Management's Discussion and Analysis
Operating Results
Revenue and earnings reached record levels during each of the
past three fiscal years. During fiscal '96, revenue was over $3.5
billion and net earnings were $455 million. Earnings per share
increased 14% to $1.57. All per share amounts are adjusted for
a two-for-one common stock split, effective January 1, 1996. Fiscal
'96 was ADP's 35th consecutive year of double-digit earnings per
share growth since becoming a public company in 1961.
Effective November 1, 1995, ADP acquired control of GSI, the
leading European provider of payroll and human resource information
services. GSI also provides facilities management, banking, clearing
and other information services in Europe.
The financial results of GSI are included in ADP's consolidated
results on a one-month lag. Accordingly, the consolidated results
for the year ended June 30, 1996 include GSI operations for the
7 months ended May 31, 1996. During the fourth quarter a decision
was reached to sell GSI's facilities management business. As a
result, the net of revenues and pre-tax expenses of that business
for the quarter, which are not material, have been included in
general, administrative and selling expenses.
Revenue and revenue growth by ADP's major service groups are
shown below:
| ($ in millions) | ||||||
| Employer Services(a) | ||||||
| Brokerage Services | ||||||
| Dealer Services | ||||||
| Other (a) | ||||||
| Consolidated | ||||||
(a) Reclassified
Consolidated revenue grew 23% in fiscal '96, primarily from
increased market penetration, an expanded array of products and
services, and from acquisitions, with relatively minor contributions
from price increases. Revenue growth, excluding the GSI acquisition,
approximated 15%.
The margins of several of the current year acquisitions are
lower than ADP's overall margins, and, as expected, consolidated
margins decreased slightly. The consolidated pretax margin was
17.8% in '96, 18.5% in '95, and 18.1% in '94.
The Company does not prepare its financial statements in a
manner that generates the true stand-alone profitability for each
unit and profitability measurements are not maintained in a consistent
manner among 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 (ES)
Employer Services' revenue grew 18% in fiscal '96 (12% excluding
GSI). In the absence of all acquisitions revenue growth would
have been about 10%, the same as in '95 and up from the 9% internal
growth rate in '94.
As expected, the GSI acquisition had a slight negative impact
on the overall ES operating margin, which was 2S% for the year.
Without GSI the ES margin would have been 26%. (Margins were 26%
in '95 and 27% in 394.) Field operating margin increased in each
of the past three years as a result of continued productivity
and operating efficiencies. This increased field margin has enabled
ES to significantly increase its investments in product development,
sales, and marketing.
Employer Services' revenue shown above includes the pre- tax
equivalent of interest earned on funds collected from clients
as part of the Company's integrated payroll and pay- roll tax
filing services. The pretax equivalent has been calculated at
a consistent standard rate of 7.8% since 1986.
Brokerage Services
Aided by acquisitions and very high trading volumes, Broker
age Services' revenue grew 20% in '96. Without acquisitions, Brokerage
revenue growth would have approximated 12%. Growth rates in '95
end '94 were 8% and 20%, respectively.
Brokerage Services' operating margin was about 13% in fiscal
'96, depressed slightly by the impact of acquisitions. The operating
margin was 13% in '95 and 15% in '94. These prior year margins
are slightly lower than previously reported as prior years' results
have been restated for the inclusion of certain expenses previously
recorded at the Corporate level.
Dealer Services
Dealer Services' revenue grew 26% in '96, compared to increases
of 32% in '95 and 22% in '94. Revenue growth in each year was
aided by several small acquisitions. In the absence of acquisitions,
'96 revenue growth would have been about 10%. The current year's
acquisitions have lower mar- gins than the existing Dealer margins,
and accordingly, operating margin decreased slightly to approximately
18% in fiscal '96 from 20% in '95 end '94.
Other
The primary components of "Other revenue" are claims
services, services for wholesalers, the non-Employer Services
businesses of GSI 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%.
The revenue from two businesses providing payroll services in
Europe have been reclassified from Other revenue" and are
now included in Employer Services. Other revenue" has increased
primarily as a result of the GSI acquisition and growth in the
Claims Services business.
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 material during the three-year
period ended June 30, 1996.
In '96, the Company's effective tax rate was approximately
28%, up from approximately 26% in '95, primarily s a result of
greater weighting of taxable versus non-taxable earnings, the
impact of non-deductible goodwill arising from e GSI acquisition,
and the elimination of the research and development tax credit
in '96. The '95 effective rate increased from approximately 25%
in '94, primarily as a result of greater weighting of taxable
versus non-taxable earnings. Consolidated after-tax margins were
12.7% in '96, 13.6% in '95, and 3.5% in '94.
In '94 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 $2.7 million ($.01 per share). The cumulative
effect of adopting Statement No. 112 was to decrease net earnings
by $7.5 million ($.03 per share), net of $5.0 million of income
tax benefits.
For '97 ADP is planning another record year with double-digit
growth in revenue and about 15% growth in earnings per share.
Additional comments and operating results are included in the
Letters to Shareholders on pages 2 through 4 and in the business
descriptions presented on pages 5 through 15.
Financial Condition
ADP's financial condition and balance sheet remain exceptionally
strong. At June 30, 1996, cash and marketable securities approximated
$1.1 billion. Shareholders' equity exceeded $2.3 billion, and
return on average equity for the year was 20%. The ratio of long-term
debt to equity at June 30, 1996 was 17%.
A portion of the GSI purchase price was funded by borrowing
approximately 466 million French francs (equivalent to $91 million
at June 30, 1996) with the remainder coming from the Company's
cash and marketable securities.
Cash flow from operating activities exceeded $644 million in
'96. We expect another excellent cash flow year in fiscal 1997.
In '96, 6.6 million shares of common stock were purchased at
an average price of approximately $37, as part of an ongoing program
to fund equity related employee benefits. The Board of Directors
has authorized the purchase of up to 6.8 million additional shares.
During '96, the Company purchased several businesses for approximately
$473 million in cash and $20 million in common stock. The cost
of acquisitions in '95 end '94 aggregated $123 million and $81
million, respectively. The Company also acquired several businesses
in '96 and '95 in pooling of interest transactions in exchange
for 969,000 and 2,362,000 shares of common stock, respectively.
The Company's historical financial statements were not restated
because in the aggregate these pooling transactions were not material.
Capital expenditures during '96 were approximately $164 million,
following investments of $118 million in '95 and $111 million
in '94. Capital spending in fiscal '97 should approximate $200
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:
| Fiscal 1996 quarter ended | |||
| June 30 | |||
| March 31 | |||
| December 31 | |||
| September 30 | |||
| Fiscal 1995 quarter ended | |||
| June 30 | |||
| March 31 | |||
| December 31 | |||
| September 30 |
As of June 30, 1996 there were approximately 26,800 holders of record of Automatic Data Processing, Inc. common stock. Over 100,000 additional holders have their stock in "street name". All per share information has been adjusted to reflect a two-for-one stock split on January 1, 1996.