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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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______________ |
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FORM 10-Q |
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______________
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 1-5397
AUTOMATIC DATA PROCESSING, INC. |
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(Exact name of registrant as specified in its charter) |
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Delaware |
22-1467904 |
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(State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) |
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One ADP Boulevard, Roseland, New Jersey |
07068 |
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(Address of principal executive offices) |
(Zip Code) |
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Registrant’s telephone number, including area code: (973) 974-5000 | |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x |
No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o |
No x |
The number of shares outstanding of the registrant’s common stock as of October 31, 2006 was 550,607,173.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
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Three Months Ended |
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September 30, |
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2006 |
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2005 |
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REVENUES: |
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Revenues, other than interest on funds held for Employer Services’ clients and PEO revenues |
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$ |
1,888.0 |
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$ |
1,657.5 |
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Interest on funds held for Employer Services’ clients |
|
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134.6 |
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108.4 |
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PEO revenues (A) |
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195.0 |
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155.8 |
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TOTAL REVENUES |
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2,217.6 |
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1,921.7 |
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EXPENSES: |
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Operating expenses |
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1,111.9 |
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925.4 |
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Selling, general and administrative expenses |
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528.4 |
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454.5 |
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Systems development and programming costs |
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137.6 |
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142.0 |
|
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Depreciation and amortization |
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81.8 |
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70.1 |
|
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Other income, net |
|
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(54.8 |
) |
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(2.4 |
) |
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TOTAL EXPENSES |
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1,804.9 |
|
|
1,589.6 |
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|
|
|
|
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|
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EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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412.7 |
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332.1 |
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Provision for income taxes |
|
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155.2 |
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126.0 |
|
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NET EARNINGS FROM CONTINUING OPERATIONS |
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$ |
257.5 |
|
$ |
206.1 |
|
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Earnings from discontinued operations, net of provision for income taxes of $7.1 for the three months ended September 30, 2005 |
|
|
— |
|
|
13.9 |
|
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NET EARNINGS |
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$ |
257.5 |
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$ |
220.0 |
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Basic Earnings Per Share from Continuing Operations |
|
$ |
0.46 |
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$ |
0.36 |
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Basic Earnings Per Share from Discontinued Operations |
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— |
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0.02 |
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BASIC EARNINGS PER SHARE |
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$ |
0.46 |
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$ |
0.38 |
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Diluted Earnings Per Share from Continuing Operations |
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$ |
0.46 |
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$ |
0.35 |
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Diluted Earnings Per Share from Discontinued Operations |
|
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— |
|
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0.02 |
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DILUTED EARNINGS PER SHARE |
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$ |
0.46 |
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$ |
0.38 |
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Basic weighted average shares outstanding |
|
|
554.2 |
|
|
577.3 |
|
|
Diluted weighted average shares outstanding |
|
|
559.5 |
|
|
582.8 |
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Dividends declared per common share |
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$ |
0.1850 |
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$ |
0.1550 |
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(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs of $1,902.8 and $1,490.7 for the three months ended September 30, 2006 and 2005, respectively.
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See notes to the consolidated financial statements. |
Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
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September 30, |
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June 30, |
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Assets |
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2006 |
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2006 |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,401.2 |
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$ |
1,900.6 |
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Short-term marketable securities (includes $40.2 |
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468.7 |
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367.9 |
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Accounts receivable, net |
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1,178.9 |
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1,202.4 |
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Securities clearing receivables |
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1,030.7 |
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836.8 |
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Other current assets |
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511.8 |
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452.4 |
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Total current assets |
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4,591.3 |
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4,760.1 |
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Long-term marketable securities |
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210.7 |
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334.0 |
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Long-term receivables, net |
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203.9 |
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215.4 |
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Property, plant and equipment, net |
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773.5 |
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782.4 |
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Other assets |
|
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857.5 |
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830.1 |
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Goodwill |
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2,486.0 |
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2,466.2 |
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Intangible assets, net |
|
|
606.3 |
|
|
618.0 |
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Total assets before funds held for clients |
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9,729.2 |
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10,006.2 |
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Funds held for clients |
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16,480.1 |
|
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17,483.9 |
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Total assets |
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$ |
26,209.3 |
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$ |
27,490.1 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
166.6 |
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$ |
207.3 |
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Accrued expenses and other current liabilities |
|
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1,423.9 |
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1,566.1 |
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Securities clearing payables |
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795.0 |
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613.6 |
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Income taxes payable |
|
|
201.6 |
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205.7 |
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Total current liabilities |
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2,587.1 |
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2,592.7 |
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Long-term debt |
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74.4 |
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74.3 |
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Other liabilities |
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394.1 |
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373.4 |
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Deferred income taxes |
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182.4 |
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123.7 |
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Deferred revenues |
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523.8 |
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527.0 |
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Total liabilities before client funds obligations |
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3,761.8 |
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3,691.1 |
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Client funds obligations |
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16,599.6 |
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17,787.4 |
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Total liabilities |
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20,361.4 |
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21,478.5 |
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Stockholders’ equity: |
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Preferred stock, $1.00 par value: |
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Authorized 0.3 shares; issued, none |
|
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— |
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— |
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Common stock, $0.10 par value: |
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|
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Authorized 1,000.0 shares; issued 638.7 shares |
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63.9 |
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63.9 |
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Capital in excess of par value |
|
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210.2 |
|
|
157.4 |
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Retained earnings |
|
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9,266.6 |
|
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9,111.4 |
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Treasury stock- at cost: 87.9 and 77.3 shares, respectively |
|
|
(3,709.2 |
) |
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(3,194.8 |
) |
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Accumulated other comprehensive income (loss) |
|
|
16.4 |
|
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(126.3 |
) |
|
Total stockholders’ equity |
|
|
5,847.9 |
|
|
6,011.6 |
|
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Total liabilities and stockholders’ equity |
|
$ |
26,209.3 |
|
$ |
27,490.1 |
|
See notes to the consolidated financial statements.
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In millions)
(Unaudited)
|
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Three Months Ended |
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September 30, |
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2006 |
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2005 |
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Cash Flows from Operating Activities: |
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Net earnings |
|
$ |
257.5 |
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$ |
220.0 |
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Adjustments to reconcile net earnings to cash flows provided by operating activities: |
|
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|
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|
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Gain on sale of investment |
|
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(38.6 |
) |
|
— |
|
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Depreciation and amortization |
|
|
81.8 |
|
|
70.1 |
|
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Deferred income taxes |
|
|
15.5 |
|
|
15.3 |
|
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Stock-based compensation expense |
|
|
38.5 |
|
|
43.1 |
|
|
Pension expense |
|
|
11.3 |
|
|
8.6 |
|
|
Net realized losses from the sales of marketable securities |
|
|
0.2 |
|
|
12.8 |
|
|
Amortization of premiums and discounts on available-for-sale securities |
|
|
11.2 |
|
|
24.3 |
|
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Other |
|
|
26.9 |
|
|
17.8 |
|
|
Operating activities of discontinued operations |
|
|
(0.2 |
) |
|
(12.0 |
) |
|
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses: |
|
|
|
|
|
|
|
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Decrease in securities deposited with clearing organizations or segregated for regulatory purposes |
|
|
0.1 |
|
|
178.4 |
|
|
(Increase) decrease in receivables and other assets |
|
|
(72.3 |
) |
|
64.5 |
|
|
Decrease in accounts payable, accrued expenses and other liabilities |
|
|
(152.1 |
) |
|
(136.9 |
) |
|
Increase in securities clearing receivables |
|
|
(193.9 |
) |
|
(23.5 |
) |
|
Increase (decrease) in securities clearing payables |
|
|
181.4 |
|
|
(80.7 |
) |
|
Net cash flows provided by operating activities |
|
|
167.3 |
|
|
401.8 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
(418.0 |
) |
|
(1,669.8 |
) |
|
Proceeds from the sales and maturities of marketable securities |
|
|
562.8 |
|
|
1,680.8 |
|
|
Net proceeds from client funds securities |
|
|
1,052.8 |
|
|
2,471.5 |
|
|
Change in client funds obligations |
|
|
(1,183.1 |
) |
|
(2,443.6 |
) |
|
Capital expenditures |
|
|
(40.7 |
) |
|
(57.8 |
) |
|
Additions to intangibles |
|
|
(20.9 |
) |
|
(24.2 |
) |
|
Proceeds from the sale of investment |
|
|
38.6 |
|
|
— |
|
|
Acquisitions of businesses, net of cash acquired |
|
|
(24.8 |
) |
|
(0.7 |
) |
|
Other |
|
|
2.2 |
|
|
(0.4 |
) |
|
Investing activities of discontinued operations |
|
|
— |
|
|
(2.6 |
) |
|
Net cash flows used in investing activities |
|
|
(31.1 |
) |
|
(46.8 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of notes |
|
|
0.1 |
|
|
0.1 |
|
|
Payments of debt |
|
|
(0.2 |
) |
|
(0.2 |
) |
|
Repurchases of common stock |
|
|
(611.6 |
) |
|
(229.2 |
) |
|
Proceeds from stock purchase plan and exercises of stock options |
|
|
80.4 |
|
|
47.5 |
|
|
Dividends paid |
|
|
(105.0 |
) |
|
(91.0 |
) |
|
Financing activities of discontinued operations |
|
|
— |
|
|
0.4 |
|
|
Net cash flows used in financing activities |
|
|
(636.3 |
) |
|
(272.4 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
0.7 |
|
|
0.7 |
|
|
Net change in cash and cash equivalents |
|
|
(499.4 |
) |
|
83.3 |
|
|
Cash and cash equivalents, beginning of period |
|
|
1,900.6 |
|
|
975.4 |
|
|
Cash and cash equivalents, end of period |
|
|
1,401.2 |
|
|
1,058.7 |
|
|
Less cash and cash equivalents of discontinued operations, end of period |
|
|
— |
|
|
131.4 |
|
|
Cash and cash equivalents of continuing operations, end of period |
|
$ |
1,401.2 |
|
$ |
927.3 |
|
See notes to the consolidated financial statements.
Automatic Data Processing, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation.
The accompanying unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. Adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes of Automatic Data Processing, Inc. and Subsidiaries (“ADP” or the “Company”) as of and for the year ended June 30, 2006. The results of operations for the three months ended September 30, 2006 may not be indicative of the results to be expected for the fiscal year ending June 30, 2007.
Note 2. Spin-off of Brokerage Services Group.
On August 2, 2006, the Company announced that its Board of Directors approved a plan to spin-off the Brokerage Services Group business, comprised of Brokerage Services and Securities Clearing and Outsourcing Services, into an independent publicly traded company through a tax-free spin-off of 100% of Brokerage Services Group to ADP shareholders. The spin-off is subject to required regulatory approvals and reviews.
Note 3. New Accounting Pronouncements
In September 2006, the staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company plans to include the effect of adopting SAB 108 in its Annual Report on Form 10-K for the year ending June 30, 2007 and is currently evaluating the effect that the adoption will have on its consolidated results of operations and financial condition.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). This statement would require a company to (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and (c) recognize changes in the funded status of a defined postretirement plan in the year in which the changes occur (reported in comprehensive income). The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The Company plans to include the effect of adopting SFAS No. 158 in its Annual Report on Form 10-K for the year ending June 30, 2007 and is currently assessing the impact of adoption. The requirement to measure the plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not believe this requirement will have a material impact on its consolidated results of operations and 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. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have, if any, on its consolidated results of operations and financial condition.
In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes” and defines the confidence level that a tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more-likely-than-not” to be sustained then no benefits of the position are to be recognized. FIN 48 requires additional annual disclosures and is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company expects to adopt FIN 48 on July 1, 2007 and is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition.
Note 4. Acquisitions
The Company acquired one business during the three months ended September 30, 2006 for approximately $25.2 million, net of cash acquired. The acquisition resulted in approximately $16.3 million of goodwill. Intangible assets acquired, which totaled approximately $7.7 million, consisted primarily of customer contracts and lists and software that are being amortized over a weighted average life of 10 years. The acquisition was not material to the Company’s operations, financial position or cash flows. The Company also made $0.2 million of contingent payments relating to previously consummated acquisitions.
During October 2006, the Company acquired two businesses for approximately $222 million and signed a definitive agreement to acquire an additional business for approximately $125 million. These purchase prices are subject to working capital adjustments.
Note 5. Discontinued Operations
On February 8, 2006, the Company entered into a definitive agreement to sell its Claims Services business to Solera, Inc. for $975 million in cash. The Company completed the sale of its Claims Services business on April 13, 2006, which resulted in a gain of $560.9 million, or $452.8 million after tax, and net cash from the transaction of approximately $760 million. The Claims Services business was a separate operating segment of the Company and was reported in the “Other” segment. In connection with the disposal of this business, the Company has classified the results of operations of this business as discontinued operations.
On January 20, 2006, the Company completed the sale of its Brokerage Services’ financial print business. The Company has classified the results of operations of this business as discontinued operations.
Operating results of these discontinued operations were as follows:
|
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|
Three Months Ended |
| ||||
|
|
|
September 30, |
| ||||
|
|
|
2006 |
|
2005 |
| ||
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
$ |
124.5 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
— |
|
|
21.0 |
|
|
Provision for income taxes |
|
|
— |
|
|
(7.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued operations |
|
$ |
— |
|
$ |
13.9 |
|
Note 6. Earnings per Share (“EPS”)
|
|
|
For the three months ended September 30, |
| ||||||||||||||
|
|
|
2006 |
|
2005 |
| ||||||||||||
|
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|
|
|
|
|
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|
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|
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|
| ||||
|
|
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Net |
|
Weighted |
|
EPS |
|
Net |
|
Weighted |
|
EPS |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
257.5 |
|
554.2 |
|
$ |
0.46 |
|
$ |
206.1 |
|
577.3 |
|
$ |
0.36 |
|
|
Effect of zero |
|
|
0.4 |
|
1.1 |
|
|
|
|
|
0.3 |
|
1.2 |
|
|
|
|
|
Effect of |
|
|
|
|
4.2 |
|
|
|
|
|
— |
|
4.3 |
|
|
|
|
|
Diluted |
|
$ |
257.9 |
|
559.5 |
|
$ |
0.46 |
|
$ |
206.4 |
|
582.8 |
|
$ |
0.35 |
|
Options to purchase 25.7 million and 53.6 million shares of common stock for the three months ended September 30, 2006 and 2005, respectively, were excluded from the calculation of diluted earnings per share, as the effect would have been anti-dilutive for each respective period.
Note 7. Fair Value Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), which requires the measurement of stock-based compensation expense to be recognized in net earnings based on the fair value of the award on the date of grant. Stock-based compensation primarily consists of the following:
|
|
• |
Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s common stock on the dates of grant. Stock options are issued under a grade vesting schedule and, generally vest ratably over five years and have a term of 10 years. Compensation expense for stock options is recognized over the requisite service period for each separately vesting portion of the stock option award. In fiscal 2007, the Company will be reducing the number of stock options issued to employees and replacing these awards with the issuance of performance-based restricted stock. |
|
|
• |
Employee Stock Purchase Plan. Prior to November 2005, the Company offered an employee stock purchase plan that allowed eligible employees to purchase shares of common stock at 85% of the lower of market value as of the date the purchase price for an offering was determined or as of the end of such offering. In November 2005, the Company revised the employee stock purchase plan offering beginning on January 1, 2006, whereby eligible employees can purchase shares of common stock at 85% of the market value at the date the purchase price for the offering is determined. Compensation expense for the employee stock purchase plan is recognized over the vesting period of 24 months on a straight-line basis. |
|
|
• |
Restricted Stock. The Company has a restricted stock program under which shares of common stock have been issued at par value to certain key employees. These shares are restricted as to transfer and in certain circumstances must be returned to the Company at the original purchase price. The Company records stock compensation expense relating to the issuance of restricted stock over the period during which the transfer restrictions exist, which is up to five years from the date of grant. The value of the Company’s restricted stock, based on market prices, is recognized as compensation expense over the restriction period on a straight-line basis. |
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under its employee stock purchase plan and restricted stock awards. The following stock-based compensation expense of $38.5 million and $43.1 million was recognized in earnings from continuing operations for the three months ended September 30, 2006 and 2005, respectively, as well as related tax benefits of $11.2 million and $12.4 million, respectively:
|
|
|
Three Months Ended |
| ||||
|
|
|
September 30, |
| ||||
|
|
|
2006 |
|
2005 |
| ||
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
6.6 |
|
$ |
8.3 |
|
|
Selling, general and administrative expenses |
|
|
24.9 |
|
|
26.1 |
|
|
System development and programming costs |
|
|
7.0 |
|
|
8.7 |
|
|
Total pre-tax stock-based compensation expense |
|
$ |
38.5 |
|
$ |
43.1 |
|
|
Total pre-tax stock-based compensation expense |
|
|
— |
|
|
2.3 |
|
|
Total pre-tax stock-based compensation expense |
|
$ |
38.5 |
|
$ |
45.4 |
|
The total pre-tax stock-based compensation expense included in continuing operations includes expenses related to restricted stock awards of $5.4 million and $4.3 million within selling, general and administrative expenses for the three months ended September 30, 2006 and 2005, respectively. As of September 30, 2006, the total remaining unrecognized compensation cost related to non-vested stock options, the employee stock purchase plan and restricted stock awards amounted to $122.2 million, $16.0 million and $96.2 million respectively, which will be amortized over the weighted-average remaining requisite service periods of 1.2 years, 0.6 years and 1.3 years, respectively.
The fair value of each stock option issued prior to January 1, 2005 was estimated on the date of grant using a Black-Scholes option pricing model. For stock options issued on or after January 1, 2005, the fair value of each stock option was estimated on the date of grant using a binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on a combination of implied market volatilities, historical volatility of the Company’s 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
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.
The following assumptions were used to determine the fair values estimated at the date of grant of stock options granted during the three months ended September 30, 2006 and 2005:
|
Risk-free interest rate |
|
|
5.0 |
% |
|
4.0 |
% |
|
Dividend yield |
|
|
1.6 |
% |
|
1.4 |
% |
|
Weighted average volatility factor |
|
|
24.5 |
% |
|
24.7 |
% |
|
Weighted average expected life (in years): |
|
|
5.6 |
|
|
5.5 |
|
|
Weighted average fair value (in dollars): |
|
$ |
12.21 |
|
$ |
10.37 |
|
Note 8. Other Income, net
|
|
|
Three Months Ended |
| ||||
|
|
|
September 30, |
| ||||
|
|
|
2006 |
|
2005 |
| ||
|
Interest income on corporate funds |
|
$ |
(51.8 |
) |
$ |
(33.9 |
) |
|
Interest expense |
|
|
35.4 |
|
|
18.7 |
|
|
Gain on sale of investment |
|
|
(38.6 |
) |
|
— |
|
|
Realized gains on available- for-sale securities |
|
|
(0.4 |
) |
|
(0.5 |
) |
|
Realized losses on available- for-sale securities |
|
|
0.6 |
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
$ |
(54.8 |
) |
$ |
(2.4 |
) |
Proceeds from sales and maturities of available-for-sale securities were $562.8 million and $1,680.8 million for the three months ended September 30, 2006 and 2005, respectively.
During the three months ended September 30, 2006, the Company sold a minority investment that was previously accounted for using the cost basis and had a net book value of $0. The Company’s sale of this investment resulted in a gain of approximately $38.6 million.
Note 9. Comprehensive Income
|
|
|
Three Months Ended |
| ||||
|
|
|
September 30, |
| ||||
|
|
|
2006 |
|
2005 |
| ||
|
Net earnings |
|
$ |
257.5 |
|
$ |
220.0 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
21.6 |
|
|
16.4 |
|
|
Unrealized net gain (loss) on available-for-sale securities, net of tax |
|
|
121.1 |
|
|
(73.3 |
) |
|
Comprehensive income |
|
$ |
400.2 |
|
$ |
163.1 |
|
Note 10. Interim Financial Data by Segment
Employer Services, Brokerage Services, Securities Clearing and Outsourcing Services and Dealer Services are the Company’s reportable segments. The primary components of “Other” are miscellaneous processing services, and corporate allocations and expenses, including stock-based
compensation expense.
The Company evaluates the performance of its reportable segments based on operating results before interest on corporate funds, foreign currency gains and losses and income taxes. Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. The prior year’s reportable segment revenues and earnings from continuing operations before income taxes have been adjusted to reflect updated fiscal 2007 budgeted foreign exchange rates.
Reconciling items include foreign exchange differences between the actual foreign exchange rates and fiscal 2007 budgeted foreign exchange rates, and the adjustment for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services at a standard rate of 4.5%. Both of these adjustments are eliminated in consolidation and as such represent reconciling items to revenues and earnings from continuing operations before income taxes. The reportable segment results also include an internal cost of capital charge related to the funding of acquisitions and other investments. This charge is eliminated in consolidation and as such represents a reconciling item to earnings from continuing operations before income taxes.
Segment Results:
|
|
|
Revenues |
|
Earnings from Continuing |
| ||||||||
|
|
|
Three Months Ended |
|
Three Months Ended |
| ||||||||
|
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Services |
|
$ |
1,453.7 |
|
$ |
1,303.2 |
|
$ |
295.5 |
|
$ |
271.8 |
|
|
Brokerage Services |
|
|
412.6 |
|
|
356.7 |
|
|
58.5 |
|
|
54.7 |
|
|
Securities Clearing and Outsourcing Services |
|
|
21.8 |
|
|
17.7 |
|
|
(6.5 |
) |
|
(11.8 |
) |
|
Dealer Services |
|
|
313.0 |
|
|
254.7 |
|
|
48.2 |
|
|
41.5 |
|
|
Other |
|
|
7.4 |
|
|
11.7 |
|
|
(15.8 |
) |
|
(37.4 |
) |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange |
|
|
15.6 |
|
|
(2.3 |
) |
|
2.4 |
|
|
(1.0 |
) |
|
Client fund interest |
|
|
(6.5 |
) |
|
(20.0 |
) |
|
(6.5 |
) |
|
(20.0 |
) |
|
Cost of capital charge |
|
|
— |
|
|
— |
|
|
36.9 |
|
|
34.3 |
|
|
Total |
|
$ |
2,217.6 |
|
$ |
1,921.7 |
|
$ |
412.7 |
|
$ |
332.1 |
|
Note 11. Corporate Investments and Funds Held for Clients
Corporate investments and funds held for clients at September 30, 2006 and June 30, 2006 are as follows:
|
|
|
September 30, 2006 |
| ||||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| ||||
|
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and other cash equivalents |
|
$ |
4,879.4 |
|
|
— |
|
|
— |
|
$ |
4,879.4 |
|
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and direct obligations of |
|
|
40.2 |
|
|
— |
|
|
— |
|
|
40.2 |
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and direct obligations of |
|
|
6,418.7 |
|
|
8.4 |
|
|
(89.3 |
) |
|
6,337.8 |
|
|
Asset backed securities |
|
|
2,084.5 |
|
|
5.1 |
|
|
(18.3 |
) |
|
2,071.3 |
|
|
Corporate bonds |
|
|
3,626.9 |
|
|
11.9 |
|
|
(37.9 |
) |
|
3,600.9 |
|
|
Canadian government obligations and |
|
|
806.0 |
|
|
5.1 |
|
|
(3.1 |
) |
|
808.0 |
|
|
Other debt securities |
|
|
829.0 |
|
|
2.7 |
|
|
(8.6 |
) |
|
823.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
13,765.1 |
|
|
33.2 |
|
|
(157.2 |
) |
|
13,641.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate investments and funds |
|
$ |
18,684.7 |
|
$ |
33.2 |
|
$ |
(157.2 |
) |
$ |
18,560.7 |
|
|
|
|
June 30, 2006 |
| ||||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| ||||
|
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and other cash equivalents |
|
$ |
6,433.3 |
|
|
— |
|
|
— |
|
$ |
6,433.3 |
|
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and direct obligations of |
|
|
40.3 |
|
|
— |
|
|
— |
|
|
40.3 |
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and direct obligations of |
|
|
6,441.5 |
|
|
0.1 |
|
|
(165.0 |
) |
|
6,276.6 |
|
|
Asset backed securities |
|
|
2,214.1 |
|
|
0.3 |
|
|
(40.8 |
) |
|
2,173.6 |
|
|
Corporate bonds |
|
|
3,564.7 |
|
|
0.2 |
|
|
(75.9 |
) |
|
3,489.0 |
|
|
Canadian government obligations and |
|
|
838.1 |
|
|
0.1 |
|
|
(11.5 |
) |
|
826.7 |
|
|
Other debt securities |
|
|
867.3 |
|
|
0.1 |
|
|
(20.5 |
) |
|
846.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
13,925.7 |
|
|
0.8 |
|
|
(313.7 |
) |
|
13,612.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate investments and funds |
|
$ |
20,399.3 |
|
$ |
0.8 |
|
$ |
(313.7 |
) |
$ |
20,086.4 |
|
Classification of investments on the Consolidated Balance Sheets is as follows:
|
|
|
September 30, |
|
June 30, |
| ||
|
|
|
2006 |
|
2006 |
| ||
|
|
|
|
|
|
|
|
|
|
Corporate investments: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,401.2 |
|
$ |
1,900.6 |
|
|
Short-term marketable securities |
|
|
468.7 |
|
|
367.9 |
|
|
Long-term marketable securities |
|
|
210.7 |
|
|
334.0 |
|
|
|
|
|
|
|
|
|
|
|
Total corporate investments |
|
|
2,080.6 |
|
|
2,602.5 |
|
|
Funds held for clients |
|
|
16,480.1 |
|
|
17,483.9 |
|
|
|
|
|
|
|
|
|
|
|
Total corporate investments and funds held for clients |
|
$ |
18,560.7 |
|
$ |
20,086.4 |
|
The Company’s trading securities include $40.2 million and $40.3 million at September 30, 2006 and June 30, 2006, respectively, that have been pledged as collateral to exchanges and clearinghouses.
The Company believes that its available-for-sale securities that have fair values below cost are not other-than-temporarily impaired since it is probable that principal and interest would be collected in accordance with contractual terms, and that the decline in the market value was primarily due to changes in interest rates and not changes to credit risk. The Company currently believes that it has the ability and intent to hold these investments until the earlier of market price recovery and/or maturity. The Company’s assessment that an investment is not other-than-temporarily impaired could change in the future due to new developments or changes in the Company’s strategies or assumptions related to any particular investment.
At September 30, 2006 approximately 95% of the available-for-sale securities held an AAA or AA rating, as rated by Moody’s, Standard & Poor’s and Dominion Bond Rating Service.
Expected maturities of available-for-sale securities at September 30, 2006 are as follows:
|
Due in one year or less |
|
$ |
3,030.2 |
|
|
Due after one year to two years |
|
|
2,667.1 |
|
|
Due after two years to three years |
|
|
2,664.5 |
|
|
Due after three years to four years |
|
|
2,867.2 |
|
|
Due after four years to ten years |
|
|
2,412.1 |
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
13,641.1 |
|
Note 12. Securities Clearing and Outsourcing Services
Securities clearing receivables and payables consist of the following: