Management's Discussion and Analysis
Operating Results
Revenue and earnings reached record levels during each of the
past three fiscal years. During fiscal '97, revenue increased
15% to over $4.1 billion. Prior to minor non-recurring charges,
pretax earnings increased 19% and earnings per share (EPS) increased
15% to $1.80. The Company reached a settlement with the Federal
Trade Commission to divest certain assets acquired in fiscal '95,
and consequently, a non-recurring charge was recorded in the fourth
quarter lowering EPS by $.04 to $1.76 for the year. Fiscal '97
EPS was not impacted by the net effect of certain non-recurring
items related to the Brokerage Front Office business (see Brokerage
discussion below). Fiscal '97 was ADP's 36th consecutive year
of double-digit earnings per share growth since becoming a public
company in 1961.
Revenue and revenue growth by ADP's major service groups are shown
below:
| ($ in millions) | ||||||
| Employer Services (a) | ||||||
| Brokerage Services | ||||||
| Dealer Services | ||||||
| Other (a) | ||||||
| Consolidated | ||||||
(a) Reclassified
Consolidated revenue grew 15% in fiscal '97 primarily from increased
market penetration, an expanded array of products and services
and from acquisitions, with relatively minor contributions from
price increases. Prior to acquisitions, business dispositions
and foreign exchange differences, revenue increased approximately
12%.
Prior to non-recurring charges, the consolidated pretax margin
was 18.3% in '97, 17.8% in '96 and 18.5% in '95. Pretax margin
improved over the previous year as continued automation and operating
efficiencies enabled the Company to offset start-up costs associated
with new products and acquisitions. Pretax margin in '97 after
non-recurring charges was 17.6%.
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 19% in fiscal '97, and in the
absence of acquisitions revenue growth would have been about 11%,
up from 10% in '96.
In '97 and '96 the overall operating margin was 22%. The margin
in North America has improved by about 1% versus fiscal '96 primarily
due to continued automation and operating efficiencies. This increased
field margin has enabled ES to increase investments in product
development and sales. The overall ES margin remained flat as
a result of greater weighting of international operations which
have somewhat lower margins in '97.
ES' 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 standard rate. In fiscal '97
the standard rate was changed from 7.8% in prior years to 6% and,
accordingly, the previously reported balances for Employer Services'
and "Other" revenue have been reclassified. As a result
of this change, the ES margin is 3% lower than previously reported.
Brokerage Services
Brokerage revenue grew by 13% aided by very high back-office trading
volumes. In the absence of acquisitions, revenue growth would
have been about 12%, the same as in '96.
Prior to non-recurring items in '97, Brokerage Services' operating
margin was about 14% in '97, compared to 13% in both '96 and '95.
In '97 the Company recorded a non-taxable $19 million gain to
net earnings related to the return of a front-office client deposit.
The Company also recorded a provision of $31 million ($19 million
after tax) to restructure its front-office business in order to
reduce product lines and platforms and consolidate data centers.
This effort will continue and will result in about $25 million
lower earnings in the front-office business in '98.
Dealer Services
Dealer Services' revenue grew 17% in '97, compared to 26% in '96
and 32% in '95. Revenue growth in each year was aided by several
small acquisitions. In the absence of acquisitions, '97 revenue
growth would have been 6%. Revenue growth has been aided by increased
usage of applications at auto dealerships, while at the same time
changes in industry distribution channels have slowed auto dealership
investments in new computer systems. Dealer Services' margins
decreased slightly to 17% in fiscal '97 from 18% in '96 and 20%
in '95 primarily due to the integration of acquisitions and a
shift in product mix.
Other
The primary components of "Other" revenue are claims
services, services for wholesalers, interest income, foreign exchange
differences, and miscellaneous processing services. 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
6.0%.
A non-recurring pre-tax charge of $17.8 million was recorded in
the fourth quarter of fiscal '97 reflecting the Company's settlement
with the Federal Trade Commission, under which the Company will
divest certain non-material assets.
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, address Year
2000 compliance, and develop new products.
In '97 the Company's effective tax rate was approximately 29%,
up from 28% in '96 and 26% in '95. The increased rate is primarily
as a result of the greater weighting of taxable versus non-taxable
earnings, and the impact of non-deductible goodwill arising from
the '96 GSI acquisition.
For '98 ADP is planning another record year with about 15% growth
in revenue and double-digit growth in earnings per share over
the '97 results prior to non-recurring items.
Additional comments and operating results are included in the
Letters to Shareholders on pages 3 through 5 and in the business
descriptions presented on pages 6 through 15.
Financial Condition
ADP's financial condition and balance sheet remains exceptionally
strong. At June 30, 1997, cash and marketable securities approximated
$1.5 billion. Shareholders' equity exceeded $2.6 billion, and
return on average equity for the year was 21%. The ratio of long-term
debt to equity at June 30, 1997 was 15%.
Cash flow from operating activities exceeded $700 million in '97.
We expect another excellent cash-flow year in '98.
In '97, 3.2 million shares of common stock were purchased at an
average price of approximately $40, as part of an ongoing program
to fund equity related employee benefits. The board of directors
has authorized the purchase of up to 4.4 million additional shares.
During '97, the Company purchased several businesses for approximately
$115 million in cash and $7 million in common stock. The cost
of acquisitions in '96 and '95 aggregated $473 million and $123
million, respectively. The Company also acquired several businesses
in the three years ended 1997, 1996 and 1995 in pooling of interest
transactions in exchange for 3.0, 1.0 and 2.4 million 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 '97 were approximately $175 million
following investments of $164 million in '96 and $118 million
in '95. Capital spending in fiscal '98 should approximate $230
million and remains at a very comfortable level at about 5% of
revenues.
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:
| Dividends | |||
| Fiscal 1997 Quarter Ended | |||
| June 30, | |||
| March 31, | |||
| December 31, | |||
| September 30, | |||
| Fiscal 1996 quarter ended | |||
| June 30, | |||
| March 31, | |||
| December 31, | |||
| September 30, | |||
As of June 30, 1997 there were approximately 28,000 holders of
record of Automatic Data Processing, Inc. common stock. Over 100,000
additional holders have their stock in "street name".