Operating Results
Revenue and earnings reached record levels during each of the past three fiscal years. During fiscal ’95, revenue approximated $2.9 billion and net earnings approximated $395 million. Earnings per share increased 17% to $2.77. Fiscal ’95 was ADP’s 34th consecutive year of double-digit earnings per share growth since becoming a public company in 1961.
Revenue and revenue growth by ADP’s major service groups are shown below:
Revenue Revenue Growth
Years Ended June 30, Years Ended June 30,
1995 1994 1993 1995 1994 1993
($ in millions)
Employer Services $1,615 $1,424 $1,311 13% 9% 17%
Brokerage Services 657 606 505 8 20 23
Dealer Services 440 334 274 32 22 19
Other 182 105 133 73 (21) (23)
Consolidated $2,894 $2,469 $2,223 17% 11% 15%
Consolidated revenue grew 17% in fiscal ’95, primarily from increased market penetration, an expanded array of products and services, and acquisitions, with relatively minor contributions from price increases.
The consolidated pretax margin was 18.5% in ’95, up from 18.1% and 17.4% in ’94 and ’93, respectively. Continued automation and productivity gains and the impact of higher interest rates enabled the Company to offset the start up costs associated with new products and acquisitions.
The Company does not prepare its financial statements in a manner that generates the true standalone profitability for each unit and profitability measurements are not maintained in a consistent manner between the Company’s major service groups. Certain revenues and expenses are charged to business units at a standard rate for management and motivation reasons. Other costs are recorded based on management responsibility. As a result, various income and expense items are recorded at the Corporate level and certain shared costs are not allocated. Consequently, comparisons of specific margins between groups are not meaningful, although trend information within a service group is a useful directional indicator.
Employer Services
Employer Services’ revenue grew 13% in fiscal ’95 aided by three small acquisitions. In the absence of these acquisitions, revenue growth would have been about 10%, up from the 9% rate in ’94. Revenue growth in ’93 of 17% was aided by the acquisition in May 1992 of Bank of America’s payroll business. In the absence of this transaction, ’93 revenue growth would have been approximately 8%.
As expected, the three recent acquisitions caused a slight negative impact on overall Employer Services’ operating margin, which was 26% for the year (27% in ’94 and 26% in ’93). Field operating margin has increased in each of the past three years as a result of continued productivity and operating efficiencies. This increased field margin has enabled Employer Services to significantly increase investments in product development, sales and marketing.
Employer Services’ revenue shown above includes the pretax equivalent of interest earned on funds collected from clients as part of the Company’s integrated payroll and payroll tax filing services. The pretax equivalent has been calculated at a consistent standard rate of 7.8% since 1986.
Brokerage Services
Brokerage Services’ revenue grew 8% in fiscal ’95, down from increases of 20% in ’94 and 23% in ’93. These previous growth rates were aided by the February 1993 acquisition of certain back-office processing and international equities quotation services and the February 1992 acquisition of IECA, which provides proxy distribution services. In the absence of these transactions revenue growth for ’94 and ’93 would have been approximately 10% to 11% in each year.Brokerage Services’ operating margin was about 15% in fiscal ’95, down from 16% in ’94 (14% in ’93) as a result of ’95 investments to upgrade capacity and disaster recovery capabilities.
Dealer Services
Dealer Services’ revenue grew 32% in ’95, up from increases of 22% in ’94 and 19% in ’93. Revenue growth in each year was aided by several small acquisitions. In the absence of acquisitions, ’95 revenue growth would have been about 18%. Operating margin was approximately 20% in fiscal ’95 and ’94, up from approximately 15% in ’93.
Other
The primary components of “Other revenue” are claims services, services for wholesalers and European payroll users and interest income. In addition, Other revenue has been reduced to adjust for the difference between actual interest income earned on invested tax filing funds and income credited to Employer Services at a standard rate of 7.8%. Other revenue grew in ’95 primarily as a result of several small acquisitions and higher interest rates.In each of the past three years, investments in systems development and programming have increased at a greater rate than the Company’s overall growth rate. Investments have increased to accelerate automation, migrate to new computing technologies and develop new products. The impact of fluctuations in foreign currency rates on the Company’s financial statements was not mater-ial during the three year period ended June 30, 1995.
In ’95, the Company’s effective tax rate was approximately 26%, up from approximately 25% in ’94, primarily as a result of greater weighting of taxable versus non-taxable earnings in ’95. The ’94 effective rate increased from approximately 24% in ’93, primarily as a result of the increased statutory tax rate enacted in August 1993. Consolidated after- tax margins were 13.6% in ’95, 13.5% in ’94, and 13.2% in ’93. In ’95, the Company adopted FASB Statement No. 115,“Accounting for Certain Investments in Debt and Equity Securities”. The impact of adopting this statement was not material. In 1994, the Company adopted FASB Statements No. 109, “Accounting for Income Taxes”, and No. 112, “Employer’s Accounting for Postemployment Benefits”, effective July 1, 1993. The cumulative effect of adopting Statement No. 109 was to increase net earnings by $2.7 million ($.02 per share). The cumulative effect of adopting Statement No. 112 was to decrease net earnings by $7.5 million ($.05 per share).
For ’96 ADP is planning another record year with around 15% growth in both revenue and earnings per share.
Additional comments and operating results are included in the Letter to Shareholders on pages 2 and 3 and in the business descriptions presented on pages 4 through 12.
Financial Condition
ADP’s financial condition and balance sheet remain exceptionally strong. At June 30, 1995, cash and marketable securities appproximated $1.3 billion. Shareholders’ equity approximated $2.1 billion, and return on average equity for the year was 21%. The ratio of long-term debt to equity at June 30, 1995 was 19%.
Cash flow from operating activities was $478 million in ’95. We expect another excellent year of cash flow in fiscal 1996.
In ’95, as part of an on-going program, we purchased 219,000 shares of common stock at an average price of approximately $60 to partially fund our equity related employee benefit plans. During the past five years we have spent about $532 million for the purchase of approximately 17 million treasury shares. The Board of Directors has authorized the purchase of up to 6.7 million additional shares.
During ’95, the Company purchased several businesses for approximately $107 million in cash and $16 million in common stock. The cost of acquisitions in ’94, and ’93 aggregated $81 million and $57 million, respectively. The Company also acquired several businesses in ’95 and ’93 in pooling of interest transactions in exchange for 1,181,000 and 348,000 shares of common stock, respectively. The Company’s historical financial statements were not restated because these transactions were not material in the aggregate.
Capital expenditures during ’95 were approximately $118 million, following investments of $111 million in ’94 and $87 million in ’93. Capital spending in fiscal ’96 should approximate $150 million.
Market Price and Dividend Data
The market price of Automatic Data Processing, Inc. (AUD) common shares based on New York Stock Exchange composite transactions and cash dividends per share declared during the past two years have been:
Price Per Share Dividends Fiscal 1995 quarter ended High Low Per Share June 30 $66 $60 1/2 $.175 March 31 65 1/2 57 1/2 .15 December 31 59 3/4 52 1/2 .15 September 30 56 7/8 50 3/4 .15 Fiscal 1994 quarter ended June 30 $55 1/4 $47 5/8 $.15 March 31 55 1/2 50 1/4 .13 December 31 56 7/8 49 5/8 .13 September 30 52 5/8 47 .13
As of June 30, 1995 there were approximately 24,500 holders of record of Automatic Data Processing, Inc. common stock. Over 90,000 additional holders have their stock in “street name”.