Automatic Data Processing, Inc. 10-Q
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934 |
|
|
|
For
the Quarterly Period Ended March 31, 2007 |
|
|
|
OR
|
|
|
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934 |
|
|
|
For
the Transition Period From
to |
Commission
File Number 1-5397
AUTOMATIC
DATA PROCESSING, INC.
(Exact
name of
registrant as specified in its charter)
Delaware
|
|
22-1467904
|
(State
or
other jurisdiction of incorporation or organization)
|
|
(IRS
Employer
Identification No.)
|
|
|
|
One
ADP Boulevard, Roseland, New Jersey
|
|
07068
|
(Address
of
principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant’s
telephone number, including area code: (973)
974-5000
|
|
Indicate
by check
mark whether the registrant: (1) has filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days. Yes [X] No [
]
Indicate
by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [X] |
Accelerated
filer [ ] |
Non-accelerated
filer [ ] |
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act).
Yes [
] No
[X]
The
number of shares outstanding of the registrant’s common stock as of April 30,
2007 was 553,238,164.
Part
I.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
other than interest on funds
|
|
|
|
|
|
|
|
|
|
|
|
|
held
for Employer Services' clients and
|
|
|
|
|
|
|
|
|
|
|
|
|
PEO
revenues
|
|
$ |
1,741.9
|
|
|
$ |
1,563.2
|
|
|
$ |
4,729.5
|
|
|
$ |
4,211.7
|
|
Interest
on
funds held for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Services' clients
|
|
|
198.3
|
|
|
|
166.2
|
|
|
|
475.3
|
|
|
|
393.5
|
|
PEO
revenues
(A)
|
|
|
249.1
|
|
|
|
197.6
|
|
|
|
649.5
|
|
|
|
516.9
|
|
TOTAL
REVENUES
|
|
|
2,189.3
|
|
|
|
1,927.0
|
|
|
|
5,854.3
|
|
|
|
5,122.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
899.4
|
|
|
|
781.8
|
|
|
|
2,536.8
|
|
|
|
2,160.5
|
|
Systems
development and programming costs
|
|
|
122.2
|
|
|
|
120.5
|
|
|
|
355.7
|
|
|
|
343.2
|
|
Depreciation
and amortization
|
|
|
54.0
|
|
|
|
42.3
|
|
|
|
155.8
|
|
|
|
122.9
|
|
TOTAL
COST OF REVENUES
|
|
|
1,075.6
|
|
|
|
944.6
|
|
|
|
3,048.3
|
|
|
|
2,626.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
554.1
|
|
|
|
495.3
|
|
|
|
1,570.5
|
|
|
|
1,376.4
|
|
Interest
expense
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
74.8
|
|
|
|
51.3
|
|
Other
income,
net
|
|
|
(25.2 |
) |
|
|
(23.0 |
) |
|
|
(175.4 |
) |
|
|
(78.6 |
) |
TOTAL
EXPENSES
|
|
|
1,611.5
|
|
|
|
1,423.9
|
|
|
|
4,518.2
|
|
|
|
3,975.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
FROM
CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEFORE
INCOME TAXES
|
|
|
577.8
|
|
|
|
503.1
|
|
|
|
1,336.1
|
|
|
|
1,146.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for
income taxes
|
|
|
213.5
|
|
|
|
188.5
|
|
|
|
495.7
|
|
|
|
430.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
FROM CONTINUING OPERATIONS
|
|
$ |
364.3
|
|
|
$ |
314.6
|
|
|
$ |
840.4
|
|
|
$ |
716.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from
discontinued operations, net of provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes of $51.4 and $35.0 for the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
March 31, 2007 and 2006, respectively, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$96.9
and $84.5 for the nine months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
and 2006, respectively
|
|
|
24.6
|
|
|
|
56.0
|
|
|
|
103.6
|
|
|
|
134.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
EARNINGS
|
|
$ |
388.9
|
|
|
$ |
370.6
|
|
|
$ |
944.0
|
|
|
$ |
850.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings
Per Share from Continuing Operations
|
|
$ |
0.66
|
|
|
$ |
0.54
|
|
|
$ |
1.52
|
|
|
$ |
1.24
|
|
Basic
Earnings
Per Share from Discontinued Operations
|
|
|
0.04
|
|
|
|
0.10
|
|
|
|
0.19
|
|
|
|
0.23
|
|
BASIC
EARNINGS
PER SHARE
|
|
$ |
0.70
|
|
|
$ |
0.64
|
|
|
$ |
1.71
|
|
|
$ |
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share from Continuing Operations
|
|
$ |
0.65
|
|
|
$ |
0.54
|
|
|
$ |
1.51
|
|
|
$ |
1.23
|
|
Diluted
Earnings Per Share from Discontinued Operations
|
|
|
0.04
|
|
|
|
0.10
|
|
|
|
0.19
|
|
|
|
0.23
|
|
DILUTED
EARNINGS PER SHARE
|
|
$ |
0.70
|
|
|
$ |
0.64
|
|
|
$ |
1.69
|
|
|
$ |
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted
average shares outstanding
|
|
|
552.1
|
|
|
|
577.5
|
|
|
|
551.6
|
|
|
|
577.0
|
|
Diluted
weighted average shares outstanding
|
|
|
558.7
|
|
|
|
582.8
|
|
|
|
558.5
|
|
|
|
582.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ |
0.2300
|
|
|
$ |
0.1850
|
|
|
$ |
0.6450
|
|
|
$ |
0.5250
|
|
(A)
|
Professional
Employer Organization (“PEO”) revenues are net of direct pass-through
costs of $2,417.8 and $1,957.6 for the three months ended March 31,
2007
and 2006, respectively, and $6,763.1 and $5,167.5 for the nine months
ended March 31, 2007 and 2006,
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
|
|
2007
|
|
|
2006
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
2,473.5
|
|
|
$ |
1,867.3
|
|
Short-term
marketable securities
|
|
|
207.8
|
|
|
|
327.5
|
|
Accounts
receivable, net
|
|
|
915.0
|
|
|
|
765.0
|
|
Other
current
assets
|
|
|
455.5
|
|
|
|
400.4
|
|
Assets
of
discontinued operations
|
|
|
4.6
|
|
|
|
2,122.0
|
|
Total
current
assets
|
|
|
4,056.4
|
|
|
|
5,482.2
|
|
|
|
|
|
|
|
|
|
|
Long-term
marketable securities
|
|
|
105.9
|
|
|
|
333.7
|
|
Long-term
receivables, net
|
|
|
205.1
|
|
|
|
215.4
|
|
Property,
plant and equipment, net
|
|
|
710.1
|
|
|
|
701.5
|
|
Other
assets
|
|
|
840.1
|
|
|
|
772.3
|
|
Goodwill
|
|
|
2,317.5
|
|
|
|
1,985.8
|
|
Intangible
assets, net
|
|
|
717.0
|
|
|
|
515.3
|
|
Total
assets
before funds held for clients
|
|
|
8,952.1
|
|
|
|
10,006.2
|
|
Funds
held for
clients
|
|
|
23,970.8
|
|
|
|
17,483.9
|
|
Total
assets
|
|
$ |
32,922.9
|
|
|
$ |
27,490.1
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
105.9
|
|
|
$ |
127.2
|
|
Accrued
expenses and other current liabilities
|
|
|
1,413.5
|
|
|
|
1,373.9
|
|
Income
taxes
payable
|
|
|
220.3
|
|
|
|
202.2
|
|
Liabilities
of
discontinued operations
|
|
|
25.6
|
|
|
|
967.5
|
|
Total
current
liabilities
|
|
|
1,765.3
|
|
|
|
2,670.8
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
43.6
|
|
|
|
74.3
|
|
Other
liabilities
|
|
|
396.6
|
|
|
|
361.6
|
|
Deferred
income taxes
|
|
|
190.5
|
|
|
|
103.0
|
|
Deferred
revenues
|
|
|
479.9
|
|
|
|
481.4
|
|
Total
liabilities before client funds obligations
|
|
|
2,875.9
|
|
|
|
3,691.1
|
|
Client
funds
obligations
|
|
|
24,058.3
|
|
|
|
17,787.4
|
|
Total
liabilities
|
|
|
26,934.2
|
|
|
|
21,478.5
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
63.9
|
|
|
|
63.9
|
|
Capital
in
excess of par value
|
|
|
315.7
|
|
|
|
157.4
|
|
Retained
earnings
|
|
|
9,220.2
|
|
|
|
9,111.4
|
|
Treasury
stock
- at cost: 83.7 and 77.3
|
|
|
|
|
|
|
|
|
shares,
respectively
|
|
|
(3,636.5 |
) |
|
|
(3,194.8 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
25.4
|
|
|
|
(126.3 |
) |
Total
stockholders’ equity
|
|
|
5,988.7
|
|
|
|
6,011.6
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
32,922.9
|
|
|
$ |
27,490.1
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
Flows
from Operating Activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
944.0
|
|
|
$ |
850.3
|
|
Adjustments
to
reconcile net earnings to cash flows provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Gain
on sale of cost-based investment
|
|
|
(38.6 |
) |
|
|
-
|
|
Depreciation
and amortization
|
|
|
214.4
|
|
|
|
181.9
|
|
Deferred
income taxes
|
|
|
(16.1 |
) |
|
|
(61.7 |
) |
Stock-based
compensation expense
|
|
|
103.9
|
|
|
|
106.6
|
|
Pension
expense
|
|
|
30.4
|
|
|
|
23.5
|
|
Net
realized (gain) loss from the sales of marketable
securities
|
|
|
(17.3 |
) |
|
|
16.8
|
|
Amortization
of premiums and discounts on available-for-sale securities
|
|
|
31.3
|
|
|
|
60.8
|
|
Gain
on sale of business
|
|
|
(24.4 |
) |
|
|
-
|
|
Impairment
of assets of discontinued operations businesses
|
|
|
-
|
|
|
|
18.6
|
|
Other
|
|
|
27.1
|
|
|
|
35.8
|
|
Changes
in
operating assets and liabilities, net of effects from acquisitions
and
|
|
|
|
|
|
|
|
|
divestitures
of businesses:
|
|
|
|
|
|
|
|
|
Increase
in receivables and other assets
|
|
|
(207.4 |
) |
|
|
(46.6 |
) |
(Decrease)
increase in accounts payable, accrued expenses and other
liabilities
|
|
|
(9.0 |
) |
|
|
(11.5 |
) |
Operating
activities of discontinued operations
|
|
|
73.7
|
|
|
|
299.6
|
|
Net
cash flows
provided by operating activities
|
|
|
1,112.0
|
|
|
|
1,474.1
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of
marketable securities
|
|
|
(3,347.7 |
) |
|
|
(4,164.9 |
) |
Proceeds
from
the sales and maturities of marketable securities
|
|
|
3,513.6
|
|
|
|
3,325.6
|
|
Net
purchases
of client funds securities
|
|
|
(6,065.1 |
) |
|
|
(3,787.7 |
) |
Change
in
client funds obligations
|
|
|
6,225.4
|
|
|
|
4,756.6
|
|
Capital
expenditures
|
|
|
(122.6 |
) |
|
|
(189.6 |
) |
Additions
to
intangibles
|
|
|
(138.4 |
) |
|
|
(73.4 |
) |
Proceeds
from
the sale of investment
|
|
|
38.6
|
|
|
|
-
|
|
Proceeds
from
the sale of business, net of cash divested
|
|
|
17.2
|
|
|
|
6.2
|
|
Acquisitions
of businesses, net of cash acquired
|
|
|
(433.0 |
) |
|
|
(335.5 |
) |
Dividend
received from Broadridge Financial Solutions, Inc.
|
|
|
690.0
|
|
|
|
-
|
|
Cash
retained
by Broadridge Financial Solutions, Inc.
|
|
|
(29.9 |
) |
|
|
-
|
|
Other
|
|
|
16.3
|
|
|
|
12.9
|
|
Investing
activities of discontinued operations
|
|
|
(28.2 |
) |
|
|
(56.1 |
) |
Net
cash flows
provided by (used in) investing activities
|
|
|
336.2
|
|
|
|
(505.9 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from
issuance of notes
|
|
|
0.4
|
|
|
|
0.4
|
|
Payments
of
debt
|
|
|
(1.6 |
) |
|
|
(0.5 |
) |
Repurchases
of
common stock
|
|
|
(906.3 |
) |
|
|
(545.2 |
) |
Proceeds
from
stock purchase plan and exercises of stock options
|
|
|
224.5
|
|
|
|
175.9
|
|
Dividends
paid
|
|
|
(334.0 |
) |
|
|
(286.9 |
) |
Financing
activities of discontinued operations
|
|
|
134.1
|
|
|
|
55.0
|
|
Net
cash flows
used in financing activities
|
|
|
(882.9 |
) |
|
|
(601.3 |
) |
|
|
|
|
|
|
|
|
|
Effect
of
exchange rate changes on cash and cash equivalents
|
|
|
7.5
|
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
Net
change in
cash and cash equivalents
|
|
|
572.8
|
|
|
|
361.8
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents, beginning of period
|
|
|
1,900.7
|
|
|
|
975.4
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents, end of period
|
|
$ |
2,473.5
|
|
|
$ |
1,337.2
|
|
|
|
|
|
|
|
|
|
|
Less
cash and
cash equivalents of discontinued operations, end of period
|
|
|
-
|
|
|
|
217.5
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents of continuing operations, end of period
|
|
$ |
2,473.5
|
|
|
$ |
1,119.7
|
|
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, 2006. The results of operations
for the three and nine months ended March 31, 2007 may not be indicative
of the
results to be expected for the fiscal year ending June 30, 2007.
Note
2. Discontinued Operations
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, with a par value
$0.01 per share, 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 Broadridge as discontinued
operations for all periods presented. Additionally, the Company
recorded a decrease to retained earnings of $1.2 billion for the non-cash
reduction in net assets of Broadridge related to the spin-off, offset by
an
increase to retained earnings of $690.0 million related to the cash dividend
received from Broadridge as part of the spin-off. The spin-off and
the transitional and on-going relationships between ADP and Broadridge are
governed by a Separation and Distribution Agreement entered into between
ADP and
Broadridge, and certain other ancillary agreements.
Incremental
costs
associated with the spin-off of $25.0 million and $35.5 million for the three
and nine months ended March 31, 2007, respectively, are included in earnings
from discontinued operations on the Statements of Consolidated Earnings and
are
principally related to professional services. ADP expects to incur
total incremental costs associated with the spin-off of approximately $40.0
million during fiscal 2007.
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 reported a gain of $11.2
million, or $6.9 million after tax within earnings from discontinued operations
on the Statements of Consolidated Earnings. The Company has
classified the results of operations of this business as discontinued operations
for all periods presented.
On
April 13, 2006, the Company completed the sale of its Claims Services business
to Solera, Inc. for $975.0 million in cash and reported a gain of $560.9
million, or $452.8 million after tax, during the fiscal year ended June 30,
2006. During the nine months ended March 31, 2007, the Company
received an additional payment of $13.2 million, or $12.6 million after tax,
from Solera, Inc., which represented the final purchase price adjustment
for the
sale of the Claims Services business. The Company reported the gain
and the final purchase price adjustment within earnings from discontinued
operations on the Statements of Consolidated Earnings. The Claims
Services business was a separate operating segment of the Company and was
reported in the “Other” segment. In connection with the disposal of
this business, the Company has classified the results of operations of this
business as discontinued operations for all periods presented.
On
January 20, 2006, the
Company completed the sale of its Brokerage Services’ financial print business
for $7.5 million in cash. The Company classified the results of
operations of this business as discontinued operations during the fiscal
year
ended June 30, 2006. In connection with the plan to dispose of
the financial print business, the Company recorded an impairment charge of
$18.6
million in order to reflect the assets of this business at fair value during
the
three months ended December 31, 2005 in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets.” This impairment charge is included in the earnings from
discontinued operations on the Statements of Consolidated Earnings.
Operating
results of
these discontinued operations were as follows:
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
558.5
|
|
|
$ |
625.6
|
|
|
$ |
1,444.9
|
|
|
$ |
1,652.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from
discontinued operations before income taxes
|
|
|
64.8
|
|
|
|
91.0
|
|
|
|
176.1
|
|
|
|
218.5
|
|
Provision
for
income taxes
|
|
|
47.1
|
|
|
|
35.0
|
|
|
|
92.0
|
|
|
|
84.5
|
|
Net
earnings
from discontinued operations before gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
disposal
of discontinued operations
|
|
|
17.7
|
|
|
|
56.0
|
|
|
|
84.1
|
|
|
|
134.0
|
|
Gain
on
disposal of discontinued operations, net of provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes of $4.3 for the three months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
and $4.9 for the nine months ended March 31, 2007
|
|
|
6.9
|
|
|
|
-
|
|
|
|
19.5
|
|
|
|
-
|
|
Net
earnings
from discontinued operations
|
|
$ |
24.6
|
|
|
$ |
56.0
|
|
|
$ |
103.6
|
|
|
$ |
134.0
|
|
The
following are the major classes of assets and liabilities related to the
discontinued operations as of March 31, 2007 and June 30,
2006.
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
-
|
|
|
$ |
33.4
|
|
Short-term
marketable securities
|
|
|
-
|
|
|
|
40.3
|
|
Accounts
receivable, net
|
|
|
4.6
|
|
|
|
437.3
|
|
Securities
clearing receivables
|
|
|
-
|
|
|
|
836.8
|
|
Property,
plant and equipment, net
|
|
|
-
|
|
|
|
80.9
|
|
Goodwill
|
|
|
-
|
|
|
|
480.4
|
|
Intangible
assets, net
|
|
|
-
|
|
|
|
102.7
|
|
Other
assets
|
|
|
-
|
|
|
|
110.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4.6
|
|
|
$ |
2,122.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
-
|
|
|
$ |
80.1
|
|
Accrued
expenses
|
|
|
4.8
|
|
|
|
210.1
|
|
Securities
clearing payables
|
|
|
-
|
|
|
|
613.6
|
|
Income
taxes payable
|
|
|
20.8
|
|
|
|
18.1
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
45.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
25.6
|
|
|
$ |
967.5
|
|
Note
3. Cost of Revenues
The
Company has revised the format of our Statements of Consolidated Earnings
to
include a separate line item for cost of revenues. The Company’s
costs and expenses applicable to revenues (“cost of revenues”) represent the
total of operating expenses and systems development and programming costs
as
presented on the Statements of Consolidated Earnings, as well as the portion
of
depreciation and amortization that relates to our services and
products.
The
Company previously reported that depreciation and amortization from continuing
operations totaled $61.9 million and $181.9 million for the three and nine
months ended March 31, 2006, respectively. The portion of
depreciation and amortization that relates to our services and products equals
$42.3 million and $122.9 million for the three and nine months ended March
31,
2006, respectively, and is included in cost of revenues. The portion
of depreciation and amortization that does not relate to our services and
products of $19.6 million and $59.0 million for the three and nine months
ended
March 31, 2006, respectively, was reclassified to selling, general and
administrative expenses on the Statements of Consolidated Earnings.
The
following table provides the cost of revenues from continuing operations
for the
three fiscal years ended June 30, 2006:
Years
ending
June 30,
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
$ |
2,997.9
|
|
|
$ |
2,621.4
|
|
|
$ |
2,271.5
|
|
Systems
development and programming costs
|
|
|
472.6
|
|
|
|
426.9
|
|
|
|
402.8
|
|
Depreciation
and amortization
|
|
|
166.0
|
|
|
|
156.1
|
|
|
|
159.6
|
|
Cost
of revenues
|
|
$ |
3,636.5
|
|
|
$ |
3,204.4
|
|
|
$ |
2,833.9
|
|
Note
4. New Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS
No. 159 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 and financial condition.
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin No.
108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108
requires companies to evaluate the materiality of identified unadjusted errors
on each financial statement and related financial statement disclosure using
both the rollover approach and the iron curtain approach. SAB 108 is effective
for annual financial statements covering the first fiscal year ending after
November 15, 2006. The Company plans to include the effect of
adopting SAB 108 in its Annual Report on Form 10-K for the year ending June
30,
2007 and currently estimates the adoption of SAB 108 to result in an increase
to
retained earnings of $40.0 million, net of tax, which will be primarily due
to a
reduction in certain accrued expenses.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). This statement would
require a company to (a) recognize in its statement of financial position
an
asset for a plan’s overfunded status or a liability for a plan’s underfunded
status, (b) measure a plan’s assets and its obligations that determine its
funded status as of the end of the employer’s fiscal year, and (c) recognize
changes in the funded status of a defined benefit plan in the year in which
the
changes occur (reported in comprehensive income). The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the first fiscal year ending after December
15,
2006. The Company plans to include the effect of adopting SFAS No.
158 in its Annual Report on Form 10-K for the year ending June 30,
2007. Based on the unrecognized actuarial losses of ADP’s pension
plans in its June 30, 2006 Annual Report on Form 10-K, we expect to reclassify
$116 million, net of tax, from other assets to accumulated other comprehensive
income on the Consolidated Balance Sheets upon the adoption of SFAS No. 158,
which will result in a reduction of stockholders’ equity. The Company will
reevaluate this estimate upon adoption of SFAS No. 158, based upon its June
30,
2007 plan measurement date, which will likely impact the above-described
amount. The requirement to measure the plan assets and benefit
obligations as of the date of the employer’s fiscal year-end statement of
financial position is effective for fiscal years ending after December 15,
2008. The Company does not believe that the adoption of SFAS No. 158
will have a material impact on the consolidated results of operations and
financial condition.
In
September 2006, the FASB issued SFAS 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” (“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. FIN 48 requires
additional annual disclosures and is effective as of the beginning of the
first
fiscal year beginning after December 15, 2006. The Company expects to
adopt FIN 48 on July 1, 2007 and is currently evaluating the effect that
the
adoption of FIN 48 will have on its consolidated results of operations and
financial condition.
Note
5. Acquisitions
The
Company acquired 100% interest in nine businesses during the nine months
ended
March 31, 2007 for approximately $432.1 million, net of cash acquired and
subject to post-closing purchase price adjustments. The Company has
allocated the purchase price of these acquisitions based upon preliminary
estimates and assumptions. Accordingly, these allocations are subject
to revision when the Company receives final information, including appraisals
and other analyses. These acquisitions resulted in approximately
$304.5 million of goodwill. Intangible assets acquired, which totaled
approximately $154.5 million, consisted primarily of customer contracts and
lists, as well as 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 $0.9 million of
contingent payments relating to previously consummated
acquisitions.
Note
6. Earnings Per Share (“EPS”)
|
|
For
the three
months ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Net
|
|
|
|
|
|
EPS
|
|
|
Net
|
|
|
|
|
|
EPS
|
|
|
|
Earnings
from
|
|
|
Weighted
|
|
|
from
|
|
|
Earnings
from
|
|
|
Weighted
|
|
|
from
|
|
|
|
Continuing
|
|
|
Average
|
|
|
Continuing
|
|
|
Continuing
|
|
|
Average
|
|
|
Continuing
|
|
|
|
Operations
|
|
|
Shares
|
|
|
Operations
|
|
|
Operations
|
|
|
Shares
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
364.3
|
|
|
|
552.1
|
|
|
$ |
0.66
|
|
|
$ |
314.6
|
|
|
|
577.5
|
|
|
$ |
0.54
|
|
Effect
of zero
coupon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subordinated
notes
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
|
|
|
|
0.2
|
|
|
|
1.1
|
|
|
|
|
|
Effect
of
employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
shares
|
|
|
-
|
|
|
|
5.7
|
|
|
|
|
|
|
|
-
|
|
|
|
4.2
|
|
|
|
|
|
Diluted
|
|
$ |
364.6
|
|
|
|
558.7
|
|
|
$ |
0.65
|
|
|
$ |
314.8
|
|
|
|
582.8
|
|
|
$ |
0.54
|
|
|
|
For
the nine
months ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Net
|
|
|
|
|
|
EPS
|
|
|
Net
|
|
|
|
|
|
EPS
|
|
|
|
Earnings
from
|
|
|
Weighted
|
|
|
from
|
|
|
Earnings
from
|
|
|
Weighted
|
|
|
from
|
|
|
|
Continuing
|
|
|
Average
|
|
|
Continuing
|
|
|
Continuing
|
|
|
Average
|
|
|
Continuing
|
|
|
|
Operations
|
|
|
Shares
|
|
|
Operations
|
|
|
Operations
|
|
|
Shares
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
840.4
|
|
|
|
551.6
|
|
|
$ |
1.52
|
|
|
$ |
716.3
|
|
|
|
577.0
|
|
|
$ |
1.24
|
|
Effect
of zero
coupon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subordinated
notes
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
|
|
Effect
of
employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
shares
|
|
|
-
|
|
|
|
5.9
|
|
|
|
|
|
|
|
-
|
|
|
|
4.5
|
|
|
|
|
|
Diluted
|
|
$ |
841.5
|
|
|
|
558.5
|
|
|
$ |
1.51
|
|
|
$ |
717.1
|
|
|
|
582.7
|
|
|
$ |
1.23
|
|
Options
to purchase
13.0 million and 35.8 million shares of common stock for the three months
ended
March 31, 2007 and 2006, respectively, and 19.0 million and 28.4 million
shares
of common stock for the nine months ended March 31, 2007 and 2006, respectively,
were excluded from the
calculation
of
diluted earnings per share, as the effect would have been anti-dilutive for
each
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:
·
|
Stock
Options.
Stock options are granted to employees at exercise prices equal
to the
fair market value of the Company’s common stock on the dates of grant.
Stock options are issued under a grade vesting schedule, generally
vest
ratably over five years and have a term of 10
years. Compensation expense for stock options is recognized
over the requisite service period for each separately vesting portion
of
the stock option award. In fiscal 2007, the Company has reduced
the number of stock options issued to employees and replaced these
awards
with the issuance of performance-based restricted
stock.
|
·
|
Employee
Stock
Purchase Plan. Prior to November 2005, the Company offered an employee
stock purchase plan that allowed eligible employees to purchase
shares of
common stock at 85% of the lower of market value as of the date
the
purchase price for an offering was determined or as of the end
of such
offering. In November 2005, the Company revised the employee
stock purchase plan offering beginning on January 1, 2006, whereby
eligible employees can purchase shares of common stock at 85% of
the
market value at the date the purchase price for the offering is
determined. Compensation expense for the employee stock
purchase plan is recognized over the vesting period of 24 months
on a
straight-line basis.
|
·
|
Restricted
Stock. The Company has a restricted stock program under which shares
of
common stock have been issued to certain key employees. These shares
are
restricted as to transfer and in certain circumstances must be
returned to
the Company at the original purchase price. The Company records
stock
compensation expense relating to the issuance of restricted stock
over the
period during which the transfer restrictions exist, which is up
to five
years from the date of grant. The value of the Company’s restricted stock,
based on market prices, is recognized as compensation expense over
the
restriction period on a straight-line
basis.
|
The
Company currently utilizes treasury stock to satisfy stock option exercises,
issuances under its employee stock purchase plan and restricted stock
awards. Stock-based compensation expense of $33.4 million and $35.6
million was recognized in earnings from continuing operations for the three
months ended March 31, 2007 and 2006, respectively, as well as related tax
benefits of $10.2 million and $10.6 million,
respectively. Stock-based compensation expense of $103.9 million and
$106.6 million was recognized in earnings from continuing operations for
the
nine months ended March 31, 2007 and 2006, respectively, as well as related
tax
benefits of $31.1 million and $30.7 million, respectively.
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
$ |
6.3
|
|
|
$ |
5.7
|
|
|
$ |
18.0
|
|
|
$ |
18.2
|
|
Selling,
general and administrative expenses
|
|
|
21.3
|
|
|
|
24.2
|
|
|
|
68.1
|
|
|
|
70.6
|
|
System
development and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
programming
costs
|
|
|
5.8
|
|
|
|
5.7
|
|
|
|
17.8
|
|
|
|
17.8
|
|
Total
pretax
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in continuing operations
|
|
$ |
33.4
|
|
|
$ |
35.6
|
|
|
$ |
103.9
|
|
|
$ |
106.6
|
|
Total
pretax
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in discontinued operations
|
|
|
5.5
|
|
|
|
8.0
|
|
|
|
17.9
|
|
|
|
25.4
|
|
Total
pretax
stock-based compensation expense
|
|
$ |
38.9
|
|
|
$ |
43.6
|
|
|
$ |
121.8
|
|
|
$ |
132.0
|
|
As
of March 31, 2007, the total remaining unrecognized compensation cost from
continuing operations related to non-vested stock options, the employee stock
purchase plan and restricted stock awards amounted to $84.5 million, $25.8
million and $78.7 million, respectively, which will be amortized over the
weighted average periods of 1.2 years, 0.9 years and 1.1 years,
respectively.
As
a result of the spin-off of Broadridge, the number of vested and unvested
ADP
stock options, as well as the strike price on these options, and the number
of
shares elected under the outstanding employee stock purchase plan, as well
as
the purchase price for these offerings, was adjusted to preserve the intrinsic
value of the awards immediately prior to the spin-off using an adjustment
ratio
based on the ADP closing market stock price prior to the spin-off and the
ADP
opening market stock price subsequent to the spin-off. Additionally,
the “targeted” number of performance-based restricted shares, which will convert
to actual restricted shares at the end of their performance period in fiscal
2009, were adjusted to preserve the intrinsic value of the performance-based
restricted awards immediately prior to the spin-off similar to the stock
options
and employee stock purchase plan awards noted above. As the
adjustments were considered modifications of awards in accordance with SFAS
No.123R, the Company compared the fair value of the awards immediately prior
to
the spin-off to the fair value immediately after the spin-off to measure
the
incremental stock-based compensation cost. The adjustments did not result
in an
increase in the fair value of the awards and, accordingly, the Company did
not
record incremental stock-based compensation expense. ADP stock
options and restricted stock awards held by Broadridge employees were cancelled
or forfeited as of the date of the spin-off. The stock-based
compensation expense associated with the original grant of ADP stock to
continuing ADP employees will continue to be recognized within earnings from
continuing operations on the Company’s Statements of Consolidated
Earnings. The stock-based compensation expense related to Broadridge
employees for services received through March 30, 2007 are reflected in earnings
from discontinued operations on the Statements of Consolidated
Earnings.
A
summary of changes in outstanding stock options for the nine months ended
March
31, 2007 is as follows:
|
|
Number
|
|
|
Weighted
|
|
|
|
of
Options
(a)
|
|
|
Average
Price
(a)
|
|
|
|
(in
thousands)
|
|
|
(in
dollars)
|
|
|
|
|
|
|
|
|
Options
outstanding at
|
|
|
|
|
|
|
July
1, 2006
|
|
|
73,189
|
|
|
$ |
49
|
|
Options
granted
|
|
|
3,289
|
|
|
$ |
43
|
|
Options
exercised
|
|
|
(8,933 |
) |
|
$ |
34
|
|
Options
canceled (b)
|
|
|
(10,573 |
) |
|
$ |
41
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
56,972
|
|
|
$ |
40
|
|
(a) |
The
number of
options and weighted average price were adjusted to reflect the
impact of
the spin-off of Broadridge.
|
(b) |
Includes
7.8
million of options held by Broadridge employees that were cancelled
or
forfeited as of the date of
spin-off.
|
The
fair value of each stock option issued prior to January 1, 2005 was estimated
on
the date of grant using a Black-Scholes option pricing model. For
stock options issued on or after January 1, 2005, the fair value of each
stock
option was estimated on the date of grant using a binomial option pricing
model.
The binomial model considers a range of assumptions related to volatility,
risk-free interest rate and employee exercise behavior. Expected volatilities
utilized in the binomial model are based on a combination of implied market
volatilities, historical volatility of the Company’s stock price and other
factors. Similarly, the dividend yield is based on historical
experience and expected future changes. The risk-free rate is derived from
the
U.S. Treasury yield curve in effect at the time of grant. The binomial model
also incorporates exercise and forfeiture assumptions based on an analysis
of
historical data. The expected life of the stock option grants is
derived from the output of the binomial model and represents the period of
time
that options granted are expected to be outstanding.
The
following assumptions were used to determine the fair values estimated at
the
date of grant of stock options granted during the nine months ended March
31,
2007 and 2006:
Risk-free
interest rate
|
4.7%
-
5.0%
|
|
4.0%
-
4.6%
|
Dividend
yield
|
1.6%
-
1.7%
|
|
1.4%
-
1.7%
|
Weighted
average volatility factor
|
18.4%
-
24.7%
|
|
17.1%
-
24.7%
|
Weighted
average expected life (in years)
|
|
|
|
Stock
options
|
4.9
–
5.6
|
|
5.5
–
5.6
|
Stock
purchase plan
|
2.0
|
|
2.0
|
Weighted
average fair value (in dollars)
|
|
|
|
Stock
options
|
$11.82
|
|
$10.89
|
Stock
purchase plan
|
$12.34
|
|
$9.76
|
Note
8. Other Income, net
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
income on corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
funds
|
|
$ |
(25.7 |
) |
|
$ |
(23.8 |
) |
|
$ |
(119.5 |
) |
|
$ |
(95.4 |
) |
Gain
on sale
of investment
|
|
|
-
|
|
|
|
-
|
|
|
|
(38.6 |
) |
|
|
-
|
|
Realized
gains
on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
(20.5 |
) |
|
|
(0.8 |
) |
Realized
losses on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
3.2
|
|
|
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income,
net
|
|
$ |
(25.2 |
) |
|
$ |
(23.0 |
) |
|
$ |
(175.4 |
) |
|
$ |
(78.6 |
) |
During
the nine
months ended March 31, 2007, the Company sold a minority investment that
was
previously accounted for using the cost basis and had a net book value of
$0. The Company’s sale of this investment resulted in a gain of $38.6
million.
Note
9. Comprehensive Income
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
earnings
|
|
$ |
388.9
|
|
|
$ |
370.6
|
|
|
$ |
944.0
|
|
|
$ |
850.3
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments
|
|
|
(23.8 |
) |
|
|
15.0
|
|
|
|
8.1
|
|
|
|
(1.4 |
) |
Unrealized
net gain (loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
32.5
|
|
|
|
(54.5 |
) |
|
|
143.6
|
|
|
|
(164.0 |
) |
Comprehensive
income
|
|
$ |
397.6
|
|
|
$ |
331.1
|
|
|
$ |
1,095.7
|
|
|
$ |
684.9
|
|
Note
10. Interim Financial Data by Segment
Employer
Services and Dealer Services are the Company's reportable
segments. The primary components of “Other” are miscellaneous
processing services and corporate allocations and expenses, including
stock-based compensation expense.
The
Company evaluates the performance of its reportable segments based on operating
results before interest on corporate funds, foreign currency gains and losses
and income taxes. Certain revenues and expenses are charged to the reportable
segments at a standard rate for management reasons. Other costs are
recorded based on management responsibility. The prior year’s
reportable segment revenues and earnings from continuing operations before
income taxes have been adjusted to reflect updated fiscal 2007 budgeted foreign
exchange rates.
Reconciling
items
include foreign exchange differences between the actual foreign exchange
rates
and fiscal 2007 budgeted foreign exchange rates, and the adjustment for the
difference between actual interest income earned on invested funds held for
Employer Services’ clients and interest credited to Employer Services at a
standard rate of 4.5%. Both of these adjustments are eliminated in
consolidation and as such represent reconciling items to revenues and earnings
from continuing
operations
before
income taxes. The reportable segment results also include an internal
cost of capital charge related to the funding of acquisitions and other
investments. This charge is eliminated in consolidation and as such
represents a reconciling item to earnings from continuing operations before
income taxes.
Segment
Results:
|
|
Revenues
|
|
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Services
|
|
$ |
1,860.0
|
|
|
$ |
1,656.7
|
|
|
$ |
4,854.2
|
|
|
$ |
4,336.4
|
|
Dealer
Services
|
|
|
310.6
|
|
|
|
286.6
|
|
|
|
908.0
|
|
|
|
780.1
|
|
Other
|
|
|
(5.7 |
) |
|
|
(1.2 |
) |
|
|
50.0
|
|
|
|
62.0
|
|
Reconciling
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
20.6
|
|
|
|
(1.7 |
) |
|
|
50.3
|
|
|
|
(6.7 |
) |
Client
fund interest
|
|
|
3.8
|
|
|
|
(13.4 |
) |
|
|
(8.2 |
) |
|
|
(49.7 |
) |
Total
|
|
$ |
2,189.3
|
|
|
$ |
1,927.0
|
|
|
$ |
5,854.3
|
|
|
$ |
5,122.1
|
|
|
|
Earnings
From
Continuing Operations Before Income Taxes
|
|
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Services
|
|
$ |
556.0
|
|
|
$ |
503.8
|
|
|
$ |
1,186.6
|
|
|
$ |
1,085.8
|
|
Dealer
Services
|
|
|
51.2
|
|
|
|
37.5
|
|
|
|
143.5
|
|
|
|
117.5
|
|
Other
|
|
|
(66.0 |
) |
|
|
(51.6 |
) |
|
|
(77.2 |
) |
|
|
(81.8 |
) |
Reconciling
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
2.6
|
|
|
|
0.2
|
|
|
|
5.8
|
|
|
|
(0.7 |
) |
Client
fund interest
|
|
|
3.8
|
|
|
|
(13.4 |
) |
|
|
(8.2 |
) |
|
|
(49.7 |
) |
Cost
of capital charge
|
|
|
30.2
|
|
|
|
26.6
|
|
|
|
85.6
|
|
|
|
75.3
|
|
Total
|
|
$ |
577.8
|
|
|
$ |
503.1
|
|
|
$ |
1,336.1
|
|
|
$ |
1,146.4
|
|
Note
11.
Corporate Investments and Funds Held for Clients
Corporate
investments and funds held for clients at March 31, 2007 and June 30, 2006
are
as follows:
|
|
March
31,
2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
Type
of
issue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
securities and other cash
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
|
$ |
13,162.3
|
|
|
|
-
|
|
|
|
-
|
|
|
$ |
13,162.3
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and direct obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
|
6,172.4
|
|
|
|
3.8
|
|
|
|
(62.1 |
) |
|
|
6,114.1
|
|
Asset
backed securities
|
|
|
1,991.8
|
|
|
|
6.2
|
|
|
|
(12.3 |
) |
|
|
1,985.7
|
|
Corporate
bonds
|
|
|
3,734.7
|
|
|
|
11.9
|
|
|
|
(24.6 |
) |
|
|
3,722.0
|
|
Canadian
government obligations and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
government agency obligations
|
|
|
971.8
|
|
|
|
0.2
|
|
|
|
(7.4 |
) |
|
|
964.6
|
|
Other
securities
|
|
|
813.9
|
|
|
|
2.0
|
|
|
|
(6.6 |
) |
|
|
809.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
|
13,684.6
|
|
|
|
24.1
|
|
|
|
(113.0 |
) |
|
|
13,595.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
corporate investments and funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
for clients
|
|
$ |
26,846.9
|
|
|
$ |
24.1
|
|
|
$ |
(113.0 |
) |
|
$ |
26,758.0
|
|
|
|
June
30,
2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
Type
of
issue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market
securities and other cash
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
|
$ |
6,399.6
|
|
|
|
-
|
|
|
|
-
|
|
|
$ |
6,399.6
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and direct obligations of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
|
6,441.5
|
|
|
|
0.1
|
|
|
|
(165.0 |
) |
|
|
6,276.6
|
|
Asset
backed securities
|
|
|
2,214.1
|
|
|
|
0.3
|
|
|
|
(40.8 |
) |
|
|
2,173.6
|
|
Corporate
bonds
|
|
|
3,564.7
|
|
|
|
0.2
|
|
|
|
(75.9 |
) |
|
|
3,489.0
|
|
Canadian
government obligations and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
government agency obligations
|
|
|
838.1
|
|
|
|
0.1
|
|
|
|
(11.5 |
) |
|
|
826.7
|
|
Other
securities
|
|
|
867.3
|
|
|
|
0.1
|
|
|
|
(20.5 |
) |
|
|
846.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
|
13,925.7
|
|
|
|
0.8
|
|
|
|
(313.7 |
) |
|
|
13,612.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
corporate investments and funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
for clients
|
|
$ |
20,325.3
|
|
|
$ |
0.8
|
|
|
$ |
(313.7 |
) |
|
$ |
20,012.4
|
|
Classification
of
investments on the Consolidated Balance Sheets is as follows:
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Corporate
investments:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,473.5
|
|
|
$ |
1,867.3
|
|
Short-term
marketable securities
|
|
|
207.8
|
|
|
|
327.5
|
|
Long-term
marketable securities
|
|
|
105.9
|
|
|
|
333.7
|
|
|
|
|
|
|
|
|
|
|
Total
corporate investments
|
|
|
2,787.2
|
|
|
|
2,528.5
|
|
Funds
held for
clients
|
|
|
23,970.8
|
|
|
|
17,483.9
|
|
|
|
|
|
|
|
|
|
|
Total
corporate investments and
|
|
|
|
|
|
|
|
|
funds
held for clients
|
|
$ |
26,758.0
|
|
|
$ |
20,012.4
|
|
The
Company believes that its available-for-sale securities that have fair values
below cost are not other-than-temporarily impaired since it is probable that
principal and interest would be collected in accordance with contractual
terms,
and that the decline in the market value was due to changes in interest rates
and not changes to credit risk. The Company currently believes that
it has the ability to hold these investments until the earlier of market
price
recovery and/or maturity and currently intends to do so. The
Company’s assessment that an investment is not other-than-temporarily impaired
could change in the future due to new developments or changes in the Company’s
strategies or assumptions related to any particular investment.
At
March 31, 2007 approximately 95% of the available-for-sale securities held
an
AAA or AA rating, as rated by Moody’s, Standard & Poor’s and, for Canadian
securities, Dominion Bond Rating Service.
Expected
maturities
of available-for-sale securities at March 31, 2007 are as
follows:
Due
in one
year or less
|
|
$ |
2,594.9
|
|
Due
after one
year to two years
|
|
|
2,742.9
|
|
Due
after two
years to three years
|
|
|
2,729.1
|
|
Due
after
three years to four years
|
|
|
2,475.0
|
|
Due
after four
years to ten years
|
|
|
3,053.8
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
$ |
13,595.7
|
|
Note
12. Allowance for Doubtful Accounts
The
allowance for doubtful accounts was $44.6 million and $40.0 million at March
31,
2007 and June 30, 2006, respectively.
Note
13.
Goodwill and Intangible Assets, net
Changes
in goodwill
for the nine months ended March 31, 2007 are as follows:
|
|
Employer
|
|
|
Dealer
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as
of
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
$ |
1,246.2
|
|
|
$ |
730.0
|
|
|
$ |
9.6
|
|
|
$ |
1,985.8
|
|
Additions
and
other adjustments, net
|
|
|
294.7
|
|
|
|
12.3
|
|
|
|
-
|
|
|
|
307.0
|
|
Currency
translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments
|
|
|
10.8
|
|
|
|
13.6
|
|
|
|
0.3
|
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
$ |
1,551.7
|
|
|
$ |
755.9
|
|
|
$ |
9.9
|
|
|
$ |
2,317.5
|
|
Components
of
intangible assets, net are as follows:
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Intangible
assets:
|
|
|
|
|
|
|
Software
and software licenses
|
|
$ |
933.4
|
|
|
$ |
642.2
|
|
Customer
contracts and lists
|
|
|
725.6
|
|
|
|
582.1
|
|
Other
intangibles
|
|
|
246.2
|
|
|
|
243.2
|
|
|
|
|
1,905.2
|
|
|
|
1,467.5
|
|
Less
accumulated amortization:
|
|
|
|
|
|
|
|
|
Software
and software licenses
|
|
|
(670.1 |
) |
|
|
(474.1 |
) |
Customer
contracts and lists
|
|
|
(347.0 |
) |
|
|
(313.9 |
) |
Other
intangibles
|
|
|
(171.1 |
) |
|
|
(164.2 |
) |
|
|
|
(1,188.2 |
) |
|
|
(952.2 |
) |
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$ |
717.0
|
|
|
$ |
515.3
|
|
Other
intangibles
consist primarily of purchased rights, covenants, patents and trademarks
(acquired directly or through acquisitions). All of the intangible
assets have finite lives and, as such, are subject to amortization. The weighted
average remaining useful life of the intangible assets is 8 years (3 years
for
software and software licenses, 11 years for customer contracts and lists,
and
11 years for other). Amortization of intangibles totaled $37.5 million and
$29.2
million for the three months ended March 31, 2007 and 2006, respectively,
and
totaled $106.3 million and $85.4 million for the nine months ended March
31,
2007 and 2006, respectively. Estimated amortization expense of the
Company’s existing intangible assets for the remaining three months of fiscal
2007 and the succeeding five fiscal years are as follows:
|
|
Amount
|
|
2007
|
|
$ |
49.9
|
|
2008
|
|
$ |
158.5
|
|
2009
|
|
$ |
115.7
|
|
2010
|
|
$ |
88.8
|
|
2011
|
|
$ |
56.5
|
|
2012
|
|
$ |
45.7
|
|
Note
14. Short-term Financing
In
June 2006, the Company entered into a $1.75 billion, 364-day credit agreement
and a $2.25 billion, five-year credit agreement with a group of
lenders. The five-year facility contains an accordion feature under
which the aggregate commitment can be increased by $500.0 million to $2.75
billion, subject to the availability of additional commitments. These
facilities replaced the Company’s prior $1.25 billion, 364-day facility, and
$2.25 billion, five-year facility, both of which were terminated in June
2006. The $1.75 billion and $2.25 billion agreements mature in June
2007 and June 2011, respectively. The Company also has a $1.5 billion
credit facility that matures in June 2010. The interest rate
applicable to the borrowings is tied to LIBOR or prime rate depending on
the
notification provided by the Company to the syndicated financial institutions
prior to borrowing. The Company is also required to pay facility fees
on the credit agreements. The primary uses of the credit facilities
are to provide liquidity to the commercial paper program and to provide funding
for general corporate purposes, if necessary. The Company had no
borrowings through March 31, 2007 under the credit agreements.
The
Company maintains a U.S. short-term commercial paper program providing for
the
issuance of up to $5.5 billion in aggregate maturity value of commercial
paper
at the Company’s discretion. The Company’s commercial paper program
is rated A-1+ by Standard and Poor’s and Prime-1 by Moody’s. These
ratings denote the highest quality commercial paper
securities. Maturities of commercial paper can range from overnight
to up to 270 days. At March 31, 2007 and 2006, there was no
commercial paper outstanding. For both the three months ended March
31, 2007 and 2006, the Company had average borrowings of $0.4 billion at
a
weighted average interest rate of 5.3% and 4.4%, respectively. For
the nine months ended March 31, 2007 and 2006, the Company had average
borrowings of $1.6 billion and $1.4 billion, respectively, at a weighted
average
interest rate of 5.3% and 3.8%, respectively. The weighted average maturity
of
the Company’s commercial paper during the three and nine months ended March 31,
2007 and 2006 was less than two days for each period.
The
Company’s U.S. and Canadian short-term funding requirements related to client
funds obligations are sometimes obtained on a secured basis through the use
of
repurchase agreements, which are collateralized principally by government
and
government agency securities. These agreements generally have terms
ranging from overnight to up to five business days. At March 31, 2007
and 2006, there were no outstanding obligations under repurchase
agreements. For the three months ended March 31, 2007 and 2006, the
Company had average outstanding balances under repurchase agreements of $59.8
million and $83.8 million, respectively, at a weighted average interest rate
of
4.2% and 3.4%, respectively. For the nine months ended March 31, 2007
and 2006, the Company had average outstanding balances under repurchase
agreements of $105.6 million and $169.6 million, respectively, at a weighted
average interest rate of 4.4% and 3.2%, respectively.
Note
15. Debt
In
February 2007, the Company exercised its call option and notified holders
of its
zero coupon convertible subordinated notes that the Company would redeem
all the
notes that were outstanding as of the end of the business day on March 19,
2007
(the “redemption date”). Prior to the redemption date, approximately
$39 million in face value of the notes was converted into approximately 1
million shares of the Company’s common stock. The Company
subsequently redeemed the remaining 352 notes outstanding as of the redemption
date at a redemption price of $775 for each note, representing the accrued
value
of each note at the time of the redemption.
Note
16. Pension Plans
The
components of net pension expense were as follows:
|
|
Three
months
ended
|
|
|
Nine
months
ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost–
benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
earned
during the period
|
|
$ |
10.8
|
|
|
$ |
7.9
|
|
|
$ |
32.5
|
|
|
$ |
23.7
|
|
Interest
cost
on projected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefits
|
|
|
12.1
|
|
|
|
9.9
|
|
|
|
36.3
|
|
|
|
29.6
|
|
Expected
return on plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
(15.3 |
) |
|
|
(14.0 |
) |
|
|
(45.8 |
) |
|
|
(41.9 |
) |
Net
amortization and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferral
|
|
|
3.7
|
|
|
|
4.8
|
|
|
|
10.9
|
|
|
|
14.4
|
|
Net
pension
expense
|
|
$ |
11.3
|
|
|
$ |
8.6
|
|
|
$ |
33.9
|
|
|
$ |
25.8
|
|
Net
pension expense for the three months ended March 31, 2007 and 2006 includes
$1.2
million and $0.8 million, respectively, reported within earnings from
discontinued operations on the Statements of Consolidated
Earnings. Net pension expense for the nine months ended March 31,
2007 and 2006 includes $3.5 million and $2.3 million, respectively, reported
within earnings from discontinued operations on the Statements of Consolidated
Earnings.
The
minimum required contribution to the Company’s pension plans is $3.3 million in
fiscal 2007. For the nine months ended March 31, 2007, the Company
made $22.5 million in contributions to the pension plans and expects to
contribute an additional $0.8 million during fiscal 2007.
Note
17. Commitments and Contingencies
The
Company is subject to various claims and litigation in the normal course
of
business. The Company does not believe that the resolution of these matters
will
have a material impact on the consolidated financial statements.
It
is not the Company’s business practice to enter into off-balance sheet
arrangements. However, the Company is exposed to market risk from
changes in foreign currency exchange rates that could impact its financial
position, results of operations and cash flows. The Company manages its exposure
to these market risks through its regular operating and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. The Company uses derivative financial instruments as risk
management tools and not for trading purposes. In the normal course
of business, the Company also enters into contracts in which it makes
representations and warranties that relate to the performance of the Company’s
products and services.
Note
18. Income Taxes
The
Company is routinely examined by the IRS and tax authorities in countries
in
which it conducts business, as well as in states in which it has significant
business operations. The tax years under examination vary by
jurisdiction. The Company expects an IRS examination for fiscal 1998
through fiscal 2002 to be substantially completed during fiscal
2008. In addition, the IRS is conducting an examination of fiscal
2003 through fiscal 2006. The Company regularly considers the
likelihood of assessments in each of the jurisdictions resulting from
examinations. The Company has established tax reserves which it
believes are adequate in relation to the potential assessments. Once
established, reserves are adjusted when there is more information available,
when an event occurs necessitating a
change
to the
reserves or when the statute of limitations for the relevant taxing authority
to
examine the tax position has expired. The resolution of tax
matters should not have a material effect on the consolidated financial
condition of the Company, although a resolution could have a material impact
on
the Company’s Statements of Consolidated Earnings for a particular future period
and on the Company’s effective tax rate.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Tabular
dollars are
presented in millions, except per share amounts)
CRITICAL
ACCOUNTING POLICIES
Our
consolidated financial statements and accompanying notes have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America. The preparation of these financial statements requires management
to
make estimates, judgments and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses. We continually evaluate the
accounting policies and estimates used to prepare the consolidated financial
statements. The estimates are based on historical experience and assumptions
believed to be reasonable under current facts and circumstances. Actual amounts
and results could differ from these estimates made by
management. Certain accounting policies that require significant
management estimates and are deemed critical to our results of operations
or
financial position are discussed in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2006 in the Critical Accounting Policies section
of
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
RESULTS
OF
OPERATIONS
Analysis
of
Consolidated Operations
|
|
Three
Months
Ended
|
|
|
|
|
|
|
March
31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
2,189.3
|
|
|
$ |
1,927.0
|
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
899.4
|
|
|
|
781.8
|
|
|
|
|
|
Systems
development and
|
|
|
|
|
|
|
|
|
|
|
|
|
programming
costs
|
|
|
122.2
|
|
|
|
120.5
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
54.0
|
|
|
|
42.3
|
|
|
|
|
|
Total
cost of revenues
|
|
|
1,075.6
|
|
|
|
944.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
554.1
|
|
|
|
495.3
|
|
|
|
|
|
Interest
expense
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
|
|
Other
income,
net
|
|
|
(25.2 |
) |
|
|
(23.0 |
) |
|
|
|
|
Total
expenses
|
|
$ |
1,611.5
|
|
|
$ |
1,423.9
|
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from
continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
before income
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
|
|
$ |
577.8
|
|
|
$ |
503.1
|
|
|
|
15 |
% |
Margin
|
|
|
26 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for
income taxes
|
|
$ |
213.5
|
|
|
$ |
188.5
|
|
|
|
13 |
% |
Effective
tax
rate
|
|
|
37.0 |
% |
|
|
37.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
from
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
$ |
364.3
|
|
|
$ |
314.6
|
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
0.65
|
|
|
$ |
0.54
|
|
|
|
20 |
% |
|
|
Nine
Months
Ended
|
|
|
|
|
|
|
March
31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
5,854.3
|
|
|
$ |
5,122.1
|
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,536.8
|
|
|
|
2,160.5
|
|
|
|
|
|
Systems
development and
|
|
|
|
|
|
|
|
|
|
|
|
|
programming
costs
|
|
|
355.7
|
|
|
|
343.2
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
155.8
|
|
|
|
122.9
|
|
|
|
|
|
Total
cost of revenues
|
|
|
3,048.3
|
|
|
|
2,626.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
1,570.5
|
|
|
|
1,376.4
|
|
|
|
|
|
Interest
expense
|
|
|
74.8
|
|
|
|
51.3
|
|
|
|
|
|
Other
income,
net
|
|
|
(175.4 |
) |
|
|
(78.6 |
) |
|
|
|
|
Total
expenses
|
|
$ |
4,518.2
|
|
|
$ |
3,975.7
|
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from
continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
before income
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
|
|
$ |
1,336.1
|
|
|
$ |
1,146.4
|
|
|
|
17 |
% |
Margin
|
|
|
23 |
% |
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for
income taxes
|
|
$ |
495.7
|
|
|
$ |
430.1
|
|
|
|
15 |
% |
Effective
tax
rate
|
|
|
37.1 |
% |
|
|
37.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
from
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
$ |
840.4
|
|
|
$ |
716.3
|
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
1.51
|
|
|
$ |
1.23
|
|
|
|
23 |
% |
We
have revised the format of our Statements of Consolidated Earnings to include
a
separate line item for cost of revenues. Our costs and expenses
applicable to revenues represent the total of operating expenses and systems
development and programming costs as presented on the Statements of Consolidated
Earnings, as well as the portion of depreciation and amortization that relates
to our services and products.
We
previously reported that depreciation and amortization from continuing
operations totaled $61.9 million and $181.9 million for the three and nine
months ended March 31, 2006, respectively. The portion of
depreciation and amortization that relates to our services and products equals
$42.3 million and $122.9 million for the three and nine months ended March
31,
2006, respectively, and is included in cost of revenues. The portion
of depreciation and amortization that does not relate to our services and
products of $19.6 million and $59.0 million for the three and nine months
ended
March 31, 2006, respectively, was reclassified to selling, general and
administrative expenses on the Statements of Consolidated Earnings.
Total
Revenues
Our
consolidated revenues for the three months ended March 31, 2007 grew 14%,
to
$2,189.3 million, due to increases in Employer Services of 12%, or $203.3
million, to $1,860.0 million, and Dealer Services of 8%, or $24.0 million,
to
$310.6 million. Our consolidated internal revenue growth, which
represents revenue growth excluding the impact of acquisitions and divestitures,
was 12% for the three months ended March 31, 2007 as compared to the prior
year. Revenue growth was favorably impacted by $22.4 million, or 1%,
due to fluctuations in foreign currency exchange rates.
Our
consolidated revenues for the three months ended March 31, 2007 include interest
on funds held for Employer Services’ clients of $198.3 million as compared to
$166.2 million in the prior year. The increase in the consolidated
interest earned on funds held for Employer Services’ clients resulted from the
increase of 8% in our average client funds balances to $17.6 billion, as
well as
the increase in the average interest rates earned to approximately 4.5% for
the
three months ended March 31, 2007 as compared to approximately 4.1% in the
prior
year. We credit Employer Services with interest revenues at a
standard rate of 4.5%; therefore Employer Services’ results are not influenced
by changes in interest rates. The difference between the 4.5%
standard rate allocation in Employer Services and the actual interest earned
is
a reconciling item that increases revenue by $3.8 million in the three months
ended March 31, 2007 and reduces revenue by $13.4 million in the three months
ended March 31, 2006 and results in the elimination of this allocation in
consolidation.
Our
consolidated revenues for the nine months ended March 31, 2007 grew 14%,
to
$5,854.3 million, due to increases in Employer Services of 12%, or $517.8
million, to $4,854.2 million, and Dealer Services of 16%, or $127.9 million,
to
$908.0 million. Our consolidated internal revenue growth was 12% for
the nine months ended March 31, 2007 as compared to the prior
year. Revenue growth was favorably impacted by $57.1 million, or 1%,
due to fluctuations in foreign currency exchange rates.
Our
consolidated revenues for the nine months ended March 31, 2007 include interest
on funds held for Employer Services’ clients of $475.3 million as compared to
$393.5 million in the prior year. The increase in the consolidated
interest earned on funds held for Employer Services’ clients resulted from the
increase of 9% in our average client funds balances to $14.4 billion, as
well as
the increase in the average interest rates earned to approximately 4.4% for
the
nine months ended March 31, 2007 as compared to approximately 4.0% in the
prior
year. We credit Employer Services with interest revenues at a
standard rate of 4.5%; therefore Employer Services’ results are not influenced
by changes in interest rates. The difference between the 4.5%
standard rate allocation in Employer Services and the actual interest earned
is
a reconciling item that reduces revenue by $8.2 million and $49.7 million
in the
nine months ended March 31, 2007 and 2006, respectively, and results in the
elimination of this allocation in consolidation.
Total
Expenses
Our
consolidated expenses for the three months ended March 31, 2007 increased
by
$187.6 million, to $1,611.5 million, from $1,423.9 million for the three
months
ended March 31, 2006. Our consolidated expenses for the nine months
ended March 31, 2007 increased by $542.5 million, to $4,518.2 million, from
$3,975.7 million for the nine months ended March 31, 2006. The
increase in our consolidated expenses for both periods is due to the increase
in
our revenues, higher pass-through costs associated with our Professional
Employer Organization (“PEO”) business, an increase in our salesforce and
implementation personnel and higher expenses associated with our Employer
Services’ new business sales and implementation. In addition,
consolidated expenses increased by $20.2 million, or 1%, and $50.9 million,
or
1%, for the three and nine months ended March 31, 2007, respectively, due
to
fluctuations in foreign currency exchange rates.
Our
total cost of revenues increased by $131.0 million, to $1,075.6 million,
from
$944.6 million for the three months ended March 31, 2006 due to increases
in our
operating expenses. Operating expenses increased by $117.6 million,
or 15%, for the three months ended March 31, 2007 due to the increase in
revenues, including the increases in the PEO business, which has pass-through
costs that are re-billable. The pass-through costs for the PEO business were
$183.0 million and $146.9 million for the three months ended March 31, 2007
and
2006, respectively. In addition, operating expenses for the three
months ended March 31, 2007 increased by approximately $42 million as a result
of higher compensation expenses associated with additional implementation
and
service personnel, including approximately $12 million of spending on new
business opportunities in Employer Services. Our new business
opportunities relate to our Employer Services’ Human Resource Business Process
Outsourcing (“HR BPO”) opportunities, which focus on the outsourcing of
integrated multiple processes – such as payroll, HR, and benefits and related
administration. This spending was targeted at expanding our Comprehensive
Outsourcing Services (“COS”) product for larger employers, our PEO business, our
Administrative Services Offering (“ASO”) product, which is a bundled HR
outsourcing solution similar to a PEO, but without co-employment, and
GlobalView®, our HR outsourcing offering for multi-national
organizations. Operating expenses for the three months ended March
31, 2007 also increased by approximately 2% due to the operating costs of
new
businesses acquired.
Our
total cost of revenues increased by $421.7 million, to $3,048.3 million,
from
$2,626.6 million for the nine months ended March 31, 2007 due to increases
in
our operating expenses. Operating expenses increased by $376.3
million, or 17%, for the nine months ended March 31, 2007 due to the increase
in
revenues, including the increases in the PEO business, which has pass-through
costs that are re-billable. The pass-through costs for the PEO
business were $470.7 million and $376.4 million for the nine months ended
March
31, 2007 and 2006, respectively. In addition, operating expenses for
the nine months ended March 31, 2007 increased by approximately $131 million
as
a result of higher compensation expenses associated with additional
implementation and service personnel, including approximately $38 million
of
spending on new business opportunities in Employer Services as discussed
above. Lastly, operating expenses also increased by approximately 2%
due to the operating costs of new businesses acquired.
Selling,
general and
administrative expenses increased by $58.8 million, or 12%, for the three
months
ended March 31, 2007, due to the increase in salesforce personnel and higher
selling expenses in Employer Services resulting in an increase of approximately
$42 million of expenses. This $42 million increase includes
approximately $4 million for expenses relating to our Employer Services’ HR BPO
opportunities discussed above. In addition, selling, general and
administrative expenses also increased by approximately 4% due to the selling,
general and administrative costs of our new businesses acquired.
Selling,
general and
administrative expenses increased by $194.1 million, or 14%, for the nine
months
ended March 31, 2007, due to the increase in salesforce personnel and higher
selling expenses in Employer Services resulting in an increase of approximately
$114 million of expenses. This $114 million increase includes
approximately $13 million for expenses relating to our Employer Services’ HR BPO
opportunities discussed above. In addition, selling, general and
administrative expenses also increased by approximately 4% due to the selling,
general and administrative costs of our new businesses acquired.
Interest
expense
increased $23.5 million for the nine months ended March 31, 2007 as a result
of
higher interest rates on our short-term financing arrangements, as well as
higher borrowings.
Other
income, net,
increased $96.8 million for the nine months ended March 31, 2007 due to a
gain
of $38.6 million on the sale of a minority investment, an increase of $19.7
million of realized gains on our available for sale securities and a decline
of
$14.4 million of realized losses on our available for sale securities as
a
result of the liquidation of certain investments. Additionally, other
income, net included an increase in interest income on corporate funds of
$24.1
million as a result of higher interest rates and higher corporate
balances.
Earnings
from Continuing Operations before Income Taxes
Earnings
from
continuing operations before income taxes increased by $74.7 million, or
15%,
from $503.1 million for the three months ended March 31, 2006 to $577.8 million
for the three months ended March 31, 2007 due to the increase in revenues
and
expenses discussed above. Overall margin remained flat at 26% for the
three months ended March 31, 2007 as compared to the three months ended March
31, 2006.
Earnings
from
continuing operations before income taxes increased by $189.7 million, or
17%,
from $1,146.4 million for the nine months ended March 31, 2006 to $1,336.1
million for the nine months ended March 31, 2007 due to the increase in revenues
and expenses discussed above. Overall margin improved from 22% to 23%
for the nine months ended March 31, 2007 as compared to the nine months ended
March 31, 2006.
Provision
for Income Taxes
Our
effective tax rate for the three and nine months ended March 31, 2007 was
37.0%
and 37.1%, respectively, as compared to 37.5% for the comparable periods
in the
prior year. The decrease in the effective tax rate for both periods
is attributable to a favorable mix in income among tax
jurisdictions.
Net
Earnings
from Continuing Operations and Diluted Earnings per Share from Continuing
Operations
Net
earnings from continuing operations increased 16%, to $364.3 million, for
the
three months ended March 31, 2007, from $314.6 million for the three months
ended March 31, 2006, and the related diluted earnings per share from continuing
operations increased 20%, to $0.65, for the three months ended March 31,
2007. Net earnings from continuing operations increased 17%, to
$840.4 million, for the nine months ended March 31, 2007, from $716.3 million
for the nine months ended March 31, 2006, and the related diluted earnings
per
share from continuing operations increased 23%, to $1.51, for the nine months
ended March 31, 2007. The increase in net earnings from continuing
operations for the three and nine months ended March 31, 2007 reflects the
increase in earnings from continuing operations before income taxes as a
result
of increased revenues being offset by expenses, and a lower effective tax
rate. The increase in diluted earnings per share from continuing
operations for the three and nine months ended March 31, 2007 reflects the
increase in net earnings from continuing operations and the impact of fewer
shares outstanding due to the repurchase of 0.4 million shares and 18.1 million
shares during the three and nine months ended March 31, 2007, respectively,
and
the repurchase of 29.6 million shares in fiscal 2006.
Analysis
of
Reportable Segments
Analysis
of Reportable Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Services
|
|
$ |
1,860.0
|
|
|
$ |
1,656.7
|
|
|
|
12 |
% |
|
$ |
4,854.2
|
|
|
$ |
4,336.4
|
|
|
|
12 |
% |
Dealer
Services
|
|
|
310.6
|
|
|
|
286.6
|
|
|
|
8 |
% |
|
|
908.0
|
|
|
|
780.1
|
|
|
|
16 |
% |
Other
|
|
|
(5.7 |
) |
|
|
(1.2 |
) |
|
|
(100 |
)+% |
|
|
50.0
|
|
|
|
62.0
|
|
|
|
(19 |
)% |
Reconciling
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
20.6
|
|
|
|
(1.7 |
) |
|
|
|
|
|
|
50.3
|
|
|
|
(6.7 |
) |
|
|
|
|
Client
fund interest
|
|
|
3.8
|
|
|
|
(13.4 |
) |
|
|
|
|
|
|
(8.2 |
) |
|
|
(49.7 |
) |
|
|
|
|
Total
revenues
|
|
$ |
2,189.3
|
|
|
$ |
1,927.0
|
|
|
|
14 |
% |
|
$ |
5,854.3
|
|
|
$ |
5,122.1
|
|
|
|
14 |
% |
Earnings
From Continuing Operations Before Income Taxes
|
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Services
|
|
$ |
556.0
|
|
|
$ |
503.8
|
|
|
|
10 |
% |
|
$ |
1,186.6
|
|
|
$ |
1,085.8
|
|
|
|
9 |
% |
Dealer
Services
|
|
|
51.2
|
|
|
|
37.5
|
|
|
|
37 |
% |
|
|
143.5
|
|
|
|
117.5
|
|
|
|
22 |
% |
Other
|
|
|
(66.0 |
) |
|
|
(51.6 |
) |
|
|
(28 |
)% |
|
|
(77.2 |
) |
|
|
(81.8 |
) |
|
|
6 |
% |
Reconciling
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
2.6
|
|
|
|
0.2
|
|
|
|
|
|
|
|
5.8
|
|
|
|
(0.7 |
) |
|
|
|
|
Client
fund interest
|
|
|
3.8
|
|
|
|
(13.4 |
) |
|
|
|
|
|
|
(8.2 |
) |
|
|
(49.7 |
) |
|
|
|
|
Cost
of
capital charge
|
|
|
30.2
|
|
|
|
26.6
|
|
|
|
|
|
|
|
85.6
|
|
|
|
75.3
|
|
|
|
|
|
Total
earnings
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
$ |
577.8
|
|
|
$ |
503.1
|
|
|
|
15 |
% |
|
$ |
1,336.1
|
|
|
$ |
1,146.4
|
|
|
|
17 |
% |
Employer
Services
Revenues
Employer
Services'
revenues increased 12% for both the three and nine months ended March 31,
2007,
due to new business started in the period, an increase in the number of
employees on our clients’ payrolls, strong client retention, price increases and
an increase in client funds balances. Internal revenue growth was
approximately 11% for both the three and nine months ended March 31,
2007. New business sales, which represent the annualized recurring
revenues anticipated from sales orders to new and existing clients, grew
13% in
the United States for both the three and nine months ended March 31, 2007
and
12% and 14% worldwide for the three and nine months ended March 31, 2007,
respectively, due to the increase in the salesforce headcount as well as
an
increase in their productivity. Revenues from our traditional payroll and
payroll tax filing business grew 8% for both the three and nine months ended
March 31, 2007. The number of employees on our clients’ payrolls,
“pays per control,” increased 3.0% and 2.4% for the three and nine months ended
March 31, 2007, respectively, in the United States. This employment
metric represents over 125 thousand payrolls of small to large businesses
and
reflects a broad range of U.S. geographic regions. Our worldwide
client retention declined 0.2 percentage points and 0.1 percentage points
for
the three and nine months ended March 31, 2007, respectively, as compared
to the
high levels achieved in the three and nine months ended March 31,
2006.
Interest
income was
credited to Employer Services at a standard rate of 4.5% so the results of
the
business were not influenced by changes in interest rates. Interest income
recorded within the Employer Services segment increased by $14.9 million
and
$40.3 million for the three and nine months ended March 31, 2007, respectively,
both of which represented 1% of the growth in Employer Services’
revenues. Interest income increased in both periods due to the
increase in the average client funds balances as a result of increased Employer
Services’ new business and growth in our existing client base as compared to the
prior year. The average client funds balances were $17.6 billion and
$16.3 billion for the three months ended March 31, 2007 and 2006, respectively,
and $14.4 billion and $13.2 billion for the nine months ended March 31, 2007
and
2006, respectively, representing increases of 8% and 9%,
respectively.
Revenues
from our
"beyond payroll" products grew 23% and 20% for the three and nine months
ended
March 31, 2007, respectively. This increase includes our PEO
revenues, which grew 26% for both the three and nine months ended March 31,
2007, to $249.1 million and $649.5 million, respectively, due to 24% growth
in
the number of PEO worksite employees and additional pass-through
benefits. In addition, "beyond payroll" revenues grew due to an
increase in our Time and Labor Management Services revenues of 20% and 23%
for
the three and nine months ended March 31, 2007, respectively, as a result
of
increases in the number of clients utilizing this service.
Earnings
from
Continuing Operations before Income Taxes
Earnings
from
continuing operations before income taxes increased $52.2 million, or 10%,
to
$556.0 million, and $100.8 million, or 9%, to $1,186.6 million for the three
and
nine months ended March 31, 2007, respectively. Earnings from
continuing operations before income taxes for the three and nine months ended
March 31, 2007 did not grow at the same rate as the growth in revenues due
to
the higher pass-through costs associated with our PEO business and higher
expenses associated with sales and implementation. Our PEO
pass-through operating expenses related to benefits and workers’ compensation
costs grew 25%, to $183.0 million and to $470.7 million, for the three and
nine
months ended March 31, 2007, respectively. Earnings from continuing
operations before income taxes for the three and nine months ended March
31,
2007 were also impacted by the increase of approximately $84 million and
$245
million, respectively, in compensation expenses for implementation, service
and
salesforce personnel, spending on new business opportunities, and higher
selling
and implementation expenses associated with new business sales. This
increase in expenses for the three and nine months ended March 31, 2007 includes
approximately $16 million and $51 million, respectively, relating to our
HR BPO
opportunities. This spending was targeted at expanding our PEO
business, our COS product for larger employers, our ASO product and GlobalView®
outsourcing offering. Earnings from continuing operations before
income taxes were also impacted by an increase in expenses associated with
six
acquisitions made during the nine months ended March 31, 2007. These
acquisitions as well as the additional expenses discussed above contributed
to
the decline of 50 basis points and 60 basis points in Employer Services’ margins
during the three and nine months ended March 31, 2007,
respectively.
Dealer
Services
Revenues
Dealer
Services'
revenues increased 8% and 16% for the three and nine months ended March 31,
2007, respectively, as compared to the prior year. The increase in
revenues for the nine months ended March 31, 2007 was driven by revenues
from
Kerridge Computer Company Ltd (“Kerridge”), which was acquired in December
2005. Internal revenue growth was approximately 6% and 5% for the
three and nine months ended March 31, 2007, respectively. New
business sales grew 27% and 22% for the three and nine months ended March
31,
2007, respectively, due to a combination of higher sales in
North
America
and strength
in the International market driven by our acquisition of
Kerridge. Revenues increased for our Dealer Business Systems in North
America by $19.9 million, to $239.2 million, for the three months ended March
31, 2007 and $57.9 million, to $704.3 million, for the nine months ended
March
31, 2007, due to growth in our key products. The growth in our key
products was driven by the increased users for Application Service Provider
managed services, increased Credit Check and Computerized Vehicle Registration
transaction volume, new network installations and increased market penetration
of our Digital Marketing product.
Earnings
from
Continuing Operations before Income Taxes
Earnings
from
continuing operations before income taxes increased $13.7 million, or 37%,
to
$51.2 million and $26.0 million, or 22%, to $143.5 million for the three
and
nine months ended March 31, 2007, respectively, due to the increases in revenues
of our Dealer Business Systems and contributions from recent acquisitions.
Overall margin improved 340 basis points and 70 basis points for the three
and
nine months ended March 31, 2007, respectively, driven by growth in the
international market due to contributions from the Kerridge acquisition and
cost
savings achieved from the integration of Kerridge during the current
year. In addition, earnings from continuing operations before income
taxes for the three and nine months ended March 31, 2007 improved as a result
of
severance expenses of $5.6 million recorded in the prior year relating to
the
integration of Kerridge.
Other
The
primary components of "Other" are miscellaneous processing services and
corporate allocations and expenses, including stock-based compensation
expense. Additionally, a gain of $38.6 million on the sale of a
minority investment is included in “Other” for the nine months ended March 31,
2007.
Reconciling
Items
The
prior year’s reportable segment revenues and earnings from continuing operations
before income taxes have been adjusted to reflect updated fiscal 2007 budgeted
foreign exchange rates. Reconciling items include foreign exchange
differences between the actual foreign exchange rates and fiscal 2007 budgeted
foreign exchange rates, and the adjustment for the difference between actual
interest income earned on invested funds held for Employer Services’ clients and
interest credited to Employer Services at a standard rate of
4.5%. Both of these adjustments are eliminated in consolidation and
as such represent reconciling items to revenues and earnings from continuing
operations before income taxes. The reportable segment results also
include an internal cost of capital charge related to the funding of
acquisitions and other investments. This charge is eliminated in
consolidation and as such represents a reconciling item to earnings from
continuing operations before income taxes.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At
March 31, 2007, cash and marketable securities were $2,787.2 million,
stockholders’ equity was $5,988.7 million and the ratio of long-term
debt-to-equity was 0.7%. At March 31, 2007, working capital was
$2,291.1 million as compared to $2,811.4 million at June 30,
2006. This fluctuation is due to the decrease of $1,175.5 million in
net assets of discontinued operations at March 31, 2007, as compared to June
30,
2006. Net assets of discontinued operations at June 30, 2006 included
the net assets of the former Brokerage Services and Securities Clearing and
Outsourcing Services segments. Such decrease was partially offset by
an increase in cash and cash equivalents of $606.2 million.
Our
principal sources of liquidity are derived from cash generated through
operations and through cash and marketable securities on hand. We
also have the ability to generate cash through our financing arrangements
under
our U.S. short-term commercial paper program and our U.S. and Canadian
short-term repurchase agreements. In addition, we have three
unsecured revolving credit agreements that allow us to borrow up to $5.5
billion
in the aggregate. Our short-term commercial paper program and
repurchase agreements are utilized as the primary instruments to meet short-term
funding requirements related to client funds obligations. Our
revolving credit agreements are in place to provide additional liquidity,
if
needed. We have never had borrowings under the revolving credit
agreements. The Company believes that the internally generated cash
flows and financing arrangements are adequate to support business operations
and
capital expenditures.
On
March 30, 2007, we completed the tax free spin-off of our 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 with a par value $0.01 per
share,
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. We have
classified the results of operations of the spun-off businesses as discontinued
operations for all periods presented. Additionally, we recorded a
decrease to retained earnings of $1.2 billion for the non-cash reduction
in net
assets of Broadridge related to the spin-off, offset by an increase to retained
earnings of $690.0 million related to the cash dividend received from Broadridge
as part of the spin-off.
In
February 2007, we exercised our call option and notified holders of our zero
coupon convertible subordinated notes that we would redeem all the notes
that
were outstanding as of the end of the business day on March 19, 2007 (the
“redemption date”). Prior to the redemption date, approximately $39
million in face value of the notes was converted into approximately 1 million
shares of the Company’s common stock. We subsequently redeemed the remaining 352
notes outstanding as of the redemption date at a redemption price of $775
for
each note, representing the accrued value of each note at the time of the
redemption.
Net
cash flows provided by operating activities were $1,112.0 million for the
nine
months ended March 31, 2007, as compared to $1,474.1 million for the comparable
period in the prior fiscal year. The fluctuation between periods was
due to the increase of $160.8 million in receivables and other assets as
well as
the decrease of $225.9 million in operating activities of discontinued
operations businesses. The increase in receivables and other assets
was due to a $68.8 million increase in trade receivables related to our
increased revenues, a $21.2 million increase in our pension plan cash
contributions and a $55.4 million increase in other current assets due to
the
timing of certain payments for prepaid insurance and software maintenance
contracts during the nine months ended March 31, 2007, as compared to the
nine
months ended March 31, 2006. The cash flows provided by discontinued
operations businesses relates to the Broadridge and Claims Services businesses,
which have been spun-off and sold, respectively. The decrease in cash
flows from discontinued operations businesses is due to the decrease in
securities deposited with clearing organizations or segregated for the exclusive
benefit of Securities Clearing and Outsourcing Services’ customers to meet
regulatory requirements.
Cash
flows provided
by investing activities for the nine months ended March 31, 2007 totaled
$336.2
million, compared to cash flows used in investing activities for the nine
months
ended March 31, 2006 of $505.9 million for the comparable period in the prior
year. The fluctuation between periods was due to the receipt of the
$690.0 million cash dividend from Broadridge offset by the $29.9 million
of cash
retained by Broadridge, the proceeds of $38.6 million received on the sale
of a
minority investment, $13.2 million received from a purchase price adjustment
relating to the fiscal 2006 sale of the Claims Services business and $4.0
million received from the sale of Sandy Corporation, a business
previously
reported
within the
Dealer Services segment. In addition, the fluctuations between
periods were due to the timing of purchases of and proceeds from the sales
and
maturities of marketable securities, the change in client funds obligations
and
the decrease of $67.0 million in capital expenditures due to the completion
of
the data center facilities during fiscal 2006. The cash flows
provided by investing activities for the nine months ended March 31, 2007
were
offset by an increase of $65.0 million of additions to intangible assets
due to
the timing of payments for software license fees and the increase of $97.5
million in cash paid for acquisitions as a result of the nine businesses
acquired during the nine months ended March 31, 2007.
Cash
flows used in
financing activities for the nine months ended March 31, 2007 totaled $882.9
million, compared to $601.3 million for the nine months ended March 31,
2006. The increase in cash used in financing activities was due to
increased repurchases of common stock of $361.1 million and an increase in
dividends paid of $47.1 million, resulting from the increase in the amount
of
dividends per common share for the nine months ended March 31, 2007, as compared
to the comparable period in the prior year, offset by an increase in proceeds
received from the stock purchase plan and exercises of stock options of $48.6
million and an increase in the financing activities of discontinued operations
of $79.1 million. We purchased 18.1 million shares of our common stock at
an
average price per share of $47.18 during the nine months ended March 31,
2007. As of March 31, 2007, we had remaining Board of Directors’
authorization to purchase up to 65.9 million additional shares.
In
June 2006, we entered into a $1.75 billion, 364-day credit agreement and
a $2.25
billion, five-year credit agreement with a group of lenders. The five-year
facility contains an accordion feature under which the aggregate commitment
can
be increased by $500.0 million to $2.75 billion, subject to the availability
of
additional commitments. These facilities replaced our prior $1.25 billion,
364-day facility, and $2.25 billion, five-year facility, both of which were
terminated in June 2006. The $1.75 billion and $2.25 billion
agreements mature in June 2007 and June 2011, respectively. We also
have a $1.5 billion credit facility that matures in June 2010. The
interest rate applicable to the borrowings is tied to LIBOR or prime rate
depending on the notification provided by the Company to the syndicated
financial institutions prior to borrowing. We are also required to
pay facility fees on the credit agreements. The primary uses of the
credit facilities are to provide liquidity to the commercial paper program
and
to provide funding for general corporate purposes, if
necessary. There were no borrowings through March 31, 2007 under the
credit agreements.
We
maintain a U.S. short-term commercial paper program providing for the issuance
of up to $5.5 billion in aggregate maturity value of commercial paper at
the
Company’s discretion. Our commercial paper program is rated A-1+ by
Standard and Poor's and Prime-1 by Moody's. These ratings denote the
highest quality commercial paper securities. Maturities of commercial
paper can range from overnight to up to 270 days. At March 31, 2007
and 2006, there was no commercial paper outstanding. For both the three months
ended March 31, 2007 and 2006, we had average borrowings of $0.4 billion
at a
weighted average interest rate of 5.3% and 4.4%, respectively. For
the nine months ended March 31, 2007 and 2006, we had average borrowings
of $1.6
billion and $1.4 billion, respectively, at a weighted average interest rate
of
5.3% and 3.8%, respectively. The weighted average maturity of our
commercial paper during the three and nine months ended March 31, 2007 and
2006
was less than two days for each period.
Our
U.S. and Canadian short-term funding requirements related to client funds
obligations are sometimes obtained on a secured basis through the use of
repurchase agreements, which are collateralized principally by government
and
government agency securities. These agreements generally have terms
ranging from overnight to up to five business days. At March 31, 2007
and 2006, there were no outstanding obligations under repurchase
agreements. For the three months ended March 31, 2007 and 2006, the
Company had average outstanding balances under repurchase agreements of $59.8
million and $83.8 million, respectively, at a weighted average interest rate
of
4.2% and 3.4%, respectively. For the nine months ended March 31, 2007
and 2006, the Company had average outstanding balances under repurchase
agreements of $105.6 million and $169.6 million, respectively, at a weighted
average interest rate of 4.4% and 3.2%, respectively.
For
the nine months ended March 31, 2007 capital expenditures for continuing
operations were $119.4 million. Capital expenditures for continuing
operations for fiscal 2007 are expected to be approximately $190.0 million,
compared to $254.9 million in fiscal 2006.
In
the normal course of business, we also enter into contracts in which we make
representations and warranties that relate to the performance of our products
and services. We do not expect any material losses related to such
representations and warranties.
Quantitative
and Qualitative Disclosures about Market Risk
During
the nine
months ended March 31, 2007, approximately 25% of our overall investment
portfolio was invested in cash and cash equivalents, and therefore was impacted
almost immediately by changes in short-term interest rates. The other
75% of our investment portfolio was invested in fixed-income securities,
with
varying maturities of less than ten years, which were also subject to interest
rate risk, including reinvestment risk. We have historically had the
ability to hold these investments until maturity. Details regarding our overall
investment portfolio are as follows:
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Average
investment balances
|
|
|
|
|
|
|
|
|
|
|
|
|
at
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
investments
|
|
$ |
2,095.2
|
|
|
$ |
2,109.9
|
|
|
$ |
3,555.6
|
|
|
$ |
3,335.3
|
|
Funds
held for clients
|
|
|
17,649.2
|
|
|
|
16,295.0
|
|
|
|
14,411.4
|
|
|
|
13,225.7
|
|
Total
|
|
$ |
19,744.4
|
|
|
$ |
18,404.9
|
|
|
$ |
17,967.0
|
|
|
$ |
16,561.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rates earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exclusive
of realized gains/(losses) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
investments
|
|
|
4.9 |
% |
|
|
4.5 |
% |
|
|
4.5 |
% |
|
|
3.8 |
% |
Funds
held for clients
|
|
|
4.5 |
% |
|
|
4.1 |
% |
|
|
4.4 |
% |
|
|
4.0 |
% |
Total
|
|
|
4.5 |
% |
|
|
4.2 |
% |
|
|
4.4 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gains
on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
$ |
0.4
|
|
|
$ |
0.2
|
|
|
$ |
20.5
|
|
|
$ |
0.8
|
|
Realized
losses on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
|
(0.9 |
) |
|
|
(1.0 |
) |
|
|
(3.2 |
) |
|
|
(17.6 |
) |
Net
realized
gains (losses) on available-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for-sale
securities
|
|
$ |
(0.5 |
) |
|
$ |
(0.8 |
) |
|
$ |
17.3
|
|
|
$ |
(16.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
unrealized
pre-tax losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities
|
|
$ |
(88.9 |
) |
|
$ |
(312.9 |
) |
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
$ |
13,595.7
|
|
|
$ |
13,612.8
|
|
|
|
|
|
|
|
|
|
The
return on our portfolio is impacted by interest rate changes. Factors
that influence the earnings impact of the interest rate changes include,
among
others, the amount of invested funds and the overall portfolio mix between
short-term and long-term investments. This mix varies during the
fiscal year and is impacted by daily interest rate changes. A
hypothetical change in both short-term interest rates (e.g., overnight interest
rates or the Fed Funds rate) and intermediate-term interest rates of 25 basis
points applied to the estimated fiscal 2007 average investment balances and
any
related borrowings would result in approximately a $10 million impact to
earnings before income taxes over a twelve-month period. A
hypothetical change in only short-term interest rates of 25 basis points
applied
to the estimated fiscal 2007 average short-term investment balances and any
related short-term borrowings would result in approximately a $4 million
impact
to earnings before income taxes over a twelve-month period.
The
Company is exposed to credit risk in connection with our available-for-sale
securities through the possible inability of the borrowers to meet the terms
of
the bonds. The Company limits credit risk by investing in primarily
AAA and AA rated securities, as rated by Moody’s, Standard & Poor’s and, for
Canadian securities, Dominion Bond Rating Service. At March 31, 2007,
approximately 95% of our available-for-sale securities held an AAA or AA
rating. In addition, we also limit amounts that can be invested in
certain issuers.
The
Company is exposed to market risk from changes in foreign currency exchange
rates that could impact its financial position, results of operations and
cash
flows. The Company manages its exposure to these market risks through its
regular operating and financing activities and, when deemed appropriate,
through
the use of derivative financial instruments. The Company uses derivative
financial instruments as risk management tools and not for trading
purposes.
New
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS
No. 159 provides companies with an option to measure selected financial assets
and liabilities at fair value. We are currently evaluating the effect
that the adoption of SFAS No. 159 will have, if any, on our consolidated
results
of operations and financial condition.
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin No.
108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108
requires companies to evaluate the materiality of identified unadjusted errors
on each financial statement and related financial statement disclosure using
both the rollover approach and the iron curtain approach. SAB 108 is effective
for annual financial statements covering the first fiscal year ending after
November 15, 2006. We plan to include the effect of adopting SAB 108
in our Annual Report on Form 10-K for the year ending June 30, 2007 and
currently estimate the adoption of SAB 108 to result in an increase to retained
earnings of $40.0 million, net of tax, which will be primarily due to a
reduction in certain accrued expenses.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). This statement would
require a company to (a) recognize in its statement of financial position
an
asset for a plan’s overfunded status or a liability for a plan’s underfunded
status, (b) measure a plan’s assets and its obligations that determine its
funded status as of the end of the employer’s fiscal year, and (c) recognize
changes in the funded status of a defined benefit plan in the year in which
the
changes occur (reported in comprehensive income). The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the first fiscal year ending after December
15,
2006. We plan to include the effect of adopting SFAS No. 158 in our
Annual Report on Form 10-K for the year ending June 30, 2007. Based
on the unrecognized actuarial losses of our pension plans in the June 30,
2006
Annual Report on Form 10-K, we expect to reclassify $116 million, net of
tax,
from other assets to accumulated other comprehensive income on the Consolidated
Balance Sheets upon the adoption of SFAS No. 158, which will result in a
reduction of stockholders’ equity. We will reevaluate this estimate upon
adoption of SFAS No. 158 based upon our June 30, 2007 plan measurement date,
which will likely impact the above-described amount. The requirement
to measure the plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. We do not believe that
the adoption of SFAS No. 158 will have a material impact on the consolidated
results of operations and financial condition.
In
September 2006, the FASB issued SFAS 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. We believe that the adoption of SFAS No. 157 will
not have a material effect on our 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” (“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. FIN 48 requires additional annual disclosures and
is
effective
as of the
beginning of the first fiscal year beginning after December 15,
2006. We expect to adopt FIN 48 on July 1, 2007 and are currently
evaluating the effect that the adoption of FIN 48 will have on our consolidated
results of operations and financial condition.
Income
Taxes
The
Company is routinely examined by the IRS and tax authorities in countries
in
which it conducts business, as well as in states in which it has significant
business operations. The tax years under examination vary by
jurisdiction. The Company expects an IRS examination for fiscal 1998
through fiscal 2002 to be substantially completed during fiscal
2008. In addition, the IRS is conducting an examination of fiscal
2003 through fiscal 2006. The Company regularly considers the
likelihood of assessments in each of the jurisdictions resulting from
examinations. The Company has established tax reserves which it
believes are adequate in relation to the potential assessments. Once
established, reserves are adjusted when there is more information available,
when an event occurs necessitating a change to the reserves or when the statute
of limitations for the relevant taxing authority to examine the tax position
has
expired. The resolution of tax matters should not have a
material effect on the consolidated financial condition of the Company, although
a resolution could have a material impact on the Company’s Statements of
Consolidated Earnings for a particular future period and on the Company’s
effective tax rate.
FORWARD-LOOKING
INFORMATION
This
report and
other written or oral statements made from time to time by ADP may contain
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements that are not historical in
nature and which may be identified by the use of words like “expects,”
“assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and
other words of similar meaning, are forward-looking statements. These
statements are based on management’s expectations and assumptions and are
subject to risks and uncertainties that may cause actual results to differ
materially from those expressed. Factors that could cause actual
results to differ materially from those contemplated by the forward-looking
statements include: ADP’s success in obtaining, retaining and selling additional
services to clients; the pricing of products and services; changes in laws
regulating payroll taxes, professional employer organizations and employee
benefits; overall market and economic conditions, including interest rate
and
foreign currency trends; competitive conditions; auto sales and related industry
changes; employment and wage levels; changes in technology; availability
of
skilled technical associates and the impact of new acquisitions and
divestitures. ADP disclaims any obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise. These risks and uncertainties, along with the
risk factors discussed below under Item “1A. – Risk Factors”, should be
considered in evaluating any forward-looking statements contained
herein.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
The
information called for by this item is provided under the caption “Quantitative
and Qualitative Disclosures about Market Risk” under Item 2 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Item
4. Controls and Procedures
The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures, as defined in Rules 13a-15(e)
and
15d-15(e) of the Securities and Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report.
There
were no
changes in the Company's internal control over financial reporting that occurred
during the three and nine months ended March 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART
II. OTHER INFORMATION
Except
as noted
below, all other items are either inapplicable or would result in negative
responses and, therefore, have been omitted.
Item
1. Legal Proceedings
In
the normal course of business, the Company is subject to various claims and
litigation. While the outcome of any litigation is inherently
unpredictable, the Company believes it has valid defenses with respect to
the
legal matters pending against it and the Company believes that the ultimate
resolution of these matters will not have a material adverse impact on its
financial condition, results of operations or cash flows.
Item
1A.
Risk Factors
The
spin-off of Broadridge has necessitated changes to the risk factors disclosed
under Item 1A to Part I of our Annual Report on Form 10-K for the year
ended June 30, 2006. The following risk factors update and replace
such disclosure in its entirety.
Our
businesses
routinely encounter and address risks, some of which may cause our future
results to be different than we currently anticipate. Risk factors described
below represent our current view of some of the most important risks facing
our
businesses and are important to understanding our business. The following
information should be read in conjunction with financial and other information
included in our Annual Report on Form 10-K for the year ended June 30, 2006
and
our Quarterly Reports on Form 10-Q filed thereafter. This discussion includes
a
number of forward-looking statements. You should refer to the description
of the
qualifications and limitations on forward-looking statements in the last
paragraph under Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in this Quarterly Report on Form 10-Q. Unless
otherwise indicated or the context otherwise requires, reference in this
section
to “we,” “ours,” “us” or similar terms means ADP, together with its
subsidiaries. The level of importance of each of the following risks may
vary
from time to time.
Changes
in
laws and regulations may decrease our revenues and
earnings
Portions
of ADP’s
business are subject to governmental regulations. Changes in governmental
regulations may decrease our revenues and earnings and may require us to
change
the manner in which we conduct some of the aspects of our business. For
example,
a change in regulations either decreasing the amount of taxes to be withheld
or
allowing less time to remit taxes to government authorities would adversely
impact interest income from investing funds that we collect from clients
but
have not yet remitted to the applicable taxing authorities or client employees,
thus reducing our revenues and income from this source.
Security
and
privacy breaches may hurt our business
We
store electronically personal information, including social security numbers,
about our clients and employees of our clients. In addition, our retirement
services systems maintain investor account information for retirement plans.
There is no guarantee that the systems and procedures that we maintain
to
protect against unauthorized access to such information are adequate to
protect
against all security breaches. Any significant violations of data privacy
could
result in the loss of business, litigation and regulatory investigations
and
penalties that could damage our reputation and the growth of our business
could
be materially adversely affected.
Our
systems
may be subject to disruptions that could adversely affect our business
and
reputation
Many
of our
businesses are highly dependent on our ability to process, on a daily basis,
a
large number of complicated transactions. We rely heavily on our payroll,
financial, accounting and other data processing systems. If any of these
systems
fail to operate properly or become disabled even for a brief period of
time, we
could suffer financial loss, a disruption of our businesses, liability
to
clients, regulatory intervention or damage to our reputation. We have disaster
recovery plans in place to protect our businesses against natural disasters,
security breaches, military or terrorist actions, power or communication
failures or similar events. Despite our preparations, in the event of a
catastrophic occurrence, our disaster recovery plans may not be successful
in
preventing the loss of customer data, service interruptions, disruptions
to our
operations, or damage to our important facilities.
If
we fail
to adapt our technology to meet customer needs and preferences, the demand
for
our services may diminish
Our
businesses operate in industries that are subject to rapid technological
advances and changing customer needs and preferences. In order to remain
competitive and responsive to customer demands, we continually upgrade,
enhance
and expand our existing products and services. If we fail to respond
successfully to the technology challenges, the demand for our services
may
diminish.
Political
and economic factors may adversely affect our business and financial
results
Trade,
monetary and
fiscal policies, and political and economic conditions may substantially
change.
When there is a slowdown in the economy, employment levels and interest
rates
may decrease with a corresponding impact on our businesses. Customers may
react
to worsening conditions by reducing their spending on payroll and other
outsourcing services or renegotiating their contracts with us. If any of
these
circumstances remain in effect for an extended period of time, there could
be a
material adverse effect on our financial results.
Change
in
our credit ratings could adversely impact our operations and lower our
profitability
The
major credit rating agencies periodically evaluate our creditworthiness
and have
consistently given us their highest long-term debt and commercial paper
ratings.
Failure to maintain high credit ratings on long-term and short-term debt
could
increase our cost of borrowing, reduce our ability to obtain
intra-day
borrowing
required
by our Employer Services business, and ultimately reduce our client interest
revenue.
We
may be
unable to attract and retain qualified personnel
Our
ability to grow and provide our customers with competitive services is
partially
dependent on our ability to attract and retain highly motivated people
with the
skills to serve our customers. Competition for skilled employees in the
outsourcing and other markets in which we operate is intense and if we
are
unable to attract and retain highly skilled and motivated personnel,
expected
results from our operations may suffer.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Issuer
Purchases of
Equity Securities
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total
Number
of
|
|
|
Maximum
Number
|
|
|
|
|
|
|
|
|
|
Shares
Purchased
|
|
|
of
Shares
that
|
|
|
|
|
|
|
|
|
|
as
Part of
the
|
|
|
may
yet
be
|
|
|
|
|
|
|
|
|
|
Publicly
|
|
|
Purchased
under
|
|
|
|
Total
Number
|
|
|
Average
Price
|
|
|
Announced
|
|
|
the
Common
Stock
|
|
|
|
of
Shares
|
|
|
Paid
per
|
|
|
Common
Stock
|
|
|
Repurchase
|
|
Period
|
|
Purchased
|
|
|
Share
(3)
|
|
|
Repurchase
Plan (1)
|
|
|
Plan
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1,
2007 to
|
|
|
|
|
|
|
|
|
|
|
|
|
January
31,
2007
|
|
|
481,563
|
|
|
$ |
48.85
|
|
|
|
400,000
|
|
|
|
65,909,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
February
28, 2007
|
|
|
21,171
|
|
|
$ |
49.23
|
|
|
|
-
|
|
|
|
65,909,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1, 2007
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
2007
|
|
|
3,976
|
|
|
$ |
49.23
|
|
|
|
-
|
|
|
|
65,909,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
506,710
|
(2) |
|
|
|
|
|
|
400,000
|
|
|
|
|
|
(1)
In March 2001, the Company received the Board of Directors’ approval to
repurchase up to 50 million shares of the Company’s common stock. In
November 2002, November 2006 and August 2007, the Company received
the Board of
Directors’ approval to repurchase an additional 35 million, 50 million and 50
million shares, respectively, of the Company’s common stock. There is
no expiration date for the common stock repurchase plan.
(2)
During fiscal 2007, pursuant to the terms of the Company’s restricted stock
program, the Company (i) made repurchases of 81,563 shares during January
2007,
21,171 shares during February 2007 and 638 shares during March 2007
at the then
market value of the shares in connection with the exercise by employees
of their
option under such program to satisfy certain tax withholding requirements
through the delivery of shares to the Company instead of cash and (ii)
made
purchases of 3,338 shares during March 2007 at a price of $.10 per
share under
the terms of such program to repurchase stock granted to employees
who have left
the Company.
(3)
The average price per share does not include the repurchases described
in clause
(ii) of the preceding footnote.
Item
6.
Exhibits
Exhibit
Number
|
|
Exhibit
|
|
|
|
10.4
|
|
Supplemental
Officers’ Retirement Plan
|
|
|
|
31.1
|
|
Certification
by Gary C. Butler pursuant to Rule 13a-14(a) of the Securities
Exchange
Act of 1934
|
|
|
|
31.2
|
|
Certification
by Christopher R. Reidy pursuant to Rule 13a-14(a) of the
Securities
Exchange Act of 1934
|
|
|
|
32.1
|
|
Certification
by Gary C. Butler pursuant to 18 U.S.C. Section 1350, as
adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification
by Christopher R. Reidy pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant
to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
AUTOMATIC
DATA PROCESSING, INC.
(Registrant)
|
|
|
Date:
May 9,
2007
|
/s/
Christopher R. Reidy
Christopher
R.
Reidy
|
|
|
|
Chief
Financial Officer
(Title)
|