Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Automatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Earnings

(In millions, except per share amounts)

(Unaudited)

 

 

		Three Months Ended						Nine Months Ended
		March 31,						March 31,
		2008			2007			2008			2007
REVENUES:
Revenues, other than interest on funds held for clients and PEO revenues		$	1,931.0		$	1,725.1		$	5,273.4		$	4,679.6
Interest on funds held for clients			198.5			198.3			515.0			475.3
PEO revenues (A)			297.7			247.6			780.9			645.2
TOTAL REVENUES			2,427.2			2,171.0			6,569.3			5,800.1
EXPENSES:
Costs of revenues:
Operating expenses			1,033.5			891.4			2,921.6			2,516.4
Systems development and programming costs			132.0			122.2			385.1			355.7
Depreciation and amortization			58.9			53.5			177.9			154.4
TOTAL COSTS OF REVENUES			1,224.4			1,067.1			3,484.6			3,026.5
Selling, general and administrative expenses			585.3			549.8			1,673.4			1,557.0
Interest expense			7.9			7.0			68.0			74.7
TOTAL EXPENSES			1,817.6			1,623.9			5,226.0			4,658.2
Other income, net			(25.9	)		(24.3	)		(114.2	)		(174.2	)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			635.5			571.4			1,457.5			1,316.1
Provision for income taxes			231.9			211.3			521.8			488.9
NET EARNINGS FROM CONTINUING OPERATIONS		$	403.6		$	360.1		$	935.7		$	827.2
Earnings from discontinued operations, net of provision for income taxes of $0.9 and $53.6 for the three months ended March 31, 2008 and 2007, respectively, and $31.7 and $103.8 for the nine months ended March 31, 2008 and 2007, respectively			10.0			28.8			66.5			116.8
NET EARNINGS		$	413.6		$	388.9		$	1,002.2		$	944.0
Basic Earnings Per Share from Continuing Operations		$	0.78		$	0.65		$	1.79		$	1.50
Basic Earnings Per Share from Discontinued Operations			0.02			0.05			0.13			0.21
BASIC EARNINGS PER SHARE		$	0.80		$	0.70		$	1.91		$	1.71
Diluted Earnings Per Share from Continuing Operations		$	0.77		$	0.65		$	1.77		$	1.48
Diluted Earnings Per Share from Discontinued Operations			0.02			0.05			0.13			0.21
DILUTED EARNINGS PER SHARE		$	0.79		$	0.70		$	1.89		$	1.69
Basic weighted average shares outstanding			519.8			552.1			524.0			551.6
Diluted weighted average shares outstanding			523.2			558.7			529.9			558.5
Dividends declared per common share		$	0.2900		$	0.2300		$	0.8100		$	0.6450

 

 

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $3,043.9 and $2,417.8 for the three months ended March 31, 2008 and 2007, respectively, and $8,413.0 and $6,763.1 for the nine months ended March 31, 2008 and 2007, respectively.

 

See notes to the consolidated financial statements.

 

Automatic Data Processing, Inc. and Subsidiaries

Consolidated Balance Sheets

(In millions, except per share amounts)

(Unaudited)

 

 

		March 31,			June 30,
Assets		2008			2007
Current assets:
Cash and cash equivalents		$	1,644.7		$	1,746.1
Short-term marketable securities			31.6			70.4
Accounts receivable, net			1,179.1			1,041.9
Other current assets			592.5			448.1
Assets of discontinued operations			—			57.7
Total current assets before funds held for clients			3,447.9			3,364.2
Funds held for clients			24,372.1			18,489.2
Total current assets			27,820.0			21,853.4
Long-term marketable securities			59.1			68.1
Long-term receivables, net			240.0			226.5
Property, plant and equipment, net			732.6			723.8
Other assets			843.9			735.5
Goodwill			2,420.7			2,353.6
Intangible assets, net			659.2			688.0
Total assets		$	32,775.5		$	26,648.9
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	99.4		$	125.9
Accrued expenses and other current liabilities			1,597.7			1,527.1
Income taxes payable			207.6			118.7
Liabilities of discontinued operations			—			19.1
Total current liabilities before client funds obligations			1,904.7			1,790.8
Client funds obligations			23,958.1			18,673.0
Total current liabilities			25,862.8			20,463.8
Long-term debt			52.5			43.5
Other liabilities			576.9			390.5
Deferred income taxes			281.6			127.7
Long-term deferred revenues			502.9			475.5
Total liabilities			27,276.7			21,501.0
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 March 31, 2008 and June 30, 2007;outstanding, 518.2 and 535.8 shares at March 31, 2008 and June 30, 2007, respectively			63.9			63.9
Capital in excess of par value			463.6			351.8
Retained earnings			9,952.9			9,378.5
Treasury stock- at cost: 120.5 and 102.9 shares at March 31, 2008 and June 30, 2007, respectively			(5,459.7	)		(4,612.9	)
Accumulated other comprehensive income (loss)			478.1			(33.4	)
Total stockholders’ equity			5,498.8			5,147.9
Total liabilities and stockholders’ equity		$	32,775.5		$	26,648.9

 

 

See notes to the consolidated financial statements.

Automatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Cash Flows

(In millions)

(Unaudited)

 

 

		Nine Months Ended March 31,
		2008			2007
Cash Flows from Operating Activities:
Net earnings		$	1,002.2		$	944.0
Adjustments to reconcile net earnings to cash flows provided by operating activities:
Gain on sale of cost-based investment			—			(38.6	)
Depreciation and amortization			246.2			213.0
Deferred income taxes			3.1			(13.9	)
Stock-based compensation expense			94.8			103.6
Net pension expense			28.8			30.3
Net realized gain from the sales of marketable securities			(0.5	)		(17.3	)
Net amortization of premiums and accretion of discounts on available-for-sale securities			29.5			31.3
Gain on sale of discontinued businesses, net of tax			(66.5	)		(19.5	)
Other			70.5			26.5
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
Increase in accounts receivable			(127.1	)		(143.2	)
Increase in other assets			(43.8	)		(66.2	)
Decrease in accounts payable			(16.2	)		(23.8	)
Increase in accrued expenses and other liabilities			77.6			13.2
Operating activities of discontinued operations			—			72.6
Net cash flows provided by operating activities			1,298.6			1,112.0
Cash Flows from Investing Activities:
Purchases of corporate and client funds marketable securities			(4,783.6	)		(3,347.7	)
Proceeds from the sales and maturities of corporate and client funds marketable securities			3,455.7			3,513.6
Net (increase) in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations			(3,809.7	)		(6,065.1	)
Capital expenditures			(127.0	)		(121.3	)
Additions to intangibles			(67.7	)		(138.4	)
Acquisitions of businesses, net of cash acquired			(90.4	)		(433.0	)
Proceeds from the sale of cost-based investment			—			38.6
Dividend received from Broadridge Financial Solutions, Inc., net of $29.9 million in cash retained by Broadridge Financial Solutions, Inc.			—			660.1
Other			18.2			16.3
Proceeds from the sale of businesses included in discontinued operations, net of cash divested			112.4			17.2
Investing activities of discontinued operations			—			(29.5	)
Net cash flows used in investing activities			(5,292.1	)		(5,889.2	)
Cash Flows from Financing Activities:
Net increase in client funds obligations			5,175.2			6,225.4
Proceeds from issuance of debt			21.2			0.4
Payments of debt			(9.7	)		(1.6	)
Repurchases of common stock			(1,111.7	)		(906.3	)
Proceeds from stock purchase plan and exercises of stock options			170.3			224.5
Dividends paid			(401.4	)		(334.0	)
Financing activities of discontinued operations			—			134.1
Net cash flows provided by financing activities			3,843.9			5,342.5
Effect of exchange rate changes on cash and cash equivalents			33.5			7.5
Net change in cash and cash equivalents			(116.1	)		572.8
Cash and cash equivalents of continuing operations, beginning of period			1,746.1			1,800.1
Cash and cash equivalents of discontinued operations, beginning of period			14.7			100.5
Cash and cash equivalents, end of period			1,644.7			2,473.4
Less cash and cash equivalents of discontinued operations, end of period			—			59.3
Cash and cash equivalents of continuing operations, end of period		$	1,644.7		$	2,414.1

 

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 nine months ended March 31, 2008 may not be indicative of the results to be expected for the fiscal year ending June 30, 2008.

 

Note 2. 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. Previously presented amounts reclassified were as follows:

 

 

		June 30,
		2007			2006
Funds held for clients		$	18,489.2		$	17,483.9
Client funds obligations		$	18,673.0		$	17,787.4

 

 

This reclassification had no impact on total assets or total liabilities for any period 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. The impacts of the reclassification were as follows:

 

 

		Year ended June 30,									Nine months ended
		2007			2006			2005			March 31, 2007
Net cash flows provided by (used in) investing activities - as previously reported		$	430.8		$	452.2		$	(437.9	)	$	336.2
Impact of reclassification		$	(707.7	)	$	174.3		$	(5,018.9	)	$	(6,225.4	)
Net cash flows (used in) provided by investing activities - as reclassified		$	(276.9	)	$	626.5		$	(5,456.8	)	$	(5,889.2	)
Net cash flows used in financing activities - as previously reported		$	(1,884.4	)	$	(1,348.8	)	$	(746.5	)	$	(882.9	)
Impact of reclassification		$	707.7		$	(174.3	)	$	5,018.9		$	6,225.4
Net cash flows (used in) provided by financing activities - as reclassified		$	(1,176.7	)	$	(1,523.1	)	$	4,272.4		$	5,342.5

 

This reclassification had no impact on the net change in cash and cash equivalents or cash flows from operating activities for any period presented.

Refer to Note 11 “Corporate Investments and Funds Held for Clients” for additional disclosures related to funds held for clients and client funds obligations.

 

Note 3. 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, in January 2008, the Company finalized a purchase price adjustment and received an additional payment of $7.2 million, for which the Company recorded a gain of $7.2 million, or $4.9 million after taxes, within earnings from discontinued operations on the Statements of Consolidated Earnings. During the nine months ended March 31, 2008, the Company reported a gain of $95.7 million, or $62.1 million after taxes, within earnings from discontinued operations on the Statements of Consolidated Earnings.

 

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. The Company has classified the results of operations of this business as discontinued operations for all periods presented. Additionally, 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 from discontinued operations on the Statements of Consolidated Earnings. In March 2008, the Company received an additional payment of $2.5 million, which represented a purchase price adjustment for the sale of Sandy Corporation. The Company recorded an additional gain of $2.5 million, or $1.6 million, net of tax, within earnings from discontinued operations during the three and nine months ended March 31, 2008.

 

During the three and nine months ended March 31, 2008, the Company recorded a net gain of $3.5 million and $2.8 million, net of taxes, respectively, within earnings from discontinued operations related to a change in estimated taxes on the divestitures of businesses, partially offset by professional fees incurred in connection with the divestitures of businesses.

Operating results of these discontinued operations were as follows:

 

 

		Three Months Ended						Nine Months Ended
		March 31,						March 31,
		2008			2007			2008			2007
Revenues		$	—		$	576.8		$	—		$	1,499.1
Earnings from discontinued operations before income taxes			—			71.2			—			196.2
Provision for income taxes			—			49.3			—			98.9
Net earnings from discontinued operations before gain on disposal of discontinued operations			—			21.9			—			97.3
Gain on disposal of discontinued operations, net of provision for income taxes of $0.9 and $4.3 for the three months ended March 31, 2008 and 2007, respectively, and $31.7 and $4.9 for the nine months ended March 31, 2008 and 2007, respectively			10.0			6.9			66.5			19.5
Net earnings from discontinued operations		$	10.0		$	28.8		$	66.5		$	116.8

 

 

There were no assets or liabilities of discontinued operations as of March 31, 2008. 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 4. New Accounting Pronouncements

 

In March 2008, the Financial Accounting Standards Board (“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.” It requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and 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. The Company does not anticipate the adoption of SFAS No. 161 will have a material impact on its 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 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 anticipate 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 or 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 or 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 18).

Note 5. Acquisitions

 

The Company acquired three businesses during the nine months ended March 31, 2008 for approximately $42.1 million, net of cash acquired. These acquisitions resulted in approximately $26.2 million of goodwill. Intangible assets acquired, which totaled approximately $17.5 million, consisted primarily of customer contracts and lists and software that are being amortized over a weighted average life of approximately 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 $48.3 million of contingent payments during the nine months ended March 31, 2008, relating to previously consummated acquisitions.

 

Note 6. 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 March 31,
2008
Net earnings from continuing operations		$	403.6		$	—		$	—		$	—		$	—		$	403.6
Weighted average shares (in millions)			519.8						2.3			—			1.1			523.2
EPS from continuing operations		$	0.78														$	0.77
2007
Net earnings from continuing operations		$	360.1			0.3		$	—		$	—		$	—		$	360.4
Weighted average shares (in millions)			552.1			0.9			5.0			0.4			0.3			558.7
EPS from continuing operations		$	0.65														$	0.65
Nine months ended March 31,
2008
Net earnings from continuing operations		$	935.7		$	—		$	—		$	—		$	—		$	935.7
Weighted average shares (in millions)			524.0						4.5			0.4			1.0			529.9
EPS from continuing operations		$	1.79														$	1.77
2007
Net earnings from continuing operations		$	827.2			1.1		$	—		$	—		$	—		$	828.3
Weighted average shares (in millions)			551.6			1.0			4.4			0.5			1.0			558.5
EPS from continuing operations		$	1.50														$	1.48

 

Options to purchase 24.3 million and 13.0 million shares of common stock for the three months ended March 31, 2008 and 2007, respectively, and 12.8 million and 19.0 million shares of common stock for the nine months ended March 31, 2008 and 2007, 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 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 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 $31.4 million and $33.4 million was recognized in earnings from continuing operations for the three months ended March 31, 2008 and 2007, respectively, as well as related tax benefits of $9.2 million and $10.2 million, respectively. Stock-based compensation expense of $94.8 million and $103.6 million was recognized in earnings from continuing operations for the nine months ended March 31, 2008 and 2007, respectively, as well as related tax benefits of $28.3 million and $31.1 million, respectively.

 

		Three Months Ended March 31,						Nine Months  Ended March 31,
		2008			2007			2008			2007
Operating expenses		$	7.3		$	6.3		$	19.4		$	18.0
Selling, general and administrative expenses			18.3			21.3			58.8			67.9
System development and programming costs			5.8			5.8			16.6			17.7
Total pretax stock-based compensation expense included in continuing operations		$	31.4		$	33.4		$	94.8		$	103.6
Total pretax stock-based compensation expense included in discontinued operations			—