Automatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Cash Flows

(In millions)

(Unaudited)

 

 

 

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, 2007. The results of operations for the three and six months ended December 31, 2007 may not be indicative of the results to be expected for the fiscal year ending June 30, 2008.

 

Note 2. Divestitures

 

On June 30, 2007, the Company entered into a definitive agreement to sell its Travel Clearing business for approximately $116.0 million in cash. The Company completed the sale of its Travel Clearing business on July 6, 2007. The Travel Clearing business was previously reported in the “Other” segment. In connection with the disposal of this business, the Company has classified the results of this business as discontinued operations for all periods presented. Additionally, during the six months ended December 31, 2007, the Company reported a gain of $88.5 million, or $57.2 million after taxes, exclusive of a working capital adjustment, within earnings (loss) from discontinued operations on the Statements of Consolidated Earnings. In January 2008, the Company resolved all remaining contingencies related to the sale and received an additional payment of $7.2 million, which represented the final purchase price adjustment for the sale of the Travel Clearing business. The Company will record this amount as an additional gain within earnings from discontinued operations during the three months ended March 31, 2008.

 

On March 30, 2007, the Company completed the tax free 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. (“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 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. ADP distributed approximately 138.8 million shares of Broadridge common stock in the distribution. The spin-off was made without the payment of any consideration or the exchange of any shares by ADP stockholders. The Company has classified the results of operations of the spun-off business as discontinued operations for all periods presented.

 

On January 23, 2007, the Company completed the sale of Sandy Corporation, a business within the Dealer Services segment, which specializes in sales and marketing training, for approximately $4.0 million in cash and the assumption of certain liabilities by the buyer, plus an additional earn-out payment if certain revenue targets are achieved. During the fiscal year ended June 30, 2007, the Company reported a gain of $11.2 million, or $6.9 million after tax, within earnings (loss) from discontinued operations on the Statements of Consolidated Earnings. The Company has classified the results of operations of this business as discontinued operations for all periods presented.

During the three months ended December 31, 2007, the Company recorded a charge of $0.7 million, net of taxes, within earnings (loss) from discontinued operations related to professional fees incurred in connection with the divestitures of businesses.

 

Operating results of these discontinued operations were as follows:

 

 

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2007			2006			2007			2006
Revenues		$	—		$	459.5		$	—		$	922.3
Earnings from discontinued operations before income taxes			—			61.6			—			125.1
Provision for income taxes			—			24.5			—			49.7
Net earnings from discontinued operations before gain on disposal of discontinued operations			—			37.1			—			75.4
Gain (loss) on disposal of discontinued operations, net of provision for income taxes of $(0.4) and $0.6 for the three months ended December 31,2007 and 2006, respectively, and $30.8 and $0.6 for the six months ended December 31, 2007 and 2006, respectively			(0.4	)		12.6			56.5			12.6
Net earnings (loss) from discontinued operations		$	(0.4	)	$	49.7		$	56.5		$	88.0

 

 

There were no assets or liabilities of discontinued operations as of December 31, 2007. The following are the major classes of assets and liabilities related to the discontinued operations as of June 30, 2007:

 

 

		June 30,
		2007
Assets:
Cash		$	14.7
Accounts receivable, net			12.7
Property, plant and equipment, net			5.3
Goodwill			10.1
Intangible assets, net			9.6
Other assets			5.3
Total		$	57.7
Liabilities:
Accrued expenses		$	15.9
Income taxes payable			1.4
Other liabilities			1.8
Total		$	19.1

 

 

Note 3. New Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (“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 which will require disclosure of 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. The Company cannot anticipa te whether the adoption of SFAS No. 141R will have a material impact on its results of operations and financial condition as the impact is solely dependent on whether the Company enters into a business combination after July 1, 2009 and the terms of such a transaction.

 

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 will impact business combinations for the Company that may be completed on or after July 1, 2009. Currently, the Company does not anticipate the adoption of SFAS No. 160 will have a material impact on its results of operations and financial condition.

 

In March 2007, the FASB ratified EITF Issue No. 06-11 (“EITF 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. The Company does not expect EITF 06-11 to have a material impact on its results of operations or cash flows.

 

In February 2007, the FASB issued Statement 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. The Company is currently evaluating the effect that the adoption of SFAS No. 159 will have, if any, on its consolidated results of operations and financial condition.

 

In September 2006, the FASB issued Statement 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 believes that the adoption of SFAS No. 157 will not have a material effect on its consolidated results of operations, cash flows or financial condition.

 

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“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. The Company adopted the provisions of FIN 48 as of July 1, 2007, which resulted in a decrease to stockholders’ equity of $11.7 million (see Note 16).

 

Note 4. Acquisitions

 

The Company acquired three businesses during the six months ended December 31, 2007 for approximately $40.5 million, net of cash acquired. These acquisitions resulted in approximately $22.8 million of goodwill. Intangible assets acquired, which totaled approximately $18.0 million, consisted primarily of customer contracts and lists and software that are being amortized over a weighted average life of 10 years. The acquisitions were not material, either individually or in the aggregate, to the Company's operations, financial position or cash flows. The Company also made $39.9 million of contingent payments during the six months ended December 31, 2007, relating to previously consummated acquisitions.

 

Note 5. Earnings per Share (“EPS”)

 

		Basic			Effect of Zero Coupon Subordinated Notes			Effect of Employee Stock Option Shares			Effect of Employee Stock Purchase Plan Shares			Effect of Employee Restricted Stock Shares			Diluted
Three months ended December 31,
2007
Net earnings from continuing operations		$	291.6		$	—		$	—		$	—		$	—		$	291.6
Weighted average shares (in millions)			523.1						5.6			0.6			1.1			530.4
EPS from continuing operations		$	0.56														$	0.55
2006
Net earnings from continuing operations		$	248.0		$	0.4		$	—		$	—		$	—		$	248.4
Weighted average shares (in millions)			548.5			1.1			4.8			0.6			0.3			555.3
EPS from continuing operations		$	0.45														$	0.45
Six months ended December 31,
2007
Net earnings from continuing operations		$	532.0		$	—		$	—		$	—		$	—		$	532.0
Weighted average shares (in millions)			525.7						5.6			0.6			1.0			532.9
EPS from continuing operations		$	1.01														$	1.00
2006
Net earnings from continuing operations		$	467.1		$	0.8		$	—		$	—		$	—		$	467.9
Weighted average shares (in millions)			551.4			1.1			4.1			0.5			0.8			557.9
EPS from continuing operations		$	0.85														$	0.84

 

 

Options to purchase 6.9 million and 21.5 million shares of common stock for the three months ended December 31, 2007 and 2006, respectively, and 6.9 million and 24.9 million shares of common stock for the six months ended December 31, 2007 and 2006, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market price of outstanding common shares for the respective period.

 

Note 6. 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 consists of the following:

 

 

 

 

 

 

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company’s employee stock purchase plan and restricted stock awards. Stock-based compensation expense of $34.5 million and $37.7 million was recognized in earnings from continuing operations for the three months ended December 31, 2007 and 2006, respectively, as well as related tax benefits of $10.6 million and $11.4 million, respectively. Stock-based compensation expense of $63.4 million and $70.3 million was recognized in earnings from continuing operations for the six months ended December 31, 2007 and 2006, respectively, as well as related tax benefits of $19.1 million and $20.9 million, respectively.

 

 

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2007			2006			2007			2006
Operating expenses		$	6.8		$	6.7		$	12.1		$	11.7
Selling, general and administrative expenses			21.6			24.0			40.5			46.6
System development and programming costs			6.1			7.0			10.8			12.0
Total pretax stock-based compensation expense included in continuing operations		$	34.5		$	37.7		$	63.4		$	70.3
Total pretax stock-based compensation expense included in discontinued operations			—			6.7			—			12.6
Total pretax stock-based compensation expense		$	34.5		$	44.4		$	63.4		$	82.9

 

 

As of December 31, 2007, the total remaining unrecognized compensation cost related to non-vested stock options, the employee stock purchase plan and restricted stock awards amounted to $49.5 million, $10.4 million and $110.7 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 1.9 years, 1.0 years and 1.8 years, respectively.

 

During the six months ended December 31, 2007, the following activity occurred under our existing plans:

 

 

Stock Options:
		Number of Options (in thousands)		Weighted Average Price (in dollars)
Options outstanding at July 1, 2007		53,786		$	40
Options granted		304		$	47
Options exercised		(2,858	)	$	34
Options canceled		(880	)	$	41
Options outstanding at December 31, 2007		50,352		$	41

 

 

 

Performance-Based Restricted Stock:
		Number of Shares (in thousands)
Restricted shares outstanding at July 1, 2007		1,711
Restricted shares granted		1,487
Restricted shares vested		(122	)
Restricted shares forfeited		(51	)
Restricted shares outstanding at December 31, 2007		3,025

 

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 l ife 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.