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<SEC-DOCUMENT>0000008670-05-000186.txt : 20050831
<SEC-HEADER>0000008670-05-000186.hdr.sgml : 20050831
<ACCEPTANCE-DATETIME>20050831163305
ACCESSION NUMBER: 0000008670-05-000186
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20050831
FILED AS OF DATE: 20050831
DATE AS OF CHANGE: 20050831
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOMATIC DATA PROCESSING INC
CENTRAL INDEX KEY: 0000008670
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374]
IRS NUMBER: 221467904
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-05397
FILM NUMBER: 051062151
BUSINESS ADDRESS:
STREET 1: ONE ADP BOULVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
BUSINESS PHONE: 9739747849
MAIL ADDRESS:
STREET 1: ONE ADP BOULEVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
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<FILENAME>form10k.txt
<DESCRIPTION>FORM10K
<TEXT>
________________________________________________________________________________
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
One ADP Boulevard, Roseland, New Jersey 07068
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 973-974-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $.10 Par Value New York Stock Exchange
(voting) Chicago Stock Exchange
Pacific Exchange
Liquid Yield Option Notes due 2012 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 the filing
requirements for the past 90 days. Yes x No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No _____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [x] No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant as of the last business day of the Registrant's
most recently completed second fiscal quarter was approximately $25,860,350,486.
On August 24, 2005 there were 578,425,694 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2005 Annual Report Parts I, II & IV
to Stockholders.
Portions of the Registrant's Proxy Statement for Annual Part III
Meeting of Stockholders to be held on November 8, 2005.
________________________________________________________________________________
<PAGE>
Part I
Item 1. Business
Automatic Data Processing, Inc., incorporated in Delaware in 1961 (together
with its subsidiaries "ADP" or the "Registrant"), is one of the largest
providers of computerized transaction processing, data communication and
information services in the world. For financial information by segment and by
geographic area, see Note 16 of the "Notes to Consolidated Financial Statements"
contained in ADP's 2005 Annual Report to Stockholders, which information is
incorporated herein by reference. The Registrant's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments
to those reports, Proxy Statement for its Annual Meeting of Stockholders and
Annual Report to Stockholders are made available, free of charge, on its website
at www.adp.com as soon as reasonably practicable after such reports have been
filed with or furnished to the Securities and Exchange Commission. The following
summary describes ADP's activities.
Employer Services
Employer Services offers a comprehensive range of human resource ("HR")
information, payroll processing and benefit administration products and
services, including traditional and Web-based outsourcing solutions, that assist
over 518,000 employers in the United States, Canada, Europe, South America
(primarily Brazil), Australia and Asia to staff, manage, pay and retain their
employees. Employer Services markets these products and services through its
direct marketing sales force and, on a limited basis, through indirect sales
channels, such as marketing relationships with banks and accountants. In fiscal
2005, 86% of Employer Services' revenues were from the United States, 9% were
from Europe, 4% were from Canada and 1% was from South America (primarily
Brazil), Australia and Asia.
United States and Canada
Employer Services' approach to the market is to match a client's needs with
the product that will best meet expectations. To facilitate this approach, in
the United States and Canada, Employer Services is comprised of the following
groups: Small Business Services ("SBS") (primarily companies with fewer than 50
employees); Major Accounts Services (primarily companies with between 50 and 999
employees); and National Account Services (primarily companies with 1,000 or
more employees).
SBS processes payroll for smaller companies and provides them with leading
solutions, including a range of value-added services that are specifically
designed for small business clients. Major Accounts Services and National
Account Services offer a full suite of best-of-breed employer services
solutions, including full database and other functional integration between
payroll and HR, for clients ranging from mid-sized through many of the world's
largest corporations.
Through ADP Connection(R) (in the United States), and by using current
product import capabilities (in Canada), ADP can enable its largest clients to
interface their major enterprise resource planning applications with ADP's
outsourced payroll services. For those companies that choose to process these
applications in-house, ADP currently delivers stand-alone services such as
payroll tax filing, check printing and distribution and year-end tax statements
(i.e., form W-2) in the United States. In addition, in order to expand its
presence in the small business client market, during fiscal 2005 ADP continued
to develop with Microsoft(R) Corporation two new fully integrated ADP payroll
solutions-ADP Payroll(SM) and ADP Total Payroll(SM)--that will be included
within Microsoft(R) Office Small Business Accounting 2006, available only in the
United States. ADP Payroll will offer users access to a
2
<PAGE>
"do-it-yourself" solution similar to those that are available in the traditional
software market and ADP Total Payroll will offer a full-featured payroll
solution for those who prefer to fully outsource payroll processing. ADP expects
these new offerings to be available for general distribution through Microsoft
Office Small Business Accounting 2006 during fiscal 2006.
In order to address the growing business process outsourcing (BPO) market
for clients seeking customized human resource information systems and benefit
outsourcing solutions, ADP continued to roll out its integrated comprehensive
outsourcing services (COS) solution that allows a client to outsource its HR,
payroll, payroll administration, employee service center, benefits
administration, and time and labor management functions to ADP.
In the United States and Canada, ADP provides payroll services that include
the preparation of client employee paychecks and electronic direct deposits,
along with supporting journals, summaries and management reports. In the United
States, ADP also supplies the quarterly and annual social security, medicare and
federal, state and local income tax withholding reports required to be filed by
employers and employees, and analogous services are provided in the Canadian
market.
ADP's Tax and Financial Services business in the United States and its
money movement business in Canada process and collect federal, state, provincial
and local payroll taxes on behalf of, and from, ADP clients and remit these
taxes to the appropriate taxing authorities. ADP's Tax and Financial Services
business in the United States and its money movement business in Canada are also
responsible for the efficient movement of information and funds from clients to
third parties through service offerings such as new hire reporting, ADP's
TotalPay(R) payroll check (ADPCheck(TM)), full service direct deposit (FSDD)
and, in conjunction with major bank partners, stored value payroll card
(TotalPay(R) Card) products, and the collection and payment of wage
garnishments. In the United States and Canada, these businesses support large,
mid-sized and small clients and provide an electronic interface between
approximately 401,000 ADP clients and over 2,000 federal, state, provincial and
local tax agencies, from the Internal Revenue Service and Canada Revenue Agency,
to local town governments. In fiscal 2005, ADP's Tax and Financial Services
business in the United States and its money movement business in Canada together
processed and delivered over 49 million year-end tax statements to its clients'
employees (i.e., form W-2 in the United States and analogous statements in
Canada) and approximately 40.5 million remittances and employer payroll tax
returns, and moved approximately $885 billion in client funds to taxing
authorities and its clients' employees via electronic transfer, direct deposit
and ADPCheck.
ADP's HR services, by interfacing with a client's payroll database, provide
comprehensive HR recordkeeping services, including benefit administration and
outsourcing, applicant tracking, employee history and position control. ADP's
Benefit Services provides benefit administration across all market segments,
including management of the open enrollment of benefits, COBRA and flexible
spending account administration, Section 529 College Savings Plan administrative
services and 401(k) recordkeeping.
In the United States, ADP TotalSource(R), ADP's professional employer
organization ("PEO") business, provides clients with comprehensive employment
administration outsourcing solutions, including payroll, payroll tax filing,
employee background checks, HR guidance, 401(k) plan administration, benefit
administration, compliance services, workers' compensation insurance and
supplemental benefits for employees. ADP TotalSource(R), the second largest PEO
in the U.S. (based on the number of worksite employees), has 36 offices located
in sixteen states and serves approximately 4,900 PEO clients and approximately
113,000 work-site employees in all 50 states.
3
<PAGE>
ADP complements its payroll, payroll tax and HR services with additional
employer services that include products such as time and labor management,
pre-employment screening and selection services, substance abuse testing and
unemployment compensation management. ADP's Tax Credit Services business
provides job tax credit services that assist employers in the identification of,
and filing for, special tax credits based on geography, demographics and other
criteria.
Outside the United States and Canada
The continued increase in the number of multi-national companies makes
payroll and human resource management services a global opportunity. In Europe,
ADP is the leading provider of payroll processing (including full departmental
outsourcing) and various human resource administration services. Employer
Services is present in eight countries in Europe: France, Germany, Italy, the
Netherlands, Poland, Spain, Switzerland and the United Kingdom. It also offers
services in Ireland (from the United Kingdom) and in Portugal (from Spain). In
South America (primarily Brazil), Australia and Asia, Employer Services provides
full departmental outsourcing of payroll services. In fiscal 2005, ADP continued
to expand its GlobalView(SM) offering, making it available in 18 countries.
GlobalView is built on the mySAP(TM) ERP Human Capital Management and the SAP
NetWeaver(TM) platform and offers multinational corporations an end-to-end
outsourcing solution enabling standardized payroll processing and human
resources administration.
Brokerage Services
Brokerage Services provides transaction processing services, desktop
productivity applications and investor communications solutions to the financial
services industry worldwide. Brokerage Services' products and services include:
(i) global order entry, trade processing and settlement systems that enable
firms to trade virtually any financial instrument, in any market, at any time;
(ii) Internet delivery; personalized on-demand and offset financial printing;
statements, confirmations, fulfillment, content management, and imaging,
archival, and workflow solutions that enhance communications with investors;
proxy distribution and vote processing, regulatory mailings, tax reporting and
corporate actions/reorganization solutions that help clients meet regulatory and
compliance needs; (iii) automated, browser-based desktop productivity tools for
financial consultants and back office personnel; and (iv) integrated delivery of
multiple products and services through ADP's Global Processing Solution.
Brokerage Services serves a large client base in the financial services
industry, including: retail and institutional brokerage firms; global banks;
mutual funds; annuity companies; institutional investors; specialty trading
firms; clearing firms; and publicly owned corporations. Brokerage Services
provides securities transaction processing, printing and electronic distribution
of shareholder communications and other services to clients that conduct
business in more than 90 countries in North America, Europe, Asia and Australia.
Brokerage Services also provides computerized proxy vote tabulation and
shareholder communication, distribution and fulfillment services, including
Web-enabled products and services. In fiscal 2005, ADP served approximately
13,000 United States publicly traded companies and 450 mutual funds and annuity
companies with proxy services on behalf of more than 850 brokerage firms and
banks.
Securities Clearing and Outsourcing Services
In fiscal 2005, ADP completed its acquisition of the U.S. Clearing and
BrokerDealer Services divisions of Bank of America and created the Securities
Clearing and Outsourcing Services segment. This acquisition furthered Brokerage
Services' business process outsourcing strategy by positioning ADP to provide
any brokerage firm, regardless of size, an appropriate range of outsourcing
services to best
4
<PAGE>
meet its individual needs on a single technology platform: service bureau,
operations outsourcing, or correspondent clearing services.
Securities Clearing and Outsourcing Services provides clearing, custody,
financing, securities lending, trade execution and outsourcing solutions to
broker-dealers. Securities Clearing and Outsourcing Services derives revenues
from commissions and service charges related to clearing and execution
activities and from interest income on margin financing, client short selling
activity, and uninvested balances. Securities Clearing and Outsourcing Services
also extends margin loans directly to correspondents to finance their
proprietary activity.
Securities transactions are effected for customers on either a cash or
margin basis. In a margin transaction, Securities Clearing and Outsourcing
Services extends credit to a customer for a portion of the purchase price of the
security. Such credit is collateralized by securities in the customer's accounts
in accordance with regulatory and internal requirements. Securities Clearing and
Outsourcing Services receives income from interest charged on such loans.
Securities Clearing and Outsourcing Services also borrows securities from banks
and other broker-dealers to facilitate customer and proprietary short selling
activity, and lends securities to broker-dealers and other trading entities to
cover short sales and to complete transactions that require delivery of
securities by settlement date.
Dealer Services
Dealer Services provides integrated dealer management systems (such a
system is also known in the industry as a "DMS") and business solutions to
automotive, heavy truck, and powersports (i.e., motorcycle, marine and
recreational) vehicle retailers and manufacturers throughout North America and
Europe. More than 19,500 automotive, heavy truck and powersports dealers use
ADP's DMS, other software based solutions, networking solutions, data
integration, consulting and/or marketing services.
Dealer Services offers its dealership clients a service product that
includes computer hardware, hardware maintenance services, licensed software,
software support, system design and network consulting services. Dealer Services
also offers its clients Web-enabled business solutions, "front-end" dealership
sales process and business development training services, consulting services,
software products and customer relationship management solutions (CRM). Clients
use an ADP DMS to manage business activities such as accounting, inventory,
factory communications, scheduling, vehicle financing, insurance, sales and
service. Dealer Services also designs, establishes and maintains communications
networks for its dealership clients that allow interactive communications among
multiple site locations (for larger dealers), as well as links between
franchised dealers and their vehicle manufacturer franchisors. These networks
are used for activities such as new vehicle ordering and status inquiry,
warranty submission and validation, parts and vehicle locating, dealership
customer credit application submission and decisioning, vehicle repair
estimation and acquisition of vehicle registration and lien holder information.
Dealer Services also offers an Application Service Provider (ASP) managed
services solution to its dealership clients in which the clients license ADP's
DMS and/or other software, and outsource all information technology management,
computing and network infrastructure, technology decisions and system support to
Dealer Services.
In fiscal 2005, ADP acquired Tesoft Automocion S.A., which provides dealer
management systems to approximately 1,500 automotive dealers in Spain, Portugal
and France. ADP also acquired AutoFuse, Inc., a web site development solutions
company.
5
<PAGE>
Claims Services
Claims Services offers integrated business solutions for clients in the
property insurance, auto collision repair and auto recycling industries. These
solutions help clients manage costs, improve efficiency and accelerate the
claims review and settlement process. Claims Services' products and services
include (i) claims management applications, such as automated collision repair
estimating, total loss vehicle valuation, first notice of loss, dispatch and
assignment, claims audit, claims payment, managed repair solutions and
alternative parts locating, that streamline the end-to-end claims process, (ii)
body shop and auto recycler management systems and auto recycler alternative
parts locating solutions, (iii) other applications, databases and management
information tools and services that enhance and optimize the claims process and
(iv) insurance broker risk management and insurance distribution services that
help clients create, update and manage insurance policies. In fiscal 2005,
Claims Services expanded its auto claims services into India, Russia, Eastern
Europe and Central America. It also acquired a majority interest in its Spanish
licensee, Audatex Espana, S.A.
Markets and Marketing Methods
ADP's services are offered broadly across North America and Europe. Some
services within the Employer Services and Brokerage Services business units are
also offered in Australia and Asia, and Employer Services and Claims Services
also provides services in South America (primarily Brazil).
None of ADP's major business groups have a single homogenous client base or
market. For example, Brokerage Services and Securities Clearing and Outsourcing
Services serve a large client base in the financial services industry, including
retail and institutional firms, banks and individual non-brokerage corporations.
Dealer Services primarily serves automobile dealers, but also serves heavy
truck, powersports (i.e., motorcycle, marine and recreational), and agricultural
equipment dealers, auto repair shops, used car lots, state departments of motor
vehicles and manufacturers of automobiles, trucks and agricultural equipment.
Claims Services has many clients who are insurance companies, but it also
provides services to automobile manufacturers, body repair shops, salvage yards,
distributors of new and used automobile parts and other non-insurance clients.
Employer Services has clients from a large variety of industries and markets.
Within this client base are concentrations of clients in specific industries.
Employer Services also sells to auto dealers, brokerage clients and insurance
clients. While concentrations of clients exist, no one client or industry group
is material to ADP's overall revenues.
ADP's businesses are not overly sensitive to price changes. Economic
conditions among selected clients and groups of clients may and do have a
temporary impact on demand for ADP's services. In fiscal 2005, Employer Services
continued to grow, primarily due to the increase in its United States payroll
and payroll tax businesses, including new business started in the fiscal year,
an increase in the number of employees on our clients' payrolls, strong growth
in its "beyond payroll" products, and improved client retention; Brokerage
Services grew as a consequence of the increased volume in its investor
communication services resulting from an increase in the amount of holders of
equities and an increase in mutual fund special communications; Dealer Services
grew due to the revenues generated in fiscal 2005 from fiscal 2004 acquisitions
and growth in its traditional businesses; and our investment income on our
client funds increased due to the increase in our average client fund balances
and higher interest rates.
ADP enjoys a leadership position in each of its major service offerings and
does not believe any major service or business unit in ADP is subject to unique
market risk.
6
<PAGE>
Competition
The computing services industry is highly competitive. ADP knows of no
reliable statistics by which it can determine the number of its competitors, but
it believes that it is one of the largest providers of computerized transaction
processing, data communication and information services in the world.
ADP's competitors include other independent computing services companies,
divisions of diversified enterprises and banks. Another competitive factor in
the computing services industry is the in-house computing function, whereby a
company installs and operates its own computing systems.
Competition in the computing services industry is primarily based on
service responsiveness, product quality and price. ADP believes that it is very
competitive in each of these areas and that there are no material negative
factors impacting ADP's competitive position in the computing services industry.
No one competitor or group of competitors is dominant in the computing services
industry.
Clients and Client Contracts
ADP provides its services to approximately 590,000 clients. In fiscal 2005,
no single client or group of affiliated clients accounted for revenues in excess
of 2% of annual consolidated revenues.
ADP has no material "backlog" because the period between the time a client
agrees to use ADP's services and the time the service begins is generally very
short and because no sale is considered firm until it is installed and begins
producing revenue. ADP receives sales orders in all of our businesses and is
continuously in the process of performing implementation services for our
clients. Depending on the service agreement and/or the size of the client, the
installation or conversion period for new clients could vary from a short period
of time (up to two weeks) for an SBS client to a longer period (generally six to
twelve months) for a National Account Services or Dealer Services client with
multiple deliverables.
ADP's average client retention is estimated at more than 8 years in
Employer Services and is 10 or more years in Brokerage Services and Dealer
Services, and does not vary significantly from period to period.
ADP's services are provided under written price quotations or service
agreements having varying terms and conditions. No one price quotation or
service agreement is material to ADP. Discounts, rebates and promotions offered
by ADP to clients are not material.
Systems Development and Programming
During the fiscal years ended June 30, 2005, 2004 and 2003, ADP invested
$696 million, $704 million, and $604 million, respectively, in systems
development and programming, migration to new computing technologies and the
development of new products and maintenance of our existing technologies,
including purchases of new software and software licenses.
Product Development
ADP continually upgrades, enhances and expands its existing products and
services. Generally, no new product or service has a significant effect on ADP's
revenues or negatively impacts its existing products and services, and ADP's
products and services have a significant remaining life cycle.
7
<PAGE>
Licenses
ADP is the licensee under a number of agreements for computer programs and
databases. ADP's business is not dependent upon a single license or group of
licenses. Third-party licenses, patents, trademarks and franchises are not
material to ADP's business as a whole.
Number of Employees
ADP employed approximately 44,000 persons as of June 30, 2005.
Item 2. Properties
ADP leases space for 22 of its principal processing centers. In addition,
ADP leases numerous other operational offices and sales offices. All of these
leases, which aggregate approximately 7,374,053 square feet in North America,
Europe, South America (primarily Brazil), Asia, Australia and South Africa,
expire at various times up to the year 2018. ADP owns 15 of its processing
facilities, other operational offices and its corporate headquarters complex in
Roseland, New Jersey, which aggregate approximately 3,574,365 square feet. None
of ADP's owned facilities is subject to any material encumbrances. ADP believes
its facilities are currently adequate for their intended purposes and are
adequately maintained.
Item 3. Legal Proceedings
In the normal course of business, the Registrant is subject to various
claims and litigation. While the outcome of any litigation is inherently
unpredictable, the Registrant believes it has valid defenses with respect to the
legal matters pending against it and the Registrant 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. Among the various
claims and litigation pending against the Registrant is the following:
The Registrant and its indirect wholly-owned subsidiaries Dealer Solutions,
L.L.C. and Dealer Solutions Holdings, Inc. ("DSI") are named as defendants in a
lawsuit filed on March 4, 1999 in the 133rd Judicial District Court of Harris
County, Texas by Universal Computer Systems, Inc., Universal Computer
Consulting, Ltd., Universal Computer Services, Inc., and Dealer Computer
Services, Inc. (collectively, "UCS"), which lawsuit has since been tried before
an arbitration panel in June 2003. This lawsuit alleges trade secret violations
by DSI in the creation by DSI of the CARMan automobile dealership software
product and misappropriation of those trade secrets by the Registrant through
its acquisition of DSI. UCS sought injunctive relief and damages of $56 million.
On November 11, 2003, the arbitration panel appointed by the District Court
entered an Award in favor of DSI and its co-defendants. The Award denied all
relief to UCS. The Award has been affirmed and adopted by the District Court as
a final judgment of the Court. On March 12, 2004, the plaintiffs filed an appeal
of the final judgment, which appeal is now pending before the Texas Court of
Appeals. The Registrant believes that the judgment of the District Court was
correct and that the Registrant should prevail.
Item 4. Submission of Matters to a Vote of Security Holders
None
8
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Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
See "Market Price, Dividend Data and Other" contained in the Registrant's
2005 Annual Report to Stockholders, which information is incorporated herein by
reference. As of August 17, 2005, the Registrant had 40,337 registered holders
of its Common Stock, par value $.10 per share. The Registrant's Common Stock is
traded on the New York, Chicago and Pacific Stock Exchanges.
On January 24, 2005, the Registrant issued 12,452 shares of its Common
Stock, with a market value of approximately $500,000, in respect of an earnout
paid to a company related to an asset purchase agreement dated November 30,
2000, pursuant to which the Registrant acquired substantially all of the assets
of such company. The Registrant issued the foregoing shares of Common Stock
without registration under the Securities Act of 1933, as amended, in reliance
upon the exemption therefrom set forth in Section 4(2) of such Act relating to
sales by an issuer not involving a public offering.
Issuer Purchases of Equity Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(a) (b) (c) (d)
Total Number of
Shares Purchased as Maximum Number of
Part of the Publicly Shares that may yet
Announced Common be Purchased under
Total Number of Average Price Paid Stock Repurchase the Common Stock
Period Shares Purchased per Share (3) Plan (1) Repurchase Plan (1)
- -------------------- ----------------- ------------------ -------------------- --------------------
April 1, 2005 to
April 30, 2005 444,610 $44.12 444,400 17,204,400
May 1, 2005 to
May 31, 2005 1,068,509 $44.11 1,050,000 16,154,400
June 1, 2005 to
June 30, 2005 2,573,044 $42.04 2,563,300 13,591,100
Total 4,086,163(2) 4,057,700
</TABLE>
(1) In March 2001, the Registrant received the Board of Directors' approval to
repurchase up to 50 million shares of the Registrant's common stock. In November
2002, the Registrant received the Board of Directors' approval to repurchase an
additional 35 million shares of the Registrant's common stock. There is no
expiration date for the common stock repurchase plan.
(2) During 2005, pursuant to the terms of the Registrant's restricted stock
program, the Registrant (i) made repurchases of 210 shares during April 2005,
3,509 shares during May 2005 and 744 shares during June 2005 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 Registrant instead of cash and (ii)
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<PAGE>
made purchases of 15,000 shares during May 2005 and 9,000 shares during June
2005 at a price of $.10 per share under the terms of such program to repurchase
stock granted to employees who have left the Registrant.
(3) The average price per share does not include the repurchases described in
clause (ii) of the preceding footnote.
Item 6. Selected Financial Data
See "Selected Financial Data" contained in the Registrant's 2005 Annual
Report to Stockholders, which information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Registrant's 2005 Annual Report to
Stockholders, which information is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Registrant's 2005 Annual Report to
Stockholders, which information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements described in Item 15(a)1 hereof are incorporated
herein.
The following supplementary data is incorporated herein by reference:
Quarterly Financial Results (unaudited) for the two fiscal years ended June
30, 2005 (see Note 17 of the "Notes to Consolidated Financial Statements"
contained in ADP's 2005 Annual Report to Stockholders)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
Attached as Exhibits 31.1 and 31.2 to this Form 10-K are certifications of
ADP's Chief Executive Officer and Chief Financial Officer, which are required by
Rule 13a-14(a) of the Securities Exchange Act of 1934. This "Controls and
Procedures" section should be read in conjunction with such certifications and
the Deloitte & Touche LLP attestation report on management's assessment of ADP's
internal control over financial reporting that appears on page 47 of ADP's 2005
Annual Report to Stockholders and is hereby incorporated herein by reference.
Management's Evaluation of Disclosure Controls and Procedures
ADP carried out an evaluation, under the supervision and with the
participation of ADP's management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of
10
<PAGE>
ADP'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
ADP's disclosure controls and procedures as of June 30, 2005 were effective to
ensure that information required to be disclosed by ADP in reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission's rules and forms.
Management's Report on Internal Control over Financial Reporting
It is the responsibility of Automatic Data Processing, Inc.'s ("ADP")
management to establish and maintain effective internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934). Internal control over financial reporting is designed to provide
reasonable assurance to ADP's management and board of directors regarding the
preparation of reliable financial statements for external purposes in accordance
with generally accepted accounting principles.
ADP's internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of ADP; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
ADP are being made only in accordance with authorizations of management and
directors of ADP; and (iii) provide reasonable assurance regarding the
prevention or timely detection of unauthorized acquisition, use or disposition
of ADP's assets that could have a material effect on the financial statements of
ADP.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management has performed an assessment of the effectiveness of ADP's
internal control over financial reporting as of June 30, 2005 based upon
criteria set forth in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management determined that ADP's internal control over financial
reporting was effective as of June 30, 2005.
Management has excluded from its assessment of internal control over
financial reporting at June 30, 2005 its subsidiary, ADP Clearing and
Outsourcing Services, Inc., which holds all the assets of the Securities
Clearing and Outsourcing Services segment that was formed as a result of an
acquisition on November 1, 2004. ADP Clearing and Outsourcing Services, Inc.
represents 1% and 5% of ADP's consolidated total revenues and consolidated total
assets, respectively, for the year ended June 30, 2005.
Deloitte & Touche LLP, an independent registered public accounting firm,
has issued an attestation report on management's assessment of internal control
over financial reporting, which attestation report appears on page 47 of ADP's
2005 Annual Report to Stockholders.
Changes in Internal Control over Financial Reporting
There were no changes in ADP's internal control over financial reporting
that occurred during the quarter ended June 30, 2005 that have materially
affected, or are reasonably likely to materially affect, ADP's internal control
over financial reporting.
11
<PAGE>
Item 9B. Other Information
None
12
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Registrant
The executive officers of the Registrant, their ages, positions and the
period during which they have been employed by ADP are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Employed by
Name Age Position ADP Since
- --------------------- --- ------------------------ -------------
Steven J. Anenen 52 President, 1975
Dealer Services
James B. Benson 60 Vice President, General 1977
Counsel and Secretary
Richard C. Berke 60 Vice President, Human 1989
Resources
Gary C. Butler 58 President and Chief 1975
Operating Officer
Janice M. Colby 50 President, 2001
Claims Solutions Group
Raymond L. Colotti 59 Vice President and 1995
Treasurer
Richard J. Daly 52 Group President, 1989
Brokerage Services
Karen E. Dykstra 46 Vice President and 1981
Chief Financial Officer
John Hogan 57 Group President, 1993
Brokerage Services
Campbell B. Langdon 44 President, 2000
Tax, Financial and Time
Management Services
S. Michael Martone 57 Group President, Employer 1987
Services
Dan Sheldon 49 Vice President, 1984
Corporate Controller
13
<PAGE>
Jan Siegmund 41 Vice President, 1999
Strategic Development
George I. Stoeckert 57 President, Employer 1991
Services - International
Arthur F. Weinbach 62 Chairman and 1980
Chief Executive Officer
</TABLE>
Messrs. Benson, Berke, Butler, Colotti, Daly, Hogan, Martone and Weinbach
have each been employed by ADP in senior executive positions for more than the
past five years.
Steven J. Anenen joined ADP in 1975. Prior to his promotion to President,
Dealer Services in 2004, he served as Senior Vice President, Dealer Services
from 1998 to 2004.
Janice M. Colby joined ADP in 2001. Prior to her promotion to President,
Claims Solutions Group in 2005, she served as President, Small Business Services
Division, Employer Services from 2001 to 2005. From 1996 to 2001 she served as
Vice President, Business Customer Care for AT&T Corporation.
Karen E. Dykstra joined ADP in 1981. Prior to her promotion to Chief
Financial Officer in 2003, she served as Vice President, Finance from 2001 to
2003 and as Vice President and Controller from 1998 to 2001.
Campbell B. Langdon joined ADP in 2000 as Vice President, Strategic
Development. In 2003, he was promoted to President, Tax, Financial and Time
Management Services.
Dan Sheldon joined ADP in 1984. Prior to his promotion to Vice President,
Corporate Controller in 2003, he served as Chief Financial Officer of Brokerage
Services from 2001 to 2003 and Chief Financial Officer of Dealer Services from
1996 to 2001.
Jan Siegmund joined ADP in 1999 as Vice President, Strategy. Prior to his
promotion to Vice President, Strategic Development in 2004, he served as Senior
Vice President of Strategic Development, Brokerage Services from 2000 to 2004.
George I. Stoeckert joined ADP in 1991. Prior to his promotion to
President, Employer Services International in 2003, he served as President -
Major Accounts Services Division, Employer Services from 1995 to 2003.
Each of ADP's executive officers is elected for a term of one year and
until their successors are chosen and qualified or until their death,
resignation or removal.
Directors of the Registrant
See "Election of Directors" in the Proxy Statement for Registrant's 2005
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
Section 16(a) Beneficial Ownership Reporting Compliance
See "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement for Registrant's 2005 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
14
<PAGE>
Code of Ethics
ADP has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer and persons
performing similar functions. The code of ethics may be viewed online on ADP's
website at www.adp.com under "Ethics" in the "About ADP" section.
Audit Committee
See "Audit Committee Report" in the Proxy Statement for Registrant's 2005
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
Item 11. Executive Compensation
See "Compensation of Executive Officers" and "Election of Directors" in the
Proxy Statement for Registrant's 2005 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
See "Election of Directors - Security Ownership of Certain Beneficial
Owners and Managers" and "Compensation of Executive Officers - Equity
Compensation Plan Information" in the Proxy Statement for Registrant's 2005
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
See "Compensation of Executive Officers - Certain Transactions" in the
Proxy Statement for Registrant's 2005 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
See "Independent Registered Public Accounting Firms' Fees" in the Proxy
Statement for Registrant's 2005 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
15
<PAGE>
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a)1. Financial Statements
The following reports and consolidated financial statements of the
Registrant contained in the Registrant's 2005 Annual Report to Stockholders are
also included in Part II, Item 8:
Statements of Consolidated Earnings - years ended June 30, 2005, 2004 and
2003
Consolidated Balance Sheets - June 30, 2005 and 2004
Statements of Consolidated Stockholders' Equity - years ended June 30,
2005, 2004 and 2003
Statements of Consolidated Cash Flows - years ended June 30, 2005, 2004 and
2003
Notes to Consolidated Financial Statements
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Financial information of the Registrant is omitted because the Registrant
is primarily a holding company. The Registrant's subsidiaries, which are listed
on Exhibit 21 attached hereto, are wholly owned.
2. Financial Statement Schedules
Page in Form 10-K
-----------------
Report of Independent Registered
Public Accounting Firm 20
Schedule II - Valuation and Qualifying Accounts 21
All other Schedules have been omitted because they are inapplicable or are
not required or the information is included elsewhere in the financial
statements or notes thereto.
3. Exhibits
The following exhibits are filed with this Form 10-K or incorporated herein
by reference to the document set forth next to the exhibit in the list below:
3.1 - Amended and Restated Certificate of Incorporation dated
November 11, 1998 - incorporated by reference to Exhibit 3.1
to Registrant's Registration Statement No. 333-72023 on Form
S-4 filed with the Commission on February 9, 1999
16
<PAGE>
3.2 - Amended and Restated By-laws of the Registrant - incorporated
by reference to Exhibit 3.2 to Registrant's Current Report on
Form 8-K, dated August 11, 2005
4 - Indenture dated as of February 20, 1992 between Automatic
Data Processing, Inc. and Bankers Trust Company, as trustee,
regarding the Liquid Yield Option Notes due 2012 of the
Registrant - incorporated by reference to Exhibit (4)-#1 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992
10.1 - Letter Agreement dated as of April 28, 2005 between Automatic
Data Processing, Inc. and Arthur F. Weinbach - incorporated
by reference to Exhibit 10.1 to Registrant's Current Report
on Form 8-K, dated April 28, 2005 (Management Contract)
10.2 - Letter Agreement dated September 14, 1998 between Automatic
Data Processing, Inc. and Gary Butler - incorporated by
reference to Exhibit 10.2 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998 (Management
Contract)
10.3 - Key Employees' Restricted Stock Plan - incorporated by
reference to Registrant's Registration Statement No. 33-25290
on Form S-8 (Management Compensatory Plan)
10.4 - Supplemental Officers' Retirement Plan, as amended -
incorporated by reference to Exhibit 10.4 to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2004 (Management Compensatory Plan)
10.5 - 1989 Non-Employee Director Stock Option Plan - incorporated
by reference to Exhibit 10(iii)(A)-#7 to Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1990
(Management Compensatory Plan)
10.5(a) - Amendment to 1989 Non-Employee Director Stock Option Plan -
incorporated by reference to Exhibit 10(6)(a) to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1997 (Management Compensatory Plan)
10.6 - 1990 Key Employees' Stock Option Plan - incorporated by
reference to Exhibit 10(iii)(A)-#8 to Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1990
(Management Compensatory Plan)
10.6(a) - Amendment to 1990 Key Employees' Stock Option Plan -
incorporated by reference to Exhibit 10(7)(a) to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1997 (Management Compensatory Plan)
17
<PAGE>
10.7 - 1994 Directors' Pension Arrangement - incorporated by
reference to Exhibit 10(iii)(A)-#10 to Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994
(Management Compensatory Plan)
10.8 - 2000 Stock Option Plan - incorporated by reference to Exhibit
10.8 to Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 2004 (Management
Compensatory Plan)
10.9 - 2001 Executive Incentive Compensation Plan - incorporated by
reference to Exhibit 10.9 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001 (Management
Compensatory Plan)
10.10 - Change in Control Severance Plan for Corporate Officers -
incorporated by reference to Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2001 (Management Compensatory Plan)
10.11 - Employees' Saving-Stock Option Plan - incorporated by
reference to Registrant's Registration Statement No.
333-10281 on Form S-8 (Management Compensatory Plan)
10.12 - 2003 Director Stock Plan - incorporated by reference to
Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 2003 (Management
Compensatory Plan)
10.13 - Amended and Restated Employees' Savings-Stock Purchase Plan -
incorporated by reference to Exhibit 10.5 to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2003
10.14 - 364-Day Credit Agreement, dated as of June 29, 2005, among
Automatic Data Processing, Inc., the Lenders Party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of
America, N.A., as Syndication Agent, and Barclays Bank PLC,
BNP Paribas, Citicorp USA, Inc., Deutsche Bank Securities
Inc. and Wachovia Bank, National Association, as
Documentation Agents - incorporated by reference to Exhibit
10.14 to Registrant's Current Report on Form 8-K, dated June
29, 2005
10.15 - Five-Year Credit Agreement, dated as of June 30, 2004, among
Automatic Data Processing, Inc., the Lenders Party thereto,
JPMorgan Chase Bank, as Administrative Agent, J.P. Morgan
Europe Limited, as London Agent, JPMorgan Chase Bank, Toronto
Branch, as Canadian Agent, the Swingline Lenders, and Bank of
America, N.A., Barclays Bank PLC, BNP Paribas, Citibank,
N.A., Deutsche Bank Securities Inc. and Wachovia National
Association, as Co-Syndication Agents - incorporated by
reference to Exhibit 10.15 to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2004
18
<PAGE>
10.16 - Five-Year Credit Agreement, dated as of June 29, 2005, among
Automatic Data Processing, Inc., the Lenders Party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of
America, N.A., as Syndication Agent, and Barclays Bank PLC,
BNP Paribas, Citicorp USA, Inc., Deutsche Bank Securities
Inc. and Wachovia Bank, National Association, as
Documentation Agents - incorporated by reference to Exhibit
10.16 to Registrant's Current Report on Form 8-K, dated June
29, 2005
10.17 - 2000 Stock Option Grant Agreement (Form for Employees) -
incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2004 (Management Compensatory Plan)
10.18 - 2000 Stock Option Grant Agreement (Form for French
Associates) - incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004 (Management Compensatory
Plan)
10.19 - 2000 Stock Option Grant Agreement (Form for Non-Employee
Directors) - incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2004 (Management Compensatory
Plan)
10.20 - Directors Compensation Summary Sheet - incorporated by
reference to Exhibit 10.20 to Registrant's Current Report on
Form 8-K, dated August 11, 2005
13 - Pages 16 to 47 of the 2005 Annual Report to Stockholders
(with the exception of the pages incorporated by reference
herein, the Annual Report is not a part of this filing)
21 - Subsidiaries of the Registrant
23 - Consent of Independent Registered Public Accounting Firm
31.1 - Certification by Arthur F. Weinbach pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934
31.2 - Certification by Karen E. Dykstra pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934
32.1 - Certification by Arthur F. Weinbach 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 Karen E. Dykstra pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
19
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the consolidated financial statements of Automatic Data
Processing, Inc. and subsidiaries (the "Company") as of June 30, 2005 and 2004,
and for each of the three years in the period ended June 30, 2005, and have
issued our report thereon dated August 17, 2005; such consolidated financial
statements and report are included in your 2005 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of Automatic Data Processing, Inc.,
listed at Item 15(a)2. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
- --------------------------
New York, New York
August 17, 2005
20
<PAGE>
<TABLE>
<CAPTION>
AUTOMATIC DATA PROCESSING, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
----------------------
(1) (2)
<S> <C> <C> <C> <C> <C>
Charged to
Balance at Charged to other Balance at
beginning costs and accounts- Deductions- end of
of period expenses describe describe period
--------- ----------- ----------- ----------- -----------
Year ended June 30, 2005:
Allowance for doubtful accounts:
Current $50,980 $17,964 $1,209(B) $(24,475)(A) $45,678
Long-term $8,578 $1,326 $ -- $ (1,732)(A) $8,172
Deferred tax valuation allowance $25,858 $7,821 $ -- $ (1,205)(E) $32,474
Year ended June 30, 2004:
Allowance for doubtful accounts:
Current $54,654 $15,656 $3,335(B) $(22,665)(A) $50,980
Long-term $11,103 $680 $ -- $ (3,205)(A) $8,578
Deferred tax valuation allowance $32,220 $2,953 $ -- $ (9,315)(D) $25,858
Year ended June 30, 2003:
Allowance for doubtful accounts:
Current $52,873 $17,588 $ 712(B) $(16,519)(A) $54,654
Long-term $16,019 $1,534 $ -- $ (6,450)(A) $11,103
Deferred tax valuation allowance $40,140 $5,318 $ 899(C) $ (14,137)(E) $32,220
(A) Doubtful accounts written off, less recoveries on accounts previously written off.
(B) Acquired in purchase transactions.
(C) Related to foreign exchange fluctuation.
(D) Related to the net deferred tax assets recorded in purchase accounting. The recognition of this allowance is allocated to
reduce goodwill.
(E) A portion of this allowance is related to the net deferred tax assets recorded in purchase accounting, the recognition of which
is allocated to reduce goodwill. The remaining portion reduced the current year provision for income taxes.
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
August 31, 2005 By:/s/ Arthur F. Weinbach
------------------------------
Arthur F. Weinbach
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
/s/ Arthur F. Weinbach Chairman, Chief Executive August 31, 2005
- -------------------------- Officer and Director
(Arthur F. Weinbach) (Principal Executive Officer)
/s/ Karen E. Dykstra Chief Financial Officer August 31, 2005
- -------------------------- (Principal Financial Officer
(Karen E. Dykstra) and Principal Accounting
Officer)
/s/ Gregory D. Brenneman Director August 31, 2005
- -------------------------
(Gregory D. Brenneman)
/s/ Leslie A. Brun Director August 31, 2005
- -------------------------
(Leslie A. Brun)
/s/ Gary C. Butler Director August 31, 2005
- -------------------------
(Gary C. Butler)
/s/ Leon G. Cooperman Director August 31, 2005
- -------------------------
(Leon G. Cooperman)
22
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ R. Glenn Hubbard Director August 31, 2005
- -------------------------
(R. Glenn Hubbard)
/s/ John P. Jones Director August 31, 2005
- -------------------------
(John P. Jones)
/s/ Ann Dibble Jordan Director August 31, 2005
- -------------------------
(Ann Dibble Jordan)
/s/ Harvey M. Krueger Director August 31, 2005
- -------------------------
(Harvey M. Krueger)
/s/ Frederic V. Malek Director August 31, 2005
- -------------------------
(Frederic V. Malek)
/s/ Henry Taub Director August 31, 2005
- -------------------------
(Henry Taub)
</TABLE>
23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>exhibit13.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
Selected Financial Data
<TABLE>
<CAPTION>
(In millions, except per share amounts)
==================================================================================================================================
Years Ended June 30, 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 8,499.1 $ 7,754.9 $ 7,147.0 $ 7,004.3 $ 6,853.7
Earnings before income taxes $ 1,677.9 $ 1,494.5 $ 1,645.2 $ 1,787.0 $ 1,525.0
Net earnings $ 1,055.4 $ 935.6 $ 1,018.2 $ 1,100.8 $ 924.7
Pro forma net earnings* $ 971.7
--------------------------------------------------------------------------
Basic earnings per share $ 1.81 $ 1.58 $ 1.70 $ 1.78 $ 1.47
Diluted earnings per share $ 1.79 $ 1.56 $ 1.68 $ 1.75 $ 1.44
Pro forma basic earnings per share* $ 1.54
Pro forma diluted earnings per share* $ 1.51
Basic weighted average shares outstanding 583.2 591.7 600.1 618.9 629.0
Diluted weighted average shares outstanding 590.0 598.7 605.9 630.6 646.0
Cash dividends per share $ .6050 $ .5400 $ .4750 $ .4475 $ .3950
Return on equity 18.8% 17.3% 19.4% 22.4% 19.9%
--------------------------------------------------------------------------
At year end:
Cash, cash equivalents and marketable securities $ 2,119.1 $ 2,092.5 $ 2,344.3 $ 2,749.6 $ 2,597.0
Working capital $ 1,640.4 $ 993.2 $ 1,676.7 $ 1,406.2 $ 1,747.2
Total assets before funds held for clients $ 9,717.9 $ 8,217.0 $ 8,025.9 $ 7,051.3 $ 6,550.0
Total assets $27,615.4 $21,120.6 $19,833.7 $18,276.5 $17,889.1
Long-term debt $ 75.8 $ 76.2 $ 84.7 $ 90.6 $ 110.2
Stockholders' equity $ 5,783.8 $ 5,417.7 $ 5,371.5 $ 5,114.2 $ 4,701.0
==================================================================================================================================
</TABLE>
* Pro forma net earnings and earnings per share reflect the impact relating
to the July 1, 2001 adoption of Statement of Financial Accounting Standards
No. 142, which eliminated goodwill amortization.
See notes to consolidated financial statements.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular dollars in millions, except per share amounts)
DESCRIPTION OF THE COMPANY AND BUSINESS SEGMENTS
Automatic Data Processing, Inc. ("ADP" or the "Company") provides
technology-based outsourcing solutions to employers, the brokerage and financial
services community and vehicle retailers and manufacturers. The Company's
reportable segments are: Employer Services, Brokerage Services, Dealer Services,
and Securities Clearing and Outsourcing Services. A brief description of each
segment's operations is provided below.
Employer Services
Employer Services offers a comprehensive range of human resource ("HR")
information, payroll processing and benefit administration products and
services, including traditional and Web-based outsourcing solutions, that assist
over 518,000 employers in the United Sates, Canada, Europe, South America
(primarily Brazil), Australia and Asia to staff, manage, pay and retain their
employees. Employer Services categorizes its services between traditional
payroll and payroll tax and "beyond payroll." The traditional payroll and
payroll tax business represents the Company's core payroll processing and
payroll tax filing business. The "beyond payroll" business represents the
products that extend beyond the traditional payroll and payroll tax filing
services, such as the Professional Employer Organization ("PEO") business,
TotalPay(R), Time and Labor Management, and benefit and retirement
administration. Within Employer Services, the Company collects client funds and
remits such funds to tax authorities for payroll tax filing and payment
services, and to employees of payroll services clients.
Brokerage Services
Brokerage Services provides transaction processing services, desktop
productivity applications and investor communications services to the financial
services industry worldwide. Brokerage Services' products and services include:
(i) global order entry, trade processing and settlement systems that enable
firms to trade virtually any financial instrument, in any market, at any time;
(ii) full-service investor communications services including: electronic
delivery and Web solutions; workflow services; financial, offset, and on-demand
printing; proxy distribution and vote processing; householding; regulatory
mailings; fulfillment; and customized communications; (iii) automated,
browser-based desktop productivity tools for financial consultants and
back-office personnel; and (iv) integrated delivery of multiple products and
services through ADP's Global Processing Solution.
Dealer Services
Dealer Services provides integrated dealer management systems (such a system is
also known in the industry as a "DMS") and business solutions to automotive,
heavy truck and powersports (i.e., motorcycle, marine and recreational) vehicle
retailers and manufacturers throughout North America and Europe. More than
19,500 automotive, heavy truck and powersports dealers use our DMS, other
software-based solutions, networking solutions, data integration, consulting
and/or marketing services.
Securities Clearing and Outsourcing Services
On November 1, 2004, the Company acquired the U.S. Clearing and BrokerDealer
Services divisions of Bank of America Corporation ("U.S. Clearing and
BrokerDealer Business"), which provides third-party clearing operations, and
formed the Securities Clearing and Outsourcing Services segment to report the
results of the acquired business. The Securities Clearing and Outsourcing
Services segment provides execution, clearing, and customer financing (such as
margin lending), securities borrowing to facilitate customer short sales, and
outsourcing services for a variety of clearing and custody-related functions.
Our clients engage in either the retail or institutional brokerage business.
EXECUTIVE OVERVIEW
Consolidated revenues in fiscal 2005 grew 10%, to $8,499.1 million, as compared
to $7,754.9 million in fiscal 2004. Earnings before income taxes and net
earnings increased 12% and 13%, respectively. Diluted earnings per share of
$1.79 increased 15% from $1.56 per share in fiscal 2004 on fewer shares
outstanding. During fiscal 2005, we acquired 14.1 million of our shares for
treasury for $591.4 million. Operating cash flows were $1,433.4 million in
fiscal 2005 as compared to $1,385.4 million in fiscal 2004, and cash and
marketable securities were $2,119.1 million at June 30, 2005.
We had an excellent fiscal year that surpassed our expectations. Employer
Services' revenues grew 8% for fiscal 2005. 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. During fiscal 2005,
Employer Services grew average client funds balances 11% as a result of new
business and growth in our existing client base. This resulted in an increase of
interest revenues within Employer Services, which accounted for approximately 1%
growth in Employer Services' revenues as compared to fiscal 2004. The key
metrics in Employer Services were the strongest they have been in five years.
New business sales growth was 13% and all market segments achieved double-digit
growth, resulting in about $840 million of annualized recurring revenues
anticipated from new orders. The number of employees on our clients' payrolls,
"pays per control," increased in all market segments with nearly 2% overall
growth in the United States, and client retention improved by 0.5 percentage
points over last year's record level. Brokerage Services' revenues grew 5% for
the fiscal year. Revenue growth was primarily from our investor communications
business as the volume of pieces delivered increased 15%, driven by an increase
in mutual fund meetings and special communications, as well as 6% stock record
growth. Back-office average trades per day increased 7% for the fiscal year, but
the volume increase was offset by a decline in average revenue per trade of 10%.
Dealer Services' revenues grew 10% for fiscal 2005 due to the growth of our key
products and the effect of acquisitions. Securities Clearing and Outsourcing
Services' revenues were $61.5 million since its acquisition in November 2004,
which was in line with our expectations.
As of July 1, 2005, using the modified prospective method, we adopted Statement
of Financial Accounting Standards ("SFAS") No. 123R, which requires the
expensing of our stock compensation programs. The impact of adopting SFAS No.
123R is
17
<PAGE>
expected to lower earnings per share by $0.18 to $0.19 in fiscal 2006 and would
have lowered earnings per share in fiscal 2005 by $0.22. The lower dilution
anticipated in fiscal 2006 is primarily driven by the reduction in the number of
options granted to associates, which began in fiscal 2005.
Our fiscal 2006 guidance is high single-digit revenue growth and earnings per
share growth of 15% to 20%, assuming stock compensation was expensed in fiscal
2005. Excluding stock compensation expense in both periods, we anticipate growth
in earnings per share would have been 12% to 15%.
Our fiscal 2006 earnings per share ("EPS") guidance is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year-Over-Year
Years Ended June 30, 2005 2006 (F) Growth (F)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Diluted EPS, as reported $1.79
Less: Pro forma EPS impact
of stock compensation expense 0.22
Diluted EPS, assuming stock
compensation expensed in =====
both periods $1.57(P) $1.81-$1.88 15%-20%
================================================================================
Diluted EPS, assuming stock
compensation not expensed in
either period $1.79 $2.00-$2.06(P) 12%-15%
================================================================================
</TABLE>
(F) Forecast (P) Pro forma
Our plans reflect strong momentum in Employer Services, with about 9% revenue
growth, double-digit new business sales growth (annualized recurring revenue
from new orders) and continued improvement in client retention. Within both
Brokerage Services and Dealer Services, our revenue forecast is in the mid
single-digit growth range. We are anticipating at least 1% margin improvement in
each of our businesses. Our consolidated revenue for interest earned on client
funds is anticipated to grow over 20% to approximately $500 million. Our
forecast is based on an improvement of over 30 basis points in the overall yield
in the client funds portfolio, which is expected to contribute about $40 million
in fiscal 2006, and expected growth of 9% in client funds balances due to the
growth in net new business and intrinsic growth from our existing clients.
RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30, Change
- -------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $8,499.1 $7,754.9 $7,147.0 10% 9% 2%
Total expenses $6,821.2 $6,260.4 $5,501.8 9% 14% 5%
-------------------------------------------------------------
Earnings before
income taxes $1,677.9 $1,494.5 $1,645.2 12% (9)% (8)%
Margin 19.7% 19.3% 23.0%
-------------------------------------------------------------
Provision for
income taxes $ 622.5 $ 558.9 $ 627.0 11% (11)% (9)%
Effective tax rate 37.1% 37.4% 38.1%
-------------------------------------------------------------
Net earnings $1,055.4 $ 935.6 $1,018.2 13% (8)% (8)%
Diluted earnings
per share $ 1.79 $ 1.56 $ 1.68 15% (7)% (4)%
=====================================================================================
</TABLE>
Fiscal 2005 Compared to Fiscal 2004
Revenues
Our consolidated revenues for fiscal 2005 grew 10%, to $8,499.1 million, as
compared to the prior fiscal year primarily due to increases in Employer
Services of 8%, or $387.0 million, to $5,199.9 million, Brokerage Services of
5%, or $83.8 million, to $1,749.8 million, Dealer Services of 10%, or $90.0
million, to $979.8 million, as well as $61.5 million from our Securities
Clearing and Outsourcing Services segment. Our consolidated revenues, excluding
the impact of acquisitions and divestitures, grew 9% in fiscal 2005 as compared
to the prior fiscal year. Revenue growth for fiscal 2005 was also favorably
impacted by $113.2 million, or 1.5%, due to fluctuations in foreign currency
exchange rates.
Our consolidated revenues for fiscal 2005 include interest on funds held for
Employer Services' clients of $421.4 million, as compared to $355.4 million in
the prior fiscal year. The increase in the consolidated interest earned on funds
held for Employer Services' clients was primarily due to the increase of 11% in
our average client funds balances in fiscal 2005 to $12.3 billion as a result of
Employer Services' new business and growth in our existing client base. 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 to Employer
Services and the actual interest earned is a reconciling item that reduces
revenues by $126.4 million and $140.5 million in fiscal 2005 and 2004,
respectively, to eliminate this allocation in consolidation.
Expenses
Our consolidated expenses for fiscal 2005 increased by $560.8 million, from
$6,260.4 million to $6,821.2 million. The increase in our consolidated expenses
is primarily due to the increase in operating expenses associated with the
growth of our revenues, including the additional expenses associated with
acquisitions. In addition, consolidated expenses increased by $92.0 million, or
1.5%, due to fluctuations in foreign currency exchange rates. Our consolidated
expenses did not increase comparably with our revenue primarily due to the
leveraging of our increasing revenues within our Employer Services and Brokerage
Services businesses. Operating expenses increased by $444.1 million, or 13%,
primarily due to the increase in operating personnel to support the revenue
growth. In addition, our operating expenses grew at a faster rate than revenue
primarily due to the higher growth rates of our PEO business and investor
communications activity, which both have pass-through costs. The pass-through
costs for these two services were $999.6 million in fiscal 2005, as compared to
$862.6 million in fiscal 2004. Selling, general and administrative expenses
increased by $53.8 million, to $1,957.1 million, primarily due to the increase
in sales personnel in our Employer Services and Dealer Services businesses to
support the revenue growth. Systems development and programming costs increased
by $42.9 million, to $624.1 million, due to continued investments in sustaining
our products, primarily in our Employer Services business, and the maintenance
of our existing technology throughout all of our businesses. In addition, other
income, net decreased $22.4 million primarily due to the
18
<PAGE>
increase in interest expense of $16.3 million, which resulted from higher
interest rates on our short-term financing arrangements and an increase of $20.9
million in net realized losses on our available-for-sale securities.
Earnings Before Income Taxes
Earnings before income taxes increased by $183.4 million, or 12%, to $1,677.9
million during fiscal 2005 due to the increase in revenues and expenses
discussed above.
Provision for Income Taxes
Our effective tax rate for fiscal 2005 was 37.1%, as compared to 37.4% for
fiscal 2004. The decrease in the effective tax rate was primarily attributable
to a favorable mix in income among tax jurisdictions.
Net Earnings
Net earnings for fiscal 2005 increased by 13%, to $1,055.4 million, from $935.6
million, and the related diluted earnings per share increased 15%, to $1.79. The
increase in net earnings for fiscal 2005 reflects the increase in earnings
before income taxes and the impact of the lower effective tax rate. The increase
in diluted earnings per share for fiscal 2005 reflects the increase in net
earnings and the impact of fewer shares outstanding due to the repurchase of
14.1 million shares during fiscal 2005 and 15.8 million shares during fiscal
2004.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Our consolidated revenues for fiscal 2004 grew 9%, to $7,754.9 million,
primarily due to increases in Employer Services of 10%, to $4,812.9 million,
Brokerage Services of 3%, to $1,666.0 million, and Dealer Services of 9%, to
$889.8 million. Our consolidated revenues, excluding the impact of acquisitions
and divestitures, grew 6% in fiscal 2004 as compared to the prior fiscal year.
Revenue growth for fiscal 2004 was also favorably impacted by $144.1 million, or
2%, due to fluctuations in foreign currency exchange rates.
Our fiscal 2004 consolidated revenues include interest on funds held for
Employer Services' clients of $355.4 million, as compared to $368.7 million in
fiscal 2003. The decrease in the consolidated interest earned on funds held for
Employer Services' clients was primarily due to the decrease in interest rates
in fiscal 2004, offset by the increase of 24% in our average client funds
balances in fiscal 2004 to $11.1 billion. 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 to Employer Services and the actual interest
earned was a reconciling item that reduced revenues by $140.5 million and $41.2
million in fiscal 2004 and 2003, respectively, to eliminate this allocation in
consolidation.
Expenses
Our consolidated expenses for fiscal 2004 increased by $758.6 million, from
$5,501.8 million to $6,260.4 million. The increase in our consolidated expenses
was primarily due to the increase in operating expenses associated with the
growth of our revenues, including the additional expenses related to
acquisitions, and expenses relating to our incremental investments of $170.4
million. The incremental investments were targeted at revenue growth
opportunities as well as costs to scale back or exit lower growth areas. These
expenses consisted primarily of $45.0 million of Employer of Choice initiatives
(mostly associate compensation), $35.1 million of expenses relating to our
salesforce (mostly additional salesforce, training, sales meetings and marketing
expenses), $30.4 million of severance and facility exit costs, and expenses
relating to maintaining our products and services. In addition, consolidated
expenses increased by $114.9 million, or 2%, due to fluctuations in foreign
currency exchange rates. Operating expenses increased by $428.7 million, or 14%,
primarily due to the increase in consolidated revenues. Selling, general and
administrative expenses increased by $145.0 million, to $1,903.3 million,
primarily due to the additional compensation expenses incurred relating to our
Employer of Choice initiatives and the additional salesforce added during fiscal
2004. Systems development and programming costs increased by $82.0 million, to
$581.2 million, due to continued investments in sustaining our products,
primarily in our Employer Services business, and the maintenance of our existing
technology throughout all of our businesses. Depreciation and amortization
expenses increased by $32.1 million, to $306.8 million, due to an increase in
amortization of intangible assets primarily from the increase in software
licenses acquired with our fiscal 2004 and fiscal 2003 acquisitions. In
addition, other income, net decreased $70.8 million due to a decline in interest
income on corporate funds of $39.5 million resulting from lower investment
yields and the net realized losses of $7.6 million in fiscal 2004, as compared
to the net realized gains of $29.5 million in fiscal 2003 on our
available-for-sale securities.
Earnings Before Income Taxes
Earnings before income taxes decreased by $150.7 million, or 9%, to $1,494.5
million for fiscal 2004 primarily due to the investment spending relating to our
Employer of Choice initiatives, investments in our salesforce and costs to
sustain our products and services, which impacted all of our business segments,
the integration of certain fiscal 2003 acquisitions, and a decrease in
investment income on funds held for Employer Services' clients and corporate
funds of $90.0 million, primarily due to the lower interest rates during fiscal
2004.
Provision for Income Taxes
Our effective tax rate for fiscal 2004 was 37.4%, as compared to 38.1% for
fiscal 2003. The decrease in the effective tax rate was attributable to a
favorable mix in income among tax jurisdictions and favorable settlements of
state income tax examinations.
Net Earnings
Fiscal 2004 net earnings decreased 8%, to $935.6 million, from $1,018.2 million
and the related diluted earnings per share decreased 7%, to $1.56. The decrease
in net earnings reflects the decrease in earnings before income taxes, slightly
offset by a lower effective tax rate. The decrease in diluted earnings per share
reflects the decrease in net earnings, partially offset by fewer shares
outstanding due to the repurchase of 15.8 million shares in fiscal 2004 and 27.4
million shares in fiscal 2003.
19
<PAGE>
ANALYSIS OF REPORTABLE SEGMENTS
Revenues
<TABLE>
<CAPTION>
Years Ended June 30, Change
- -------------------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employer Services $5,199.9 $4,812.9 $4,393.6 8% 10% 5%
Brokerage Services 1,749.8 1,666.0 1,611.9 5 3 (9)
Dealer Services 979.8 889.8 814.1 10 9 11
Securities Clearing
and Outsourcing
Services 61.5 -- -- -- -- --
Other 481.8 477.5 461.9 1 3 --
Reconciling items:
Foreign exchange 152.7 49.2 (93.3) -- -- --
Client funds
interest (126.4) (140.5) (41.2) -- -- --
--------------------------------------------------------------------
Total revenues $8,499.1 $7,754.9 $7,147.0 10% 9% 2%
=================================================================================================
</TABLE>
Earnings Before Income Taxes
<TABLE>
<CAPTION>
Years Ended June 30, Change
- -------------------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employer Services $1,143.8 $ 994.1 $1,070.0 15% (7)% 8%
Brokerage Services 294.3 244.6 232.0 20 5 (35)
Dealer Services 142.8 143.4 135.7 -- 6 14
Securities Clearing
and Outsourcing
Services (23.6) -- -- -- -- --
Other 73.1 111.4 153.8 (34) (28) (11)
Reconciling items:
Foreign exchange 29.4 7.2 (14.1) -- -- --
Client funds
interest (126.4) (140.5) (41.2) -- -- --
Cost of capital
charge 144.5 134.3 109.0 -- -- --
--------------------------------------------------------------------
Total earnings before
income taxes $1,677.9 $1,494.5 $1,645.2 12% (9)% (8)%
=================================================================================================
</TABLE>
Certain revenues and expenses are charged to the reportable segments at a
standard rate for management reasons. Other costs are charged to the reportable
segments based on management's responsibility for the applicable costs. As a
result, various income and expense items, including certain non-recurring gains
and losses, are recorded at the corporate level.
The fiscal 2004 and 2003 reportable segments' revenues and earnings before
income taxes have been adjusted to reflect updated fiscal 2005 budgeted foreign
exchange rates. This adjustment is made for management purposes so that the
reportable segments' revenues are presented on a consistent basis without the
impact of fluctuations in foreign currency exchange rates. This adjustment is a
reconciling item to revenues and earnings before income taxes in order to
eliminate the adjustment in consolidation.
In addition, Employer Services' fiscal 2003 revenues and earnings before income
taxes were adjusted to include interest income earned on funds held for Employer
Services' clients at a standard rate of 4.5%. Prior to fiscal 2004, Employer
Services was credited with interest earned on client funds at 6.0%. Given the
decline in interest rates, the standard rate was changed to 4.5%. This
allocation is made for management reasons so that the Employer Services' results
are presented on a consistent basis without the impact of fluctuations in
interest rates. This allocation is a reconciling item to our reportable
segments' revenues and earnings before income taxes to eliminate the allocation
in consolidation.
The reportable segments' results also include a cost of capital charge related
to the funding of acquisitions and other investments. This charge is a
reconciling item to earnings before income taxes to eliminate the charge in
consolidation.
Employer Services
Fiscal 2005 Compared to Fiscal 2004
Revenues
Employer Services' revenues increased 8% in fiscal 2005 as compared to fiscal
2004 primarily due to new business started in fiscal 2005, a pricing increase of
approximately 2%, an increase in the number of employees on our clients'
payrolls in the United States, strong client retention, and an increase in
client funds balances. Internal revenue growth, which represents revenue growth
excluding the impact of acquisitions and divestitures, was approximately 8% for
fiscal 2005. New business sales, which represents the annualized recurring
revenues anticipated from sales orders to new and existing clients, grew 13% to
approximately $840 million for fiscal 2005 due to the increased growth in the
salesforce and its productivity. The number of employees on our clients'
payrolls, "pays per control," increased approximately 1.9% for fiscal 2005 in
the United States. This employment metric is based upon actual results of over
125,000 payrolls across a broad range of U.S. geographies ranging from small to
very large businesses. Our client retention in the United States improved by 0.5
percentage points from the record retention levels in fiscal 2004 primarily due
to our continued investment and commitment to client service.
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. In
fiscal 2005, interest income increased due to the growth 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 fiscal 2004. The average
client funds balance was $12.3 billion during fiscal 2005 as compared to $11.1
billion for the prior fiscal year, representing an increase of 11% for fiscal
2005.
Revenues from our "beyond payroll" products continued to grow at a faster rate
than the traditional payroll and payroll tax revenues. Our Professional Employer
Organization ("PEO") revenues grew 24%, to $577.0 million, during fiscal 2005
primarily due to 21% growth in the number of PEO worksite employees and
additional pass-through benefits. In addition, "beyond payroll" revenues grew
due to a 13% increase in revenues from our TotalPay(R) Services and a 22%
increase in revenues from our Time and Labor Management Services, both due to
the increase in the number of clients utilizing these services.
20
<PAGE>
Earnings Before Income Taxes
Earnings before income taxes increased 15%, from $994.1 million to $1,143.8
million, for fiscal 2005 primarily due to the increase in revenues. Our
operating expenses and selling, general and administrative expenses increased
due to the increase in operating and sales personnel to support the revenue
growth. In addition, the increase in operating expenses exceeded our revenue
growth due to the higher growth in our PEO business, which includes pass-through
costs associated with the services. Our PEO revenues grew 24%, to $577.0
million, and pass-through operating expenses related to benefits and workers'
compensation costs grew 25% to $424.9 million, in fiscal 2005. The increase in
PEO operating expenses was partially offset by efficiencies of scale in
operating expenses in our Employer Services business. Our systems development
and programming costs increased due to the continued maintenance of our products
and services to comply with statutory requirements and to support our revenue
growth. Our total expenses at Employer Services did not increase comparably with
our revenue primarily due to the leveraging of our increasing revenues, which
has resulted in improved margins for our services. This was primarily due to the
increase in the efficiency of our sales personnel, which resulted in a decline
of our selling expenses as a percentage of new business sales in fiscal 2005 as
compared to fiscal 2004.
In addition, earnings before income taxes increased approximately $17.1 million
during fiscal 2005 as a result of the completion of the integration of certain
acquisitions, primarily ProBusiness Services, Inc., in the prior fiscal year.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Employer Services' revenues increased 10% in fiscal 2004 primarily due to
revenues from fiscal 2003 acquisitions, strong client retention, new business
started in fiscal 2004, price increases and interest earned on client funds
balances. Internal revenue growth, which represents revenue growth excluding the
impact of acquisitions and divestitures, was approximately 5% for fiscal 2004.
Our client retention in the United States was excellent, improving almost one
percentage point from record retention levels in fiscal 2003. New business sales
increased 6% to approximately $740 million in fiscal 2004.
Interest income was credited to Employer Services at a standard rate of 4.5% so
that the results of the business were not influenced by changes in interest
rates. The average client funds balance was $11.1 billion during fiscal 2004,
representing an increase of 24%, of which about one-half was related to the June
2003 acquisition of ProBusiness Services, Inc.
Revenues from our "beyond payroll" products grew at a faster rate than the
traditional payroll and payroll tax revenues. Our PEO revenues grew 28%, to
$467.0 million, in fiscal 2004 primarily due to 10% growth in the number of PEO
worksite employees and additional pass-through benefits and workers'
compensation costs. In addition, "beyond payroll" revenues increased due to an
increased number of clients utilizing services, such as Time and Labor
Management and TotalPay(R) Services.
Earnings Before Income Taxes
Earnings before income taxes in Employer Services decreased 7% for fiscal 2004
as compared to fiscal 2003 primarily due to our investment spending related to
our Employer of Choice initiatives, investments in our salesforce and costs to
sustain our products and services totaling approximately $138.0 million. In
addition, earnings before income taxes declined approximately 3% as a result of
the integration of certain fiscal 2003 acquisitions. These decreases were offset
by the increase in earnings before income taxes of approximately 9% as a result
of the revenue growth and operating efficiencies.
Brokerage Services
Fiscal 2005 Compared to Fiscal 2004
Revenues
Brokerage Services' revenues increased 5% for fiscal 2005 as compared to fiscal
2004 due to an increase in certain investor communications activity, offset by
the decrease in our back-office services revenue. Revenues from investor
communications for fiscal 2005 increased by 9%, to $1,313.1 million, primarily
due to increases in the volume of our proxy and interim communications services,
as well as increases in our distribution services revenues. Our proxy and
interim communications pieces delivered increased 15%, from 865 million to 995
million, for fiscal 2005 as compared to fiscal 2004. The increase in the fiscal
2005 proxy and interim communications activity resulted from more holders of
equities, increased activity related to additional mutual fund meetings, and
more mutual fund special communications. Stock record growth, which is a measure
of how many stockholders own a security compared to the prior year and a key
factor in the number of pieces delivered, increased 6% in fiscal 2005. Our
distribution services revenues increased due to new business growth for
post-sale mutual fund services. In addition, there was an increased demand for
our services for the consolidation or electronic delivery of proxies, which
increased our service fee revenues, but lowered our postage revenues.
Our back-office trade processing revenues decreased by 2%, to $334.6 million,
for fiscal 2005 due to a number of factors. The average revenue per trade
declined 10% for fiscal 2005 primarily due to our client mix, which was driven
by the increase in electronic retail trades and volume processed under tiered
pricing agreements. In addition, the acquisition of the U.S. Clearing and
BrokerDealer Business, which was previously a customer of Brokerage Services,
reduced revenues by approximately $14 million, as the back-office services
previously provided to such third party became an internal (intercompany)
service. These decreases were offset by an increase in the average trades per
day of 7%, from 1.4 million in fiscal 2004 to 1.5 million in fiscal 2005.
Average trades per day increased primarily due to net new business sales and
growth in our existing client base.
Earnings Before Income Taxes
Earnings before income taxes increased $49.7 million, to $294.3 million, for
fiscal 2005 primarily due to the increased revenues in our investor
communications activities and improved margins for our back-office services.
With the increase in volume of our
21
<PAGE>
investor communications, we were able to leverage our expense structure to
improve our margins associated with such services. In addition, earnings before
income taxes were favorably impacted by an increase in our services to
consolidate or electronically deliver proxies, which is a higher margin service.
The margin on our back-office services improved due to the continued alignment
of our operating expenses to the lower back-office revenues. Earnings before
income taxes also increased approximately $9.7 million during fiscal 2005 as a
result of the elimination of unprofitable business lines and alignment of our
cost structure in our underperforming businesses that occurred during fiscal
2004.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Brokerage Services' revenues increased 3% for fiscal 2004 as compared to fiscal
2003 primarily due to an increase in certain investor communications activity
offset by continued industry consolidations, which reduced our trade processing
revenues. Revenues from investor communications increased by $82.9 million, or
7%, to $1,210.6 million in fiscal 2004 primarily due to increases in the volume
of our proxy and interim communications services, as well as our distribution
services for confirmations, statements, and pre- and post-sale mutual fund
documents. Our proxy and interim communications pieces delivered increased 15%,
from 755 million in fiscal 2003 to 865 million in fiscal 2004, stemming from
more holders of equities and incremental activity from recent mutual fund
industry regulatory activity. Stock record growth increased 4% in fiscal 2004.
Our distribution services' revenue increased $39.1 million primarily due to the
increase in the amount of pre- and post-sale mutual fund pieces delivered. Our
back-office trade processing revenues declined by $12.4 million, to $343.1
million, in fiscal 2004 primarily due to an 11% decline in the average revenue
per trade. The average revenue per trade was primarily impacted by industry
consolidations, our client mix, and volume processed under tiered pricing
agreements. The decline in the average revenue per trade was partially offset by
an increase in average trades per day of 6%, from 1.3 million in fiscal 2003 to
1.4 million in fiscal 2004, primarily due to net new business sales and growth
in our existing client base.
Earnings Before Income Taxes
Earnings before income taxes increased 5% in fiscal 2004 primarily due to our
cost containment efforts in our underperforming businesses and increased
revenues in our investor communications activities. Our ability to eliminate
unprofitable business lines and properly align our cost structure with the
slower growth levels of our underperforming businesses contributed approximately
$19.4 million to earnings before income taxes. These increases were offset by
the decline in earnings before income taxes from our trade processing services,
primarily due to industry consolidations. In addition, our earnings before
income taxes were negatively impacted by our incremental investments in our
products and services and Employer of Choice initiatives that totaled
approximately $14.0 million during fiscal 2004.
Dealer Services
Fiscal 2005 Compared to Fiscal 2004
Revenues
Dealer Services' revenues increased 10% for fiscal 2005 as compared to fiscal
2004. Internal revenue growth was approximately 6% for fiscal 2005. Revenues
increased for our dealer business systems in North America by $93.2 million, to
$811.0 million, for fiscal 2005 primarily due to growth in our key products and
the effect of acquisitions. The growth in our key products was primarily driven
by the increased users for Application Service Provider ("ASP") managed
services, increased Credit Check installations, new network installations and
increased market penetration of our Customer Relationship Management ("CRM")
product. In addition, our revenue growth was impacted by our continued strong
client retention.
Earnings Before Income Taxes
Earnings before income taxes decreased slightly from $143.4 million in fiscal
2004 to $142.8 million in fiscal 2005 primarily due to the additional sales
expenses relating to headcount additions to generate the current revenue growth
and additional implementation expenses to support the new sales contracts
awarded during fiscal 2005 for two of the largest dealership groups in the
United States. In addition, earnings before income taxes were negatively
impacted by the integration costs of acquisitions that occurred during the
fourth quarter of fiscal 2004.
Fiscal 2004 Compared to Fiscal 2003
Revenues
Dealer Services' revenues increased 9% in fiscal 2004 as compared to fiscal
2003. Internal revenue growth was approximately 8% for fiscal 2004. Revenues
increased 8% for our dealer business systems in North America, to $717.8
million, due to new product growth in our traditional core businesses. The new
product growth accounted for approximately 60% of the increase in revenue for
fiscal 2004 and is primarily driven by increased users for ASP managed services,
new network installations, and strong market acceptance of our CRM product.
Earnings Before Income Taxes
Earnings before income taxes grew 6% in fiscal 2004 primarily due to the
increase in revenues of our traditional core business, which contributed
approximately 15% to earnings before income taxes. These increases were
partially offset by our incremental investments in our products and services and
Employer of Choice initiatives which totaled approximately $10.0 million during
fiscal 2004.
Securities Clearing and Outsourcing Services
Fiscal 2005 Compared to Fiscal 2004
Revenues
On November 1, 2004, the Company formed the Securities Clearing and Outsourcing
Services segment upon the acquisition of the U.S. Clearing and BrokerDealer
Business. Revenues for Securities Clearing and Outsourcing Services were $61.5
million
22
<PAGE>
from November 1, 2004 to June 30, 2005. Average customer margin balances were
$955.1 million and the average number of trades cleared per day were 23 thousand
from November 1, 2004 to June 30, 2005.
Loss Before Income Taxes
Loss before income taxes was $23.6 million from November 1, 2004 to June 30,
2005 due to the current alignment of the cost structure associated with the
revenues of the segment as well as the integration costs incurred since the
acquisition of the business.
Other
The primary components of "Other" are Claims Services, miscellaneous processing
services, and corporate allocations and expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our financial condition and balance sheet remain strong. At June 30, 2005, cash
and marketable securities were $2,119.1 million. Stockholders' equity was
$5,783.8 million at June 30, 2005 and the return on average equity for fiscal
2005 was 18.8%. The ratio of long-term debt-to-equity was 1.3% at June 30, 2005.
At June 30, 2005, working capital was $1,640.4 million, as compared to $993.2
million at June 30, 2004. The increase in working capital arose primarily as a
result of the change in the mix of marketable securities from long-term to
short-term and the acquisition of the U.S. Clearing and BrokerDealer Business.
Our principal sources of liquidity are derived from cash generated through
operations and our 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 $5.0 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.
During fiscal 2005, we acquired the U.S. Clearing and BrokerDealer Business and
formed the Securities Clearing and Outsourcing Services segment to report the
results of the acquired business. The Securities Clearing and Outsourcing
Services segment provides third-party clearing operations in the regulated
broker-dealer industry. The cash flows from operations from this business differ
from that of our other businesses because the broker-dealer third-party clearing
activities utilize payables to finance their business activities and the
regulations associated with the broker-dealer industry require cash or
securities to be segregated for the exclusive benefit of customers in certain
circumstances based on regulatory calculations driven by customers' balances. As
a result, management analyzes cash flows provided from operating activities of
the Securities Clearing and Outsourcing Services segment separately from all
other businesses. Management's view of the net cash flows provided by operating
activities is as follows:
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 2004 2003
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash flows provided by operating
activities for all businesses, excluding
the Securities Clearing and
Outsourcing Services segment $1,626.4 $1,385.4 $1,505.0
Net cash flows used in operating
activities for the Securities Clearing
and Outsourcing Services segment (193.0) -- --
-------------------------------
Net cash flows provided by operating
activities, as reported $1,433.4 $1,385.4 $1,505.0
================================================================================
</TABLE>
Net cash flows provided by operating activities for all businesses, excluding
the Securities Clearing and Outsourcing Services segment, were $1,626.4 million
in fiscal 2005, as compared to $1,385.4 million in fiscal 2004. This increase
was primarily due to the increase in net earnings for all businesses, excluding
the Securities Clearing and Outsourcing Services segment, of $130.4 million and
the increase in accounts payable and accrued expenses primarily due to the
timing of income tax payments made during fiscal 2005 as compared to fiscal
2004.
Net cash flows used in operating activities for the Securities Clearing and
Outsourcing Services segment were $193.0 million from November 1, 2004 to June
30, 2005. The net cash flows used in operating activities primarily resulted
from the segregation of $179.8 million of securities deposited with clearing
organizations or segregated for the exclusive benefit of our Securities Clearing
and Outsourcing Services' customers to meet regulatory requirements. In
addition, securities clearing payables decreased due to the increase in
securities clearing activities of the segment.
Cash flows used in investing activities in fiscal 2005 totaled $437.9 million,
as compared to $1,318.8 million in fiscal 2004. The fluctuation between periods
was primarily due to the timing of purchases of and proceeds from marketable
securities and the change in client funds obligations, offset by the increase in
cash paid for acquisitions in fiscal 2005.
Cash flows used in financing activities in fiscal 2005 totaled $746.5 million,
as compared to $770.3 million in fiscal 2004. The decrease in cash used in
financing activities was primarily due to the increase in proceeds received from
the stock purchase plan and exercises of stock options and the decrease in the
amount of common stock purchased for treasury, offset by the increase in
dividends paid as a result of the increase in the amount of dividends per common
share in fiscal 2005. We purchased 14.1 million shares of our common stock at an
average price of $41.98 per share during fiscal 2005. As of June 30, 2005, we
had remaining Board of Directors' authorization to purchase up to 13.6 million
additional shares.
23
<PAGE>
In June 2005, we entered into a $1.25 billion, 364-day credit agreement and a
$1.5 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 $2.0 billion, subject to the availability of
additional commitments. These facilities replaced the Company's prior $2.25
billion, 364-day facility, which terminated on June 29, 2005. The $1.25 billion
and $1.5 billion agreements mature in June 2006 and June 2010, respectively. We
also have a $2.25 billion credit facility that matures in June 2009. The
interest rate applicable to the borrowings is tied to LIBOR or prime rate
depending on the notification that we provide 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 under the credit
agreements at June 30, 2005 or at June 30, 2004.
We maintain a U.S. short-term commercial paper program providing for the
issuance of up to $4.5 billion in aggregate maturity value of commercial paper
at our discretion. Our commercial paper program is rated A-1+ by Standard &
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. We use the commercial paper issuances as a primary
instrument to meet short-term funding requirements related to client funds
obligations that occur as a result of our decision to extend maturities of our
client funds marketable securities. This allows us to take advantage of higher
extended term yields, rather than liquidating portions of our marketable
securities, in order to provide more cost-effective liquidity. We also use
commercial paper issuances to fund general corporate purposes, if needed. At
June 30, 2005 and 2004, there was no commercial paper outstanding. For both
fiscal 2005 and 2004, the Company's average borrowings were $1.0 billion at a
weighted average interest rate of 2.1% and 1.0%, respectively. The weighted
average maturity of the Company's commercial paper during fiscal 2005 and 2004
was less than two days for both fiscal years.
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 June 30, 2005 and 2004, there were no
outstanding repurchase agreements. For fiscal 2005 and 2004, the Company had an
average outstanding balance of $321.2 million and $32.0 million, respectively,
at an average interest rate of 1.9% and 1.8%, respectively.
Capital expenditures during fiscal 2005 were $202.8 million, as compared to
$204.1 million in fiscal 2004 and $133.8 million in fiscal 2003. The capital
expenditures in fiscal 2005 related primarily to technology assets, buildings,
furniture and equipment and leasehold improvements to support our operations. We
expect capital expenditures in fiscal 2006 to be approximately $250.0 million.
The following table provides a summary of our contractual obligations as of June
30, 2005:
<TABLE>
<CAPTION>
Payments due by period
- -----------------------------------------------------------------------------------
More
Less than 1-3 3-5 than
Contractual Obligations 1 year years years 5 years Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt Obligations(1) $ 0.2 $ 0.6 $ 16.4 $ 58.8 $ 76.0
Operating Lease and
Software License
Obligations(2) 285.8 408.6 245.6 144.1 1,084.1
Purchase Obligations(3) 134.3 58.4 12.8 -- 205.5
Other long-term
liabilities reflected
on our Consolidated
Balance Sheets:
Compensation and
Benefits(4) 25.5 89.2 48.6 68.1 231.4
----------------------------------------------------
Total $445.8 $556.8 $323.4 $271.0 $1,597.0
===================================================================================
</TABLE>
(1) These amounts represent the principal repayments of our debt and are
included on our Consolidated Balance Sheets. See Note 10 to the
consolidated financial statements for additional information about our debt
and related matters.
(2) Included in these amounts are various facilities and equipment leases, and
software license agreements. We enter into operating leases in the normal
course of business relating to facilities and equipment, as well as the
licensing of software. The majority of our lease agreements have fixed
payment terms based on the passage of time. Certain facility and equipment
leases require payment of maintenance and real estate taxes and contain
escalation provisions based on future adjustments in price indices. Our
future operating lease obligations could change if we exit certain
contracts and if we enter into additional operating lease agreements.
(3) Purchase obligations primarily relate to purchase and maintenance
agreements on our software, equipment and other assets.
(4) Compensation and benefits primarily relates to amounts associated with our
employee benefit plans and other compensation arrangements.
Our operating lease and software license obligations increased from $930.8
million in fiscal 2004 to $1,084.1 million in fiscal 2005 primarily as a result
of entering into a five-year agreement with a major mainframe and distributed
equipment manufacturer that is expected to result in cost-savings of over $50
million during the term of the agreement. Our purchase obligations increased
from $88.7 million in fiscal 2004 to $205.5 million in fiscal 2005 primarily as
a result of entering into two new agreements, with extended terms, to purchase
and maintain our software and equipment at more favorable rates.
In addition to the obligations quantified in the table above, we have
obligations for the remittance of funds relating to our payroll and payroll tax
filing services. As of June 30, 2005, the obligations relating to these matters,
which are expected to be paid in fiscal 2006, total $17,859.2 million and are
recorded in client funds obligations on our Consolidated Balance Sheets. We have
$17,897.5 million of cash and marketable securities recorded in funds held for
clients on our Consolidated Balance Sheets as of June 30, 2005 that have been
impounded from our clients to satisfy such obligations.
The Company's wholly-owned subsidiary, ADP Indemnity, Inc., provides workers'
compensation and employer liability insurance coverage for our PEO worksite
employees. We have secured specific per occurrence and aggregate stop loss
reinsurance from third-party carriers that cap losses that reach a
24
<PAGE>
certain level in each policy year. We utilize historical loss experience and
actuarial judgment to determine the estimated insurance liability for these
services. We review the assumptions and obtain valuations provided by an
independent third-party actuary to determine the adequacy of the workers'
compensation liabilities. During fiscal 2005 and 2004, we received premiums of
$54.0 million and $56.8 million, respectively, and paid claims of $15.9 million
and $7.4 million, respectively. At June 30, 2005, our cash and marketable
securities balances totaled approximately $128.0 million to cover potential
future workers' compensation claims for the policy years that the PEO worksite
employees were covered by ADP Indemnity, Inc. We believe that the workers'
compensation liabilities are adequate to cover the future workers' compensation
claims for the PEO worksite employees covered.
It is not our business practice to enter into off-balance sheet arrangements.
However, in the normal course of business, we do enter into contracts in which
we guarantee the performance of our products and services. In addition, the
security clearing transactions of the Securities Clearing and Outsourcing
Services segment involve collateral arrangements required by various regulatory
and internal guidelines, which are monitored daily. We do not expect any
material losses related to such guarantees or collateral arrangements.
We are a member of numerous exchanges and clearinghouses. Under the membership
agreements, members are generally required to guarantee the performance of other
members. Additionally, if a member becomes unable to satisfy its obligations to
the clearinghouse, other members would be required to meet these shortfalls. To
mitigate these performance risks, the exchanges and clearinghouses often require
members to post collateral. Our maximum potential liability under these
arrangements cannot be quantified. However, we believe that it is unlikely that
we will be required to make payments under these arrangements. Accordingly, no
contingent liability is recorded in the consolidated financial statements for
these arrangements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our overall investment portfolio is comprised of corporate investments (cash and
cash equivalents, short-term marketable securities, and long-term marketable
securities) and client funds assets (funds that have been collected from clients
but not yet remitted to the applicable tax authorities or client employees).
In order to provide more cost-effective liquidity and maximize our interest
income, we utilize a strategy by which we extend the maturities of our
investment portfolio for funds held for clients and employ short-term financing
arrangements to satisfy our short-term funding requirements related to client
funds obligations. In these instances, a portion of this portfolio is considered
and reported within the corporate investment balances in order to reflect the
pure client funds assets and related obligations. Interest income on this
portfolio and the related interest expense on the borrowings are reported in
other income, net on our Statements of Consolidated Earnings.
Our corporate investments are invested in highly liquid, investment grade
securities. These assets are available for repurchases of common stock for
treasury and/or acquisitions, as well as other corporate operating purposes. The
majority of our short-term and long-term marketable securities are classified as
available-for-sale securities as we have the ability and intent to hold these
securities until maturity.
Our client funds assets are invested with safety of principal, liquidity, and
diversification as the primary goals, while also seeking to maximize interest
income. Client funds assets are invested in highly liquid, investment grade
marketable securities with a maximum maturity of 10 years at time of purchase. A
significant portion of the client funds assets are invested in U.S. government
agencies.
We have established credit quality, maturity, and exposure limits for our
investments. The minimum allowed credit rating for fixed income securities is
single-A. The maximum maturity at time of purchase for a single-A rated security
is 5 years, for AA-rated securities is 7 years, and for AAA-rated securities is
10 years. Commercial paper must be rated A1/P1 and, for time deposits, banks
must have a Financial Strength Rating of C or better.
During fiscal 2005, approximately 20% 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 80% of our
investment portfolio was invested in fixed-income securities, with varying
maturities of less than 10 years, which were also subject to interest rate risk
including reinvestment risk.
Details regarding our overall investment portfolio are as follows:
<TABLE>
<CAPTION>
===============================================================================
Years Ended June 30, 2005 2004 2003
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Average investment balances at cost:
Corporate investments $ 3,262.7 $ 3,218.3 $ 3,374.4
Funds held for clients 12,263.9 11,086.8 8,936.8
- -------------------------------------------------------------------------------
Total $15,526.6 $14,305.1 $12,311.2
===============================================================================
Average interest rates earned
exclusive of realized
gains/(losses) on:
Corporate investments 2.9% 2.4% 3.4%
Funds held for clients 3.5% 3.2% 4.1%
Total 3.4% 3.1% 3.9%
===============================================================================
Realized gains on available-
for-sale securities $ 10.7 $ 9.7 $ 34.5
Realized losses on available-
for-sale securities (39.2) (17.3) (5.0)
- -------------------------------------------------------------------------------
Net realized (losses) gains $ (28.5) $ (7.6) $ 29.5
===============================================================================
As of June 30:
Net unrealized pre-tax gains
on available-for-sale
securities $ 32.9 $ 59.9 $ 375.9
===============================================================================
Total available-for-sale
securities $13,001.5 $12,092.8 $ 9,875.9
===============================================================================
</TABLE>
25
<PAGE>
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 Fed Funds rates)
and intermediate-term interest rates of 25 basis points applied to the estimated
fiscal 2006 average investment balances and any related borrowings would result
in less than 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 2006 average short-term
investment balances and any related short-term borrowings would result in
approximately a $2 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 securities. The Company limits credit risk by investing primarily in AAA and
AA rated securities, as rated by Moody's, Standard & Poor's, and for Canadian
securities, Dominion Bond Rating Service. In addition, we also limit amounts
that can be invested in any single issuer. At June 30, 2005, approximately 95%
of our available-for-sale securities held a AAA or AA rating.
In the normal course of business, the securities clearing activities of the
Securities Clearing and Outsourcing Services segment involve execution,
settlement and financing of various security clearing transactions for a
nationwide client base. With these activities, we may be exposed to risk in the
event customers, other broker-dealers, banks, clearing organizations or
depositories are unable to fulfill contractual obligations.
For securities clearing activities of the Securities Clearing and Outsourcing
Services segment in which we extend credit to customers and broker-dealers, we
seek to control the risk associated with these activities by requiring customers
and broker-dealers to maintain margin collateral in compliance with various
regulatory and internal guidelines. We monitor margin levels and, pursuant to
such guidelines, request the deposit of additional collateral or the reduction
of securities positions, when necessary. In addition, broker-dealers may be
required to maintain deposits relating to any securities clearing activities we
perform on their behalf.
We record customers' security clearing transactions on a settlement date basis,
which is generally three business days after trade date. The Company is
therefore exposed to off-balance sheet risk of loss on unsettled transactions in
the event customers and other counterparties are unable to fulfill contractual
obligations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R,
"Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R is effective for our
fiscal year beginning July 1, 2005. Among other things, SFAS No. 123R requires
that compensation cost relating to share-based payment transactions be
recognized in the consolidated financial statements. In Note 1P to the fiscal
2005 consolidated financial statements, we have disclosed the pro forma
disclosures regarding the effect on net earnings and earnings per share as if we
had applied the fair value method of accounting for stock-based compensation
under SFAS No.123. Effective July 1, 2005, we have adopted SFAS No.123R
utilizing the modified prospective method. In anticipation of adoption of SFAS
No. 123R, we reduced the amount of stock options issued in fiscal 2005 by
approximately one-third. Additionally, we reviewed and refined the assumptions
utilized in determining our total stock compensation expense and changed the
fair value option-pricing model from the Black-Scholes model to a binomial model
for all options granted after January 1, 2005. We believe that the binomial
model is indicative of the stock option's fair value and considers
characteristics that are not taken into account under the Black-Scholes model.
As a result, we expect that the annualized cost associated with expensing stock
options and the employee stock purchase plan to be approximately $0.18 - $0.19
per diluted share in fiscal 2006, as compared to a pro forma impact of $0.22 per
diluted share in fiscal 2005, which is disclosed in Note 1P to the fiscal 2005
consolidated financial statements.
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 below.
Revenue Recognition. Our revenues are primarily attributable to fees for
providing services (e.g., Employer Services' payroll processing fees and
Brokerage Services' trade processing fees) as well as investment income on
payroll funds, payroll tax filing funds and other Employer Services'
client-related funds. We typically enter into agreements for a fixed fee per
transaction (e.g., number of payees or number of trades). Fees associated with
services are recognized in the period services are rendered and earned under
service arrangements with clients where service fees are fixed or determinable
and collectibility is reasonably
26
<PAGE>
assured. Our service fees are determined based on written price quotations or
service agreements having stipulated terms and conditions which do not require
management to make any significant judgments or assumptions regarding any
potential uncertainties. Interest income on collected but not yet remitted funds
held for Employer Services' clients is recognized in revenues as earned, as the
collection, holding and remittance of these funds are critical components of
providing these services.
We also recognize revenues associated with the sale of software systems and
associated software licenses. For a majority of our software sales arrangements,
which provide hardware, software licenses, installation and post-contract
customer support, revenues are recognized ratably over the software license term
as vendor-specific objective evidence of the fair values of the individual
elements in the sales arrangement does not exist. Changes to the elements in an
arrangement and the ability to establish vendor-specific objective evidence for
those elements could affect the timing of the revenue recognition.
We assess collectibility of our revenues based primarily on the creditworthiness
of the customer as determined by credit checks and analysis, as well as the
customer's payment history. We do not believe that a change in our assumptions
utilized in the collectibility determination would result in a material change
to revenues as no single customer accounts for a significant portion of our
revenues.
Goodwill. We review the carrying value of all our goodwill in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets," by comparing the carrying
value of our reporting units to their fair values. We are required to perform
this comparison at least annually or more frequently if circumstances indicate
possible impairment. When determining fair value, we utilize a discounted future
cash flow approach using various assumptions, including projections of revenues
based on assumed long-term growth rates, estimated costs, and appropriate
discount rates based on the particular businesses' weighted average cost of
capital. Our estimates of long-term growth and costs are based on historical
data, various internal estimates and a variety of external sources, and are
developed as part of our routine long-range planning process. We had $2,408.5
million of goodwill as of June 30, 2005. Given the significance of our goodwill,
an adverse change to the fair value could result in an impairment charge, which
could be material to our consolidated earnings.
Income Taxes. We account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity's financial
statements or tax returns. Judgment is required in addressing the future tax
consequences of events that have been recognized in our financial statements or
tax returns (e.g., realization of deferred tax assets, changes in tax laws or
interpretations thereof). In addition, we are subject to the continuous
examination of our income tax returns by the Internal Revenue Service and other
tax authorities. A change in the assessment of the outcomes of such matters
could materially impact our consolidated financial statements.
MARKET PRICE, DIVIDEND DATA AND OTHER
The market price of our common stock (symbol: ADP) based on New York Stock
Exchange composite transactions and cash dividends per share declared during the
past two fiscal years have been:
<TABLE>
<CAPTION>
Price Per Share
- ----------------------------------------------------------------------
Dividends
High Low Per Share
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal 2005 quarter ended
June 30 $45.56 $40.37 $.1550
March 31 $45.50 $41.13 $.1550
December 31 $46.31 $39.79 $.1550
September 30 $43.12 $38.60 $.1400
- ----------------------------------------------------------------------
Fiscal 2004 quarter ended
June 30 $47.31 $41.63 $.1400
March 31 $44.68 $39.61 $.1400
December 31 $39.88 $35.86 $.1400
September 30 $40.70 $33.45 $.1200
======================================================================
</TABLE>
As of June 30, 2005, there were 39,277 holders of record of our common stock. As
of such date, 332,352 additional holders have their stock in "street name."
FORWARD-LOOKING STATEMENTS
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, employee benefits and registered clearing agencies and
broker-dealers; overall market and economic conditions, including interest rate
and foreign currency trends; competitive conditions; stock market activity; 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.
27
<PAGE>
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
Statements of Consolidated Earnings
<TABLE>
<CAPTION>
(In millions, except per share amounts)
====================================================================================================
Years Ended June 30, 2005 2004 2003
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues, other than interest on funds held for
Employer Services' clients and PEO revenues $7,500.7 $6,932.5 $6,412.1
Interest on funds held for Employer Services' clients 421.4 355.4 368.7
PEO revenues(A) 577.0 467.0 366.2
--------------------------------------
Total revenues 8,499.1 7,754.9 7,147.0
--------------------------------------
Operating expenses 3,969.5 3,525.4 3,096.7
Selling, general and administrative expenses 1,957.1 1,903.3 1,758.3
Systems development and programming costs 624.1 581.2 499.2
Depreciation and amortization 304.4 306.8 274.7
Other income, net (33.9) (56.3) (127.1)
--------------------------------------
6,821.2 6,260.4 5,501.8
--------------------------------------
Earnings before income taxes 1,677.9 1,494.5 1,645.2
Provision for income taxes 622.5 558.9 627.0
--------------------------------------
Net earnings $1,055.4 $ 935.6 $1,018.2
======================================
Basic earnings per share $ 1.81 $ 1.58 $ 1.70
--------------------------------------
Diluted earnings per share $ 1.79 $ 1.56 $ 1.68
--------------------------------------
Basic weighted average shares outstanding 583.2 591.7 600.1
--------------------------------------
Diluted weighted average shares outstanding 590.0 598.7 605.9
====================================================================================================
</TABLE>
(A) Professional Employer Organization ("PEO") revenues are net of direct
pass-through costs of $5,499.2, $4,237.0 and $3,462.8, respectively.
See notes to consolidated financial statements.
28
<PAGE>
AUTOMATIC DATA PROCESING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In millions, except per share amounts)
=====================================================================================================
June 30, 2005 2004
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 975.4 $ 713.0
Short-term marketable securities (includes $204.7 of segregated
securities deposited with clearing organizations or segregated for
regulatory purposes at June 30, 2005) 695.8 416.0
Accounts receivable, net 1,207.2 1,058.0
Securities clearing receivables 965.2 --
Other current assets 597.5 574.6
--------------------------
Total current assets 4,441.1 2,761.6
Long-term marketable securities 447.9 963.5
Long-term receivables, net 186.9 196.8
Property, plant and equipment, net 684.8 642.4
Other assets 813.9 720.9
Goodwill 2,408.5 2,195.5
Intangible assets, net 734.8 736.3
--------------------------
Total assets before funds held for clients 9,717.9 8,217.0
Funds held for clients 17,897.5 12,903.6
--------------------------
Total assets $27,615.4 $21,120.6
==========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 224.1 $ 175.2
Accrued expenses and other current liabilities 1,616.0 1,482.7
Securities clearing payables 745.2 --
Income taxes payable 215.4 110.5
--------------------------
Total current liabilities 2,800.7 1,768.4
Long-term debt 75.8 76.2
Other liabilities 342.7 319.5
Deferred income taxes 290.5 283.8
Deferred revenues 462.7 414.8
--------------------------
Total liabilities before client funds obligations 3,972.4 2,862.7
Client funds obligations 17,859.2 12,840.2
--------------------------
Total liabilities 21,831.6 15,702.9
--------------------------
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 at June 30, 2005 and 2004 63.9 63.9
Capital in excess of par value -- 96.6
Deferred compensation (13.3) (17.0)
Retained earnings 7,966.0 7,326.9
Treasury stock -- at cost: 58.5 and 51.6 shares, respectively (2,246.8) (2,033.2)
Accumulated other comprehensive income (loss) 14.0 (19.5)
--------------------------
Total stockholders' equity 5,783.8 5,417.7
--------------------------
Total liabilities and stockholders' equity $27,615.4 $21,120.6
=====================================================================================================
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
Statements of Consolidated Stockholders' Equity
<TABLE>
<CAPTION>
(In millions, except per share amounts)
===================================================================================================================================
Accumulated
Other
Compre-
Common Stock Capital in Compre- hensive
--------------- Excess of Deferred Retained Treasury hensive Income
Shares Amount Par Value Compensation Earnings Stock Income (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 2002 638.7 $63.9 $352.2 $(18.8) $5,977.3 $(1,142.0) $(118.3)
Net earnings -- -- -- -- 1,018.2 -- $1,018.2 --
Foreign currency translation adjustments 174.0 174.0
Unrealized net gain on securities,
net of tax 108.6 108.6
Minimum pension liability adjustment,
net of tax (5.5) (5.5)
--------
Comprehensive income $1,295.3
========
Employee stock plans and related
tax benefits -- -- (107.8) 4.2 -- 268.9 --
Treasury stock acquired (27.4 shares) -- -- -- -- -- (938.5) --
Acquisitions (0.3 shares) -- -- (3.1) -- -- 14.9 --
Debt conversion (0.5 shares) -- -- (15.4) -- -- 23.3 --
Dividends ($.4750 per share) -- -- -- -- (284.6) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 638.7 63.9 225.9 (14.6) 6,710.9 (1,773.4) 158.8
Net earnings -- -- -- -- 935.6 -- $ 935.6 --
Foreign currency translation adjustments 17.1 17.1
Unrealized net loss on securities,
net of tax (196.3) (196.3)
Minimum pension liability adjustment,
net of tax 0.9 0.9
--------
Comprehensive income $ 757.3
========
Employee stock plans and related
tax benefits -- -- (122.6) (2.4) -- 371.8 --
Treasury stock acquired (15.8 shares) -- -- -- -- -- (648.9) --
Acquisitions -- -- -- -- -- 0.5 --
Debt conversion (0.4 shares) -- -- (6.7) -- -- 16.8 --
Dividends ($.5400 per share) -- -- -- -- (319.6) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004 638.7 63.9 96.6 (17.0) 7,326.9 (2,033.2) (19.5)
Net earnings -- -- -- -- 1,055.4 -- 1,055.4 --
Foreign currency translation adjustments 52.5 52.5
Unrealized net loss on securities,
net of tax (16.8) (16.8)
Minimum pension liability adjustment,
net of tax (2.2) (2.2)
--------
Comprehensive income $1,088.9
========
Employee stock plans and related
tax benefits -- -- (94.5) 3.7 (63.6) 373.6 --
Treasury stock acquired (14.1 shares) -- -- -- -- -- (591.4) --
Acquisitions -- -- -- -- -- 0.6 --
Debt conversion (0.1 shares) -- -- (2.1) -- -- 3.6 --
Dividends ($.6050 per share) -- -- -- -- (352.7) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 638.7 $63.9 $ -- $(13.3) $7,966.0 $(2,246.8) $ 14.0
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
AUTOMATIC DATA PROCESSING, INC. AND SUBSIDIARIES
Statements of Consolidated Cash Flows
<TABLE>
<CAPTION>
(In millions)
==================================================================================================================
Years Ended June 30, 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net earnings $1,055.4 $ 935.6 $1,018.2
Adjustments to reconcile net earnings to net cash flows
provided by operating activities:
Depreciation and amortization 304.4 306.8 274.7
Deferred income taxes 18.9 109.1 (15.8)
Amortization of premiums and discounts on available-for-sale securities 120.0 129.9 77.9
Other 44.3 80.4 35.2
Changes in operating assets and liabilities, net of effects
from acquisitions of businesses:
Securities deposited with clearing organizations or
segregated in compliance with federal regulations (179.8) -- --
Increase in receivables and other assets (149.6) (233.8) (94.4)
Increase in accounts payable and accrued expenses 290.8 57.4 209.2
Increase in securities clearing receivables (16.3) -- --
Decrease in securities clearing payables (54.7) -- --
------------------------------------
Net cash flows provided by operating activities 1,433.4 1,385.4 1,505.0
------------------------------------
Cash Flows From Investing Activities
Purchases of marketable securities (7,599.4) (8,087.2) (3,451.6)
Proceeds from the sales and maturities of marketable securities 6,629.1 5,339.3 4,014.3
Net (purchases of) proceeds from client funds securities (3,765.6) 663.8 1,501.3
Change in client funds obligations 5,019.0 1,391.3 (967.8)
Capital expenditures (196.1) (204.1) (133.8)
Additions to intangibles (112.3) (148.1) (144.7)
Acquisitions of businesses, net of cash acquired (434.4) (295.2) (651.3)
Proceeds from the sale of businesses 17.2 26.9 4.1
Other 4.6 (5.5) 6.6
------------------------------------
Net cash flows (used in) provided by investing activities (437.9) (1,318.8) 177.1
------------------------------------
Cash Flows From Financing Activities
Payments of debt (1.1) (1.4) (1.4)
Proceeds from issuance of notes 0.4 0.4 1.0
Repurchases of common stock (584.4) (629.9) (938.6)
Proceeds from stock purchase plan and exercises of stock options 183.5 169.2 92.8
Dividends paid (344.9) (308.6) (284.6)
------------------------------------
Net cash flows used in financing activities (746.5) (770.3) (1,130.8)
------------------------------------
Effect of exchange rate changes on cash and cash equivalents 13.4 6.5 60.1
------------------------------------
Net change in cash and cash equivalents 262.4 (697.2) 611.4
Cash and cash equivalents, at beginning of year 713.0 1,410.2 798.8
------------------------------------
Cash and cash equivalents, at end of year $ 975.4 $ 713.0 $1,410.2
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
Notes to Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Consolidation and Basis of Preparation. The consolidated financial statements
include the financial results of Automatic Data Processing, Inc. and its
majority-owned subsidiaries (the "Company" or "ADP"). Intercompany balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
these estimates.
B. Description of Business. The Company is a provider of technology-based
outsourcing solutions to employers, the brokerage and financial services
community, vehicle retailers and manufacturers, and the property and casualty
insurance, auto collision repair and auto recycling industries. The Company
classifies its operations into the following reportable segments: Employer
Services, Brokerage Services, Dealer Services, Securities Clearing and
Outsourcing Services and Other. "Other" consists primarily of Claims Services,
miscellaneous processing services, and corporate allocations and expenses.
C. Revenue Recognition. A majority of the Company's revenues are attributable to
fees for providing services (e.g., Employer Services' payroll processing fees
and Brokerage Services' trade processing fees) as well as investment income on
payroll funds, payroll tax filing funds and other Employer Services'
client-related funds. The Company typically enters into agreements for a fixed
fee per transaction (e.g., number of payees or number of trades). Fees
associated with services are recognized in the period services are rendered and
earned under service arrangements with clients where service fees are fixed or
determinable and collectibility is reasonably assured.
Interest income on collected but not yet remitted funds held for clients is
earned on funds that are collected from clients and invested until remittance to
the applicable tax agencies or clients' employees. The interest earned on these
funds is included in revenues because the collection, holding and remittance of
these funds are critical components of providing these services.
The Company also recognizes revenues associated with the sale of software
systems and associated software licenses. For a majority of the Company's
software sales arrangements, which provide hardware, software licenses,
installation and post-contract customer support, revenues are recognized ratably
over the software license term as vendor-specific objective evidence of the fair
values of the individual elements in the sales arrangement does not exist.
Postage fees for client mailings are included in revenues and the associated
postage expenses are included in operating expenses. Professional Employer
Organization ("PEO") revenues are included in revenues and are reported net of
direct costs billed and incurred for PEO worksite employees, which primarily
include payroll wages and payroll taxes. Benefits and workers' compensation fees
for PEO worksite employees are included in PEO revenues and the associated costs
are included in operating expenses.
Customer clearing security transactions and the related revenues, primarily
consisting of customer margin interest, and expenses, primarily consisting of
brokerage clearing expenses and interest expense, are recorded on a settlement
date basis. Revenues for the fees charged to an introducing broker-dealer to
process trades in clearing accounts are recorded on a trade-date basis.
D. Cash and Cash Equivalents. Investment securities with a maturity of ninety
days or less at the time of purchase are considered cash equivalents.
E. Corporate Investments and Funds Held for Clients. All of the Company's
marketable securities are considered to be "trading" or "available-for-sale"
and, accordingly, are carried on the Consolidated Balance Sheets at fair value.
The Company's trading securities represent securities that have been either
pledged as collateral to exchanges and clearinghouses or segregated for the
exclusive benefit of our Securities Clearing and Outsourcing Services' customers
to meet regulatory requirements. Unrealized gains and losses on these trading
securities are reflected in revenues, other than interest on funds held for
Employer Services' clients and PEO revenues on the Statements of Consolidated
Earnings. For available-for-sale securities, unrealized gains and losses, net of
the related tax effect, are excluded from earnings and are reported as a
separate component of accumulated other comprehensive income (loss), on the
Consolidated Balance Sheets, until realized. Realized gains and losses from the
sale of available-for-sale securities are determined on a
specific-identification basis and are included in other income, net.
If the market value of any available-for-sale security declines below cost and
it is deemed to be other-than-temporary, an impairment charge is recorded to
earnings for the difference between the carrying amount of the respective
security and the fair value.
Premiums and discounts are amortized or accreted over the life of the related
available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
F. Long-term Receivables. Long-term receivables relate to notes receivable from
the sale of computer systems, primarily to automotive and truck dealerships.
Unearned income from
32
<PAGE>
finance receivables represents the excess of gross receivables over the sales
price of the computer systems financed. Unearned income is amortized using the
effective-interest method to maintain a constant rate of return on the net
investment over the term of each contract.
The allowance for doubtful accounts on long-term receivables is the Company's
best estimate of the amount of probable credit losses in the Company's existing
note receivables.
G. Property, Plant and Equipment. Property, plant and equipment is stated at
cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the term of the lease or the estimated useful lives of the improvements. The
estimated useful lives of assets are primarily as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Data processing equipment 2 to 5 years
- --------------------------------------------------------------------------------
Buildings 20 to 40 years
- --------------------------------------------------------------------------------
Furniture and fixtures 3 to 7 years
- --------------------------------------------------------------------------------
</TABLE>
H. Securities Clearing Receivables and Payables. Receivables from and payables
to clearing customers represent the amounts receivable from and payable to
clearing customers in connection with cash and margin securities transactions.
Receivables from customers are collateralized by securities that are not
reflected on the Consolidated Balance Sheets.
Securities borrowed and loaned represents the amount of cash collateral advanced
or received from other broker-dealers. Securities borrowed and securities loaned
are recorded on the settlement date based upon the amount of cash advanced or
received. The Company takes possession of securities borrowed, monitors the
market value of securities loaned and obtains additional collateral as
appropriate.
I. Goodwill and Other Intangible Assets. The Company accounts for goodwill and
other intangible assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which states
that goodwill and intangible assets with indefinite useful lives should not be
amortized, but instead tested for impairment at least annually at the reporting
unit level. If an impairment exists, a write-down to fair value (normally
measured by discounting estimated future cash flows) is recorded. Intangible
assets with finite lives are amortized primarily on a straight-line basis over
their estimated useful lives and are reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144").
J. Impairment of Long-Lived Assets. In accordance with SFAS No. 144, long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized for the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
K. Foreign Currency Translation. The net assets of the Company's foreign
subsidiaries are translated into U.S. dollars based on exchange rates in effect
at the end of each period, and revenues and expenses are translated at average
exchange rates during the periods. Currency transaction gains or losses, which
are included in the results of operations, are immaterial for all periods
presented. Gains or losses from balance sheet translation are included in
accumulated other comprehensive income (loss) on the Consolidated Balance
Sheets.
L. Earnings Per Share ("EPS"). The calculations of basic and diluted EPS are as
follows:
<TABLE>
<CAPTION>
======================================================================================
Effect of
Zero Coupon Effect of
Subordinated Stock
Years Ended June 30, Basic Notes Options Diluted
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2005
Net earnings $1,055.4 $1.0 $ -- $1,056.4
Weighted average
shares (in millions) 583.2 1.2 5.6 590.0
EPS $ 1.81 $ 1.79
- --------------------------------------------------------------------------------------
2004
Net earnings $ 935.6 $1.4 $ -- $ 937.0
Weighted average
shares (in millions) 591.7 1.5 5.5 598.7
EPS $ 1.58 $ 1.56
- --------------------------------------------------------------------------------------
2003
Net earnings $1,018.2 $1.2 $ -- $1,019.4
Weighted average
shares (in millions) 600.1 1.7 4.1 605.9
EPS $ 1.70 $ 1.68
======================================================================================
</TABLE>
Options to purchase 34.6 million and 36.9 million shares of common stock for
fiscal 2005 and 2004, respectively, were excluded from the calculation of
diluted earnings per share because their exercise prices exceeded the average
market price of outstanding common shares for the fiscal year.
M. Internal Use Software. Expenditures for major software purchases and software
developed or obtained for internal use are capitalized and amortized over a
three- to five-year period on a straight-line basis. For software developed or
obtained for internal use, the Company capitalizes costs in accordance with
33
<PAGE>
the provisions of Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company's policy
provides for the capitalization of external direct costs of materials and
services associated with developing or obtaining internal use computer software.
In addition, the Company also capitalizes certain payroll and payroll-related
costs for employees who are directly associated with internal use computer
software projects. The amount of capitalizable payroll costs with respect to
these employees is limited to the time directly spent on such projects. Costs
associated with preliminary project stage activities, training, maintenance and
all other post-implementation stage activities are expensed as incurred. The
Company also expenses internal costs related to minor upgrades and enhancements,
as it is impractical to separate these costs from normal maintenance activities.
N. Computer Software to be Sold, Leased or Otherwise Marketed. The Company
capitalizes certain costs of computer software to be sold, leased or otherwise
marketed in accordance with the provisions of SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company's policy provides for the capitalization of all software production
costs upon reaching technological feasibility for a specific product.
Technological feasibility is attained when software products have a completed
working model whose consistency with the overall product design has been
confirmed by testing. Costs incurred prior to the establishment of technological
feasibility are expensed as incurred. The establishment of technological
feasibility requires considerable judgment by management and in many instances
is only attained a short time prior to the general release of the software. Upon
the general release of the software product to customers, capitalization ceases
and such costs are amortized over a three-year period on a straight-line basis.
Maintenance-related costs are expensed as incurred.
O. Income Taxes. The provisions for income taxes, income taxes payable and
deferred income taxes are determined using the liability method. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse. A valuation allowance is provided when the Company
determines that it is more likely than not that a portion of the deferred tax
asset balance will not be realized.
P. Fair Value Accounting for Stock Plans. The Company accounts for its stock
options and employee stock purchase plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations, as permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). The value of the
Company's restricted stock awards, based on market prices, is recognized as
compensation expense over the restriction period on a straight-line basis. No
stock-based employee compensation expense related to the Company's stock options
and employee stock purchase plans is reflected in net earnings, as all options
granted under the stock option plans had an exercise price equal to the market
value of the underlying common stock on the date of grant, and for the employee
stock purchase plans, the discount does not exceed fifteen percent.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation. 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. Pro forma compensation expense
for the employee stock purchase plans is recognized over the vesting period on a
straight-line basis. Stock options are issued under a grade vesting schedule and
pro forma compensation expense is recognized over the vesting period for each
separately vested portion of the stock option award.
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 2004 2003
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings, as reported $1,055.4 $ 935.6 $1,018.2
Add: Stock-based employee
compensation expense
included in reported net
earnings, net of
related tax effects 8.9 7.8 6.7
Deduct: Total stock-based
employee compensation
expense determined using
the fair value-based method
for all awards, net of related
tax effects (140.5) (120.4) (129.8)
---------------------------------
Pro forma net earnings $ 923.8 $ 823.0 $ 895.1
---------------------------------
Earnings per share:
Basic - as reported $ 1.81 $ 1.58 $ 1.70
---------------------------------
Basic - pro forma $ 1.58 $ 1.39 $ 1.49
---------------------------------
Diluted - as reported $ 1.79 $ 1.56 $ 1.68
---------------------------------
Diluted - pro forma $ 1.57 $ 1.38 $ 1.48
================================================================================
</TABLE>
34
<PAGE>
The fair value for these instruments was estimated at the date of grant with the
following assumptions:
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 2004 2003
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 2.1%-4.2% 3.9%-4.5% 3.2%-4.1%
Dividend yield 1.2%-1.4% 1.0%-1.1% .8%-.9%
Volatility factor 26.2%-29.2% 29.0%-29.3% 29.5%-31.7%
Expected life (in years):
Stock options 5.5-6.5 6.5 6.4
Stock purchase plans 2.0 2.0 2.0
Weighted average fair value (in dollars):
Stock options $11.38 $13.96 $12.85
Stock purchase plans $12.66 $11.95 $12.94
================================================================================
</TABLE>
See Note 12, Employee Benefit Plans, for additional information relating to the
Company's stock plans.
Q. Reclassification of Prior Financial Statements. Certain reclassifications
have been made to previous years' financial statements to conform to the 2005
presentation.
R. Recently Issued Accounting Pronouncement. In December 2004, the Financial
Accounting Standards Board issued SFAS No. 123R, "Share-Based Payment" ("SFAS
No. 123R"). SFAS No. 123R is effective for the Company's fiscal year beginning
July 1, 2005. Among other things, SFAS No. 123R requires that compensation cost
relating to share-based payment transactions be recognized in the consolidated
financial statements. In Note 1P, the Company has disclosed the pro forma
disclosures regarding the effect on net earnings and earnings per share as if
the Company had applied the fair value method of accounting for stock-based
compensation under SFAS No. 123. Effective July 1, 2005, the Company has adopted
SFAS No. 123R utilizing the modified prospective method. In anticipation of the
adoption of SFAS 123R, the Company reduced the amount of stock options issued in
fiscal 2005 by approximately one-third. Additionally, the Company reviewed and
refined the assumptions utilized in determining its total stock compensation
expense and changed the fair value option-pricing model from the Black-Scholes
model to a binomial model for all options granted after January 1, 2005. The
Company believes that the binomial model is indicative of the stock option's
fair value and considers characteristics that are not taken into account under
the Black-Scholes model. As a result, the Company expects the annualized cost
associated with expensing stock options and the employee stock purchase plan to
be approximately $0.18 - $0.19 per diluted share in fiscal 2006, as compared to
a pro forma impact of $0.22 per diluted share in fiscal 2005, which is disclosed
in Note 1P.
NOTE 2. OTHER INCOME, NET
Other income, net consists of the following:
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 2004 2003
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income on
corporate funds $(94.7) $(79.9) $(119.4)
Interest expense 32.3 16.0 21.8
Realized gains on
available-for-sale securities (10.7) (9.7) (34.5)
Realized losses on
available-for-sale securities 39.2 17.3 5.0
-----------------------------------
Other income, net $(33.9) $(56.3) $(127.1)
================================================================================
</TABLE>
Proceeds from the sales and maturities of available-for-sale securities were
$6,629.1 million, $5,339.3 million, and $4,014.3 million for fiscal 2005, 2004
and 2003, respectively.
NOTE 3. ACQUISITIONS AND DIVESTITURES
Assets acquired and liabilities assumed in business combinations were recorded
on the Company's Consolidated Balance Sheets as of the respective acquisition
dates based upon their estimated fair values at such dates. The results of
operations of businesses acquired by the Company have been included in the
Company's Statements of Consolidated Earnings since their respective dates of
acquisition. The excess of the purchase price over the estimated fair values of
the underlying assets acquired and liabilities assumed was allocated to
goodwill. In certain circumstances, the allocations of the excess purchase price
are based upon preliminary estimates and assumptions. Accordingly, the
allocations are subject to revision when the Company receives final information,
including appraisals and other analyses.
The Company acquired six businesses in fiscal 2005 for approximately $422.7
million, net of cash acquired. These acquisitions resulted in approximately
$189.5 million of goodwill. Intangible assets acquired, which totaled
approximately $36.9 million, consist primarily of software, and customer
contracts and lists that are being amortized over a weighted average life of 9
years. In addition, the Company made $12.2 million of contingent payments
(including $0.5 million in common stock) relating to previously consummated
acquisitions. As of June 30, 2005, the Company had contingent consideration
remaining for all transactions of approximately $62.2 million, which is payable
over the next five years, subject to the acquired entity's achievement of
specified revenue, earnings and/or development targets.
The largest acquisition in fiscal 2005 was the acquisition, on November 1, 2004,
of the U.S. Clearing and BrokerDealer Services divisions of Bank of America
Corporation ("U.S. Clearing and BrokerDealer Business"), which provides
third-party clearing operations. The Company formed the Securities Clearing and
Outsourcing Services segment to report the results
35
<PAGE>
of the acquired business. The acquisition of the U.S. Clearing and BrokerDealer
Business enables the Company to provide execution, clearing, and customer
financing (such as margin lending); securities borrowing to facilitate customer
short sales to clearing clients; and outsourcing services for a variety of
clearing and custody-related functions.
The Company acquired six businesses in fiscal 2004 for approximately $270.3
million, net of cash acquired. These acquisitions resulted in approximately
$185.7 million of goodwill. Intangible assets acquired, which totaled
approximately $88.3 million, consist primarily of software, and customer
contracts and lists that are being amortized over a weighted average life of 9
years. In addition, the Company made contingent payments totaling $25.4 million
(including $0.5 million in common stock) relating to previously consummated
acquisitions.
On June 20, 2003, the Company acquired all of the outstanding common and
preferred stock of ProBusiness Services, Inc. ("ProBusiness") for $17 per common
share and $26 per preferred share. The transaction was consummated in cash for
approximately $516.9 million, net of cash acquired. ProBusiness was a leading
provider of comprehensive payroll and human resource processing solutions to
larger employers within the United States. The acquisition resulted in
approximately $421.7 million of goodwill. Intangible assets acquired, which
totaled approximately $79.8 million, consist of software, customer contracts and
lists, and other intangible assets that are being amortized over a weighted
average life of 8 years.
In addition to the acquisition of ProBusiness in fiscal 2003, the Company also
acquired ten other businesses for approximately $118.3 million, net of cash
acquired. These acquisitions resulted in approximately $90.0 million of
goodwill. Intangible assets acquired of $27.9 million, which consist of
software, customer contracts and lists, and other intangible assets, are being
amortized over a weighted average life of 5 years.
The acquisitions discussed above for fiscal 2005, 2004 and 2003 were not
material, either individually or in the aggregate, to the Company's operations,
financial position or cash flows.
The Company divested two, five and two businesses in fiscal 2005, 2004 and 2003,
respectively, for $17.2 million, $26.9 million and $4.1 million, respectively.
The divestitures of these businesses were not material, either individually or
in the aggregate, to the Company's operations, financial position or cash flows
in fiscal 2005, 2004 and 2003.
NOTE 4. CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS
Corporate investments and funds held for clients at June 30, 2005 and 2004 are
as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
2005 2004
Gross Gross Gross Gross
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of issue:
Money market securities and other cash
equivalents $ 6,810.4 $ -- $ -- $ 6,810.4 $ 2,903.3 $ -- $ -- $ 2,903.3
Trading securities:
U.S. Treasury and direct obligations
of U.S. government agencies 204.7 -- -- 204.7 -- -- -- --
Available-for-sale securities:
U.S. Treasury and direct obligations
of U.S. government agencies 6,573.3 48.2 (30.3) 6,591.2 5,449.7 65.0 (29.1) 5,485.6
Asset backed securities 1,815.2 8.6 (11.3) 1,812.5 2,570.4 22.1 (11.9) 2,580.6
Corporate bonds 2,684.8 8.7 (15.3) 2,678.2 2,342.0 15.1 (16.1) 2,341.0
Canadian government obligations and
Canadian government agency
obligations 894.3 20.5 (0.3) 914.5 765.9 11.9 (2.9) 774.9
Other debt securities 999.5 8.5 (3.8) 1,004.2 899.2 7.1 (5.7) 900.6
Other equity securities 1.5 -- (0.6) 0.9 5.7 4.4 -- 10.1
--------------------------------------------------------------------------------------------
Total available-for-sale securities 12,968.6 94.5 (61.6) 13,001.5 12,032.9 125.6 (65.7) $12,092.8
--------------------------------------------------------------------------------------------
Total corporate investments
and funds held for clients $19,983.7 $94.5 $(61.6) $20,016.6 $14,936.2 $125.6 $(65.7) $14,996.1
====================================================================================================================================
</TABLE>
36
<PAGE>
Classification of investments on the Consolidated Balance Sheets are as follows:
<TABLE>
<CAPTION>
================================================================================
June 30, 2005 2004
- --------------------------------------------------------------------------------
<S> <C> <C>
Corporate investments:
Cash and cash equivalents $ 975.4 $ 713.0
Short-term marketable securities 695.8 416.0
Long-term marketable securities 447.9 963.5
----------------------
Total corporate investments 2,119.1 2,092.5
Funds held for clients 17,897.5 12,903.6
----------------------
Total corporate investments and funds
held for clients $20,016.6 $14,996.1
================================================================================
</TABLE>
The Company's trading securities include $27.9 million that have been pledged as
collateral to exchanges and clearinghouses. These investments can not be pledged
or sold by the exchanges or clearinghouses. Additionally, $176.8 million of
trading securities have been segregated for the exclusive benefit of our
Securities Clearing and Outsourcing Services' customers to meet regulatory
requirements.
At June 30, 2005, approximately 95% of our available-for-sale securities held a
AAA or AA rating, as rated by Moody's, Standard & Poor's and Dominion Bond
Rating Service.
Available-for-sale securities that have been in an unrealized loss position for
a period of less than and greater than 12 months as of June 30, 2005 are as
follows:
<TABLE>
<CAPTION>
=========================================================================================================================
Unrealized Fair market
Unrealized Fair market losses value Total Total
losses value greater greater gross fair
less than less than than than unrealized market
12 months 12 months 12 months 12 months losses value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and direct obligations
of U.S. government agencies $(25.6) $3,137.2 $ (4.7) $ 387.6 $(30.3) $3,524.8
Asset backed securities (7.1) 825.9 (4.2) 354.5 (11.3) 1,180.4
Corporate bonds (8.6) 1,183.1 (6.7) 511.5 (15.3) 1,694.6
Canadian government obligations and
Canadian government agency obligations (0.2) 123.6 (0.1) 16.4 (0.3) 140.0
Other debt securities (1.3) 216.1 (2.5) 160.9 (3.8) 377.0
Other equity securities (0.6) 0.9 -- -- (0.6) 0.9
--------------------------------------------------------------------------
$(43.4) $5,486.8 $(18.2) $1,430.9 $(61.6) $6,917.7
=========================================================================================================================
</TABLE>
The Company believes the available-for-sale securities that have fair values
below cost are not other-than-temporarily impaired since it is probable that
principal and interest will be collected in accordance with the applicable
contractual terms and the Company has the ability and intent to hold the
available-for-sale securities until maturity.
Expected maturities of available-for-sale securities at June 30, 2005 are as
follows:
<TABLE>
<CAPTION>
Maturity Dates:
================================================================================
<S> <C>
Due in one year or less $ 2,874.0
Due after one year through two years 2,794.7
Due after two years through three years 2,300.6
Due after three years through four years 2,033.6
Due after four years through ten years 2,998.6
---------
Total available-for-sale securities $13,001.5
================================================================================
</TABLE>
NOTE 5. RECEIVABLES
Accounts receivable is net of an allowance for doubtful accounts of $45.7
million and $51.0 million at June 30, 2005 and 2004, respectively.
The Company's receivables for the financing of the sale of computer systems,
most of which are due from automotive, heavy truck and powersports dealers, are
reflected on the Consolidated Balance Sheets as follows:
<TABLE>
<CAPTION>
===============================================================================
June 30, 2005 2004
- -------------------------------------------------------------------------------
Current Long-term Current Long-term
<S> <C> <C> <C> <C>
Receivables $153.3 $210.9 $151.8 $222.1
Less:
Allowance for
doubtful accounts (5.0) (8.2) (5.3) (8.6)
Unearned income (16.9) (15.8) (18.1) (16.7)
------------------------------------------
$131.4 $186.9 $128.4 $196.8
===============================================================================
</TABLE>
Long-term receivables at June 30, 2005 mature as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
2007 $107.7
2008 60.7
2009 32.8
2010 9.0
2011 0.6
Thereafter 0.1
------
$210.9
================================================================================
</TABLE>
37
<PAGE>
NOTE 6. SECURITIES CLEARING AND OUTSOURCING SERVICES
Securities clearing receivables and payables consist of the following as of June
30, 2005:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Receivables:
Clearing customers $473.3
Securities borrowed 122.3
Broker-dealers and other 148.1
Clearing organizations 87.0
Securities failed to deliver 134.5
------
Total $965.2
================================================================================
Payables:
Clearing customers $454.2
Securities loaned 117.3
Broker-dealers and other 114.5
Securities failed to receive 59.2
------
Total $745.2
================================================================================
</TABLE>
Securities failed to deliver and failed to receive represent the contract value
of securities that have not been delivered or received as of the settlement
date. Securities failed to receive transactions are recorded at the amount for
which the securities were purchased, and are paid upon receipt of the securities
from other brokers or dealers. In the case of aged securities failed to receive,
the Company may purchase the underlying security in the market and seek
reimbursement for losses from the counterparty.
As of June 30, 2005, the Company had received collateral, primarily in
connection with securities borrowed and customer margin loans, with a market
value of approximately $1,477.5 million, which it can sell or repledge. Of this
amount, approximately $571.8 million had been pledged or sold as of June 30,
2005 in connection with securities loaned and deposits with clearing
organizations.
The Securities Clearing and Outsourcing Services segment is comprised of one
subsidiary, which is subject to the Uniform Net Capital Rule of the Securities
and Exchange Commission. At June 30, 2005, the aggregate net capital of such
subsidiary was $221.3 million, exceeding the net capital requirement by $207.1
million. This subsidiary has secured unlimited Securities Industry Protection
Corporation ("SIPC") insurance coverage for its customers. Under the terms of
the unlimited SIPC insurance coverage, this subsidiary is required to maintain
aggregate net capital of $200.0 million.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost and accumulated depreciation at June 30,
2005 and 2004 are as follows:
<TABLE>
<CAPTION>
===============================================================================
June 30, 2005 2004
- -------------------------------------------------------------------------------
<S> <C> <C>
Property, plant and equipment:
Land and buildings $ 540.4 $ 513.7
Data processing equipment 681.9 645.6
Furniture, leaseholds and other 603.1 552.2
----------------------
1,825.4 1,711.5
----------------------
Less: Accumulated depreciation (1,140.6) (1,069.1)
----------------------
Property, plant and equipment, net $ 684.8 $ 642.4
===============================================================================
</TABLE>
NOTE 8. GOODWILL AND INTANGIBLE ASSETS, NET
Changes in goodwill for the fiscal year ended June 30, 2005 are as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Securities
Clearing and
Employer Brokerage Dealer Outsourcing
Services Services Services Services Other Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 2004 $1,314.6 $366.3 $324.1 $ -- $190.5 $2,195.5
Additions 5.0 1.8 31.6 129.1 28.9 196.4
Sale of businesses -- -- (1.4) -- -- (1.4)
Cumulative translation adjustments 14.4 0.7 0.3 -- 2.6 18.0
----------------------------------------------------------------------------
Balance as of June 30, 2005 $1,334.0 $368.8 $354.6 $129.1 $222.0 $2,408.5
===================================================================================================================================
</TABLE>
During fiscal 2005, 2004 and 2003, the Company performed the required impairment
tests of goodwill and determined that there was no impairment.
Components of intangible assets are as follows:
<TABLE>
<CAPTION>
===============================================================================
June 30, 2005 2004
- -------------------------------------------------------------------------------
<S> <C> <C>
Intangibles:
Software and software licenses $ 818.3 $ 729.4
Customer contracts and lists 690.2 594.9
Other intangibles 332.2 391.9
----------------------
1,840.7 1,716.2
Less: Accumulated amortization (1,105.9) (979.9)
----------------------
Intangible assets, net $ 734.8 $ 736.3
===============================================================================
</TABLE>
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 10 years (4 years for
software and software licenses, 13 years for customer contracts and lists, and
11 years for other intangibles). Amortization of intangibles totaled $147.5
million, $145.1 million and $114.2 million for fiscal 2005, 2004 and 2003,
respectively.
38
<PAGE>
Estimated amortization expenses of the Company's existing intangible assets for
the next five fiscal years are as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
2006 $144.7
2007 $123.4
2008 $ 95.1
2009 $ 56.6
2010 $ 50.5
================================================================================
</TABLE>
NOTE 9. SHORT-TERM FINANCING
In June 2005, the Company entered into a $1.25 billion, 364-day credit agreement
and a $1.5 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 $2.0 billion, subject to the
availability of additional commitments. These facilities replaced the Company's
prior $2.25 billion, 364-day facility, which terminated on June 29, 2005. The
$1.25 billion and $1.5 billion agreements mature in June 2006 and June 2010,
respectively. The Company also has a $2.25 billion credit facility that matures
in June 2009. 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 at June 30, 2005 or June 30, 2004 under the credit agreements.
The Company maintains a U.S. short-term commercial paper program providing for
the issuance of up to $4.5 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 June 30, 2005 and 2004, there was
no commercial paper outstanding. For both fiscal 2005 and 2004, the Company's
average borrowings were $1.0 billion at a weighted average interest rate of 2.1%
and 1.0%, respectively. The weighted average maturity of the Company's
commercial paper during fiscal 2005 and 2004 was less than two days for both
fiscal years.
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 June 30, 2005 and 2004, there
were no outstanding repurchase agreements. For fiscal 2005 and 2004, the Company
had an average outstanding balance of $321.2 million and $32.0 million,
respectively, at an average interest rate of 1.9% and 1.8%, respectively.
NOTE 10. DEBT
Components of long-term debt are as follows:
<TABLE>
<CAPTION>
===============================================================================
June 30, 2005 2004
- -------------------------------------------------------------------------------
<S> <C> <C>
Zero coupon convertible subordinated
notes (5.25% yield) $31.7 $31.9
Industrial revenue bonds
(with variable interest rates from
2.45% to 2.95%) 36.5 36.5
Other 7.8 8.3
---------------
76.0 76.7
Less: Current portion (0.2) (0.5)
---------------
$75.8 $76.2
===============================================================================
</TABLE>
The zero coupon convertible subordinated notes have a face value of
approximately $16.0 million at June 30, 2005 and mature February 20, 2012,
unless converted or redeemed earlier. At June 30, 2005, the notes were
convertible into approximately 1.2 million shares of the Company's common stock.
The notes are callable at the option of the Company, and the holders of the
notes can convert into common stock at any time or require redemption in fiscal
2007. During fiscal 2005 and 2004, approximately $1.0 million and $5.1 million
face value of notes were converted, respectively. As of June 30, 2005 and 2004,
the quoted market prices for the zero coupon notes were approximately $48.9
million and $51.9 million, respectively. The fair value of the industrial
revenue bonds and other debt, included above, approximates carrying value.
Long-term debt repayments at June 30, 2005 are due as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
2007 $ 0.3
2008 0.3
2009 16.4
2010 --
2011 --
Thereafter 58.8
-----
$75.8
================================================================================
</TABLE>
Cash payments relating to interest were approximately $25.7 million, $13.9
million and $20.0 million in fiscal 2005, 2004 and 2003, respectively.
NOTE 11. FUNDS HELD FOR CLIENTS AND CLIENT FUNDS OBLIGATIONS
As part of its integrated payroll and payroll tax filing services, the Company
impounds funds for federal, state and local employment taxes from approximately
401,000 clients; handles regulatory payroll tax filings, correspondence,
amendments, and penalty and interest disputes; remits the funds to the
appropriate tax agencies; and handles other employer-related services. In
addition to fees paid by clients for these services, the Company receives
interest during the interval between the receipt and
39
<PAGE>
disbursement of these funds by investing the funds primarily in fixed-income
instruments. The amount of collected but not yet remitted funds for the
Company's payroll and payroll tax filing and other services varies significantly
during the fiscal year, and averaged approximately $12,263.9 million, $11,086.8
million and $8,936.8 million in fiscal 2005, 2004 and 2003, respectively.
NOTE 12. EMPLOYEE BENEFIT PLANS
A. Stock Plans. The Company has stock option plans which provide for the
issuance, to eligible employees, of incentive and non-qualified stock options,
which may expire as much as 10 years from the date of grant, at prices not less
than the fair market value on the date of grant. At June 30, 2005, there were
11,537 participants in the stock option plans. The aggregate purchase price for
options outstanding at June 30, 2005 was approximately $2,972.9 million. The
options expire at various points between fiscal 2006 and fiscal 2015.
A summary of changes in the stock option plans for the three fiscal years ended
June 30, 2005 is as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
Number of Options Weighted Average Price
(in thousands) (in dollars)
====================================================================================================================================
Years Ended June 30, 2005 2004 2003 2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 70,159 60,958 50,843 $42 $41 $41
Options granted 8,698 18,080 15,867 $43 $41 $37
Options exercised (4,012) (4,557) (2,588) $28 $24 $19
Options canceled (4,450) (4,322) (3,164) $45 $46 $48
------------------------------
Options outstanding, end of year 70,395 70,159 60,958 $42 $42 $41
------------------------------
Options exercisable, end of year 36,992 32,140 27,617 $42 $40 $36
------------------------------
Shares available for future grants, end of year 18,183 22,431 1,189
------------------------------
Shares reserved for issuance under stock option plans 88,578 92,590 62,147
====================================================================================================================================
</TABLE>
Summarized information about stock options outstanding as of June 30, 2005 is as
follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Outstanding Exercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Exercise Number Remaining Average Number Average
Price of Options Life Price of Options Price
Range (in thousands) (in years) (in dollars) (in thousands) (in dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under $15 42 1.7 $12 42 $12
$15 to $25 3,075 1.2 $21 3,060 $21
$25 to $35 10,129 5.7 $32 6,778 $31
$35 to $45 35,016 7.3 $41 13,726 $41
$45 to $55 17,340 6.8 $49 9,685 $50
Over $55 4,793 5.2 $60 3,701 $60
===================================================================================================================================
</TABLE>
The Company has stock purchase plans under which eligible employees have the
ability to purchase shares of common stock at 85% of the lower of market value
as of the date of purchase election or as of the end of the stock purchase
plans. Approximately 3.0 million and 2.8 million shares are scheduled for
issuance on December 31, 2006 and 2005, respectively. Approximately 2.8 million
and 1.9 million shares were issued during fiscal 2005 and 2004, respectively. At
June 30, 2005 and 2004, there were approximately 5.8 million and 8.0 million
shares, respectively, reserved for purchase under the stock purchase plans. As
of June 30, 2005 and 2004, employee stock purchase plan withholdings of $62.8
million and $63.2 million, respectively, are included in accrued expenses and
other current liabilities, and $25.4 million and $26.0 million, respectively,
are included in other non-current liabilities on our Consolidated Balance
Sheets.
The Company has a restricted stock plan under which shares of common stock have
been sold for nominal consideration to certain key employees. These shares are
restricted as to transfer and in certain circumstances must be resold to the
Company at the original purchase price. The 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 six years. During fiscal
2005, 2004 and 2003, the Company issued 335 thousand, 393 thousand and 221
thousand restricted shares, respectively.
B. Pension Plans.
The Company has a defined benefit cash balance pension plan covering
substantially all U.S. employees, under which employees are credited with a
percentage of base pay plus interest. The plan interest credit rate will vary
from year-to-year based on the ten-year U.S. Treasury rate.
40
<PAGE>
Employees are fully vested on completion of five years of service. The Company's
policy is to make contributions within the range determined by generally
accepted actuarial principles. In addition, the Company has various retirement
plans for its non-U.S. employees and maintains a Supplemental Officer Retirement
Plan ("SORP"). The SORP is a defined benefit plan pursuant to which the Company
will pay supplemental pension benefits to certain key officers upon retirement
based upon the officers' years of service and compensation.
A June 30 measurement date was used in determining the Company's benefit
obligations and fair value of plan assets.
The Company's pension plans funded status as of June 30, 2005 and 2004 is as
follows:
<TABLE>
<CAPTION>
===============================================================================
June 30, 2005 2004
- -------------------------------------------------------------------------------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $678.0 $553.2
Acquisitions 22.2 --
Actual return on plan assets 56.2 81.8
Employer contributions 48.1 59.5
Benefits paid (14.4) (16.5)
------------------
Fair value of plan assets at end of year $790.1 $678.0
==================
Change in benefit obligation:
Benefit obligation at beginning of year $636.7 $593.4
Acquisitions 26.4 --
Service cost 30.6 23.0
Interest cost 39.0 33.7
Actuarial and other losses 68.8 3.1
Benefits paid (14.4) (16.5)
------------------
Projected benefit obligation at end of year $787.1 $636.7
==================
Funded status--plan assets less
benefit obligations $ 3.0 $ 41.3
Unrecognized net actuarial loss due to
different experience than assumed 296.2 240.7
------------------
Prepaid pension cost $299.2 $282.0
===============================================================================
</TABLE>
The accumulated benefit obligation for all defined benefit pension plans was
$778.9 million and $629.0 million at June 30, 2005 and 2004, respectively. The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets for the Company's pension plans with accumulated benefit obligations
in excess of plan assets were $109.9 million, $104.6 million and $49.7 million,
respectively, as of June 30, 2005, and $70.1 million, $65.0 million and $22.8
million, respectively, as of June 30, 2004.
The components of net pension expense were as follows:
<TABLE>
<CAPTION>
===============================================================================
Years Ended June 30, 2005 2004 2003
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned
during the period $ 30.6 $ 23.0 $ 25.6
Interest cost on projected benefits 39.0 33.7 31.2
Expected return on plan assets (54.0) (50.5) (50.5)
Net amortization and deferral 11.1 10.2 1.1
------------------------------
$ 26.7 $ 16.4 $ 7.4
===============================================================================
</TABLE>
Assumptions used to determine the actuarial present value of benefit obligations
generally were:
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 2004
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 5.25% 6.00%
Increase in compensation levels 6.00% 6.00%
================================================================================
</TABLE>
Assumptions used to determine the net pension expense generally were:
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 2004
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 6.00% 5.75%
Expected long-term rate of return on assets 7.25% 7.25%
Increase in compensation levels 6.00% 6.00%
================================================================================
</TABLE>
The discount rate is based upon published rates for high-quality fixed-income
investments that produce cash flows that approximate the timing and amount of
expected future benefit payments.
The long-term expected rate of return on assets assumption is 7.25%. This
percentage has been determined based on historical and expected future rates of
return on plan assets considering the target asset mix and the long-term
investment strategy.
Plan Assets
The Company's pension plans' weighted average asset allocations at June 30, 2005
and 2004, by asset category were as follows:
<TABLE>
<CAPTION>
================================================================================
2005 2004
- --------------------------------------------------------------------------------
<S> <C> <C>
United States Fixed Income Securities 35% 31%
United States Equity Securities 48% 54%
International Equity Securities 17% 15%
-------------------
Total 100% 100%
================================================================================
</TABLE>
The Company's pension plans' asset investment strategy is designed to ensure
prudent management of assets, consistent with long-term return objectives and
the prompt fulfillment of all pension plan obligations. The investment strategy
and asset mix were developed in coordination with an asset liability study
conducted by external consultants to maximize the funded ratio with the least
amount of volatility.
41
<PAGE>
The pension plans' assets are currently invested in various asset classes with
differing expected rates of return, correlations and volatilities including
large capitalization and small capitalization U.S. equities, international
equities, and U.S. fixed income securities and cash.
The target asset allocation ranges are as follows:
<TABLE>
================================================================================
<S> <C>
United States Fixed Income Securities 30-40%
United States Equity Securities 45-55%
International Equity Securities 12-20%
Total Equities 60-70%
================================================================================
</TABLE>
The pension plans' fixed income portfolio is designed to match the duration and
liquidity characteristics of the pension plans' liabilities. In addition, the
pension plans invest only in investment-grade debt securities to ensure
preservation of capital. The pension plans' equity portfolios are subject to
diversification guidelines to reduce the impact of losses in single investments.
Investment managers are prohibited from buying or selling commodities and from
the short selling of securities.
None of the pension plans' assets are directly invested in the Company's stock,
although the pension plans may hold a minimal amount of Company stock to the
extent of the Company's participation in the S&P 500 Index.
Contributions
The minimum required contributions to the Company's pension plans is $3.0
million in fiscal 2006; however, the Company expects to contribute approximately
$25.0 million.
Estimated Future Benefit Payments
The benefits expected to be paid in each year from fiscal 2006 to 2010 are $21.0
million, $25.8 million, $26.8 million, $33.8 million and $30.8 million,
respectively. The aggregate benefits expected to be paid in the five fiscal
years from 2011 to 2015 are $324.8 million. The expected benefits to be paid are
based on the same assumptions used to measure the Company's pension plans'
benefit obligation at June 30, 2005 and include estimated future employee
service.
C. Retirement and Savings Plan. The Company has a 401(k) retirement and savings
plan, which allows eligible employees to contribute up to 35% of their
compensation annually and allows highly compensated employees to contribute up
to 10% of their compensation annually. The Company matches a portion of employee
contributions, which amounted to approximately $40.2 million, $34.6 million and
$33.9 million for calendar years ending December 31, 2004, 2003 and 2002,
respectively.
NOTE 13. INCOME TAXES
Earnings before income taxes shown below are based on the geographic location to
which such earnings are attributable.
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 2004 2003
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings before income taxes:
United States $1,438.3 $1,307.5 $1,474.9
Foreign 239.6 187.0 170.3
------------------------------------------
$1,677.9 $1,494.5 $1,645.2
================================================================================
</TABLE>
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
===============================================================================
Years Ended June 30, 2005 2004 2003
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $468.8 $350.3 $496.9
Foreign 87.2 78.4 84.2
State 47.6 21.1 61.7
---------------------------------------
Total current 603.6 449.8 642.8
---------------------------------------
Deferred:
Federal 16.0 100.1 0.4
Foreign 1.0 (13.7) (16.4)
State 1.9 22.7 0.2
---------------------------------------
Total deferred 18.9 109.1 (15.8)
---------------------------------------
Total provision $622.5 $558.9 $627.0
===============================================================================
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S. federal
statutory rate is as follows:
<TABLE>
<CAPTION>
================================================================================
Years Ended June 30, 2005 % 2004 % 2003 %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for taxes
at U.S. statutory rate $587.3 35.0 $523.1 35.0 $575.8 35.0
Increase (decrease)
in provision from:
State taxes, net
of federal tax benefit 32.2 1.9 28.5 1.9 40.2 2.4
Other 3.0 0.2 7.3 0.5 11.0 0.7
--------------- --------------- -------------
$622.5 37.1 $558.9 37.4 $627.0 38.1
================================================================================
</TABLE>
42
<PAGE>
The significant components of deferred income tax assets and liabilities and
their balance sheet classifications are as follows:
<TABLE>
<CAPTION>
===============================================================================
June 30, 2005 2004
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible $221.0 $190.6
Net operating losses 34.1 45.9
Other 12.8 30.1
-------------------
267.9 266.6
Less: Valuation allowances (32.5) (25.9)
-------------------
Deferred tax assets -- net $235.4 $240.7
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized investment gains, net $ 12.2 $ 22.4
Accrued retirement benefits 114.3 112.3
Depreciation and amortization 299.7 275.8
Other 45.1 47.3
-------------------
Deferred tax liabilities $471.3 $457.8
-------------------
Net deferred tax liabilities $235.9 $217.1
===============================================================================
</TABLE>
There are $72.5 million and $84.0 million of current deferred tax assets
included in other current assets on the Consolidated Balance Sheets at June 30,
2005 and 2004, respectively. There are $1.4 million of long-term deferred tax
assets included in other assets on the Consolidated Balance Sheets at June 30,
2005. There are $19.3 million and $17.3 million of current deferred tax
liabilities included in accrued expenses and other current liabilities on the
Consolidated Balance Sheets at June 30, 2005 and 2004, respectively.
Income taxes have not been provided on undistributed earnings of foreign
subsidiaries as the Company considers such earnings to be permanently reinvested
as of June 30, 2005 and 2004.
The Company has estimated domestic and foreign net operating loss carry forwards
of approximately $17.5 million and $76.5 million, respectively, at June 30,
2005.
The Company has recorded valuation allowances of $32.5 million and $25.9 million
at June 30, 2005 and 2004, respectively, to reflect the estimated amount of
domestic and foreign deferred tax assets that may not be realized. A portion of
the valuation allowances in the amounts of approximately $2.1 million and $3.4
million at June 30, 2005 and 2004, respectively, relate to net deferred tax
assets which were recorded in purchase accounting. Any recognition of such
amounts in future years will be a reduction to goodwill.
Income tax payments were approximately $490.1 million, $539.1 million and $686.3
million for fiscal 2005, 2004 and 2003, respectively.
On October 22, 2004, the American Jobs Creation Act (the "AJCA") was signed into
law. The AJCA includes a deduction of 85% of certain foreign earnings that are
repatriated, as defined in the AJCA. The Company may elect to apply this
provision to qualifying earnings repatriations in fiscal 2006. The Company is
continuing to evaluate the effects of the repatriation provision. The range of
possible amounts that the Company could repatriate under this provision is
between zero and $500 million. The related potential range of income tax is
between zero and $35 million.
The Company is routinely examined by the Internal Revenue Service (the "IRS")
and tax authorities in countries in which it conducts business, as well as
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 in fiscal 2006.
The Company also expects several state examinations to be completed in 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 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.
NOTE 14. CONTRACTUAL COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET
ARRANGEMENTS
The Company has obligations under various facilities and equipment
leases and software license agreements. Total expense under these agreements was
approximately $321.8 million, $317.5 million and $319.2 million in fiscal 2005,
2004 and 2003, respectively, with minimum commitments at June 30, 2005 as
follows:
<TABLE>
<CAPTION>
================================================================================
Years Ending June 30,
- --------------------------------------------------------------------------------
<S> <C>
2006 285.8
2007 226.8
2008 181.8
2009 137.1
2010 108.5
Thereafter 144.1
--------
$1,084.1
================================================================================
</TABLE>
In addition to fixed rentals, certain leases require payment of maintenance and
real estate taxes and contain escalation provisions based on future adjustments
in price indices.
As of June 30, 2005, the Company has purchase commitments of approximately
$205.5 million relating to software and equipment purchases and maintenance
contracts, of which $134.3 million
43
<PAGE>
relates to fiscal 2006, $43.7 million relates to fiscal 2007 and the remaining
$27.5 million relates to fiscal 2008 through fiscal 2010.
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, in the normal course of business, the Company does enter
into contracts in which it makes representations and warranties that guarantee
the performance of the Company's products and services. Historically, there have
been no material losses related to such guarantees. The Company also has
provisions within certain contracts that require the Company to make future
payments if specific conditions occur. The maximum potential payments under
these contracts are not material to the consolidated financial statements.
The Company is a member of numerous exchanges and clearinghouses. Under the
membership agreements, members are generally required to guarantee the
performance of other members. Additionally, if a member becomes unable to
satisfy its obligations to the clearinghouse, other members would be required to
meet these shortfalls. To mitigate these performance risks, the exchanges and
clearinghouses often require members to post collateral. The Company's maximum
potential liability under these arrangements cannot be quantified. However, the
Company believes that it is unlikely that the Company will be required to make
payments under these arrangements. Accordingly, no contingent liability is
recorded in the consolidated financial statements for these arrangements.
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is a measure of income that includes both net earnings and
other comprehensive income (loss). Other comprehensive income (loss) results
from items deferred on the balance sheet in stockholders' equity. Other
comprehensive income (loss) was $33.5 million, $(178.3) million and $277.1
million in fiscal 2005, 2004 and 2003, respectively. The accumulated balances
for each component of other comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
===============================================================================
June 30, 2005 2004 2003
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Currency translation adjustments $ 0.1 $(52.4) $(69.5)
Unrealized gain on
available-for-sale securities,
net of tax 20.7 37.5 233.8
Minimum pension liability
adjustment, net of tax (6.8) (4.6) (5.5)
------------------------------
Accumulated other
comprehensive income (loss) $14.0 $(19.5) $158.8
===============================================================================
</TABLE>
NOTE 16. FINANCIAL DATA BY SEGMENT
The Company manages its business operations through strategic business units and
provides technology-based outsourcing solutions to employers, the brokerage and
financial services community, vehicle retailers and manufacturers, and the
property and casualty insurance, auto collision repair and auto recycling
industries. Based upon similar economic characteristics and operational
characteristics, the Company's strategic business units are aggregated into the
following four reportable segments: Employer Services, Brokerage Services,
Dealer Services, and Securities Clearing and Outsourcing Services. The primary
components of "Other" are Claims Services, miscellaneous processing services,
and corporate allocations and expenses. 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 fiscal 2004 and 2003 reportable segments' revenues and earnings before
income taxes have been adjusted to reflect updated fiscal 2005 budgeted foreign
exchange rates. In addition, Employer Services' fiscal 2003 revenues and
earnings before income taxes were adjusted to include interest income earned on
funds held for clients at a standard rate of 4.5%. Prior to fiscal 2004,
Employer Services was credited with interest earned on client funds at 6.0%.
Given the decline in interest rates, the standard rate was changed to 4.5%. The
reportable segments' results also include an internal cost of capital charge
related to the funding of acquisitions and other investments. All of these
adjustments/charges are eliminated in consolidation and as such represent
reconciling items to earnings before income taxes. Reportable segments' assets
include funds held for clients, but exclude corporate cash, corporate marketable
securities and goodwill.
44
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Reconciling Items
Securities -----------------------------
Clearing and Client Cost of
Employer Brokerage Dealer Outsourcing Foreign Fund Capital
Services Services Services Services Other Exchange Interest Charge Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended June 30, 2005
Revenues $ 5,199.9 $1,749.8 $979.8 $ 61.5 $ 481.8 $152.7 $(126.4) -- $ 8,499.1
Earnings before income taxes $ 1,143.8 $ 294.3 $142.8 $ (23.6) $ 73.1 $ 29.4 $(126.4) $ 144.5 $ 1,677.9
Assets $19,483.3 $ 668.2 $486.3 $1,248.3 $5,729.3 -- -- -- $27,615.4
Capital expenditures $ 104.8 $ 34.0 $ 34.7 $ -- $ 29.3 -- -- -- $ 202.8
Depreciation and amortization $ 251.0 $ 76.3 $ 57.9 $ 9.5 $ 54.2 -- -- $(144.5) $ 304.4
--------------------------------------------------------------------------------------------------
Year ended June 30, 2004
Revenues $ 4,812.9 $1,666.0 $889.8 -- $ 477.5 $ 49.2 $(140.5) -- $ 7,754.9
Earnings before income taxes $ 994.1 $ 244.6 $143.4 -- $ 111.4 $ 7.2 $(140.5) $ 134.3 $ 1,494.5
Assets $14,406.8 $ 610.7 $434.0 -- $5,669.1 -- -- -- $21,120.6
Capital expenditures $ 95.7 $ 36.4 $ 33.9 -- $ 38.1 -- -- -- $ 204.1
Depreciation and amortization $ 246.2 $ 85.7 $ 50.5 -- $ 58.7 -- -- $(134.3) $ 306.8
--------------------------------------------------------------------------------------------------
Year ended June 30, 2003
Revenues $ 4,393.6 $1,611.9 $814.1 -- $ 461.9 $(93.3) $ (41.2) -- $ 7,147.0
Earnings before income taxes $ 1,070.0 $ 232.0 $135.7 -- $ 153.8 $(14.1) $ (41.2) $ 109.0 $ 1,645.2
Assets $13,255.5 $ 556.3 $350.6 -- $5,671.3 -- -- -- $19,833.7
Capital expenditures $ 63.9 $ 23.8 $ 26.2 -- $ 19.9 -- -- -- $ 133.8
Depreciation and amortization $ 191.0 $ 94.9 $ 49.8 -- $ 48.0 -- -- $(109.0) $ 274.7
====================================================================================================================================
</TABLE>
Revenues and assets by geographic area are as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
United
States Europe Canada Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 2005
Revenues $ 7,000.9 $ 988.9 $ 413.1 $ 96.2 $ 8,499.1
Assets $23,936.4 $1,765.2 $1,731.3 $182.5 $27,615.4
--------------------------------------------------------------------------
Year ended June 30, 2004
Revenues $ 6,449.3 $ 880.5 $ 354.5 $ 70.6 $ 7,754.9
Assets $17,591.1 $1,661.7 $1,719.4 $148.4 $21,120.6
--------------------------------------------------------------------------
Year ended June 30, 2003
Revenues $ 6,016.1 $ 774.8 $ 292.1 $ 64.0 $ 7,147.0
Assets $16,840.8 $1,475.4 $1,391.2 $126.3 $19,833.7
====================================================================================================================================
</TABLE>
NOTE 17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results of operations for the two fiscal years ended June
30, 2005 are as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 30, 2005
Revenues $1,854.7 $1,993.6 $2,349.0 $2,301.8
Net earnings $ 208.2 $ 250.1 $ 338.4 $ 258.7
Basic earnings per share $ .36 $ .43 $ .58 $ .44
Diluted earnings per share $ .35 $ .42 $ .57 $ .44
--------------------------------------------------------------------
Year ended June 30, 2004
Revenues $1,720.3 $1,827.4 $2,121.4 $2,085.8
Net earnings $ 194.9 $ 228.6 $ 300.2 $ 211.9
Basic earnings per share $ .33 $ .39 $ .51 $ .36
Diluted earnings per share $ .32 $ .38 $ .50 $ .36
====================================================================================================================================
</TABLE>
45
<PAGE>
Management Report on Internal Control over Financial Reporting
It is the responsibility of Automatic Data Processing, Inc.'s ("ADP") management
to establish and maintain effective internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934).
Internal control over financial reporting is designed to provide reasonable
assurance to ADP's management and board of directors regarding the preparation
of reliable financial statements for external purposes in accordance with
generally accepted accounting principles.
ADP's internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of ADP; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
ADP are being made only in accordance with authorizations of management and
directors of ADP; and (iii) provide reasonable assurance regarding the
prevention or timely detection of unauthorized acquisition, use or disposition
of ADP's assets that could have a material effect on the financial statements of
ADP.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management has performed an assessment of the effectiveness of ADP's internal
control over financial reporting as of June 30, 2005 based upon criteria set
forth in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management determined that ADP's internal control over financial reporting was
effective as of June 30, 2005.
Management has excluded from its assessment of internal control over financial
reporting at June 30, 2005 its subsidiary, ADP Clearing and Outsourcing
Services, Inc., which holds all the assets of the Securities Clearing and
Outsourcing Services segment that was formed as a result of an acquisition on
November 1, 2004. ADP Clearing and Outsourcing Services, Inc. represents 1% and
5% of ADP's consolidated total revenues and consolidated total assets,
respectively, for the year ended June 30, 2005.
Deloitte & Touche LLP, an independent registered public accounting firm, has
issued an attestation report on management's assessment of the internal control
over financial reporting, which attestation report appears herein.
/s/ Arthur F. Weinbach
- ----------------------
Arthur F. Weinbach
Chairman and Chief Executive Officer
/s/ Karen E. Dykstra
- ----------------------
Karen E. Dykstra
Chief Financial Officer
Roseland, New Jersey
August 17, 2005
<PAGE>
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the accompanying consolidated balance sheets of Automatic Data
Processing, Inc. and subsidiaries ("the Company") as of June 30, 2005 and 2004,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 2005. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Automatic Data Processing, Inc. and
subsidiaries at June 30, 2005 and 2004, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2005,
in conformity with accounting principles generally accepted in the United States
of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of June 30, 2005, based on the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated August 17, 2005 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ Deloitte & Touche LLP
- ---------------------------
New York, New York
August 17, 2005
46
<PAGE>
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Automatic Data
Processing, Inc. and subsidiaries (the "Company" or "ADP") maintained effective
internal control over financial reporting as of June 30, 2005, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in
Management's Report on Internal Control Over Financial Reporting, management
excluded from their assessment the internal control over financial reporting of
the business of ADP Clearing and Outsourcing Services, Inc., which business was
acquired on November 1, 2004 and whose financial statements reflect total assets
and revenues constituting 5 and 1 percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended June 30,
2005. Accordingly, our audit did not include the internal control over financial
reporting at ADP Clearing and Outsourcing Services, Inc. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of June 30, 2005, is fairly stated,
in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
June 30, 2005, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended June 30, 2005 of the Company, and our
report dated August 17, 2005 expressed an unqualified opinion on those
consolidated financial statements.
/s/ Deloitte & Touche LLP
- --------------------------
New York, New York
August 17, 2005
47
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>exhibit21.txt
<DESCRIPTION>LIST OF SUBSIDIARIES
<TEXT>
EXHIBIT 21
Jurisdiction of
Name of Subsidiary Incorporation
------------------ ---------------
71 Hanover Florham Park Associates LLC New Jersey
ABZ Group B.V. Netherlands
ABZ Nederland B.V. Netherlands
ADP Atlantic, Inc. Delaware
ADP Belgium CVA Belgium
ADP Brasil Ltda. Brazil
ADP Broker-Dealer, Inc. New Jersey
ADP Brokerage International Limited United Kingdom
ADP Canada Co. Canada
ADP Central, Inc. Delaware
ADP Claims Services Group, Inc. Delaware
ADP Clearing and Outsourcing Services, Inc. Delaware
ADP Commercial Leasing, LLC Delaware
ADP Dealer Services Deutschland GmbH Germany
ADP Dealer Services France SAS France
ADP Dealer Services Italia s.r.l. Italy
ADP East, Inc. Delaware
ADP Employer Services GmbH Germany
ADP Europe S.A. France
ADP France SAS France
ADP Financial Information Services, Inc. Delaware
ADP Graphic Communications, Inc. New Jersey
ADP GSI Espana S.A. Spain
ADP GSI France SAS France
ADP Hollander, Inc. Delaware
ADP, Inc. Delaware
ADP Indemnity, Inc. Vermont
ADP Investor Communication Services, Inc. Delaware
ADP Investor Communications Corporation Canada
ADP Nederland B.V. Netherlands
ADP Network Services International, Inc. Delaware
ADP Network Services Limited United Kingdom
ADP of North America, Inc. Delaware
ADP of Roseland, Inc. Delaware
ADP Output Services, Inc. Delaware
ADP Pacific, Inc. Delaware
ADP Payroll Services, Inc. Delaware
ADP Screening and Selection Services, Inc. Colorado
ADP South, Inc. Delaware
ADP Tax Services, Inc. Delaware
ADP TotalSource Group, Inc. Florida
ADP Wilco Ltd. United Kingdom
Audatex GmbH Switzerland
Audatex Holding GmbH Switzerland
Audatex Deutschland Datenverarbeitungs GmbH Germany
Automatic Data Processing Limited Australia
Automatic Data Processing Limited United Kingdom
Automatic Data Processing SPRL Belgium
24
<PAGE>
Jurisdiction of
Name of Subsidiary Incorporation
----------------- ---------------
Automotive Directions, Inc. Wisconsin
Business Management Software Limited United Kingdom
Cunningham Graphics International, Inc. New Jersey
Digital Motorworks Holdings, Inc. Texas
GSI Transport Tourisme S.A. France
Informex S.A. Belgium
ProBusiness Services, Inc. Delaware
In accordance with Item 601(b)(21) of Regulation S-K, the Registrant has omitted
the names of particular subsidiaries because the unnamed subsidiaries,
considered in the aggregate as a single subsidiary, would not have constituted a
significant subsidiary as of June 30, 2005.
25
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>exhibit23.txt
<DESCRIPTION>AUDITOR'S CONSENT
<TEXT>
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
33-45150, 33-52876, 33-55909, 33-57207, 33-58165, 33-61629, 333-01839,
333-02331, 333-12767, 333-15103, 333-29713, 333-48493, 333-57075, 333-80237,
333-79749, 333-72497, 333-31058, 333-42294 and 333-68030 on Form S-3,
Registration Statement No. 333-72023 on Form S-4, and Registration Statement
Nos. 33-24987, 33-25290, 33-38338, 2-75287, 33-38366, 33-38365, 33-46168,
33-51979, 33-51977, 33-52629, 33-56419, 33-56463, 333-10281, 333-10279,
333-10277, 333-13945, 333-50123, 333-84647, 333-81725, 333-74265, 333-33258,
333-69020, 333-75468, 333-90540, 333-103426, 333-103935, 333-110395, 333-110393
and 333-110392 on Form S-8 of Automatic Data Processing, Inc. of our reports
dated August 17, 2005, relating to the financial statements of Automatic Data
Processing, Inc. and management's report on the effectiveness of internal
control over financial reporting appearing in and incorporated by reference in
this Annual Report on Form 10-K of Automatic Data Processing, Inc. as of and for
the year ended June 30, 2005.
/s/ Deloitte & Touche LLP
New York, New York
August 31, 2005
26
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>6
<FILENAME>exhibit311.txt
<DESCRIPTION>CERTIFICATION OF CHAIRMAN AND CEO
<TEXT>
EXHIBIT 31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Arthur F. Weinbach, certify that:
1. I have reviewed this annual report on Form 10-K of Automatic Data
Processing, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 31, 2005
/s/ Arthur F. Weinbach
---------------------------------------
Arthur F. Weinbach
Chairman and Chief Executive Officer
27
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>7
<FILENAME>exhibit312.txt
<DESCRIPTION>CERTIFICATION OF CFO
<TEXT>
EXHIBIT 31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Karen E. Dykstra, certify that:
1. I have reviewed this annual report on Form 10-K of Automatic Data
Processing, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 31, 2005
/s/ Karen E. Dykstra
---------------------------
Karen E. Dykstra
Chief Financial Officer
28
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>8
<FILENAME>exhibit321.txt
<DESCRIPTION>CERTIFICATION OF CHAIRMAN AND CEO
<TEXT>
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Automatic Data Processing, Inc.
(the "Company") on Form 10-K for the fiscal year ending June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Arthur F. Weinbach, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Arthur F. Weinbach
- ----------------------------------------------
Arthur F. Weinbach
Chairman and Chief Executive Officer
August 31, 2005
29
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>9
<FILENAME>exhibit322.txt
<DESCRIPTION>CERTIFICATION OF CFO
<TEXT>
EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Automatic Data Processing, Inc.
(the "Company") on Form 10-K for the fiscal year ending June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Karen E. Dykstra, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Karen E. Dykstra
- ----------------------------
Karen E. Dykstra
Chief Financial Officer
August 31, 2005
30
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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