Years ended June 30, 1995, 1994 and 1993
Note 1. Summary of Significant Accounting Policies
A. Principles of Consolidation. The consolidated financial statements include the accounts of Automatic Data Processing, Inc. and its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.B. Accounting Changes. In fiscal 1994 the Company adopted FASB Statements No. 109, "Accounting for Income Taxes", and No. 112, "Employers' 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, which requires certain postemployment benefits to be accrued as service is provided, was to decrease net earnings by $7.5 million ($.05 per share), net of $5.0 million of income tax benefits.
C. Cash and Cash Equivalents. Highly liquid investments with a maturity of three months or less at the time of purchase are considered cash equivalents.
D. Marketable Securities. Marketable securities consist primarily of high grade municipal investments. Effective July 1, 1994 the Company adopted FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Most of the Company's marketable securities are classified under Statement No. 115 as "available- for-sale", and, accordingly, are carried on the June 30, 1995 balance sheet at fair market value which approximates cost. Gains/losses from the sale of marketable securities during fiscal 1995 were not material and there was no significant impact resulting from the adoption of the Statement. Approximately $244 million of the Company's long-term marketable securities mature in 1-2 years, $253 million in 2-3 years, and the remainder in less than 7 years.
E. Property, Plant and Equipment. Property, plant and equipment is depreciated over the estimated useful lives of the assets by the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements.
The estimated useful lives of assets are primarily as follows:
Data processing equipment 2 to 3 years Buildings 20 to 40 years Furniture and fixtures 3 to 7 years
F. Intangibles. Intangible assets are recorded at cost and are amortized primarily on a straight-line basis over appropriate periods ranging from 3 to 40 years. Goodwill is periodically reviewed to determine recoverability by comparing its carrying value to expected future cash flows.
G. Revenue Recognition. Service revenue, including software license fees, maintenance fees and other ancillary fees, is recognized as services are provided. In those instances where hardware is sold to clients as part of a bundled service offering, the gross profit on the sale of hardware and prepaid software license fees, less costs of selling and installation, is deferred and recognized on a straight-line basis over the initial contract period, which generally is from 5 to 7 years.
H. Earnings Per Share. Earnings per share are based upon the weighted average number of shares outstanding during the respective periods. I. Line of Business. The Company is engaged in the computing services business.
J. Reclassification of Prior Financial Statements. Certain reclassifications have been made to previous years' financial statements to conform to current classifications.
Note 2. Acquisitions
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 approximately $81 million and $57 million, respectively. The results of acquired businesses, which were not material to the Company's financial statements, are included in the consolidated financial statements from the date of acquisition.
The Company 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 in the aggregate these transactions were not material.
Note 3. Receivables
Trade accounts receivable is net of an allowance for doubtful accounts of $23 million and $21 million at June 30, 1995 and 1994, respectively. The Company finances the sale of computer systems to certain of its clients. These finance receivables, substantially all of which are due from automobile and truck dealerships, are reflected in the consolidated balance sheets as follows:
1995 1994
(In thousands) Current Long-Term Current Long-Term
June 30,
Receivables $110,345 $247,145 $ 91,884 $214,815
Less:
Allowance for
doubtful accounts (12,136) (26,166) (10,204) (24,526)
Unearned income (24,102) (31,121) (20,603) (28,017)
$ 74,107 $189,858 $ 61,077 $162,272
Unearned income from finance receivables represents the excess of gross receivables over the sales price of the computer systems financed. Unearned income is amortized using the interest method to maintain a constant rate of return on the net investment over the term of each contract.
Long-term receivables at June 30, 1995 mature as follows:
(In thousands)
1997 $ 96,852
1998 77,016
1999 48,546
2000 19,807
Thereafter 4,924
$247,145
Note 4. Intangible Assets
Components of intangible assets are as follows:
(In thousands)
June 30, 1995 1994
Goodwill $ 482,076 $348,740
Other. 528,277 513,055
1,010,353 861,795
Less accumulated amortization (304,697) (252,770)
$ 705,656 $609,025
Other intangibles consist primarily of purchased rights to provide data processing
services to various groups of clients. Amortization of intangibles totalled $66 million
for fiscal 1995, $61 million for 1994 and $57 million for 1993.
Note 5. Long-Term Debt
Components of long-term debt are as follows:
(In thousands)
June 30, 1995 1994
Zero coupon convertible
subordinated notes (5 1/4% yield) $339,132 $319,057
Industrial revenue bonds
(with fixed and variable
interest rates from 3.6% to 8.3%) 39,560 39,995
Other 21,041 16,103
399,733 375,155
Less current portion (9,556) (2,196)
$390,177 $372,959
The zero coupon convertible subordinated notes have a $805 million face value and
mature February 20, 2012, unless converted or redeemed earlier. The notes are
convertible into approximately 5.2 million shares of the Company's common stock. The
notes are callable at the option of the Company after February 1996, and the holders of
the notes can require redemption in 1997, 2002, and 2007. As of June 30, 1995 and 1994,
the quoted market prices for the zero coupon notes were approximately $360 million and
$322 million, respectively. The fair value of the other debt included above, based on
available market information, approximates its carrying value.
Long-term debt repayments are due as follows:
(In thousands)
1997 $3,226
1998 630
1999 630
2000 630
Thereafter 385,061
$390,177
Interest payments were approximately $4 million during the years ended June 30, 1995,
1994 and 1993.
Note 6. Payroll and Payroll Tax Filing Services
As part of its integrated payroll and payroll tax filing services, the Company collects
funds for federal, state and local employment taxes from approximately 235,000 clients,
files over 10.5 million applicable returns, handles all regulatory correspondence and
amendments, absorbs regulatory charges for certain penalties and interest, and remits
the funds to the appropriate tax agencies. In addition to fees paid by clients for
these services, the Company receives interest during the interval between the receipt
and disbursement of funds by investing the funds primarily in AA or better rated
municipal instruments, with no more than $60 million in any single instrument. The
amount of collected but unremitted funds varies significantly during the year and
averaged approximately $3.3 billion in fiscal 1995, $2.8 billion in fiscal 1994 and
$2.4 billion in fiscal 1993. The amount of such funds as of June 30, 1995 and 1994 was
$4.6 billion and $3.7 billion, respectively.
Note 7. Employee Benefit Plans
A. Stock Option Plans. The Company has stock option plans which provide for the
issuance to eligible employees of incentive and non-qualified stock options, which may
expire as much as 10 and 12 years, respectively, from the date of grant, at prices not
less than the fair market value on the date of grant. At June 30, 1995, there were
4,650 participants in the plans. The aggregate purchase price for options outstanding
at June 30, 1995 was approximately $428 million. The options expire between 1995 and
2005.
A summary of changes in the stock option plans for the three years ended June 30, 1995
is as follows:
(In thousands, except per share amounts) Number of Options
Year ended June 30, 1995 1994 1993
Options outstanding, beginning of year 9,670 8,237 8,021
Options granted ($53 to $62 per share in 1995,
$47 to $51 in 1994 and $43 to $48 in 1993) 2,692 3,091 1,566
Options exercised ($8 to $49 per share in 1995,
$8 to $47 in 1994 and $6 to $43 in 1993) (1,141) (859) (886)
Options cancelled (882) (804) (467)
Other 23 5 3
Options outstanding, end of year ($12 to $62 per share
in 1995, $9 to $51 in 1994 and $8 to $48 in 1993) 10,362 9,670 8,237
Options exercisable, end of year 2,826 2,590 2,332
Shares available for future grants, end of year. 2,221 4,054 2,347
Shares reserved for issuance under stock option plans 12,583 13,724 10,584
B. Restricted Stock Plan. The Company has a restricted stock plan under which shares of
common stock have been sold for nominal consideration to certain key employees. These
shares are restricted as to transfer and in certain circumstances must be resold to the
Company at the original purchase price. The restrictions lapse over periods of up to
six years. During the years ended June 30, 1995, 1994 and 1993, the Company issued
53,150, 94,050 and 126,200 restricted shares, and repurchased 25,100, 23,100 and 6,700
shares, respectively.
C. Employee Stock Purchase Plans. The Company has stock purchase plans under which
eligible employees have the ability to purchase shares of common stock at 85% of the
lower of market value as of the date of purchase election or end of the plan.
Approximately 1.0 million shares are scheduled for issuance on December 31, 1995 and
1.1 million on December 31, 1996. Approximately 1.0 million and 1.2 million shares were
issued during the years ended June 30, 1995 and 1994, respectively. At June 30, 1995
and 1994, there were approximately 5.3 million and 6.3 million shares reserved for
purchase under the plan. Included in liabilities as of June 30, 1995 and 1994 are
employee stock purchase plan withholdings of approximately $45 million and $42 million,
respectively.
D. Pension Plan. The Company has a defined benefit cash balance pension plan covering
substantially all domestic employees, under which employees are credited with a
percentage of base pay each year plus 7% interest. Employees are fully vested on
completion of five years service. The Company's policy is to make contributions within
the range determined by generally accepted actuarial principles.
The plan's funded status is as follows:
(In thousands)
June 30, 1995 1994
Funded plan assets at market value,
primarily stocks and bonds $134,200 $105,300
Actuarial present value of benefit obligations:
Vested benefits 119,000 97,700
Non-vested benefits 7,400 7,400
Accumulated/projected benefit obligation 126,400 105,100
Plan assets in excess of projected benefits 7,800 200
Prior service cost (4,300) (5,200)
Transition obligation 1,700 2,000
Unrecognized net actuarial loss due
to different experience than that assumed 31,400 32,600
Prepaid pension cost $ 36,600 $ 29,600
The components of net pension expense were as follows:
(In thousands)
Year ended June 30, 1995 1994 1993
Service cost – benefits earned
during the period $12,600 $10,700 $ 8,700
Interest cost on projected benefits 8,400 6,800 5,400
Return on plan assets (11,600) (1,500) (5,900)
Net amortization and deferral 3,600 (7,300) (800)
$13,000 $ 8,700 $ 7,400
Assumptions used to develop the actuarial
present value of benefit obligations for
the three years ended June 30, 1995 were:
1995 1994 1993
Discount rate 8.0% 8.0% 8.5%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
Rate of increase in compensation levels 6.0% 6.0% 6.0%
E. Retirement and Savings Plan. The Company has a 401(k) retirement and savings plan
which allows eligible employees to contribute up to 12% of their compensation annually.
The Company matches a portion of this contribution which amounted to approximately
$11.0 million, $9.0 million and $7.0 million for calendar years 1994, 1993 and 1992,
respectively.
Note 8. Income Taxes
In accordance with FASB Statement No. 109, accounting for income taxes follows the
asset and liability approach. Deferred taxes reflect the tax consequences on future
years of differences between the financial reporting and tax bases of assets and
liabilities.
The provision for income taxes consists of the following components:
(In thousands)
Year ended June 30, 1995 1994 1993
Current:
Federal $106,440 $ 87,430 $60,550
Foreign 19,150 10,670 9,260
State 24,910 17,310 10,550
Total current 150,500 115,410 80,360
Deferred:
Federal (4,440) (620) 9,625
Foreign (5,430) (2,880) (855)
State (1,180) 300 3,230
Total deferred (11,050) (3,200) 12,000
$139,450 $112,210 $92,360
At June 30, 1995 and 1994, the Company had gross deferred tax assets of approximately
$78 million and $58 million, respectively, consisting primarily of operating expenses
not currently deductible for tax return purposes. Valuation allowances were not
material. Gross deferred tax liabilities of approximately $85 million as of each date
consisted primarily of depreciation and amortization temporary differences.
Income tax payments were approximately $131 million in 1995, $90 million in 1994 and
$78 million in 1993. Pretax domestic earnings approximated $505 million in 1995, $430
million in 1994 and $360 million in 1993.
A reconciliation between the Company's effective tax rate and the U.S. federal
statutory rate is as follows:
(In thousands, except percentages)
Year ended June 30, 1995 Percent 1994 Percent 1993 Percent
Provision for taxes
at statutory rate $187,000 35.0 $156,200 35.0 $131,400 34.0
Increase (decrease)
in provision from:
Investments in municipals
and preferred stocks (57,995) (10.9) (50,860) (11.4) (44,100) (11.4)
State taxes, net of
federal tax benefit 15,425 2.9 12,540 2.8 9,100 2.4
Other (4,980) (.9) (5,670) (1.3) (4,040) (1.1)
$139,450 26.1 $112,210 25.1 $ 92,360 23.9
Note 9. Lease Obligations
The Company and its subsidiaries have various facilities and equipment lease
obligations. Total rental expense was approximately $152 million in 1995, $135 million
in 1994 and $123 million in 1993 with minimum lease commitments under operating leases
as follows:
(In thousands)
Year ending June 30,
1996 $131,000
1997 93,000
1998 53,000
1999 25,000
2000 14,000
Thereafter 29,000
$345,000
In addition to fixed rentals, certain leases require payment of maintenance and real
estate taxes and contain escalation provisions based on future adjustments in price
indices.
Note 10. Quarterly Financial Results (Unaudited)
Summarized quarterly results of operations for the three years ended June 30, 1995 are
as follows:
(In thousands, except per share amounts)
First Second Third Fourth
Year ended June 30, 1995 Quarter Quarter Quarter Quarter
Revenue $622,286 $672,597 $798,989 $799,870
Net earnings $ 68,700 $ 94,920 $125,270 $105,940
Earnings per share $ .49 $ .67 $ .87 $ .74
Year ended June 30, 1994
Revenue $551,983 $577,661 $674,405 $664,917
Earnings before cumulative
effect of accounting changes $ 58,510 $ 80,180 $104,990 $ 90,440
Net earnings $ 53,710 $ 80,180 $104,990 $ 90,440
Earnings per share:
Before cumulative effect
of accounting changes $ .42 $ .57 $ .74 $ .64
Cumulative effect of
accounting changes $ (.03) $ –– $ –– $ ––
Net income $ .39 $ .57 $ .74 $ .64
Year ended June 30, 1993
Revenue $495,303 $518,471 $612,956 $596,644
Net earnings $ 51,920 $ 70,130 $ 92,480 $ 79,670
Earnings per share $ .37 $ .50 $ .65 $ .56
Third quarter revenue and earnings have historically been positively impacted by
calendar year-end processings associated with many of the Company's services.