 0.4 | 0.4 | ||||||||||||||||||||||||||
| Comprehensive income | $ | 1,413.6 | ||||||||||||||||||||||||||
| Elimination of deferred compensation upon adoption of | ||||||||||||||||||||||||||||
| Statement of Financial Accounting Standards No. 123R | - | - | (13.3 | ) | 13.3 | - | - | - | ||||||||||||||||||||
| Stock-based compensation expense | - | - | 174.9 | - | - | - | - | |||||||||||||||||||||
| Stock plans and related tax benefits | - | - | (3.7 | ) | - | - | 375.6 | - | ||||||||||||||||||||
| Treasury stock acquired (29.6 shares) | - | - | - | - | - | (1,326.9 | ) | - | ||||||||||||||||||||
| Debt conversion (0.1 shares) | - | - | (0.5 | ) | - | - | 3.3 | - | ||||||||||||||||||||
| Dividends ($0.7100 per share) | - | - | - | - | (408.6 | ) | - | - | ||||||||||||||||||||
| Balance at June 30, 2006 | 638.7 | $ | 63.9 | $ | 157.4 | $ | - | $ | 9,111.4 | $ | (3,194.8 | ) | $ | (126.3 | ) | |||||||||||||
| Adoption of Statement of Financial Accounting | ||||||||||||||||||||||||||||
| Standards No. 158, net of tax | - | - | - | - | - | - | (63.1 | ) | ||||||||||||||||||||
| Net earnings | - | - | - | - | 1,138.7 | - | $ | 1,138.7 | - | |||||||||||||||||||
| Foreign currency translation adjustments | 76.4 | 76.4 | ||||||||||||||||||||||||||
| Unrealized net gain on securities, net of tax | 81.9 | 81.9 | ||||||||||||||||||||||||||
| Minimum pension liability adjustment, net of tax | (2.3 | ) | (2.3 | ) | ||||||||||||||||||||||||
| Comprehensive income | $ | 1,294.7 | ||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | 148.7 | - | - | - | - | |||||||||||||||||||||
| Stock plans and related tax benefits | - | - | 55.4 | - | - | 464.4 | - | |||||||||||||||||||||
| Treasury stock acquired (40.2 shares) | - | - | - | - | - | (1,920.3 | ) | - | ||||||||||||||||||||
| Adoption of Staff Accounting Bulletin No. 108, net of tax | - | - | (3.2 | ) | - | 44.3 | - | - | ||||||||||||||||||||
| Brokerage Services Group spin-off | - | - | - | - | (1,125.2 | ) | - | - | ||||||||||||||||||||
| Brokerage Services Group dividend | - | - | - | - | 690.0 | - | - | |||||||||||||||||||||
| Debt conversion (1.1 shares) | - | - | (6.5 | ) | - | - | 37.8 | - | ||||||||||||||||||||
| Dividends ($0.8750 per share) | - | - | - | - | (480.7 | ) | - | - | ||||||||||||||||||||
| Balance at June 30, 2007 | 638.7 | $ | 63.9 | $ | 351.8 | $ | - | $ | 9,378.5 | $ | (4,612.9 | ) | $ | (33.4 | ) | |||||||||||||
| Net earnings | - | - | - | - | 1,235.7 | - | $ | 1,235.7 | - | |||||||||||||||||||
| Foreign currency translation adjustments | 127.9 | 127.9 | ||||||||||||||||||||||||||
| Unrealized net gain on securities, net of tax | 209.7 | 209.7 | ||||||||||||||||||||||||||
| Pension liability adjustment, net of tax | (28.0 | ) | (28.0 | ) | ||||||||||||||||||||||||
| Comprehensive income | $ | 1,545.3 | ||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | 123.6 | - | - | - | - | |||||||||||||||||||||
| Stock plans and related tax benefits | - | - | 4.5 | - | - | 271.7 | - | |||||||||||||||||||||
| Treasury stock acquired (32.9 shares) | - | - | - | - | - | (1,463.5 | ) | - | ||||||||||||||||||||
| Adoption of Financial Accounting Standards Board Interpretation No. 48 | - | - | - | - | (11.7 | ) | - | - | ||||||||||||||||||||
| Tax basis adjustment related to pooling of interest (see Note 14) | - | - | 42.1 | - | - | - | - | |||||||||||||||||||||
| Dividends ($1.1000 per share) | - | - | - | - | (572.7 | ) | - | - | ||||||||||||||||||||
| Balance at June 30, 2008 | 638.7 | $ | 63.9 | $ | 522.0 | $ | - | $ | 10,029.8 | $ | (5,804.7 | ) | $ | 276.2 | ||||||||||||||
See notes to consolidated financial statements.
36
37
Notes to Consolidated Financial
Statements
(Tabular dollars in millions,
except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Consolidation and Basis of Preparation. The consolidated financial statements include the financial results of Automatic Data Processing, Inc. and its majority-owned subsidiaries