adp_10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
[X] |
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE |
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SECURITIES EXCHANGE ACT OF
1934 |
For the fiscal year ended June
30, 2010 |
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OR |
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[
] |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE |
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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
of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
One ADP Boulevard, Roseland,
New Jersey |
07068 |
(Address of principal
executive offices) |
(Zip
Code) |
Registrant’s
telephone number, including area code: 973-974-5000
Securities registered pursuant
to Section 12(b) of the Act: |
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Name of each exchange
on |
Title of each class |
which registered |
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Common Stock, $.10 Par
Value |
NASDAQ Global Select
Market |
(voting) |
Chicago Stock
Exchange |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by
check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes [x] No [ ]
Indicate by
check mark if the Registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes [ ] No [x]
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [x] No [ ]
Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405) 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 a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[x] |
Accelerated filer
[ ] |
Non-accelerated filer
[ ] |
Smaller reporting
company [ ] |
Indicate by
check mark whether the Registrant is a shell company (as defined in Rule 12b-2
of the 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 $21,535,777,370.
On August 20, 2010 there
were 492,022,525 shares
of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement for its 2010 Annual Meeting of
Stockholders.
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Part III |
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Table of
Contents |
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Page |
Part I |
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Item 1. |
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Business |
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2 |
Item
1A. |
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Risk
Factors |
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7 |
Item 1B. |
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Unresolved Staff
Comments |
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9 |
Item
2. |
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Properties |
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9 |
Item
3. |
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Legal
Proceedings |
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9 |
Part
II |
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Item
5. |
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Market for
the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
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10 |
Item
6. |
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Selected
Financial Data |
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13 |
Item
7. |
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
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14 |
Item
7A. |
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Quantitative
and Qualitative Disclosures About Market Risk |
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35 |
Item
8. |
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Financial
Statements and Supplementary Data |
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35 |
Item
9. |
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Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure |
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69 |
Item
9A. |
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Controls and
Procedures |
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69 |
Item
9B. |
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Other
Information |
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71 |
Part
III |
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Item
10. |
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Directors,
Executive Officers and Corporate Governance |
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72 |
Item
11. |
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Executive
Compensation |
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74 |
Item
12. |
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Security
Ownership of Certain Beneficial Owners and Management and
Related |
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Stockholder
Matters |
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74 |
Item
13. |
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Certain
Relationships and Related Transactions, and Director
Independence |
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74 |
Item
14. |
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Principal
Accounting Fees and Services |
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74 |
Part
IV |
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Item
15. |
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Exhibits,
Financial Statement Schedules |
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75 |
Signatures |
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81 |
Part I
Item 1. Business
Automatic Data Processing, Inc.,
incorporated in Delaware in 1961 (together with its subsidiaries, “ADP” or the
“Company”), is one of the world’s largest providers of business outsourcing
solutions. Leveraging 60 years of experience, ADP® offers a wide range of
human resource (HR), payroll, tax and benefits administration solutions from a
single source. ADP is also a leading provider of integrated computing solutions
to automotive, truck, motorcycle, marine, recreational vehicle and heavy
machinery dealers throughout the world. For financial information by segment and
by geographic area, see Note 18 of the “Notes to Consolidated Financial
Statements” contained in this Annual Report on Form 10-K. The Company’s Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all
amendments to those reports, and the Proxy Statement for its Annual Meeting of
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 HR information, payroll processing, tax and benefits
administration solutions and services, including traditional and Web-based
outsourcing solutions, that assist employers in the United States, Canada,
Europe, South America (primarily Brazil), Australia and Asia to staff, manage,
pay and retain their employees. As of June 30, 2010, Employer Services assisted
approximately 520,000 employers with approximately 614,000 payrolls. Employer
Services markets these solutions and services through its direct marketing
salesforce and, on a limited basis, through indirect sales channels, such as
marketing relationships with banks and accountants, among others. In fiscal
2010, 80% of Employer Services’ revenues were from the United States, 13% were
from Europe, 5% were from Canada and 2% were from South America (primarily
Brazil), Australia and Asia.
United States
Employer Services’ approach to the
market is to match clients’ needs to the solutions and services that will best
meet their expectations. To facilitate this approach, in the United States,
Employer Services is comprised of the following market-facing groups: Small
Business Services (SBS) (serving primarily organizations with fewer than 50
employees); Major Account Services (serving primarily organizations with between
50 and 999 employees); and National Account Services (serving primarily
organizations with 1,000 or more employees). In addition, Employer Services’
Added Value Services division provides services to clients across all three of
these groups.
ADP provides payroll services that
include the preparation of client employee paychecks, electronic direct deposits
and stored value payroll cards, along with employee pay statements, supporting
journals, summaries and management reports. 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. ADP enables its largest
clients to interface their major enterprise resource planning (ERP) applications
with ADP’s outsourced payroll services. For those companies that choose to
process payroll in-house, ADP delivers stand-alone services such as payroll tax
filing, check printing and distribution, year-end tax statements (i.e., Form W-2), wage garnishment
services, health and welfare administration and flexible spending account (FSA)
administration.
In order to address the growing
business process outsourcing (BPO) market for clients seeking human resource
information systems and benefit outsourcing solutions, ADP offers its integrated
comprehensive outsourcing services (COS) solution that allows larger clients to
outsource to ADP HR, payroll, payroll administration, employee service center,
benefits administration, and time and labor management functions. For mid-sized
clients, ADP Workforce Now™ Comprehensive Services provides integrated tools and
technology to support payroll, a full-featured benefits administration solution,
HR guidance and HR administration needs from recruitment to retirement. ADP also
offers ADP Resource®, an integrated,
flexible HR and payroll service offering for smaller clients that provides a
menu of optional services, such as 401(k), FSA and a comprehensive
Pay-by-Pay®
workers’ compensation payment program.
2
ADP’s Added Value Services division
includes the following businesses: Tax and Financial Services, Insurance
Services and Tax Credit Services. These businesses primarily support SBS, Major
Account Services and/or National Account Services, and their services are sold
through those businesses, as well as by dedicated sales teams and via marketing
arrangements with alliance partners.
- Tax and Financial
Services processes and collects federal, state and local payroll taxes on
behalf of, and from, ADP clients and remits these taxes to the appropriate
taxing authorities. This business provides an electronic interface between ADP
clients and over 7,600 federal, state and local tax agencies in the United
States, from the Internal Revenue Service to local governments. In fiscal
2010, Tax and Financial Services in the United States processed and delivered
approximately 47 million employee year-end tax statements and over 38 million
employer payroll tax returns and deposits, and moved $1.1 trillion in client
funds to taxing authorities and its clients’ employees via electronic
transfer, direct deposit and ADPCheck™. Tax and Financial Services is also
responsible for the efficient movement of information and funds from clients
to third parties through service offerings such as new hire reporting,
TotalPay®
payroll check (ADPCheck™), full service direct deposit (FSDD), stored value
payroll card (TotalPay® Card), wage
verification services, unemployment claims processing, wage garnishment
processing, sales and use tax services and its new ADP Procure-to-Pay
SolutionsSM,
which automates the P2P supply chain and streamlines order, receipt, invoice
and payment processes.
- Insurance Services
provides a comprehensive Pay-by-Pay workers’ compensation payment program and,
through Automatic Data Processing Insurance Agency, Inc., offers workers
compensation and group health insurance to small and mid-sized
clients.
- Tax Credit Services
provides job tax credit services that assist employers in the identification
of, and filing for, federal, state and local tax credits and other incentives
based on geography, demographics and other criteria, and includes negotiation
of incentive packages with applicable governmental agencies.
Employer Services also provides the
following solutions and services:
- Retirement Services
provides recordkeeping and/or related administrative services with respect to
various types of retirement (primarily 401(k) and SIMPLE IRA) plans, deferred
compensation plans and “premium only” cafeteria plans.
- Pre-Employment Services
includes Screening and Selection Services and Applicant Management Services.
Screening and Selection Services provides background checks, reference
verifications and an HR help desk. Applicant Management Services provides
employers with a web-based solution to manage their talent throughout their
lifecycle.
- ADP’s Benefit Services
provides benefits administration across all market segments, including
management of open enrollment and ongoing enrollment of benefits, and leave of
absence, COBRA and FSA administration.
- ADP’s Time and Labor
Management Services provides solutions for employers to capture, calculate and
report employee time and attendance.
- ADP’s Talent Management
solutions include Performance Management, Compensation Management and Learning
Management.
3
In fiscal 2010, ADP made several
acquisitions to help expand its client base and reach into adjacent markets,
including: DO2 Technologies Inc., a leading provider of electronic-invoicing
solutions; OneClick HR plc, a UK provider of human resources solutions offering
HR software, training services and outsourced HR solutions; and HRinterax, Inc.,
an HR content and support services company focused on the small business market.
In August 2010, ADP acquired Workscape, Inc., a leading provider of integrated
benefits and compensation solutions and services.
International
Employer Services has a growing
presence outside of the United States, where it offers solutions on the basis of
both geographic and specific client business needs. ADP offers in-country “best
of breed” payroll and human resource outsourcing solutions to both small and
large clients in over a dozen foreign countries. In each of Canada and Europe,
ADP is the leading provider of payroll processing (including full departmental
outsourcing) and human resource administration services. Within Europe, Employer
Services has business operations supporting its in-country solutions in eight
countries: 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 (primarily China), ADP provides traditional service bureau
payroll and also offers full departmental outsourcing of payroll services. ADP
also offers wage and tax collection and remittance services in Canada, the
United Kingdom and the Netherlands.
In fiscal 2010, ADP continued to
expand its GlobalView® offering, making it
available in 41 countries. GlobalView is built on the SAP® ERP Human Capital
Management and the SAP NetWeaver® platform and offers
multinational and global companies an end-to-end outsourcing solution enabling
standardized payroll processing and human resource administration. As of the end
of fiscal 2010, 96 clients had contracted for GlobalView services, with
approximately 714,000 employees being processed. Upon completing the
implementation for all these clients, ADP expects to be providing GlobalView
services to nearly 1.3 million employees in 41 countries. Further, through its
ADP Streamline®
offering, ADP also provides a single point of contact for payroll processing and
human resource administration services for multinational companies with small
and mid-sized operations in 63 countries. At the end of fiscal 2010, ADP
Streamline was used by 330 multinational companies with
approximately 52,000 employees being processed.
Professional Employer Organization
Services
In the United States, ADP’s
TotalSource®, the
Company’s professional employer organization (PEO) business, provides
approximately 5,600 clients with comprehensive
employment administration outsourcing solutions through a co-employment
relationship, including payroll, payroll tax filing, HR guidance, 401(k) plan
administration, benefits administration, compliance services, health and
workers’ compensation coverage and other supplemental benefits for employees.
ADP’s TotalSource is the largest PEO in the United States based on the number of
paid worksite employees. ADP’s TotalSource has 47 offices located in 22 states
and serves approximately 211,000 worksite employees in all 50
states.
4
Dealer Services
Dealer Services provides integrated
dealer management systems (such a system is also known in the industry as a
“DMS”) and other business management solutions to automotive, truck, motorcycle,
marine, recreational vehicle (RV) and heavy machinery retailers in North
America, Europe, Africa and the Asia Pacific region. Approximately 25,000
automotive, truck, motorcycle, marine, RV and heavy machinery retailers in over
90 countries use ADP’s DMS products, other software applications, networking
solutions, data integration, consulting and/or digital marketing services.
Clients use ADP’s DMS solutions to
manage core business activities such as accounting, inventory management,
factory communications, appointment scheduling, vehicle financing and insurance,
sales and service. In addition to its DMS solutions, Dealer Services offers its
clients a full suite of additional integrated applications to address each
department and functional area of the dealership, including Customer
Relationship Management (CRM) applications, front-end sales and
marketing/advertising solutions, and an IP Telephony phone system
fully-integrated into the DMS to help dealerships drive sales processes and
business development initiatives. Dealer Services also provides its dealership
clients computer hardware, hardware maintenance services, software support,
system design and network consulting services.
Dealer Services also designs,
establishes and maintains communications networks for its dealership clients
that allow interactive communications among multiple site locations 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 decision-making, vehicle
repair estimation and acquisition of vehicle registration and lien holder
information.
All of Dealer Services’ solutions
are supported by comprehensive training offerings and business process
consulting services. ADP’s DMS and other software solutions are available as
“on-site” applications installed at the dealership or as application service
provider (ASP) managed services solutions (in which clients outsource their
information technology management activities to Dealer Services).
In August 2010, ADP acquired Cobalt,
a leading provider of digital marketing solutions for the automotive industry,
for approximately $400 million.
Markets and Marketing Methods
Employer Services offers services in
the United States, Canada, Europe, South America (primarily Brazil), Australia
and Asia. PEO Services are offered exclusively in the United States. Dealer
Services has offerings in North America, Europe, Africa and the Asia Pacific
region. In select emerging markets, Dealer Services uses distributors to sell,
implement and support ADP’s solutions.
None of ADP’s major business groups
has a single homogenous client base or market. Employer Services and PEO
Services have clients from a large variety of industries and markets. Within
this client base are concentrations of clients in specific industries. Dealer
Services primarily serves automobile dealers, which in turn may be dependent on
a relatively small number of automobile manufacturers, but also serves truck,
powersports (i.e., motorcycle, marine and
recreational) and heavy machinery dealers, auto repair shops, used car lots,
state departments of motor vehicles and manufacturers of automobiles and trucks.
Employer Services also sells to automobile dealers. While concentrations of
clients exist, no one client or industry group is material to ADP’s overall
revenues.
5
Historically ADP’s businesses have
not been overly sensitive to price changes, although in the current economic
conditions we have observed, among some clients and groups of clients, an impact
on sensitivity to pricing and demand for ADP’s services. Employer Services’
revenues were flat in fiscal 2010. In the United States, revenues from our
traditional payroll and payroll tax filing business declined 4% for the full
year and beyond payroll revenues grew 6% for the full year. Dealer Services’
revenues decreased 3% in fiscal 2010 due to dealership consolidations and
closings, lower transactional revenue and dealerships reducing services in order
to cut their discretionary expenses. PEO Services’ revenues grew 11% in fiscal
2010 due to a 5% increase in the average number of worksite employees, as well
as an increase in benefits costs and state uninsurance 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.
Competition
The industries in which ADP operates
are 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 business outsourcing solutions in the world. Employer
Services and PEO Services compete with other independent business outsourcing
companies, companies providing enterprise resource planning services, software
companies and financial institutions. Captive in-house functions, whereby a
company installs and operates its own business processing systems, are another
competitive factor in the industries in which Employer Services and PEO Services
operate. Dealer Services’ competitors include full service DMS providers such as
The Reynolds & Reynolds Company, Dealer Services’ largest DMS competitor in
the United States and Canada, and companies providing applications and services
that compete with Dealer Services’ non-DMS applications and services.
Competition in ADP’s industries 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.
Clients and Client
Contracts
ADP provides its services to about
550,000 clients. In fiscal 2010, no single client or group of affiliated clients
accounted for revenues in excess of 2% of annual consolidated revenues.
Our business is typically
characterized by long-term client relationships that result in recurring
revenue. ADP is continuously in the process of performing implementation
services for new 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 (as little as 24 hours) 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, and in some cases may
exceed two years for a large GlobalView client or other large, complicated
implementation. Although we monitor sales that have not yet been billed or
installed, we do not view this metric as material in light of the recurring
nature of our business. This is not a reported number, but it is used by
management as a planning tool relating to resources needed to install services,
and a means of assessing our performance against the installation timing
expectations of our clients.
ADP’s average client retention is
estimated at just under 10 years in Employer Services, approximately 5 years in
PEO Services and 10 or more years in Dealer Services, and has not varied
significantly from period to period.
6
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.
Systems Development and Programming
During the fiscal years ended June
30, 2010, 2009 and 2008, ADP invested $614 million, $588 million and $611
million, respectively, from continuing operations, 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 solutions and services. Generally, no new solution or
service has a significant effect on ADP’s revenues or negatively impacts its
existing solutions and services, and ADP’s solutions and services have
significant remaining life cycles.
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
47,000 persons as of June 30, 2010.
Item 1A. Risk Factors
Our businesses routinely encounter
and address risks, some of which may cause our future results to be different
than we currently anticipate. Risk factors described below represent our current
view of some of the most important risks facing our businesses and are important
to understanding our business. The following information should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition and
Results of Operations, Quantitative and Qualitative Disclosures About Market
Risk and the consolidated financial statements and related notes included in
this Annual Report on Form 10-K. This discussion includes a number of
forward-looking statements. You should refer to the description of the
qualifications and limitations on forward-looking statements in the first
paragraph under Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in this Annual Report on Form 10-K. Unless
otherwise indicated or the context otherwise requires, reference in this section
to “we,” “ours,” “us” or similar terms means ADP, together with its
subsidiaries. The level of importance of each of the following risks may vary
from time to time, and any of these risks may have a material effect on our
business.
Changes in laws and regulations may
decrease our revenues and earnings
Portions of ADP’s business are
subject to governmental regulations. Changes in governmental regulations may
decrease our revenues and earnings and may require us to change the manner in
which we conduct some aspects of our business. For example, a change in
regulations either decreasing the amount of taxes to be withheld or allowing
less time to remit taxes to government authorities would adversely impact
interest income from investing client funds before such funds are remitted to
the applicable taxing authorities or client employees. In addition, changes in
taxation requirements in the United States or in other countries could adversely
affect our effective tax rate and our net income.
7
Security and privacy breaches may
hurt our business
We store electronically personal
information about our clients and employees of our clients. In addition, our
retirement services systems maintain investor account information for retirement
plans. There is no guarantee that the systems and procedures that we maintain to
protect against unauthorized access to such information are adequate to protect
against all security breaches. Any significant violations of data privacy could
result in the loss of business, litigation and regulatory investigations and
penalties that could damage our reputation, and the growth of our business could
be adversely affected.
Our systems may be subject to
disruptions that could adversely affect our business and
reputation
Many of our businesses are highly
dependent on our ability to process, on a daily basis, a large number of
complicated transactions. We rely heavily on our payroll, financial, accounting
and other data processing systems. If any of these systems fail to operate
properly or become disabled even for a brief period of time, we could suffer
financial loss, a disruption of our businesses, liability to clients, regulatory
intervention or damage to our reputation. We have disaster recovery plans in
place to protect our businesses against natural disasters, security breaches,
military or terrorist actions, power or communication failures or similar
events. Despite our preparations, our disaster recovery plans may not be
successful in preventing the loss of client data, service interruptions,
disruptions to our operations, or damage to our important facilities.
If we fail to adapt our technology
to meet client needs and preferences, the demand for our services may
diminish
Our businesses operate in industries
that are subject to rapid technological advances and changing client needs and
preferences. In order to remain competitive and responsive to client demands, we
continually upgrade, enhance and expand our existing solutions and services. If
we fail to respond successfully to technology challenges, the demand for our
services may diminish.
Political and economic factors may
adversely affect our business and financial results
Trade, monetary and fiscal policies,
and political and economic conditions may substantially change, and credit
markets may experience periods of constriction and volatility. When there is a
slowdown in the economy, employment levels and interest rates may decrease with
a corresponding impact on our businesses. Clients may react to worsening
conditions by reducing their spending on payroll and other outsourcing services
or renegotiating their contracts with us. In addition, the availability of
financing, even to borrowers with the highest credit ratings, may limit our
access to short-term debt markets to meet liquidity needs required by our
Employer Services business.
We invest our client funds in
liquid, investment-grade marketable securities, money market securities and
other cash equivalents. Nevertheless, our client fund assets are subject to
general market, interest rate, credit and liquidity risks, which individually or
in unison may be exacerbated during periods of unusual financial market
volatility.
We are dependent upon various large
banks to execute Automated Clearing House and wire transfers as part of our
client payroll and tax services. While we have contingency plans in place for
bank failures, a systemic shut-down of the banking industry would impede our
ability to process funds on behalf of our payroll and tax services clients and
could have an adverse impact on our financial results and liquidity.
We derive a significant portion of
our revenues and operating income from affiliates operating in non-U.S. dollar
currency environments and, as a result, we are exposed to market risk from
changes in foreign currency exchange rates that could impact our consolidated
results of operations, financial position or cash flows.
8
Change in our credit ratings could
adversely impact our operations and lower our profitability
The major credit rating agencies
periodically evaluate our creditworthiness and have consistently given us their
highest long-term debt and commercial paper ratings. Failure to maintain high
credit ratings on long-term and short-term debt could increase our cost of
borrowing, reduce our ability to obtain intra-day borrowing required by our
Employer Services business, and ultimately reduce our client interest revenue.
We may be unable to attract and
retain qualified personnel
Our ability to grow and provide our
clients with competitive services is partially dependent on our ability to
attract and retain highly motivated people with the skills to serve our clients.
Competition for skilled employees in the outsourcing and other markets in which
we operate is intense and if we are unable to attract and retain highly skilled
and motivated personnel, results from our operations may suffer.
Item 1B. Unresolved Staff
Comments
None.
Item 2.
Properties
ADP owns 41 of its processing/print
centers, other operational offices, sales offices and its corporate headquarters
complex in Roseland, New Jersey, which aggregate approximately 3,913,066 square
feet. None of ADP’s owned facilities is subject to any material encumbrances.
ADP leases space for some of its processing centers, other operational offices
and sales offices. All of these leases, which aggregate approximately 5,657,832
square feet in North America, Europe, South America (primarily Brazil), Asia,
Australia and South Africa, expire at various times up to the year 2036. 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 Company is subject to various claims and litigation. While the outcome of
any litigation is inherently unpredictable, the Company believes it has valid
defenses with respect to the legal matters pending against it and the Company
believes that the ultimate resolution of these matters will not have a material
adverse impact on its financial condition, results of operations or cash flows.
9
Part II
Item 5. Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market for the Registrant’s Common
Equity
The principal market for the
Company’s common stock (symbol: ADP) is the NASDAQ Global Select Market. The
following table sets forth the reported high and low sales prices of the
Company’s common stock reported on the NASDAQ Global Select Market and the cash
dividends per share of common stock declared, during the past two fiscal years.
As of June 30, 2010, there were 43,305 holders of record of the Company’s common
stock. As of such date, 365,199 additional holders held their common
stock in “street name.”
|
|
Price Per Share |
|
Dividends |
|
|
High |
|
Low |
|
Per
Share |
Fiscal 2010 quarter
ended: |
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
$ |
45.74 |
|
$ |
39.27 |
* |
|
$ |
0.340 |
March 31 |
|
$ |
45.22 |
|
$ |
39.72 |
|
|
$ |
0.340 |
December 31 |
|
$ |
44.50 |
|
$ |
38.51 |
|
|
$ |
0.340 |
September 30 |
|
$ |
40.44 |
|
$ |
33.26 |
|
|
$ |
0.330 |
|
Fiscal 2009 quarter
ended: |
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
$ |
39.08 |
|
$ |
34.08 |
|
|
$ |
0.330 |
March 31 |
|
$ |
40.99 |
|
$ |
32.03 |
|
|
$ |
0.330 |
December 31 |
|
$ |
42.93 |
|
$ |
30.83 |
|
|
$ |
0.330 |
September 30 |
|
$ |
45.97 |
|
$ |
40.26 |
|
|
$ |
0.290 |
* Excludes
trading on May 6, 2010, during which a low sales price of $26.46 was
reported.
10
Issuer Purchases of Equity
Securities
|
(a) |
(b) |
(c) |
(d) |
|
|
|
Total
Number |
Maximum |
|
|
|
of
Shares |
Number of
Shares |
|
|
|
Purchased as
Part |
that may yet
be |
|
|
|
of the
Publicly |
Purchased
under |
|
|
|
Announced |
the
Common |
|
Total Number
of |
Average
Price |
Common
Stock |
Stock
Repurchase |
Period |
Shares Purchased (1) |
Paid
per Share |
Repurchase Plan (2) |
Plan
(2) |
April
1, 2010 to |
|
|
|
|
April
30, 2010 |
500,190 |
$44.00 |
500,000 |
39,981,759 |
May
1, 2010 to |
|
|
|
|
May
31, 2010 |
7,681,344 |
$41.70 |
7,681,344 |
32,300,415 |
June
1, 2010 to |
|
|
|
|
June
30, 2010 |
3,516,364 |
$41.20 |
3,516,364 |
28,784,051 |
Total |
11,697,898 |
|
11,697,708 |
|
(1) |
|
Pursuant to the terms of the Company’s restricted stock program,
the Company purchased 190 shares during April 2010 at the then market
value of the shares in connection with the exercise by employees of their
option under such program to satisfy certain tax withholding requirements
through the delivery of shares to the Company instead of
cash. |
|
|
|
(2) |
|
The Company received the Board of Directors’ approval to repurchase
shares of the Company’s common stock as
follows: |
Date of
Approval |
|
Shares |
March 2001 |
50 million |
November 2002 |
35 million |
November 2005 |
50 million |
August 2006 |
50 million |
August 2008 |
50
million |
There is no expiration date for the
common stock repurchase plan.
11
Performance
Graph
The following graph compares the
cumulative return on the Company’s common stock(a) for the most recent five years with
the cumulative return on the S&P 500 Index and a Peer Group Index(b), assuming an initial investment of
$100 on June 30, 2005, with all dividends reinvested.
(a)
|
|
On March 30, 2007, the Company completed the spin-off of
its former Brokerage Services Group business, comprised of Brokerage
Services and Securities Clearing and Outsourcing Services, into an
independent publicly traded company called Broadridge Financial Solutions,
Inc. The cumulative returns of the Company’s common stock have been
adjusted to reflect the spin-off.
|
|
|
|
(b)
|
|
The Peer Group Index is comprised
of the following companies: |
|
Administaff, Inc. |
Paychex, Inc. |
|
Computer Sciences
Corporation |
The Ultimate Software Group,
Inc. |
|
Global Payments Inc. |
Total System Services,
Inc. |
|
Hewitt Associates,
Inc. |
The Western Union
Company |
|
Intuit Inc. |
|
12
Item 6. Selected Financial
Data
The following
selected financial data is derived from our consolidated financial statements
and should be read in conjunction with the consolidated financial statements and
related notes, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, and Quantitative and Qualitative Disclosures About Market
Risk included in this Annual Report on Form 10-K.
(Dollars and shares in
millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
June 30, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Total revenues |
|
$ |
8,927.7 |
|
|
$ |
8,838.4 |
|
|
$ |
8,733.7 |
|
|
$ |
7,769.8 |
|
|
$ |
6,821.3 |
|
Total costs of
revenues |
|
$ |
5,029.7 |
|
|
$ |
4,822.7 |
|
|
$ |
4,657.2 |
|
|
$ |
4,067.6 |
|
|
$ |
3,594.1 |
|
Gross profit |
|
$ |
3,898.0 |
|
|
$ |
4,015.7 |
|
|
$ |
4,076.5 |
|
|
$ |
3,702.2 |
|
|
$ |
3,227.2 |
|
Earnings from continuing
operations before income taxes |
|
$ |
1,863.2 |
|
|
$ |
1,900.1 |
|
|
$ |
1,803.4 |
|
|
$ |
1,622.7 |
|
|
$ |
1,361.6 |
|
Net
earnings from continuing operations |
|
$ |
1,207.3 |
|
|
$ |
1,325.1 |
|
|
$ |
1,155.7 |
|
|
$ |
1,020.7 |
|
|
$ |
842.2 |
|
Basic earnings per share from
continuing operations |
|
$ |
2.41 |
|
|
$ |
2.63 |
|
|
$ |
2.22 |
|
|
$ |
1.86 |
|
|
$ |
1.47 |
|
Diluted earnings per share
from continuing operations |
|
$ |
2.40 |
|
|
$ |
2.62 |
|
|
$ |
2.19 |
|
|
$ |
1.83 |
|
|
$ |
1.45 |
|
Basic weighted average shares
outstanding |
|
|
500.5 |
|
|
|
503.2 |
|
|
|
521.5 |
|
|
|
549.7 |
|
|
|
574.8 |
|
Diluted weighted average
shares outstanding |
|
|
503.7 |
|
|
|
505.8 |
|
|
|
527.2 |
|
|
|
557.9 |
|
|
|
580.3 |
|
Cash dividends declared per
share |
|
$ |
1.3500 |
|
|
$ |
1.2800 |
|
|
$ |
1.1000 |
|
|
$ |
0.8750 |
|
|
$ |
0.7100 |
|
Return
on equity from continuing operations (Note 1) |
|
|
22.4 |
% |
|
|
25.5 |
% |
|
|
22.6 |
% |
|
|
18.3 |
% |
|
|
14.3 |
% |
At year end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
marketable securities |
|
$ |
1,775.5 |
|
|
$ |
2,388.5 |
|
|
$ |
1,660.3 |
|
|
$ |
1,884.6 |
|
|
$ |
2,461.3 |
|
Total assets |
|
$ |
26,862.2 |
|
|
$ |
25,351.7 |
|
|
$ |
23,734.4 |
|
|
$ |
26,648.9 |
|
|
$ |
27,490.1 |
|
Obligation under commercial
paper borrowing |
|
$ |
- |
|
|
$ |
730.0 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Long-term debt |
|
$ |
39.8 |
|
|
$ |
42.7 |
|
|
$ |
52.1 |
|
|
$ |
43.5 |
|
|
$ |
74.3 |
|
Stockholders’ equity |
|
$ |
5,478.9 |
|
|
$ |
5,322.6 |
|
|
$ |
5,087.2 |
|
|
$ |
5,147.9 |
|
|
$ |
6,011.6 |
|
Note 1. Return
on equity from continuing operations has been calculated as net earnings from
continuing operations divided by average total stockholders’
equity.
13
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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 services and products; changes in laws regulating
payroll taxes, professional employer organizations and employee benefits;
overall market and economic conditions, including interest rate and foreign
currency trends; competitive conditions; auto sales and related industry
changes; employment and wage levels; changes in technology; availability of
skilled technical associates and the impact of new acquisitions and
divestitures. ADP disclaims any obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
These risks and uncertainties, along with the risk factors discussed above under
“Item 1A. Risk Factors,” should be considered in evaluating any forward-looking
statements contained herein.
DESCRIPTION OF THE COMPANY AND
BUSINESS SEGMENTS
ADP is one of the world’s largest providers of business outsourcing
solutions. Leveraging over 60 years of experience, ADP offers a wide range of
human resource (“HR”), payroll, tax and benefits administration solutions from a
single source. ADP is also a leading provider of integrated computing solutions
to automotive, truck, motorcycle, marine, recreational vehicle (“RV”) and heavy
machinery dealers in North America, Europe, South Africa and the Asia Pacific
region. The Company’s reportable segments are: Employer Services, PEO Services
and Dealer Services. A brief description of each segment’s operations is
provided below.
Employer
Services
Employer Services offers a comprehensive range of HR information, payroll
processing, tax and benefits administration solutions and services, including
traditional and Web-based outsourcing solutions, that assist employers in the
United States, Canada, Europe, South America (primarily Brazil), Australia and
Asia to staff, manage, pay and retain their employees. As of June 30, 2010,
Employer Services assisted approximately 520,000 employers with approximately
614,000 payrolls. From time to time, we reevaluate our employer count based upon
updated information that helps us associate individual employer accounts with
one another. As such, on a comparable basis, as of June 30, 2009, Employer
Services assisted approximately 520,000 employers with approximately 619,000
payrolls. Employer Services categorizes its services as payroll and payroll tax,
and “beyond payroll.” The payroll and payroll tax business represents the
Company’s core payroll processing and payroll tax filing business. The “beyond
payroll” business represents services such as time and labor management,
benefits administration, retirement recordkeeping and administration, and HR
administration services. 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.
PEO Services
PEO Services provides approximately
5,600 small and medium sized businesses with comprehensive employment
administration outsourcing solutions through a co-employment relationship,
including payroll, payroll tax filing, HR guidance, 401(k) plan administration,
benefits administration, compliance services, health and workers’ compensation
coverage and other supplemental benefits for employees.
Dealer
Services
Dealer Services provides integrated dealer management systems (such a
system is also known in the industry as a “DMS”) and other business management
solutions to automotive, truck, motorcycle, marine, RV and heavy machinery
retailers in North America, Europe, South Africa and the Asia Pacific region.
Approximately 25,000 automotive, truck, motorcycle, marine, RV and heavy
machinery retailers in over 90 countries use our DMS products, other software
applications, networking solutions, data integration, consulting and/or digital
marketing services. From time to time, we reevaluate our client count based upon
updated information that helps us associate individual client accounts with one
another. As such, on a comparable basis, as of June 30, 2009, Dealer Services
provided DMS products to 26,000 retailers in over 90 countries.
14
EXECUTIVE
OVERVIEW
During the
fiscal year ended June 30, 2010 (“fiscal 2010”), we maintained focus on the
execution of our five-point strategic growth program, which consists of:
- Strengthening the core
business;
- Growing our
differentiated HR Business Process Outsourcing (“BPO”)
offerings;
- Focusing on
international expansion;
- Entering adjacent
markets that leverage the core; and
- Expanding pretax
margins.
ADP’s fiscal
2010 was a challenging year and our results continued to be impacted by the
economic downturn, including high unemployment levels, record-low interest rates
and volatile financial markets. However, as we look back over fiscal 2010, we
were pleased that ADP’s financial results were better than we initially
anticipated. The economy showed signs of stabilization early on in the fiscal
year. Demand for ADP’s solutions increased and key business metrics, including
Employer Services’ sales, retention and pays per control, began to improve
during the second half of the year.
Consolidated
revenues grew 1%, to $8,927.7 million in fiscal 2010, from $8,838.4 million in
fiscal 2009, aided by fluctuations in foreign currency rates, which increased
revenues $68.2 million. In fiscal 2010, pretax earnings from continuing
operations declined 2%, to $1,863.2 million, net earnings from continuing
operations declined 9%, to $1,207.3 million, and diluted earnings per share from
continuing operations decreased 8%, to $2.40, from $2.62 in fiscal 2009. Fiscal
2010 and fiscal 2009 included favorable tax items that reduced the provision for
income taxes by $12.2 million and $120.0 million, respectively. Excluding the
favorable tax items from both years, net earnings from continuing operations
declined 1% and diluted earnings per share from continuing operations declined
slightly from $2.38 to $2.37.
Employer
Services’ revenues were flat in fiscal 2010. In the United States, revenues from
our traditional payroll and payroll tax filing business declined 4% for the full
year and beyond payroll revenues grew 6% for the full year. “Pays per control,”
which represents the number of employees on our clients’ payrolls as measured on
a same-store-sales basis utilizing a subset of approximately 130,000 payrolls of
small to large businesses that are reflective of a broad range of U.S.
geographic regions, decreased 3.4% in fiscal 2010, but were slightly positive in
the fourth quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009.
Worldwide client retention increased 0.4 percentage points as compared to the
prior year. PEO Services’ revenues grew 11% in fiscal 2010 due to a 5% increase
in the average number of worksite employees, as well as an increase in benefits
costs and state unemployment insurance rates. Employer Services’ and PEO
Services’ worldwide new business sales, which represent annualized recurring
revenues anticipated from sales orders to new and existing clients, increased
4%, to just over $1 billion in fiscal 2010. Dealer Services’ revenues decreased
3% in fiscal 2010 due to continued dealership consolidations and closings, lower
transactional revenue and dealerships reducing services in order to cut their
discretionary expenses. Consolidated interest on funds held for clients declined 11%, or $67.0
million, to $542.8 million. The decrease in the consolidated interest on funds
held for clients resulted from the decrease in the average interest rate earned
to 3.6% in fiscal 2010 as compared to 4.0% in fiscal 2009. Average client funds
balances increased slightly as a result of wage growth and an increase in state
unemployment insurance withholdings offset by the decline in pays per
control.
We have a
strong business model, which has approximately 90% recurring revenues, excellent
margins from the ability to generate consistent, healthy cash flows, strong
client retention and low capital expenditure requirements. Additionally, ADP has
continued to return excess cash to our shareholders. In the last five fiscal
years, we have reduced the Company’s common stock outstanding by approximately
15% through share buybacks, partially offset by common stock issued under
employee stock-based compensation programs. We have also raised the dividend
payout per share for 35 consecutive years.
15
We are
especially pleased with the performance of our investment portfolio and the
investment choices we made. Our investment portfolio does not contain any
asset-backed securities with underlying collateral of sub-prime mortgages,
alternative-A mortgages, sub-prime auto loans or home equity loans,
collateralized debt obligations, collateralized loan obligations, credit default
swaps, asset-backed commercial paper, derivatives, auction rate securities,
structured investment vehicles or non-investment-grade fixed-income securities.
We own senior tranches of fixed rate credit card, rate reduction, and auto loan
asset-backed securities, secured predominately by prime collateral. All
collateral on asset-backed securities is performing as expected. In addition, we
own senior debt directly issued by Federal Home Loan Banks, Federal National
Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation
(“Freddie Mac”). We do not own subordinated debt, preferred stock or common
stock of any of these agencies. We do own AAA rated mortgage-backed securities,
which represent an undivided beneficial ownership interest in a group or pool of
one or more residential mortgages. These securities are collateralized by the
cash flows of 15-year and 30-year residential mortgages and are guaranteed by
Fannie Mae and Freddie Mac as to the timely payment of principal and interest.
Our client funds investment strategy is structured to allow us to average our
way through an interest rate cycle by laddering investments out to five years
(in the case of the extended portfolio) and out to ten years (in the case of the
long portfolio). This investment strategy is supported by our short-term
financing arrangements necessary to satisfy short-term funding requirements
relating to client funds obligations. In addition, our AAA credit rating has
helped us maintain uninterrupted access to the commercial paper
market.
Our financial
condition and balance sheet remain solid at June 30, 2010, with cash and cash
equivalents and marketable securities of $1,775.5 million. Our net cash flows
provided by operating activities were $1,682.1 million in fiscal 2010, as
compared to $1,562.6 million in fiscal 2009. This increase in cash flows from
fiscal 2009 to fiscal 2010 was due to tax refunds received and a reduction in
cash bonuses paid, partially offset by an increase in pension plan contributions
as compared to the prior year.
In August
2010, we completed the acquisition of two businesses, Cobalt and Workscape, Inc.
Cobalt is a leading provider of digital marketing solutions for the automotive
industry. It aligns with ADP Dealer Services’ global layered applications
strategy and strongly supports Dealer Services’ long-term growth strategy.
Workscape, Inc. is a leading provider of integrated benefits and compensation
solutions and services.
16
RESULTS OF
OPERATIONS
ANALYSIS OF CONSOLIDATED
OPERATIONS
Fiscal 2010 Compared to Fiscal
2009
(Dollars in
millions, except per share amounts)
|
|
Years ended June 30, |
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
$
Change |
|
%
Change |
Total revenues |
|
$ |
8,927.7 |
|
|
$ |
8,838.4 |
|
|
$ |
89.3 |
|
|
1 |
% |
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
4,277.2 |
|
|
|
4,087.0 |
|
|
|
190.2 |
|
|
5 |
% |
Systems development
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
programming costs |
|
|
513.9 |
|
|
|
498.3 |
|
|
|
15.6 |
|
|
3 |
% |
Depreciation and
amortization |
|
|
238.6 |
|
|
|
237.4 |
|
|
|
1.2 |
|
|
1 |
% |
Total costs of
revenues |
|
|
5,029.7 |
|
|
|
4,822.7 |
|
|
|
207.0 |
|
|
4 |
% |
|
Selling, general and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses |
|
|
2,127.4 |
|
|
|
2,190.3 |
|
|
|
(62.9 |
) |
|
(3 |
)% |
Interest expense |
|
|
8.6 |
|
|
|
33.3 |
|
|
|
(24.7 |
) |
|
(74 |
)% |
Total expenses |
|
|
7,165.7 |
|
|
|
7,046.3 |
|
|
|
119.4 |
|
|
2 |
% |
|
Other income, net |
|
|
(101.2 |
) |
|
|
(108.0 |
) |
|
|
(6.8 |
) |
|
(6 |
)% |
|
Earnings from
continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income
taxes |
|
$ |
1,863.2 |
|
|
$ |
1,900.1 |
|
|
$ |
(36.9 |
) |
|
(2 |
)% |
Margin |
|
|
20.9 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
Provision for income
taxes |
|
$ |
655.9 |
|
|
$ |
575.0 |
|
|
$ |
80.9 |
|
|
14 |
% |
Effective tax rate |
|
|
35.2 |
% |
|
|
30.3 |
% |
|
|
|
|
|
|
|
|
Net earnings from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations |
|
$ |
1,207.3 |
|
|
$ |
1,325.1 |
|
|
$ |
(117.8 |
) |
|
(9 |
)% |
|
Diluted earnings per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing
operations |
|
$ |
2.40 |
|
|
$ |
2.62 |
|
|
$ |
(0.22 |
) |
|
(8 |
)% |
Total
Revenues
Our consolidated revenues grew 1% to $8,927.7 million in fiscal 2010,
from $8,838.4 million in fiscal 2009, due to an increase in revenues in PEO
Services of 11%, or $131.0 million, to $1,316.8 million, and fluctuations in
foreign currency rates, which increased revenues $68.2 million. Such increases
were partially offset by a decrease in Dealer Services revenues of 3%, or $38.5
million, to $1,229.4 million, and a decrease in the consolidated interest on
funds held for clients of $67.0 million. The decrease in the consolidated
interest on funds held for clients resulted from the decrease in the average
interest rate earned to 3.6% in fiscal 2010 as compared to 4.0% in fiscal 2009.
Employer Services’ revenues were flat in fiscal 2010 as compared to fiscal
2009.
Total
Expenses
Our total expenses in fiscal 2010 increased $119.4 million, to $7,165.7
million, from $7,046.3 million in fiscal 2009. The increase in our consolidated
expenses for fiscal 2010 was due to our increase in revenues, higher
pass-through costs associated with our PEO Services business of $113.7 million,
an increase of $48.6 million related to fluctuations in foreign currency
exchange rates, an increase of $14.7 million related to additional domestic
service personnel and incremental investments in our products. These increases
were partially offset by a decrease in severance expenses of $76.8 million, a
decrease in stock-based compensation expense of $28.4 million and our costs
savings initiatives, which included lower compensation from reduced headcount
and a reduction in travel and entertainment expenses.
17
Our total
costs of revenues increased $207.0 million to $5,029.7 million in fiscal 2010,
as compared to fiscal 2009 due to the increase in operating expenses discussed
below.
Operating
expenses increased $190.2 million, or 5%, in fiscal 2010 as compared to fiscal
2009, due to an increase in PEO Services pass-through costs that are
re-billable, including costs for benefits coverage, workers’ compensation
coverage and state unemployment taxes for worksite employees. These pass-through
costs were $988.5 million in fiscal 2010, which included costs for benefits
coverage of $811.5 million and costs for workers’ compensation and payment of
state unemployment taxes of $176.9 million. These costs were $874.8 million in
fiscal 2009, which included costs for benefits coverage of $724.3 million and
costs for workers compensation and payment of state unemployment taxes of $150.5
million. In addition, operating expenses increased $30.1 million due to changes
in foreign currency exchange rates and $14.7 million due to additional service
personnel. These increases were partially offset by a decrease of $8.9 million
in stock-based compensation expense and our costs savings initiatives, which
included lower compensation from reduced headcount and a reduction in travel and
entertainment expenses.
Systems
development and programming expenses increased $15.6 million, or 3%, in fiscal
2010 as compared to fiscal 2009, due to incremental investments in our products
during fiscal 2010. Additionally, systems development and programming expenses
increased by $2.1 million due to expenses of acquired businesses and by $3.6
million due to the impact from changes in foreign currency exchange rates. These
increases were partially offset by a $5.0 million decline in stock-based
compensation expense.
Selling,
general and administrative expenses decreased $62.9 million, or 3%, in fiscal
2010 as compared to fiscal 2009. The decrease in expenses was due to a decrease
in severance expenses of $76.8 million, a reduction in expenses of $31.1 million
related to cost saving initiatives, which included lower compensation from
reduced headcount and a reduction in travel and entertainment expenses and a
decline of $14.5 million in stock-based compensation expense. In addition,
selling, general and administrative expenses decreased due to the $15.5 million
charge we recorded during fiscal 2009 to increase our allowance for doubtful
accounts as a result of an increase in estimated credit losses related to our
notes receivable from automotive, truck and powersports dealers. These decreases
in expenses were partially offset by an asset impairment charge of $6.8 million,
recorded during fiscal 2010 as a result of the announcement by General Motors
Corporation (“GM”) that it will shut down its Saturn division. In addition,
there was an increase of $13.7 million due to the impact of changes in foreign
currency exchange rates and an increase of $9.5 million in expenses of acquired
businesses.
Interest
expense decreased $24.7 million in fiscal 2010 as compared to fiscal 2009. In
fiscal 2010 and 2009, the Company’s average borrowings under the commercial
paper program were $1.6 billion and $1.9 billion, respectively, at weighted
average interest rates of 0.2% and 1.0%, respectively, which resulted in a
decrease of $15.8 million in interest expense. In fiscal 2010 and 2009, the
Company’s average borrowings under the reverse repurchase program were
approximately $425.0 million and $425.9 million, respectively, at weighted
average interest rates of 0.2% and 1.3%, respectively, which resulted in a
decrease of $4.6 million in interest expense.
Other Income,
net
Years ended June 30, |
|
2010 |
|
2009 |
|
$
Change |
(Dollars in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on corporate
funds |
|
$ |
(98.8 |
) |
|
$ |
(134.2 |
) |
|
$ |
(35.4 |
) |
Realized gains on
available-for-sale securities |
|
|
(15.0 |
) |
|
|
(11.4 |
) |
|
|
3.6 |
|
Realized losses on
available-for-sale securities |
|
|
13.4 |
|
|
|
23.8 |
|
|
|
10.4 |
|
Realized (gain) loss on
investment in Reserve Fund |
|
|
(15.2 |
) |
|
|
18.3 |
|
|
|
33.5 |
|
Impairment losses on
available-for-sale securities |
|
|
14.4 |
|
|
|
- |
|
|
|
(14.4 |
) |
Net loss (gain) on sales of
buildings |
|
|
2.3 |
|
|
|
(2.2 |
) |
|
|
(4.5 |
) |
Other, net |
|
|
(2.3 |
) |
|
|
(2.3 |
) |
|
|
- |
|
|
Other income, net |
|
$ |
(101.2 |
) |
|
$ |
(108.0 |
) |
|
$ |
(6.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Other income,
net, decreased $6.8 million in fiscal 2010 as compared to fiscal 2009 due to a
$35.4 million decrease in interest income on corporate funds, a $14.4 million
impairment loss on available-for-sale securities recorded during fiscal 2010 and
a $2.3 million net loss on sales of buildings in fiscal 2010 as compared to a
$2.2 million net gain on sales of buildings in fiscal 2009. Interest income on
corporate funds decreased as a result of lower average interest rates, partially
offset by higher average daily balances. Average interest rates decreased from
3.6% in fiscal 2009 to 2.6% in fiscal 2010. Average daily balances increased
from $3.7 billion in fiscal 2009 to $3.8 billion in fiscal 2010. These decreases
in other income were partially offset by a gain on the investment in Reserve
Fund of $15.2 million in fiscal 2010 as compared to a loss on the investment in
the Reserve Fund of $18.3 million in fiscal 2009, as well as a $14.0 million
increase in net realized gains on available-for-sale securities.
Earnings from Continuing Operations
before Income Taxes
Earnings from continuing operations
before income taxes decreased $36.9 million, or 2%, from $1,900.1 million in
fiscal 2009 to $1,863.2 million in fiscal 2010 because the increase in revenues
was more than offset by the increase in expenses and decrease in other income,
net discussed above. Overall margin decreased 60 basis points in fiscal 2010.
Provision for Income
Taxes
The effective tax rate in fiscal 2010 and 2009 was 35.2% and 30.3%,
respectively. For fiscal 2010, the effective tax rate includes a reduction in
the provision for income taxes of $12.2 million related to the resolution of
certain tax matters, which decreased the effective tax rate by 0.7 percentage
points. For fiscal 2009, the effective tax rate includes a reduction in the
provision for income taxes of $120.0 million related to an Internal Revenue
Service (“IRS”) audit settlement and the settlement of a state tax matter, which
decreased the effective tax rate by 6.3 percentage points.
Net Earnings from Continuing
Operations and Diluted Earnings per Share from Continuing
Operations
Net earnings from continuing operations decreased $117.8 million to
$1,207.3 million in fiscal 2010, from $1,325.1 million in fiscal 2009, and
diluted earnings per share from continuing operations decreased 8%, to $2.40.
The decrease in net earnings from continuing operations in fiscal 2010 reflects
the decrease in earnings from continuing operations before income taxes and the
impact of the tax matters discussed above. The decrease in diluted earnings per
share from continuing operations in fiscal 2010 reflects the decrease in
earnings from continuing operations and the impact of the tax matters discussed
above partially offset by the impact of fewer shares outstanding due to the
repurchase of 18.2 million shares in fiscal 2010 and 13.8 million shares in
fiscal 2009.
The following
table reconciles the Company’s results for fiscal 2010 and fiscal 2009 to
adjusted results that exclude the impact of favorable tax items. The Company
uses certain adjusted results, among other measures, to evaluate the Company’s
operating performance in the absence of certain items and for planning and
forecasting of future periods. The Company believes that the adjusted results
provide relevant and useful information for investors because it allows
investors to view performance in a manner similar to the method used by the
Company’s management and improves their ability to understand the Company’s
operating performance. Since adjusted earnings from continuing operations and
adjusted diluted EPS are not measures of performance calculated in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”), they should not be considered in isolation from, or as a
substitute for, earnings from continuing operations and diluted EPS from
continuing operations, respectively, and they may not be comparable to similarly
titled measures employed by other companies.
|
|
Year ended June 30, 2010 |
|
|
Earnings from |
|
|
|
|
|
Diluted EPS |
|
|
continuing
operations |
|
Provision for |
|
Net earnings from |
|
from continuing |
|
|
before income taxes |
|
income taxes |
|
continuing operations |
|
operations |
As Reported |
|
$ |
1,863.2 |
|
$ |
655.9 |
|
$ |
1,207.3 |
|
$ |
2.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Favorable tax items |
|
|
- |
|
|
12.2 |
|
|
12.2 |
|
|
0.02 |
As Adjusted |
|
$ |
1,863.2 |
|
$ |
668.1 |
|
$ |
1,195.1 |
|
$ |
2.37 |
|
|
|
|
Year ended June 30, 2009 |
|
|
Earnings from |
|
|
|
|
|
Diluted EPS |
|
|
continuing
operations |
|
Provision for |
|
Net earnings from |
|
from continuing |
|
|
before income taxes |
|
income taxes |
|
continuing operations |
|
operations |
As Reported |
|
$ |
1,900.1 |
|
$ |
575.0 |
|
$ |
1,325.1 |
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Favorable tax items |
|
|
- |
|
|
120.0 |
|
|
120.0 |
|
|
0.24 |
As Adjusted |
|
$ |
1,900.1 |
|
$ |
695.0 |
|
$ |
1,205.1 |
|
$ |
2.38 |
Net earnings
from continuing operations, as adjusted, decreased $10.0 million to $1,195.1
million for fiscal 2010, from $1,205.1 million for fiscal 2009, and the related
diluted earnings per share from continuing operations, as adjusted, decreased
$0.01, to $2.37. The decrease in net earnings from continuing operations, as
adjusted, for fiscal 2010 reflects the decrease in earnings from continuing
operations before income taxes. The decrease in diluted earnings per share from
continuing operations, as adjusted, for fiscal 2010 reflects the decrease in net
earnings from continuing operations, partially offset by the impact of fewer
shares outstanding due to the repurchase of approximately 18.2 million shares
during fiscal 2010 and the repurchase of 13.8 million shares in fiscal
2009.
20
Fiscal 2009 Compared to Fiscal 2008
(Dollars in millions,
except per share amounts) |
|
|
|
|
|
|
Years ended June 30, |
|
|
|
|
2009 |
|
2008 |
|
$
Change |
|
%
Change |
Total revenues |
|
$
|
8,838.4 |
|
|
$ |
8,733.7 |
|
|
$ |
104.7 |
|
|
1 |
% |
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
4,087.0 |
|
|
|
3,898.4 |
|
|
|
188.6 |
|
|
5 |
% |
Systems development
and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
programming costs |
|
|
498.3 |
|
|
|
521.1 |
|
|
|
(22.8 |
) |
|
(4 |
)% |
Depreciation and
amortization |
|
|
237.4 |
|
|
|
237.7 |
|
|
|
(0.3 |
) |
|
0 |
% |
Total costs of
revenues |
|
|
4,822.7 |
|
|
|
4,657.2 |
|
|
|
165.5 |
|
|
4 |
% |
|
Selling, general and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses |
|
|
2,190.3 |
|
|
|
2,359.1 |
|
|
|
(168.8 |
) |
|
(7 |
)% |
Interest expense |
|
|
33.3 |
|
|
|
80.5 |
|
|
|
(47.2 |
) |
|
(59 |
)% |
Total expenses |
|
|
7,046.3 |
|
|
|
7,096.8 |
|
|
|
(50.5 |
) |
|
(1 |
)% |
|
Other income, net |
|
|
(108.0 |
) |
|
|
(166.5 |
) |
|
|
(58.5 |
) |
|
(35 |
)% |
|
Earnings from
continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income
taxes |
|
$ |
1,900.1 |
|
|
$ |
1,803.4 |
|
|
$ |
96.7 |
|
|
5 |
% |
Margin |
|
|
21.5 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
|
|
Provision for income
taxes |
|
$ |
575.0 |
|
|
$ |
647.7 |
|
|
$ |
(72.7 |
) |
|
(11 |
)% |
Effective tax rate |
|
|
30.3 |
% |
|
|
35.9 |
% |
|
|
|
|
|
|
|
|
Net earnings from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations |
|
$ |
1,325.1 |
|
|
$ |
1,155.7 |
|
|
$ |
169.4 |
|
|
15 |
% |
|
Diluted earnings per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from continuing
operations |
|
$ |
2.62 |
|
|
$ |
2.19 |
|
|
$ |
0.43 |
|
|
20 |
%
|
Total
Revenues
Our consolidated revenues grew 1%, to $8,838.4 million in fiscal 2009,
from $8,733.7 in the year ended June 30, 2008 (“fiscal 2008”), due to increases
in revenues in Employer Services of 3%, or $211.1 million, to $6,438.9 million,
and PEO Services of 12%, or $125.3 million, to $1,185.8 million. Such increases
were partially offset by changes in foreign currency exchange rates, which
reduced our revenue by $187.4 million, or 2%, a decrease in the consolidated
interest on funds held for clients of $74.7 million and a decrease in Dealer
Services revenues of 3%, or $33.9 million. The decrease in the consolidated
interest earned on funds held for clients resulted from the decrease in the
average interest rate earned to 4.0% in fiscal 2009 as compared to 4.4% in
fiscal 2008, and a decrease in our average client funds balances for fiscal 2009
of 3.1%, to $15.2 billion.
Total
Expenses
Our consolidated expenses decreased 1%, to $7,046.3 million in fiscal
2009, from $7,096.8 million in fiscal 2008. The decrease in our consolidated
expenses was due to a decrease of $160.7 million, or 2%, related to changes in
foreign currency exchange rates and a decrease in selling, general and
administrative expenses of $168.8 million, which was attributable to lower
selling expenses and cost saving initiatives that commenced in fiscal 2008 and
continued in fiscal 2009. These decreases were partially offset by an increase
in operating expenses of $188.6 million attributable to the increase in our
revenues discussed above. In addition, there was an increase in pass-through
costs in our PEO business including costs associated with providing benefits
coverage for worksite employees of $102.7 million and costs associated with
workers’ compensation and payment of state unemployment taxes for worksite
employees of $16.8 million.
21
Our total
costs of revenues increased $165.5 million, to $4,822.7 million in fiscal 2009,
from $4,657.2 million in fiscal 2008, due to an increase in our operating
expenses of $188.6 million, partially offset by a decrease in our systems
development and programming costs of $22.8 million.
Operating
expenses increased $188.6 million, or 5%, in fiscal 2009 compared to fiscal 2008
due to the increase in revenues described above, including the increases in PEO
Services, which have pass-through costs that are re-billable including costs for
benefits coverage, workers’ compensation coverage and state unemployment taxes
for worksite employees. These pass-through costs were $874.8 million in fiscal
2009, which included costs for benefits coverage of $724.3 million and costs for
workers compensation and payment of state unemployment taxes of $150.5 million.
These costs were $755.3 million in fiscal 2008, which included costs for
benefits coverage of $621.6 million and costs for workers compensation and
payment of state unemployment taxes of $133.7 million. The increase in operating
expenses is also due to higher expenses in Employer Services of $64.5 million
related to increased service costs for investment in client-facing associates.
Such increases were partially offset by a decrease in operating expenses of
approximately $83.7 million due to changes in foreign currency exchange rates.
Systems
development and programming expenses decreased $22.8 million, or 4%, in fiscal
2009 compared to fiscal 2008 due to decreases related to the impact of changes
in foreign currency exchange rates of $15.8 million, a decrease in stock-based
compensation expenses of $6.5 million and a decrease in programming expenses
related to our systems of $3.9 million. The decrease in programming expenses was
a result of a decrease in the average cost per associate as a larger percentage
of our associates are located in off-shore and smart-shore locations. In
addition, depreciation and amortization expenses decreased $0.3 million in
fiscal 2009 compared to fiscal 2008 due to decreases related to the impact of
changes in foreign currency exchange rates of $5.4 million, which were partially
offset by increased amortization expenses of $4.7 million resulting from the
intangible assets acquired with new businesses and the purchases of software and
software licenses.
Selling,
general and administrative expenses decreased $168.8 million, or 7%, in fiscal
2009 compared to fiscal 2008, which was attributable to decreases related to the
impact of changes in foreign currency exchange rates of $55.5 million, a
decrease in selling expenses related to a decline in our new client sales of
$45.6 million and a reversal of $23.3 million in expenses due to a favorable
ruling related to an international business capital tax. In addition, the
decrease is attributable to our cost saving initiatives that commenced in fiscal
2008 and continued in fiscal 2009, which included a reduction in payroll and
payroll related expenses of $32.3 million and a decrease in stock-based
compensation expenses of $16.3 million. Such decreases were partially offset by
an increase in severance charges of $67.6 million and an increase in the
provision for our allowance for doubtful accounts of $15.5 million due to losses
related to our notes receivable from automotive, truck and powersports dealers.
Interest
expense decreased $47.2 million in fiscal 2009 as a result of a decrease of
$40.6 million related to our short-term commercial paper program and a decrease
of $6.6 million related to our reverse repurchase program. In the aggregate,
interest expense decreased by approximately $68.4 million related to decreases
in interest rates and increased approximately $21.2 million related to increases
in borrowings. In fiscal 2009 and 2008, the Company’s average borrowings under
the commercial paper program were $1.9 billion and $1.4 billion, respectively,
at weighted average interest rates of 1.0% and 4.2%, respectively. In fiscal
2009 and 2008, the Company’s average borrowings under the reverse repurchase
program were approximately $425.9 million and $360.4 million, respectively, at
weighted average interest rates of 1.3% and 3.4%, respectively.
Other Income,
net
Years ended June 30, |
|
2009 |
|
2008 |
|
$
Change |
(Dollars in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on corporate
funds |
|
$ |
(134.2 |
) |
|
$ |
(149.5 |
) |
|
$ |
(15.3 |
) |
Realized gains on
available-for-sale securities |
|
|
(11.4 |
) |
|
|
(10.1 |
) |
|
|
1.3 |
|
Realized losses on
available-for-sale securities |
|
|
23.8 |
|
|
|
11.4 |
|
|
|
(12.4 |
) |
Realized loss on investment in
Reserve Fund |
|
|
18.3 |
|
|
|
- |
|
|
|
(18.3 |
) |
Gains on sales of
building |
|
|
(2.2 |
) |
|
|
(16.0 |
) |
|
|
(13.8 |
) |
Other, net |
|
|
(2.3 |
) |
|
|
(2.3 |
) |
|
|
- |
|
|
Other income, net |
|
$ |
(108.0 |
) |
|
$ |
(166.5 |
) |
|
$ |
(58.5 |
) |
22
Other income,
net, decreased $58.5 million in fiscal 2009 as compared to fiscal 2008 due to a
loss of $18.3 million related to investment in the Reserve Fund, a decrease in
interest income on corporate funds of $15.3 million, a reduction in income of
$13.8 million from the sale of buildings and an increase in net realized losses
on available-for-sale securities of $11.1 million. In the aggregate, interest
income on corporate funds decreased by approximately $30.9 million related to
decreases in interest rates and increased approximately $15.6 million related to
increases in average daily balances. Average interest rates decreased from 4.4%
in fiscal 2008 to 3.6% in fiscal 2009. Average daily balances increased from
$3.4 billion in fiscal 2008 to $3.7 billion in fiscal 2009.
Earnings from Continuing Operations
before Income Taxes
Earnings from continuing operations
before income taxes increased 5%, to $1,900.1 million in fiscal 2009, from
$1,803.4 million in fiscal 2008, due to the increase in revenues and the
decrease in expenses discussed above. Overall margin increased 80 basis points
in fiscal 2009.
Provision for Income
Taxes
The effective tax rate in fiscal 2009 was 30.3%, as compared to 35.9% in
fiscal 2008. The decrease in the effective tax rate is due to a reduction in the
provision for income taxes of $120.0 million related to favorable tax
settlements, including an IRS audit settlement and the settlement of a state tax
matter. These settlements decreased the effective tax rate by approximately 6.3
percentage points in fiscal 2009. Lastly, during fiscal 2008, there was a
reduction in the provision for income taxes of $12.4 million related to the
settlement of a state tax matter. This decreased the effective tax rate by
approximately 0.7 percentage points in fiscal 2008.
Net Earnings from Continuing
Operations and Diluted Earnings per Share from Continuing
Operations
Net earnings from continuing operations increased 15%, to $1,325.1
million, in fiscal 2009, from $1,155.7 million in fiscal 2008, and the related
diluted earnings per share from continuing operations increased 20%, to $2.62 in
fiscal 2009. The increase in net earnings from continuing operations in fiscal
2009 reflects the increased revenues, lower expenses and lower effective tax
rate as described above. The increase in diluted earnings per share from
continuing operations in fiscal 2009 reflects the increase in net earnings from
continuing operations and the impact of fewer weighted average diluted shares
outstanding due to the repurchase of 13.8 million shares in fiscal 2009 and 32.9
million shares in fiscal 2008.
ANALYSIS OF REPORTABLE SEGMENTS
Revenues
(Dollars in
millions) |
|
|
Years ended June 30, |
|
$
Change |
|
%
Change |
|
|
2010 |
|
2009 |
|
2008 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Employer Services |
|
$ |
6,442.6 |
|
|
$ |
6,438.9 |
|
|
$ |
6,227.8 |
|
|
$ |
3.7 |
|
|
$ |
211.1 |
|
|
0 |
% |
|
3 |
% |
PEO Services |
|
|
1,316.8 |
|
|
|
1,185.8 |
|
|
|
1,060.5 |
|
|
|
131.0 |
|
|
|
125.3 |
|
|
11 |
% |
|
12 |
% |
Dealer Services |
|
|
1,229.4 |
|
|
|
1,267.9 |
|
|
|
1,301.8 |
|
|
|
(38.5 |
) |
|
|
(33.9 |
) |
|
(3 |
)% |
|
(3 |
)% |
Other |
|
|
16.4 |
|
|
|
19.4 |
|
|
|
4.9 |
|
|
|
(3.0 |
) |
|
|
14.5 |
|
|
(15 |
)% |
|
100 |
+% |
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange |
|
|
59.2 |
|
|
|
(7.3 |
) |
|
|
153.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client funds
interest |
|
|
(136.7 |
) |
|
|
(66.3 |
) |
|
|
(15.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
8,927.7 |
|
|
$ |
8,838.4 |
|
|
$ |
8,733.7 |
|
|
$ |
89.3 |
|
|
$ |
104.7 |
|
|
1 |
% |
|
1 |
% |
23
Earnings from Continuing Operations
before Income Taxes
(Dollars in
millions) |
|
|
Years ended June 30, |
|
$
Change |
|
%
Change |
|
|
2010 |
|
2009 |
|
2008 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Employer Services |
|
$ |
1,722.4 |
|
|
$ |
1,758.7 |
|
|
$ |
1,606.7 |
|
|
$ |
(36.3 |
) |
|
$ |
152.0 |
|
|
(2 |
)% |
|
9 |
% |
PEO Services |
|
|
126.6 |
|
|
|
117.6 |
|
|
|
102.0 |
|
|
|
9.0 |
|
|
|
15.6 |
|
|
8 |
% |
|
15 |
% |
Dealer Services |
|
|
201.0 |
|
|
|
214.3 |
|
|
|
220.1 |
|
|
|
(13.3 |
) |
|
|
(5.8 |
) |
|
(6 |
)% |
|
(3 |
)% |
Other |
|
|
(167.8 |
) |
|
|
(233.5 |
) |
|
|
(245.4 |
) |
|
|
65.7 |
|
|
|
11.9 |
|
|
28 |
% |
|
5 |
% |
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange |
|
|
10.3 |
|
|
|
2.5 |
|
|
|
25.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client funds
interest |
|
|
(136.7 |
) |
|
|
(66.3 |
) |
|
|
(15.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of capital
charge |
|
|
107.4 |
|
|
|
106.8 |
|
|
|
109.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings from
continuing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income
taxes |
|
$ |
1,863.2 |
|
|
$ |
1,900.1 |
|
|
$ |
1,803.4 |
|
|
$ |
(36.9 |
) |
|
$ |
96.7 |
|
|
(2 |
)% |
|
5 |
% |
The fiscal
2009 and 2008 reportable segments’ revenues and earnings from continuing
operations before income taxes have been adjusted to reflect updated fiscal 2010
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 changes in foreign currency exchange rates. This
adjustment is a reconciling item to revenues and earnings from continuing
operations before income taxes and results in the elimination of this adjustment
in consolidation.
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. The primary components
of the “Other” segment are miscellaneous processing services, such as customer
financing transactions, non-recurring gains and losses and certain expenses that
have not been charged to the reportable segments, such as stock-based
compensation expense.
In addition,
the reconciling items include an adjustment for the difference between actual
interest income earned on invested funds held for clients and interest credited
to Employer Services and PEO Services at a standard rate of 4.5%. This
allocation is made for management reasons so that the reportable segments’
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 from continuing operations before income taxes
and results in the elimination of this adjustment in consolidation.
Finally, the
reportable segments’ results include a cost of capital charge related to the
funding of acquisitions and other investments. This charge is a reconciling item
to earnings from continuing operations before income taxes and results in the
elimination of this charge in consolidation.
Employer Services
Fiscal 2010 Compared to Fiscal 2009
Revenues
Employer Services' revenues
increased $3.7 million to $6,442.6 million in fiscal 2010 as compared to fiscal
2009. Revenues from our payroll and tax filing business declined 4% in fiscal
2010, due to a decline in pays per control and a decline in the number of
payrolls processed, partially offset by pricing increases. Revenues from our
“beyond payroll” services increased 6% in fiscal 2010, due to an increase in the
number of clients utilizing our COBRA and HR Benefits solutions, as well as an
increase in revenues related to our Retirement Services business due to an
increase in the market value of the assets under management. Pays per control,
which represents the number of employees on our clients’ payrolls as measured on
a same-store-sales basis utilizing a subset of approximately 130,000 payrolls of
small to large businesses that are reflective of a broad range of U.S.
geographic regions, decreased 3.4% in fiscal 2010. Worldwide client retention
improved 40 basis points, to 89.9%, and pricing increases contributed
approximately 1% to our revenue growth for fiscal 2010. In addition, interest on
client funds recorded within the Employer Services segment increased $2.7
million in fiscal 2010 due to a slight increase in average client fund balances.
We credit Employer Services with interest on client funds at a standard rate of
4.5%; therefore, Employer Services’ results are not influenced by changes in
interest rates.
24
Earnings from Continuing Operations
before Income Taxes
Employer Services’ earnings from
continuing operations before income taxes decreased $36.3 million to $1,722.4
million in fiscal 2010 as compared to fiscal 2009. The decrease was due to an
increase in expenses of $40.0 million, which was partially offset by the $3.7
million increase in revenues discussed above. The increase in expenses can be
attributed to $16.9 million of incremental investments in our products and an
increase of $14.7 million related to increased service costs for investment in
client-facing associates. These increases in expense were partially offset by
lower expenses resulting from our cost savings initiatives, which included
headcount reductions at the end of fiscal 2009 and a reduction in travel and
entertainment expenses.
Fiscal 2009 Compared to Fiscal 2008
Revenues
Employer Services' revenues
increased $211.1 million, or 3%, to $6,438.9 million in fiscal 2009. Revenues
from our payroll and payroll tax filing business were flat for fiscal 2009. Our
payroll and payroll tax filing revenues were adversely impacted in fiscal 2009
due to the reduced number of payrolls processed, a decline in pays per control
and a reduction in the average daily balances held, but these declines were
offset by pricing increases. Our worldwide client retention decreased by 1.2
percentage points during fiscal 2009. Lost business due to clients’ pricing
sensitivity and clients going out of business increased during fiscal 2009 as a
result of economic pressures. “Pays per control,” which represents the number of
employees on our clients’ payrolls as measured on a same-store-sales basis
utilizing a subset of approximately 137,000 payrolls of small to large
businesses that are reflective of a broad range of U.S. geographic regions,
decreased 2.5% in fiscal 2009. We credit Employer Services with interest on
client funds at a standard rate of 4.5%; therefore, Employer Services’ results
are not influenced by changes in interest rates. Interest on client funds
recorded within the Employer Services segment decreased $25.0 million, or 3.4%
in fiscal 2009, as a result of a decrease in average daily balances from $15.5
billion for fiscal 2008 to $15.0 billion for fiscal 2009, related to lower
bonuses, lower wage growth, and a decline in pays per control. The impact of
pricing increases was an increase of approximately 2% to our revenue for fiscal
2009. Revenues from our “beyond payroll” services increased 8% in fiscal 2009
due to an increase in our Time and Labor Management and HR Benefits services
revenues, due to an increase in the number of clients utilizing these services,
partially offset by a decline in our Retirement Services revenues due to a
decrease in the market value of the assets under management.
Earnings from Continuing Operations
before Income Taxes
Employer Services’ earnings from
continuing operations before income taxes increased $152.0 million, or 9%, to
$1,758.7 million in fiscal 2009. Earnings from continuing operations before
income taxes for fiscal 2009 grew at a faster rate than revenues due to a
decrease of $57.7 million related to management incentive compensation expenses,
slower growth in selling expenses of $36.2 million as compared to revenues due
to a decline in our new client sales and our cost saving initiatives that
commenced in fiscal 2008 and continued in fiscal 2009, including headcount
reductions and curtailment of non-essential travel and entertainment expenses.
These decreases in expenses were offset, in part, by higher expenses of $64.5
million related to increased service costs for investment in client-facing
associates.
PEO Services
Fiscal 2010 Compared to Fiscal 2009
Revenues
PEO Services’ revenues increased
$131.0 million, or 11%, to $1,316.8 million in fiscal 2010, as compared to
fiscal 2009, due to a 5% increase in the average number of worksite employees.
The increase in the average number of worksite employees as compared to fiscal
2009 was due to an increase in the number of clients. Revenues associated with
benefits coverage, workers’ compensation coverage and state unemployment taxes
for worksite employees that were billed to our clients increased $113.7 million
due to the increase in the average number of worksite employees, as well as
increases in health care costs. Administrative revenues, which
represent the fees for our services and are billed based upon a percentage of
wages related to worksite employees, increased $11.8 million, or 5%, in fiscal
2010, due to the increase in the number of average worksite
employees.
We credit PEO
Services with interest on client funds at a standard rate of 4.5%; therefore,
PEO Services’ results are not influenced by changes in interest rates. Interest
on client funds recorded within the PEO Services segment increased $0.7 million
in fiscal 2010 due to the increase in average client funds balances as a result
of increased PEO Services new business and growth in our existing client base.
Average client funds balances were $0.2 billion in both fiscal 2010 and fiscal
2009.
25
Earnings from Continuing Operations
before Income Taxes
PEO Services’ earnings from
continuing operations before income taxes increased $9.0 million, or 8%, to
$126.6 million in fiscal 2010 as compared to fiscal 2009. Earnings from
continuing operations before income taxes grew due to the increase in revenues
described above, net of the related cost of providing benefits coverage,
workers’ compensation coverage and payment of state unemployment taxes for
worksite employees that are included in costs of revenues. In fiscal 2010, there
was an increase in costs associated with providing benefits coverage for
worksite employees of $87.2 million and costs associated with workers’
compensation and payment of state unemployment taxes for worksite employees of
$26.5 million. In addition, earnings before income taxes increased $9.2 million
due to the settlement of a state unemployment tax matter. Such increases in
earnings before income taxes were offset by price concessions and higher
pass-through costs related to state unemployment taxes.
Fiscal 2009 Compared to Fiscal
2008
Revenues
PEO Services’ revenues increased
$125.3 million, or 12%, to $1,185.8 million in fiscal 2009 due to a 10% increase
in the average number of worksite employees. The increase in the average number
of worksite employees was due to new client sales. Revenues associated with
benefits coverage, workers’ compensation coverage and state unemployment taxes
for worksite employees that were billed to our clients increased $119.5 million
due to the increase in the average number of worksite employees, as well as
increases in health care costs. Administrative revenues, which represent the
fees for our services and are billed based upon a percentage of wages related to
worksite employees, increased $15.3 million, or 7%, due to the increase in the
number of average worksite employees. We credit PEO Services with interest on
client funds at a standard rate of 4.5%; therefore, PEO Services’ results are
not influenced by changes in interest rates. Interest on client funds recorded
within the PEO Services segment increased $1.5 million in fiscal 2009 due to the
increase in the average client funds balances as a result of increased PEO
Services’ new business and growth in our existing client base. The average
client funds balances were $0.2 billion in both fiscal 2009 and fiscal 2008.
Earnings from Continuing Operations
before Income Taxes
PEO Services’ earnings from
continuing operations before income taxes increased $15.6 million, or 15%, to
$117.6 million in fiscal 2009. This increase was primarily attributable to the
increase in revenues described above, net of the related cost of providing
benefits coverage, workers’ compensation coverage and payment of state
unemployment taxes for worksite employees, which are included in costs of
revenues. In fiscal 2009, there was an increase in costs associated with our PEO
business related to costs associated with providing benefits coverage for
worksite employees of $102.7 million and costs associated with workers’
compensation and payment of state unemployment taxes for worksite employees of
$16.8 million. In addition, there was an increase in expenses related to new
business sales of $2.0 million in fiscal 2009.
Dealer Services
Fiscal 2010 Compared to Fiscal 2009
Revenues
Dealer Services' revenues decreased
$38.5 million, or 3%, to $1,229.4 million in fiscal 2010. Revenues for our
Dealer Services business would have declined approximately 4% for fiscal 2010
without the impact of acquisitions. Revenues declined $112.9 million due to
client losses as a result of dealership closings, cancellation of services and
continued pressure on dealerships to reduce costs. In addition, revenues
decreased $25.1 million due to lower international software license fees and
$5.3 million due to lower Credit Check and Computerized Vehicle Registration
(“CVR”) transaction volume. These decreases in revenues were offset by a $90.0
million increase in revenues from new clients and growth in our key products
during fiscal 2010. The growth in our key products was driven by increased users
for Application Service Provider (“ASP”) managed services, growth in our
Customer Relationship Management (“CRM”) applications and new network and hosted
IP telephony installations.
26
Earnings from Continuing Operations
before Income Taxes
Dealer Services' earnings from
continuing operations before income taxes decreased $13.3 million, or 6%, to
$201.0 million in fiscal 2010. The decrease was due to the decline in revenues
of $38.5 million discussed above, which was partially offset by a decrease in
expenses of $25.2 million. The decrease in expenses was due to certain cost
saving initiatives, including headcount reductions at the end of fiscal 2009 and
a reduction in travel and entertainment expenses, offset by an asset impairment
charge of $6.8 million as a result of the announcement by GM that it will shut
down its Saturn division.
Fiscal 2009 Compared to Fiscal 2008
Revenues
Dealer Services' revenues decreased
$33.9 million, or 3%, to $1,267.9 million in fiscal 2009. Revenues for our
Dealer Services business would have declined approximately 4% for fiscal 2009
without the impact of acquisitions. The decrease in revenues was due to client
losses and cancellation of services resulting from the consolidation and closing
of dealerships and continued pressure on dealerships to reduce costs, all of
which resulted in a decrease to revenues of $72.9 million for fiscal 2009. In
addition, revenues decreased $23.9 million due to lower Credit Check, Laser
Printing, and CVR transaction volume and $9.5 million due to a decrease in
revenues from consulting services and forms and supplies. These decreases in
revenues were offset by a $67.8 million increase in revenues from new clients
and growth in our key products during fiscal 2009. The growth in our key
products was driven by increased users for ASP managed services, growth in our
CRM applications and new network and hosted IP telephony installations.
Earnings from Continuing Operations
before Income Taxes
Dealer Services’ earnings from
continuing operations before income taxes decreased $5.8 million, or 3%, to
$214.3 million in fiscal 2009 due to the decrease of $33.9 million in revenues
discussed above, which was partially offset by a decrease in expenses of $28.1
million. The decrease in expenses was due to lower selling expenses of $11.4
million related to a decline in new client sales and a decrease of $13.2 million
in expenses due to certain cost saving initiatives, including headcount
reductions and curtailment of non-essential travel and entertainment expenses,
and a decrease of $7.1 million related to management incentive compensation
expenses.
Other
The primary
components of the “Other” segment are miscellaneous processing services, such as
customer financing transactions, non-recurring gains and losses and certain
expenses that have not been charged to the reportable segments, such as
stock-based compensation expense. Stock-based compensation expense was $67.6
million, $96.0 million and $123.6 million in fiscal 2010, 2009 and 2008,
respectively.
27
FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES
At June 30,
2010, cash and marketable securities were $1,775.5 million, stockholders’ equity
was $5,478.9 million and the ratio of long-term debt-to-equity was 0.7%. Working
capital before funds held for clients and client funds obligations was $1,568.6
million, as compared to $1,515.5 million at June 30, 2009. This increase is due
to cash generated from operations, partially offset by the use of cash to
repurchase common stock, the use of cash for dividend payments and the use of
cash for acquisitions.
Our principal
sources of liquidity for operations are derived from cash generated through
operations and through corporate cash and marketable securities on hand. We
continued to generate positive cash flows from operations during fiscal 2010,
and we held approximately $1.8 billion of cash and marketable securities at June
30, 2010. 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 to meet short-term funding
requirements related to client funds obligations.
Net cash flows
provided by operating activities were $1,682.1 million in fiscal 2010, as
compared to $1,562.6 million in fiscal 2009. The increase in net cash flows
provided by operating activities was due to a $158.7 million tax refund received
by a Canadian subsidiary of the Company in fiscal 2010, an increase in cash
flows due to lower cash bonuses paid to our employees and an increase in cash
flows related to collections from our clients. Such increases in net cash flows
provided by operating activities were partially offset by an increase in pension
plan contributions as compared to fiscal 2009, which decreased cash flows by
$106.0 million. Lastly, there was a $77.1 million decrease due to income taxes
paid in fiscal 2010 as a result of the agreement reached during fiscal 2009 with
the IRS regarding all outstanding audit issues with the IRS for the tax years
1998 through 2006.
Net cash flows
used in investing activities were $2,379.5 million in fiscal 2010, as compared
to $644.1 million in fiscal 2009. The increase in net cash flows used in
investing activities was due to the timing of purchases of and proceeds from the
sales or maturities of marketable securities, which resulted in a net decrease
to cash flows of $1,023.7 million and the timing of receipts and payments of
cash and cash equivalents held to satisfy client funds obligations that resulted
in a decrease to cash flows of $907.7 million. Such decreases to cash flows were
partially offset by a reclassification, in fiscal 2009, from cash and cash
equivalents to short-term marketable securities of $211.1 million related to the
Reserve Fund discussed below. The proceeds received related to the Reserve Fund
have been included in proceeds from the sales and maturities of corporate and
client funds marketable securities.
Net cash flows
provided by financing activities were $89.0 million in fiscal 2010 as compared
to $468.4 in fiscal 2009. The decrease was due to a $1,460.0 million change in
cash due to the repayment in fiscal 2010 of a $730.0 million commercial paper
borrowing that was outstanding at June 30, 2009. In addition, there was a $186.0
million decrease in cash flows provided by financing activities due to an
increase in cash used for repurchases of common stock. We purchased
approximately 18.2 million shares of our common stock at an average price per
share of $42.02 during fiscal 2010 as compared to purchases of 13.8 million
shares of our common stock at an average price per share of $39.72 during fiscal
2009. Such decreases in cash flows of financing activities were partially offset
by the net change in the client funds obligations of $1,135.2 million as a
result of timing of cash received and payments made related to client funds
obligations and an increase of $158.4 million in the proceeds from stock
purchase plan purchases and exercises of stock options.
Our U.S.
short-term funding requirements related to client funds are sometimes obtained
through a short-term commercial paper program, which provides for the issuance
of up to $6.0 billion in aggregate maturity value of commercial paper. In August
2010, the Company increased the U.S. short-term commercial paper program to
provide for the issuance of up to $6.25 billion in aggregate maturity value. Our
commercial paper program is rated A-1+ by Standard and Poor’s and Prime-1 by
Moody’s. These ratings denote the highest quality commercial paper securities.
Maturities of commercial paper can range from overnight to up to 364 days. At
June 30, 2010, there was no commercial paper outstanding. At June 30, 2009, we
had $730.0 million in commercial paper outstanding. Such amount was repaid on
July 1, 2009. In fiscal 2010 and 2009, our average borrowings were $1.6 billion
and $1.9 billion, respectively, at a weighted average interest rate of 0.2% and
1.0%, respectively. The weighted average maturity of our commercial paper was
less than two days in both fiscal 2010 and fiscal 2009. Throughout fiscal 2010,
we had full access to our U.S. short-term funding requirements related to client
funds obligations.
28
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 reverse repurchase
agreements. These agreements are collateralized principally by government and
government agency
securities. These agreements generally have terms ranging from overnight to up
to five business days. We have $2 billion available to us on a committed basis
under these reverse repurchase agreements. At June 30, 2010 and 2009,
respectively, there were no outstanding obligations under reverse repurchase
agreements. In fiscal 2010 and 2009, we had average outstanding balances under
reverse repurchase agreements of $425.0 million and $425.9 million,
respectively, at a weighted average interest rate of 0.2% and 1.3%,
respectively. We have successfully borrowed through the use of reverse
repurchase agreements on an as needed basis to meet short-term funding
requirements related to client funds obligations.
In June 2010,
we entered into a $2.5 billion, 364-day credit agreement with a group of
lenders. The 364-day facility replaced our prior $2.25 billion 364-day facility.
In addition, we entered into a three-year $1.5 billion credit facility maturing
in June 2013 that contains an accordion feature under which the aggregate
commitment can be increased by $500.0 million, subject to the availability of
additional commitments. The three-year facility replaced our prior $1.5 billion
five-year facility, which expired in June 2010. We also have an existing $2.25
billion five-year credit facility that matures in June 2011 that also contains
an accordion feature under which the aggregate commitment can be increased by
$500.0 million, subject to the availability of additional commitments. The
interest rate applicable to committed borrowings is tied to LIBOR, the federal
funds effective rate or the prime rate depending on the notification provided by
us 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
funding for general corporate purposes, if necessary. We had no borrowings
through June 30, 2010 under the credit agreements. We believe that we currently
meet all conditions set forth in the credit agreements to borrow thereunder and
we are not aware of any conditions that would prevent us from borrowing part or
all of the $6.25 billion available to us under the credit
agreements.
Our investment
portfolio does not contain any asset-backed securities with underlying
collateral of sub-prime mortgages, alternative-A mortgages, sub-prime auto loans
or home equity loans, collateralized debt obligations, collateralized loan
obligations, credit default swaps, asset-backed commercial paper, derivatives,
auction rate securities, structured investment vehicles or non-investment-grade
fixed-income securities. We own senior tranches of fixed rate credit card, rate
reduction, auto loan and other asset-backed securities, secured predominately by
prime collateral. All collateral on asset-backed securities is performing as
expected. In addition, we own senior debt directly issued by Federal Home Loan
Banks, Federal National Mortgage Association (“Fannie Mae”) and Federal Home
Loan Mortgage Corporation (“Freddie Mac”). We do not own subordinated debt,
preferred stock or common stock of any of these agencies. We do own AAA rated
mortgage-backed securities, which represent an undivided beneficial ownership
interest in a group or pool of one or more residential mortgages. These
securities are collateralized by the cash flows of 15-year and 30-year
residential mortgages and are guaranteed by Fannie Mae and Freddie Mac as to the
timely payment of principal and interest. Our client funds investment strategy
is structured to allow us to average our way through an interest rate cycle by
laddering investments out to five years (in the case of the extended portfolio)
and out to ten years (in the case of the long portfolio). This investment
strategy is supported by our short-term financing arrangements necessary to
satisfy short-term funding requirements relating to client funds obligations.
Capital
expenditures for continuing operations in fiscal 2010 were $90.2 million, as
compared to $167.6 million in fiscal 2009 and $186.3 million in fiscal 2008. The
capital expenditures in fiscal 2010 related to our data center and other
facility improvements to support our operations. We expect capital expenditures
in the year ending June 30, 2011 (“fiscal 2011”) to be between $150 million and
$170 million.
29
The following
table provides a summary of our contractual obligations as of June 30, 2010:
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
Less than |
|
1-3 |
|
3-5 |
|
More than |
|
|
|
|
|
|
Contractual
Obligations |
|
1
year |
|
years |
|
years |
|
5
years |
|
Unknown |
|
Total |
Debt Obligations (1) |
|
$ |
2.8 |
|
$ |
18.8 |
|
$ |
3.6 |
|
$ |
17.4 |
|
$ |
- |
|
$ |
42.6 |
|
Operating Lease and
Software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License Obligations
(2) |
|
|
143.9 |
|
|
169.9 |
|
|
79.0 |
|
|
30.5 |
|
|
- |
|
|
423.3 |
|
Purchase Obligations
(3) |
|
|
262.6 |
|
|
282.6 |
|
|
164.8 |
|
|
- |
|
|
- |
|
|
710.0 |
|
Obligations related to
Unrecognized |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
107.2 |
|
|
107.2 |
Tax Benefits (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
reflected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on our Consolidated Balance
Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and Benefits
(5) |
|
|
53.3 |
|
|
122.7 |
|
|
82.7 |
|
|
166.4 |
|
|
27.3 |
|
|
452.4 |
|
Acquisition-related
obligations (6) |
|
|
7.1 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
7.1 |
Total |
|
$ |
469.7 |
|
$ |
594.0 |
|
$ |
330.1 |
|
$ |
214.3 |
|
$ |
134.5 |
|
$ |
1,742.6 |
|
|
(1) |
|
These amounts represent the principal repayments of our debt and
are included on our Consolidated Balance Sheets. See Note 12 to the
consolidated financial statements for additional information about our
debt and related matters. The estimated interest payments due by
corresponding period above are $1.1 million, $2.2 million, $2.1 million,
and $2.6 million, respectively, which have been excluded. |
|
|
|
(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 or 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) |
|
We made the determination that net cash payments expected to be
paid within the next 12 months, related to unrecognized tax benefits of
$107.2 million at June 30, 2010, are expected to be zero. We are unable to
make reasonably reliable estimates as to the period beyond the next 12
months in which cash payments related to unrecognized tax benefits are
expected to be paid. |
|
|
|
(5) |
|
Compensation and benefits primarily relates to amounts associated
with our employee benefit plans and other compensation
arrangements. |
|
|
|
(6) |
|
Acquisition-related obligations relate to contingent consideration
for business acquisitions for which the amount of contingent consideration
was determinable at the date of acquisition and therefore included on the
Consolidated Balance Sheet as a
liability. |
In addition to
the obligations quantified in the table above, we had obligations for the
remittance of funds relating to our payroll and payroll tax filing services. As
of June 30, 2010, the obligations relating to these matters, which are expected
to be paid in fiscal 2011, total $18,136.7 million and were recorded in client
funds obligations on our Consolidated Balance Sheets. We had $18,832.6
million of cash and marketable securities
that have been impounded from our clients to satisfy such obligations recorded
in funds held for clients on our Consolidated Balance Sheets as of June 30,
2010.
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 certain level in each policy
year. We utilize historical loss experience and actuarial judgment to determine
the estimated claim liability for the PEO business. In fiscal 2010 and 2009, the
net premium was $67.8 million and $60.8 million, respectively. In fiscal 2010
and 2009, we paid claims of $53.8 million and $43.6 million, respectively. At
June 30, 2010, our cash and marketable securities included balances totaling
approximately $208.6 million to cover the actuarially estimated cost of workers’
compensation claims for the policy years that the PEO worksite employees were
covered by ADP Indemnity, Inc.
In the normal
course of business, we also enter into contracts in which we make
representations and warranties that relate to the performance of our services
and products. We do not expect any material losses related to such
representations and warranties.
30
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).
Our corporate
investments are invested in cash and cash equivalents and highly liquid,
investment-grade marketable securities. These assets are available for
repurchases of common stock for treasury and/or acquisitions, as well as other
corporate operating purposes. All of our short-term and long-term fixed-income
securities are classified as available-for-sale securities.
Our client
funds assets are invested with safety of principal, liquidity, and
diversification as the primary goals. Consistent with those goals, we also seek
to maximize interest income and to minimize the volatility of interest income.
Client funds assets are invested in liquid, investment-grade marketable
securities with a maximum maturity of 10 years at time of purchase and money
market securities and other cash equivalents. At June 30, 2010, approximately
79% of the available-for-sale securities categorized as U.S. Treasury and direct
obligations of U.S. government agencies were invested in senior, unsecured,
non-callable debt directly issued by the Federal Home Loan Banks, Fannie Mae and
Freddie Mac.
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. Our client
funds investment strategy is structured to allow us to average our way through
an interest rate cycle by laddering the maturities of our investments out to
five years (in the case of the extended portfolio) and out to ten years (in the
case of the long portfolio). As part of our client funds investment strategy, we
use the daily collection of funds from our clients to satisfy other unrelated
client fund obligations, rather than liquidating previously-collected client
funds that have already been invested in available-for-sale securities. We
minimize the risk of not having funds collected from a client available at the
time such client’s obligation becomes due by impounding, in virtually all
instances, the client’s funds in advance of the timing of payment of such
client’s obligation. As a result of this practice, we have consistently
maintained the required level of client fund assets to satisfy all of our client
funds obligations.
There are
inherent risks and uncertainties involving our investment strategy relating to
our client fund assets. Such risks include liquidity risk, including the risk
associated with our ability to liquidate, if necessary, our available-for-sale
securities in a timely manner in order to satisfy our client funds obligations.
However, our investments are made with the safety of principal, liquidity and
diversification as the primary goals to minimize the risk of not having
sufficient funds to satisfy all of our client funds obligations. We also believe
we have significantly reduced the risk of not having sufficient funds to satisfy
our client funds obligations by consistently maintaining access to other sources
of liquidity, including our corporate cash balances, available borrowings under
our $6 billion commercial paper program (rated A-1+ by Standard and Poor’s and
Prime-1 by Moody’s, the highest possible credit rating), our ability to execute
reverse repurchase transactions and available borrowings under our $6 billion
committed revolving credit facilities. However, the availability of financing
during periods of economic turmoil, even to borrowers with the highest credit
ratings, may limit our ability to access short-term debt markets to meet the
liquidity needs of our business. In addition to liquidity risk, our investments
are subject to interest rate risk and credit risk, as discussed below.
We have
established credit quality, maturity, and exposure limits for our investments.
The minimum allowed credit rating at time of purchase for corporate bonds is BBB
and for asset-backed and commercial mortgage-backed securities is AAA. The
maximum maturity at time of purchase for BBB rated securities is 5 years, for
single A rated securities is 7 years, and for AA rated and 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.
31
Details
regarding our overall investment portfolio are as follows:
(Dollars in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
2010 |
|
2009 |
|
2008 |
Average investment balances at
cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
investments |
|
$ |
3,839.2 |
|
|
$ |
3,744.7 |
|
|
$ |
3,387.0 |
|
Funds held for
clients |
|
|
15,194.5 |
|
|
|
15,162.4 |
|
|
|
15,654.3 |
|
Total |
|
$ |
19,033.7 |
|
|
$ |
18,907.1 |
|
|
$ |
19,041.3 |
|
|
Average interest rates earned
exclusive of |
|
|
|
|
|
|
|
|
|
|
|
|
realized gains/ (losses)
on: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
investments |
|
|
2.6 |
% |
|
|
3.6 |
% |
|
|
4.4 |
% |
Funds held for
clients |
|
|
3.6 |
% |
|
|
4.0 |
% |
|
|
4.4 |
% |
Total |
|
|
3.4 |
% |
|
|
3.9 |
% |
|
|
4.4 |
% |
|
Realized gains on
available-for-sale securities |
|
$ |
15.0 |
|
|
$ |
11.4 |
|
|
$ |
10.1 |
|
Realized losses on
available-for-sale securities |
|
|
(13.4 |
) |
|
|
(23.8 |
) |
|
|
(11.4 |
) |
Net realized gains/(losses) on
available-for-sale securities |
|
$ |
1.6 |
|
|
$ |
(12.4 |
) |
|
$ |
(1.3 |
) |
|
As of June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized pre-tax gains
on available-for-sale securities |
|
$ |
710.9 |
|
|
$ |
436.6 |
|
|
$ |
142.1 |
|
|
Total available-for-sale
securities at fair value |
|
$ |
15,517.0 |
|
|
$ |
14,730.2 |
|
|
$ |
15,066.4 |
|
Our laddering
strategy exposes us to interest rate risk in relation to securities that mature,
as the proceeds from maturing securities are reinvested. 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. The annualized interest rates earned on our entire
portfolio decreased by 50 basis points, from 3.9% for fiscal 2009 to 3.4% for
fiscal 2010. A hypothetical change in both short-term interest rates (e.g.,
overnight interest rates or the federal funds rate) and intermediate-term
interest rates of 25 basis points applied to the estimated average investment
balances and any related short-term borrowings would result in approximately a
$9 million impact to earnings before income taxes over the ensuing twelve-month
period ending June 30, 2011. A hypothetical change in only short-term interest
rates of 25 basis points applied to the estimated average short-term investment
balances and any related short-term borrowings would result in approximately a
$5 million impact to earnings before income taxes over the ensuing twelve-month
period ending June 30, 2011.
We are 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. We
limit credit risk by investing in investment-grade securities, primarily AAA and
AA rated securities, as rated by Moody’s, Standard & Poor’s, and for
Canadian securities, Dominion Bond Rating Service. At June 30, 2010,
approximately 85% of our available-for-sale securities held an AAA or AA rating.
In addition, we limit amounts that can be invested in any security other than US
and Canadian government or government agency securities.
We are exposed
to market risk from changes in foreign currency exchange rates that could impact
our consolidated results of operations, financial position or cash flows. We
manage our exposure to these market risks through our regular operating and
financing activities and, when deemed appropriate, through the use of derivative
financial instruments. We use derivative financial instruments as risk
management tools and not for trading purposes.
During fiscal
2010, we were exposed to foreign exchange fluctuations on U.S. Dollar
denominated short-term intercompany amounts payable by a Canadian subsidiary to
a U.S. subsidiary of the Company in the amount of $178.6 million U.S. Dollars.
In order to manage the exposure related to the foreign exchange fluctuations
between the Canadian Dollar and the U.S. Dollar, the Canadian subsidiary entered
into a foreign exchange forward contract, which obligated the Canadian
subsidiary to buy $178.6 million U.S. dollars at a rate of 1.15 Canadian Dollars
to each U.S. Dollar on December 1, 2009. Upon settlement of such contract on
December 1, 2009, an additional foreign exchange forward contract was entered
into that obligated the Canadian subsidiary to buy $29.4 million U.S. Dollars at
a rate of 1.06 Canadian dollars to each U.S. Dollar on February 26, 2010. The
net loss on the foreign exchange forward contracts of $15.8 million for the
twelve months ended June 30, 2010 was recognized in earnings in fiscal 2010 and
substantially offset the foreign currency mark-to-market gains on the related
short-term intercompany amounts payable. The short-term intercompany amounts
payable were fully paid by the Canadian subsidiary to the U.S. subsidiary by
February 2010.
32
There were no
derivative financial instruments outstanding at June 30, 2010, 2009 or
2008.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In October
2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-13,
"Multiple Deliverable Revenue Arrangements." ASU 2009-13 modifies the guidance
related to accounting for arrangements with multiple deliverables by providing
an alternative when vendor specific objective evidence ("VSOE") or third-party
evidence ("TPE") does not exist to determine the selling price of a deliverable.
The alternative when VSOE or TPE does not exist is the best estimate of the
selling price of the deliverable. Consideration for multiple deliverables is
then allocated based upon the relative selling price of the deliverables and
revenue is recognized as earned for each deliverable. ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, unless the election is made to
adopt ASU 2009-13 retrospectively. In either case, early adoption is permitted.
The adoption of ASU 2009-13 will not have a material impact on our consolidated
results of operations, financial condition or cash flows.
In October
2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements that
Include Software Elements" ("ASU 2009-14"). ASU 2009-14 modifies the scope of
the software revenue recognition guidance to exclude (a) non-software components
of tangible products and (b) software components of tangible products that are
sold, licensed, or leased with tangible products when the software components
and non-software components of the tangible product function together to deliver
the tangible product's functionality. ASU 2009-14 is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, unless the election is made to adopt ASU
2009-14 retrospectively. In either case, early adoption is permitted. The
adoption of ASU 2009-14 will not have a material impact on our consolidated
results of operations, financial condition or cash flows.
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) as well as investment income on payroll funds, payroll tax
filing funds and other Employer Services’ client-related funds. We enter into
agreements for a fixed fee per transaction (e.g., number of payees or number of
payrolls processed). 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 collectability is reasonably assured.
Our service fees are determined based on written price quotations or service
agreements having stipulated terms and conditions that 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
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 (e.g., Dealer Services’ dealer management systems). 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
collectability 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 collectability determination would result in a material change to revenues
as no single customer accounts for a significant portion of our revenues.
33
Goodwill. We account for goodwill and other
intangible assets with indefinite useful lives in accordance with ASC 350-10,
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. We perform this impairment test by first comparing the
fair value of our reporting units to their carrying amount. If an indicator of
impairment exists based upon comparing the fair value of our reporting units to
their carrying amount, we would then compare the implied fair value of our
goodwill to the carrying amount in order to determine the amount of the
impairment, if any. We determine the fair value of our reporting units using the
income approach, which utilizes a discounted cash flow model. In addition, we
use comparative market multiples to corroborate our discounted cash flow
results. We had $2,383.3 million of goodwill as of June 30, 2010. 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. 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 consolidated 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 IRS and
other tax authorities. A change in the assessment of the outcomes of such
matters could materially impact our consolidated financial statements.
There is a
financial statement recognition threshold and measurement attribute for tax
positions taken or expected to be taken in a tax return. Specifically, an
entity’s tax benefits must be “more likely than not” of being sustained assuming
that those positions will be examined by taxing authorities with full knowledge
of all relevant information prior to recording the related tax benefit in the
financial statements. If a tax position drops below the “more likely than not”
standard, the benefit can no longer be recognized. Assumptions, judgment and the
use of estimates are required in determining if the “more likely than not”
standard has been met when developing the provision for income taxes. A change
in the assessment of the “more likely than not” standard could materially impact
our consolidated financial statements. As of June 30, 2010 and 2009, the
Company’s liabilities for unrecognized tax benefits, which include interest and
penalties, were $107.2 million and $92.8 million, respectively.
If certain
pending tax matters settle within the next twelve months, the total amount of
unrecognized tax benefits may increase or decrease for all open tax years and
jurisdictions. Based on current estimates, settlements related to various
jurisdictions and tax periods could increase earnings up to $10.0 million in the
next twelve months. We do not expect any cash payments related to unrecognized
tax benefits in the next twelve months. Audit outcomes and the timing of audit
settlements are subject to significant uncertainty. We continually assess the
likelihood and amount of potential adjustments and adjust the income tax
provision, the current tax liability and deferred taxes in the period in which
the facts that give rise to a revision become known.
Stock-Based Compensation.
We measure
stock-based compensation expense based on the fair value of the award on the
date of grant. We determine the fair value of stock options issued by using a
binomial option-pricing model. The binomial option-pricing model considers a
range of assumptions related to volatility, dividend yield, risk-free interest
rate and employee exercise behavior. Expected volatilities utilized in the
binomial option-pricing model are based on a combination of implied market
volatilities, historical volatility of our stock price and other factors.
Similarly, the dividend yield is based on historical experience and expected
future changes. The risk-free rate is derived from the U.S. Treasury yield curve
in effect at the time of grant. The binomial option-pricing model also
incorporates exercise and forfeiture assumptions based on an analysis of
historical data. The expected life of the stock option grants is derived from
the output of the binomial model and represents the period of time that options
granted are expected to be outstanding. Determining these assumptions is
subjective and complex, and therefore, a change in the assumptions utilized
could impact the calculation of the fair value of our stock
options.
34
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
The information called for by this
item is provided under the caption “Quantitative and Qualitative Disclosures
About Market Risk” under “Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Item 8. Financial Statements and
Supplementary Data
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 accompanying
consolidated balance sheets of Automatic Data Processing, Inc. and subsidiaries
(the "Company") as of June 30, 2010 and 2009, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 2010. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 15(a) 2.
These consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statements and
consolidated financial statement schedule 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 as of June 30, 2010
and 2009, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2010, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the consolidated 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.
We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of June 30,
2010, 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 25, 2010 expressed an unqualified opinion on the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP |
Parsippany, New Jersey |
August 25,
2010 |
35
Statements of Consolidated
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share
amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
2010 |
|
2009 |
|
2008 |
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, other than interest
on funds |
|
|
|
|
|
|
|
|
|
|
|
|
held for clients and PEO
revenues |
|
$ |
7,077.7 |
|
|
$ |
7,051.7 |
|
|
$ |
6,996.1 |
|
Interest on funds held for
clients |
|
|
542.8 |
|
|
|
609.8 |
|
|
|
684.5 |
|
PEO revenues (A) |
|
|
1,307.2 |
|
|
|
1,176.9 |
|
|
|
1,053.1 |
|
TOTAL REVENUES |
|
|
8,927.7 |
|
|
|
8,838.4 |
|
|
|
8,733.7 |
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
4,277.2 |
|
|
|
4,087.0 |
|
|
|
3,898.4 |
|
Systems development and
programming costs |
|
|
513.9 |
|
|
|
498.3 |
|
|
|
521.1 |
|
Depreciation and
amortization |
|
|
238.6 |
|
|
|
237.4 |
|
|
|
237.7 |
|
TOTAL COSTS OF
REVENUES |
|
|
5,029.7 |
|
|
|
4,822.7 |
|
|
|
4,657.2 |
|
|
Selling, general and
administrative expenses |
|
|
2,127.4 |
|
|
|
2,190.3 |
|
|
|
2,359.1 |
|
Interest expense |
|
|
8.6 |
|
|
|
33.3 |
|
|
|
80.5 |
|
TOTAL EXPENSES |
|
|
7,165.7 |
|
|
|
7,046.3 |
|
|
|
7,096.8 |
|
|
Other income, net |
|
|
(101.2 |
) |
|
|
(108.0 |
) |
|
|
(166.5 |
) |
|
EARNINGS FROM CONTINUING
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
BEFORE INCOME TAXES |
|
|
1,863.2 |
|
|
|
1,900.1 |
|
|
|
1,803.4 |
|
|
Provision for income
taxes |
|
|
655.9 |
|
|
|
575.0 |
|
|
|
647.7 |
|
NET EARNINGS FROM CONTINUING
OPERATIONS |
|
|
1,207.3 |
|
|
|
1,325.1 |
|
|
|
1,155.7 |
|
|
Earnings from discontinued
operations, net of provision |
|
|
|
|
|
|
|
|
|
|
|
|
for income taxes of $7.0, $0.7
and $25.8 for the fiscal years |
|
|
|
|
|
|
|
|
|
|
|
|
ended June 30, 2010, 2009 and
2008, respectively |
|
|
4.1 |
|
|
|
7.5 |
|
|
|
80.0 |
|
NET EARNINGS |
|
$ |
1,211.4 |
|
|
$ |
1,332.6 |
|
|
$ |
1,235.7 |
|
|
Basic earnings per share from
continuing operations |
|
$ |
2.41 |
|
|
$ |
2.63 |
|
|
$ |
2.22 |
|
Basic earnings per share from
discontinued operations |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.15 |
|
BASIC EARNINGS PER
SHARE |
|
$ |
2.42 |
|
|
$ |
2.65 |
|
|
$ |
2.37 |
|
|
Diluted earnings per share
from continuing operations |
|
$ |
2.40 |
|
|
$ |
2.62 |
|
|
$ |
2.19 |
|
Diluted earnings per share
from discontinued operations |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.15 |
|
DILUTED EARNINGS PER
SHARE |
|
$ |
2.40 |
|
|
$ |
2.63 |
|
|
$ |
2.34 |
|
|
Basic weighted average shares
outstanding |
|
|
500.5 |
|
|
|
503.2 |
|
|
|
521.5 |
|
Diluted weighted average
shares outstanding |
|
|
503.7 |
|
|
|
505.8 |
|
|
|
527.2 |
|
(A) |
|
Professional Employer Organization (“PEO”) revenues are net of
direct pass-through costs, primarily consisting of payroll wages and
payroll taxes, of $13,318.7, $12,310.4 and $11,247.4,
respectively. |
See notes to
consolidated financial statements.
36
Consolidated Balance
Sheets
|
|
|
|
|
(In
millions, except per share amounts)
|
|
|
|
|
June 30, |
|
2010 |
|
2009 |
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
1,643.3 |
|
|
$ |
2,265.3 |
|
Short-term marketable
securities |
|
|
27.9 |
|
|
|
30.8 |
|
Accounts receivable,
net |
|
|
1,127.7 |
|
|
|
1,050.7 |
|
Other current assets |
|
|
673.4 |
|
|
|
918.9 |
|
Assets held for sale |
|
|
11.8 |
|
|
|
12.1 |
|
Assets of discontinued
operations |
|
|
- |
|
|
|
8.5 |
|
Total current assets before
funds held for clients |
|
|
3,484.1 |
|
|
|
4,286.3 |
|
Funds held for
clients |
|
|
18,832.6 |
|
|
|
16,419.2 |
|
Total current assets |
|
|
22,316.7 |
|
|
|
20,705.5 |
|
Long-term marketable
securities |
|
|
104.3 |
|
|
|
92.4 |
|
Long-term receivables,
net |
|
|
129.4 |
|
|
|
162.6 |
|
Property, plant and equipment,
net |
|
|
673.8 |
|
|
|
734.3 |
|
Other assets |
|
|
712.3 |
|
|
|
702.7 |
|
Goodwill |
|
|
2,383.3 |
|
|
|
2,375.5 |
|
Intangible assets,
net |
|
|
542.4 |
|
|
|
578.7 |
|
Total assets |
|
$ |
26,862.2 |
|
|
$ |
25,351.7 |
|
|
Liabilities and Stockholders'
Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
150.0 |
|
|
$ |
130.3 |
|
Accrued expenses and other
current liabilities |
|
|
771.0 |
|
|
|
777.9 |
|
Accrued payroll and payroll
related expenses |
|
|
448.5 |
|
|
|
402.3 |
|
Dividends payable |
|
|
164.5 |
|
|
|
162.1 |
|
Short-term deferred
revenues |
|
|
321.5 |
|
|
|
329.8 |
|
Obligation under commercial
paper borrowing |
|
|
- |
|
|
|
730.0 |
|
Income taxes payable |
|
|
60.0 |
|
|
|
230.7 |
|
Liabilities of discontinued
operations |
|
|
- |
|
|
|
7.7 |
|
Total current liabilities
before client funds obligations |
|
|
1,915.5 |
|
|
|
2,770.8 |
|
Client funds
obligations |
|
|
18,136.7 |
|
|
|
15,992.6 |
|
Total current
liabilities |
|
|
20,052.2 |
|
|
|
18,763.4 |
|
Long-term debt |
|
|
39.8 |
|
|
|
42.7 |
|
Other liabilities |
|
|
528.0 |
|
|
|
477.1 |
|
Deferred income
taxes |
|
|
306.4 |
|
|
|
254.1 |
|
Long-term deferred
revenues |
|
|
456.9 |
|
|
|
491.8 |
|
Total liabilities |
|
|
21,383.3 |
|
|
|
20,029.1 |
|
|
Commitments and contingencies
(Note 16) |
|
|
|
|
|
|
|
|
|
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, 2010 and 2009; |
|
|
|
|
|
|
|
|
outstanding, 492.0 and 501.7
shares at June 30, 2010 and 2009, respectively |
|
|
63.9 |
|
|
|
63.9 |
|
Capital in excess of par
value |
|
|
493.0 |
|
|
|
520.0 |
|
Retained earnings |
|
|
11,252.0 |
|
|
|
10,716.6 |
|
Treasury stock - at cost:
146.7 and 137.0 shares at June 30, 2010 and 2009, respectively |
|
|
(6,539.5 |
) |
|
|
(6,133.9 |
) |
Accumulated other
comprehensive income |
|
|
209.5 |
|
|
|
156.0 |
|
Total stockholders'
equity |
|
|
5,478.9 |
|
|
|
5,322.6 |
|
Total liabilities and
stockholders' equity |
|
$ |
26,862.2 |
|
|
$ |
25,351.7 |
|
|
See notes to
consolidated financial statements.
37
Statements of Consolidated Stockholders’
Equity
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Capital in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Common Stock |
|
Excess of |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Comprehensive |
|
|
Shares |
|
Amount |
|
Par
Value |
|
Earnings |
|
Stock |
|
Income |
|
Income
(Loss) |
Balance at June 30,
2007 |
|
638.7 |
|
$ |
63.9 |
|
$ |
351.8 |
|
|
$ |
9,378.5 |
|
|
$ |
(4,612.9 |
) |
|
|
|
|
|
$ |
(33.4 |
) |
Net earnings |
|
- |
|
|
- |
|
|
- |
|
|
|
1,235.7 |
|
|
|
- |
|
|
$ |
1,235.7 |
|
|
|
- |
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127.9 |
|
|
|
127.9 |
|
Unrealized net gain on
securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209.7 |
|
|
|
209.7 |
|
Pension liability adjustment,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28.0 |
) |
|
|
(28.0 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,545.3 |
|
|
|
|
|
|
Stock-based compensation
expense |
|
- |
|
|
- |
|
|
123.6 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Issuances relating to stock
compensation plans |
|
- |
|
|
- |
|
|
(29.5 |
) |
|
|
- |
|
|
|
271.7 |
|
|
|
|
|
|
|
|
|
Tax benefits from stock
compensation plans |
|
- |
|
|
- |
|
|
34.0 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Treasury stock acquired (32.9
shares) |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
(1,463.5 |
) |
|
|
|
|
|
|
- |
|
Adoption of ASC
740-10 |
|
- |
|
|
- |
|
|
- |
|
|
|
(11.7 |
) |
|
|
- |
|
|
|
|
|
|
|
- |
|
Tax basis adjustment related
to pooling of interest (see Note 15) |
|
- |
|
|
- |
|
|
42.1 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Dividends ($1.1000 per share) |
|
- |
|
|
- |
|
|
- |
|
|
|
(572.7 |
) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Balance at June 30,
2008 |
|
638.7 |
|
$ |
63.9 |
|
$ |
522.0 |
|
|
$ |
10,029.8 |
|
|
$ |
(5,804.7 |
) |
|
|
|
|
|
$ |
276.2 |
|
Net earnings |
|
- |
|
|
- |
|
|
- |
|
|
|
1,332.6 |
|
|
|
- |
|
|
$ |
1,332.6 |
|
|
|
- |
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(192.1 |
) |
|
|
(192.1 |
) |
Unrealized net gain on
securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191.1 |
|
|
|
191.1 |
|
Pension liability adjustment,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119.2 |
) |
|
|
(119.2 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,212.4 |
|
|
|
|
|
|
Stock-based compensation
expense |
|
- |
|
|
- |
|
|
96.0 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Issuances relating to stock
compensation plans |
|
- |
|
|
- |
|
|
(105.8 |
) |
|
|
- |
|
|
|
219.7 |
|
|
|
|
|
|
|
- |
|
Tax benefits from stock
compensation plans |
|
- |
|
|
- |
|
|
7.8 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Treasury stock acquired (13.8
shares) |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
(548.9 |
) |
|
|
|
|
|
|
- |
|
Dividends ($1.2800 per share) |
|
- |
|
|
- |
|
|
- |
|
|
|
(645.8 |
) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Balance at June 30,
2009 |
|
638.7 |
|
$ |
63.9 |
|
$ |
520.0 |
|
|
$ |
10,716.6 |
|
|
$ |
(6,133.9 |
) |
|
|
|
|
|
$ |
156.0 |
|
Net earnings |
|
- |
|
|
- |
|
|
- |
|
|
|
1,211.4 |
|
|
|
- |
|
|
$ |
1,211.4 |
|
|
|
- |
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76.1 |
) |
|
|
(76.1 |
) |
Unrealized net gain on
securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175.4 |
|
|
|
175.4 |
|
Pension liability adjustment,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45.8 |
) |
|
|
(45.8 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,264.9 |
|
|
|
|
|
|
Stock-based compensation
expense |
|
- |
|
|
- |
|
|
67.6 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Issuances relating to stock
compensation plans |
|
- |
|
|
- |
|
|
(85.4 |
) |
|
|
- |
|
|
|
360.7 |
|
|
|
|
|
|
|
- |
|
Tax benefits from stock
compensation plans |
|
- |
|
|
- |
|
|
(9.2 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Treasury stock acquired (18.2
shares) |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
(766.3 |
) |
|
|
|
|
|
|
- |
|
Dividends ($1.3500 per share) |
|
- |
|
|
- |
|
|
- |
|
|
|
(676.0 |
) |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Balance at June 30,
2010 |
|
638.7 |
|
|
63.9 |
|
|
493.0 |
|
|
|
11,252.0 |
|
|
|
(6,539.5 |
) |
|
|
|
|
|
|
209.5 |
|
|
See notes to
consolidated financial statements.
38
Statements of Consolidated Cash
Flows |
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
2010 |
|
2009 |
|
2008 |
Cash Flows From Operating
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
1,211.4 |
|
|
$ |
1,332.6 |
|
|
$ |
1,235.7 |
|
Adjustments to reconcile net
earnings to cash flows provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
309.2 |
|
|
|
307.7 |
|
|
|
318.3 |
|
Deferred income
taxes |
|
|
96.1 |
|
|
|
(47.9 |
) |
|
|
(92.7 |
) |
Stock-based compensation
expense |
|
|
67.6 |
|
|
|
96.0 |
|
|
|
123.6 |
|
Excess tax benefit related to
exercises of stock options |
|
|
(0.2 |
) |
|
|
(1.5 |
) |
|
|
(0.7 |
) |
Net pension expense |
|
|
34.7 |
|
|
|
33.8 |
|
|
|
40.0 |
|
Net realized loss (gain) from
the sales of marketable securities |
|
|
(1.6 |
) |
|
|
12.4 |
|
|
|
1.3 |
|
Net amortization of premiums
and accretion of discounts on available-for-sale securities |
|
|
57.3 |
|
|
|
58.3 |
|
|
|
42.7 |
|
Impairment losses on
available-for-sale securities |
|
|
14.4 |
|
|
|
- |
|
|
|
- |
|
Loss (gain) on sale of
building |
|
|
2.3 |
|
|
|
(2.2 |
) |
|
|
(16.0 |
) |
Gain on sale of discontinued
businesses, net of tax |
|
|
(0.5 |
) |
|
|
(4.4 |
) |
|
|
(74.0 |
) |
Other |
|
|
8.9 |
|
|
|
35.8 |
|
|
|
100.1 |
|
Changes in operating assets
and liabilities, net of effects from acquistions and divestitures of
businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in
accounts receivable |
|
|
(108.8 |
) |
|
|
(152.6 |
) |
|
|
36.6 |
|
Decrease (increase) in other
assets |
|
|
30.0 |
|
|
|
(85.6 |
) |
|
|
(40.6 |
) |
Increase (decrease) in
accounts payable |
|
|
34.7 |
|
|
|
(9.7 |
) |
|
|
9.7 |
|
(Decrease) increase in accrued
expenses and other liabilities |
|
|
(73.3 |
) |
|
|
(12.6 |
) |
|
|
88.4 |
|
Operating activities of
discontinued operations |
|
|
(0.1 |
) |
|
|
2.5 |
|
|
|
(0.2 |
) |
Net cash flows provided by
operating activities |
|
|
1,682.1 |
|
|
|
1,562.6 |
|
|
|
1,772.2 |
|
Cash Flows From Investing
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of corporate and
client funds marketable securities |
|
|
(3,846.7 |
) |
|
|
(2,736.5 |
) |
|
|
(6,407.2 |
) |
Proceeds from the sales and
maturities of corporate and client funds marketable securities |
|
|
3,406.9 |
|
|
|
3,320.4 |
|
|
|
5,140.6 |
|
Net (increase)
decrease in restricted cash and cash equivalents and other restricted
assets held to satisfy
client funds
obligations
|
|
|
(1,639.4 |
) |
|
|
(731.7 |
) |
|
|
4,119.6 |
|
Capital expenditures |
|
|
(102.9 |
) |
|
|
(157.8 |
) |
|
|
(180.3 |
) |
Additions to
intangibles |
|
|
(123.8 |
) |
|
|
(96.0 |
) |
|
|
(96.6 |
) |
Acquisitions of businesses,
net of cash acquired |
|
|
(100.0 |
) |
|
|
(67.0 |
) |
|
|
(97.3 |
) |
Reclassification from cash and
cash equivalents to short-term marketable securities |
|
|
- |
|
|
|
(211.1 |
) |
|
|
- |
|
Proceeds from the sale of
property, plant and equipment |
|
|
3.1 |
|
|
|
25.7 |
|
|
|
- |
|
Other |
|
|
1.8 |
|
|
|
10.0 |
|
|
|
23.4 |
|
Investing activities of
discontinued operations |
|
|
(0.1 |
) |
|
|
- |
|
|
|
(0.7 |
) |
Proceeds from the sale of
businesses included in discontinued operations |
|
|
21.6 |
|
|
|
(0.1 |
) |
|
|
112.4 |
|
Net cash flows (used in)
provided by investing activities |
|
|
(2,379.5 |
) |
|
|
(644.1 |
) |
|
|
2,613.9 |
|
Cash Flows From Financing
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in
client funds obligations |
|
|
2,020.4 |
|
|
|
885.2 |
|
|
|
(3,480.3 |
) |
Proceeds from issuance of
debt |
|
|
- |
|
|
|
12.5 |
|
|
|
21.2 |
|
Payments of debt |
|
|
(2.9 |
) |
|
|
(21.9 |
) |
|
|
(10.1 |
) |
Net (purchases of) proceeds
from reverse repurchase agreements |
|
|
- |
|
|
|
(11.8 |
) |
|
|
11.8 |
|
Net (repayment) proceeds of
commercial paper borrowing |
|
|
(730.0 |
) |
|
|
730.0 |
|
|
|
- |
|
Repurchases of common
stock |
|
|
(766.4 |
) |
|
|
(580.4 |
) |
|
|
(1,504.8 |
) |
Proceeds from stock purchase
plan and exercises of stock options |
|
|
241.1 |
|
|
|
82.7 |
|
|
|
239.7 |
|
Excess tax benefit related to
exercises of stock options |
|
|
0.2 |
|
|
|
1.5 |
|
|
|
0.7 |
|
Dividends paid |
|
|
(673.4 |
) |
|
|
(629.4 |
) |
|
|
(548.9 |
) |
Net cash flows provided by
(used in) financing activities |
|
|
89.0 |
|
|
|
468.4 |
|
|
|
(5,270.7 |
) |
Effect of exchange rate
changes on cash and cash equivalents |
|
|
(13.6 |
) |
|
|
(39.1 |
) |
|
|
41.3 |
|
Net change in cash and cash
equivalents |
|
|
(622.0 |
) |
|
|
1,347.8 |
|
|
|
(843.3 |
) |
Cash and cash equivalents of
continuing operations, beginning of year |
|
|
2,265.3 |
|
|
|
917.5 |
|
|
|
1,746.1 |
|
Cash and cash equivalents of
discontinued operations, beginning of year |
|
|
- |
|
|
|
- |
|
|
|
14.7 |
|
Cash and cash equivalents, end
of year |
|
|
1,643.3 |
|
|
|
2,265.3 |
|
|
|
917.5 |
|
Less cash and cash equivalents
of discontinued operations, end of year |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cash and cash equivalents of
continuing operations, end of year |
|
$ |
1,643.3 |
|
|
$ |
2,265.3 |
|
|
$ |
917.5 |
|
|
See notes to
consolidated financial statements.
39
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 and vehicle
retailers and manufacturers. The Company classifies its operations into the
following reportable segments: Employer Services, Professional Employer
Organization (“PEO”) Services, and Dealer Services. The primary components of
the “Other” segment are miscellaneous processing services, such as customer
financing transactions, non-recurring gains and losses and certain expenses that
have not been charged to the reportable segments, such as stock-based
compensation expense.
C. Revenue Recognition.
Revenues are
primarily attributable to fees for providing services (e.g., Employer Services’ payroll
processing fees) as well as investment income on payroll funds, payroll tax
filing funds and other Employer Services’ client-related funds. The Company
enters into agreements for a fixed fee per transaction (e.g., number of payees or number of
payrolls processed). 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 collectability is reasonably assured.
Service fees are determined based on written price quotations or service
agreements having stipulated terms and conditions that 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 clients is recognized in
revenues as earned, as 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 (e.g., Dealer Services’ dealer management systems).
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.
The Company
assesses collectability 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.
PEO revenues
are reported on the Statements of Consolidated Earnings and are reported net of
direct pass-through costs, which are costs billed and incurred for PEO worksite
employees, primarily consisting of payroll wages and payroll taxes. Benefits,
workers’ compensation and state unemployment tax fees for PEO worksite employees
are included in PEO revenues and the associated costs are included in operating
expenses.
D. Cash and Cash
Equivalents.
Investment securities with a maturity of ninety days or less at the time of
purchase are considered cash equivalents. The fair value of our cash and cash
equivalents approximates carrying value.
E. Corporate Investments and Funds
Held for Clients. All of the Company’s marketable securities are considered to be
“available-for-sale” and, accordingly, are carried on the Consolidated Balance
Sheets at fair value. 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 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 on the Statements of Consolidated Earnings.
If the fair
value of an available-for-sale debt security is below its amortized cost, the
Company assesses whether it intends to sell the security or if it is more likely
than not the Company will be required to sell the security before recovery. If
either of those two conditions were met, the Company would recognize a charge in
earnings equal to the entire difference between the security’s amortized cost
basis and its fair value. If the Company does not intend to sell a security or
it is not more likely than not that it will be required to sell the security
before recovery, the unrealized loss is separated into an amount representing
the credit loss, which is recognized in earnings, and the amount related to all
other factors, which is recognized in accumulated other comprehensive
income.
40
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, truck and powersports and truck
dealers. Unearned income from finance receivables represents the excess of gross
receivables over the sales price of the computer systems financed. Unearned
income is amortized using the effective-interest method to maintain a constant
rate of return 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 related to 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:
Data processing
equipment |
2 to 5 years |
|
Buildings |
20 to 40 years |
|
Furniture and
fixtures |
3 to 7
years |
H. Goodwill and Other Intangible
Assets. Goodwill
and intangible assets with indefinite useful lives are not amortized, but are
instead tested for impairment at least annually at the reporting unit level. The
Company performs this impairment test by first comparing the fair value of our
reporting units to their carrying amount. If an indicator of impairment exists
based upon comparing the fair value of our reporting units to their carrying
amount, the Company would then compare the implied fair value of our goodwill to
the carrying amount in order to determine the amount of the impairment, if any.
The Company determines the fair value of its reporting units using the income
approach, which utilizes a discounted cash flow model. In addition, the Company
uses comparative market multiples to corroborate its discounted cash flow
results.
I. Impairment of Long-Lived
Assets. 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.
J. Foreign Currency
Translation. The
net assets of the Company’s foreign subsidiaries are translated into U.S.
dollars based on exchange rates in effect for each period, and revenues and
expenses are translated at average exchange rates in the periods. Gains or
losses from balance sheet translation are included in accumulated other
comprehensive income on the Consolidated Balance Sheets. Currency transaction
gains or losses, which are included in the results of operations, are immaterial
for all periods presented.
K. Derivative Financial
Instruments. Derivative financial instruments are measured at fair value and are
recognized as assets or liabilities on the Consolidated Balance Sheets with
changes in the fair value of the derivatives recognized in either net earnings
from continuing operations or accumulated other comprehensive income, depending
on the timing and designated purpose of the derivative.
There were no
derivative financial instruments outstanding at June 30, 2010 or June 30,
2009.
41
L. Earnings per Share
(“EPS”). The
calculations of basic and diluted EPS are as follows:
|
|
|
|
|
Effect of |
|
Effect of |
|
Effect of |
|
|
|
|
|
|
|
|
Employee |
|
Employee |
|
Employee |
|
|
|
|
|
|
|
|
Stock Option |
|
Stock Purchase |
|
Restricted Stock |
|
|
|
Years ended
June 30, |
|
Basic |
|
Shares |
|
Plan Shares |
|
Shares |
|
Diluted |
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations |
|
$ |
1,207.3 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
1,207.3 |
Weighted average shares (in
millions) |
|
|
500.5 |
|
|
2.2 |
|
|
- |
|
|
1.0 |
|
|
503.7 |
EPS from
continuing operations |
|
$ |
2.41 |
|
|
|
|
|
|
|
|
|
|
$ |
2.40 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations |
|
$ |
1,325.1 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
1,325.1 |
Weighted average shares (in
millions) |
|
|
503.2 |
|
|
1.2 |
|
|
- |
|
|
1.4 |
|
|
505.8 |
EPS from
continuing operations |
|
$ |
2.63 |
|
|
|
|
|
|
|
|
|
|
$ |
2.62 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing
operations |
|
$ |
1,155.7 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
1,155.7 |
Weighted average shares (in
millions) |
|
|
521.5 |
|
|
4.3 |
|
|
0.3 |
|
|
1.1 |
|
|
527.2 |
EPS from
continuing operations |
|
$ |
2.22 |
|
|
|
|
|
|
|
|
|
|
$ |
2.19 |
Options to
purchase 14.0 million, 32.9 million, and 12.6 million shares of common stock for
the year ended June 30, 2010 (“fiscal 2010”), the year ended June 30, 2009
(“fiscal 2009”) and the year ended June 30, 2008 (“fiscal 2008”), 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 respective fiscal year.
M. Stock-Based
Compensation. The Company recognizes stock-based compensation expense in net earnings
based on the fair value of the award on the date of the grant. The Company
determines the fair value of stock options issued using a binomial
option-pricing model. The binomial option-pricing model considers a range of
assumptions related to volatility, dividend yield, risk-free interest rate and
employee exercise behavior. Expected volatilities utilized in the binomial
option-pricing model are based on a combination of implied market volatilities,
historical volatility of the Company’s stock price and other factors. Similarly,
the dividend yield is based on historical experience and expected future
changes. The risk-free rate is derived from the U.S. Treasury yield curve in
effect at the time of grant. The binomial option-pricing model also incorporates
exercise and forfeiture assumptions based on an analysis of historical data. The
expected life of a stock option grant is derived from the output of the binomial
model and represents the period of time that options granted are expected to be
outstanding.
N. 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. 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.
O. Computer Software to be Sold,
Leased or Otherwise Marketed. The Company capitalizes certain
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 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.
P. 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. The Company is subject to the continuous examination
of our income tax returns by the Internal Revenue Service (“IRS”) and other tax
authorities.
42
There is a
financial statement recognition threshold and measurement attribute for tax
positions taken or expected to be taken in a tax return. Specifically, it
clarifies that an entity’s tax benefits must be “more likely than not” of being
sustained, assuming that these positions will be examined by taxing authorities
with full knowledge of all relevant information prior to recording the related
tax benefit in the financial statements. If a tax position drops below the “more
likely than not” standard, the benefit can no longer be recognized. Assumptions,
judgment and the use of estimates are required in determining if the “more
likely than not” standard has been met when developing the provision for income
taxes. As of June 30, 2010 and 2009, the Company’s liabilities for unrecognized
tax benefits, which include interest and penalties, were $107.2 million and
$92.8 million, respectively.
If certain
pending tax matters settle within the next twelve months, the total amount of
unrecognized tax benefits may increase or decrease for all open tax years and
jurisdictions. Based on current estimates, settlements related to various
jurisdictions and tax periods could increase earnings up to $10.0 million. Audit
outcomes and the timing of audit settlements are subject to significant
uncertainty. We continually assess the likelihood and amount of potential
adjustments and adjust the income tax provision, the current tax liability and
deferred taxes in the period in which the facts that give rise to a revision
become known.
Q. Recently Issued Accounting
Pronouncements. In October 2009, the Financial Accounting Standards Board (“FASB”) issued
ASU 2009-13, “Multiple Deliverable Revenue Arrangements.” ASU 2009-13 modifies
the guidance related to accounting for arrangements with multiple deliverables
by providing an alternative when vendor specific objective evidence (“VSOE”) or
third-party evidence (“TPE”) does not exist to determine the selling price of a
deliverable. The alternative when VSOE or TPE does not exist is the best
estimate of the selling price of the deliverable. Consideration for multiple
deliverables is then allocated based upon the relative selling price of the
deliverables and revenue is recognized as earned for each deliverable. ASU
2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, unless
the election is made to adopt ASU 2009-13 retrospectively. In either case, early
adoption is permitted. The adoption of ASU 2009-13 will not have a material
impact on the Company’s consolidated results of operations, financial condition
or cash flows.
In October
2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements that
Include Software Elements” (“ASU 2009-14”). ASU 2009-14 modifies the scope of
the software revenue recognition guidance to exclude (a) non-software components
of tangible products and (b) software components of tangible products that are
sold, licensed, or leased with tangible products when the software components
and non-software components of the tangible product function together to deliver
the tangible product’s functionality. ASU 2009-14 is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, unless the election is made to adopt ASU
2009-14 retrospectively. In either case, early adoption is permitted. The
adoption of ASU 2009-14 will not have a material impact on the Company’s
consolidated results of operations, financial condition or cash
flows.
NOTE 2. OTHER INCOME,
NET
Other income,
net consists of the following:
Years ended June 30, |
|
2010 |
|
2009 |
|
2008 |
Interest income on corporate
funds |
|
$ |
(98.8 |
) |
|
$ |
(134.2 |
) |
|
$ |
(149.5 |
) |
Realized gains on
available-for-sale securities |
|
|
(15.0 |
) |
|
|
(11.4 |
) |
|
|
(10.1 |
) |
Realized losses on
available-for-sale securities |
|
|
13.4 |
|
|
|
23.8 |
|
|
|
11.4 |
|
Realized (gain) loss on
investment in Reserve Fund |
|
|
(15.2 |
) |
|
|
18.3 |
|
|
|
- |
|
Impairment losses on
available-for-sale securities |
|
|
14.4 |
|
|
|
- |
|
|
|
- |
|
Net loss (gain) on sales of
buildings |
|
|
2.3 |
|
|
|
(2.2 |
) |
|
|
(16.0 |
) |
Other, net |
|
|
(2.3 |
) |
|
|
(2.3 |
) |
|
|
(2.3 |
) |
|
Other income, net |
|
$ |
(101.2 |
) |
|
$ |
(108.0 |
) |
|
$ |
(166.5 |
) |
|
Proceeds from
sales and maturities of available-for-sale securities were $3,406.9 million,
$3,320.4 million and $5,140.6 million for fiscal 2010, 2009 and 2008,
respectively.
In fiscal
2010, the Company recorded a $15.2 million gain to other income, net on the
Statements of Consolidated Earnings related to the Primary Fund of the Reserve
Fund (the “Reserve Fund”). In fiscal 2009, the Company recorded an $18.3 million
loss to other income, net on the Statements of Consolidated Earnings related to
the Reserve Fund. Refer to Note 5 for additional information related to the
Reserve Fund.
43
At September 30, 2009
and June 30, 2010, the Company concluded it had the intent to sell certain
securities for which unrealized losses of $5.3 million and $9.1 million,
respectively, were previously recorded in accumulated other comprehensive income
on the Consolidated Balance Sheets. As such, the Company realized impairment
losses of $14.4 million in other income, net on the Statements of Consolidated
Earnings during fiscal 2010.
During fiscal years
2010, 2009 and 2008, the Company sold buildings and, as a result, recorded gains
of $1.5 million, $2.2 million and $16.0 million, respectively, in other income,
net, on the Statements of Consolidated Earnings. Additionally, during fiscal
2010, the Company reclassified assets related to one other building to Assets
Held for Sale on the Consolidated Balance Sheets and recorded a loss of $3.8
million on the Statements of Consolidated Earnings. Refer to Note 9 for more
information related to Assets Held for Sale.
The Company has an
outsourcing agreement with Broadridge Financial Solutions, Inc. (“Broadridge”)
pursuant to which the Company provides data center outsourcing services, which
principally consist of information technology services and service delivery
network services. As a result of the outsourcing agreement, the Company
recognized income of $104.8 million and $103.5 million in fiscal 2010 and fiscal
2009, respectively, which is offset by expenses associated with providing such
services of $102.6 million and $101.3 million, respectively, both of which were
recorded in other income, net on the Statements of Consolidated Earnings. The
Company had a receivable on the Consolidated Balance Sheets from Broadridge for
the services under this agreement of $8.9 million and $8.7 million on June 30,
2010 and 2009, respectively. In fiscal 2010, Broadridge notified the Company
that it would not extend the outsourcing agreement beyond its current expiration
date of June 30, 2012. The Company is currently evaluating the impact on results
of operations, if any, that this will have and does not currently anticipate
this will have a material impact.
NOTE 3. ACQUISITIONS
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 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, which typically occurs within one year from the date of
acquisition.
The Company acquired
five businesses in fiscal 2010 for approximately $101.0 million, net of cash
acquired. The purchase price for these acquisitions includes $3.7 million in
accrued contingent payments expected to be paid in future periods. These
acquisitions resulted in approximately $80.8 million of goodwill. Intangible
assets acquired, which totaled approximately $33.5 million, consist of software,
customer contracts and lists and trademarks that are being amortized over a
weighted average life of 7 years. In addition, the Company made $2.6 million of
contingent payments in fiscal 2010 relating to previously consummated
acquisitions. As of June 30, 2010, the Company had contingent consideration
remaining for all transactions of approximately $7.1 million.
The Company acquired
four businesses in fiscal 2009 for approximately $62.7 million, which includes
$6.4 million in accrued contingent payments expected to be paid in future
periods and which is net of cash acquired. These acquisitions resulted in
approximately $60.3 million of goodwill. Intangible assets acquired, which
totaled approximately $20.8 million, consist of software, customer contracts and
lists and trademarks that are being amortized over a weighted average life of 9
years. In addition, the Company made $10.7 million of contingent payments in
fiscal 2009 relating to previously consummated acquisitions.
The Company acquired
four businesses in fiscal 2008 for approximately $45.9 million, net of cash
acquired. These acquisitions resulted in approximately $37.7 million of
goodwill. Intangible assets acquired, which totaled approximately $11.6 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
$51.4 million of contingent payments in fiscal 2008 relating to previously
consummated acquisitions.
44
The
acquisitions discussed above for fiscal 2010, 2009 and 2008 were not material,
either individually or in the aggregate, to the Company’s operations, financial
position or cash flows.
NOTE 4.
DIVESTITURES
On March 24,
2010, the Company completed its sale of the non-core Commercial Systems business
(the “Commercial business”) for approximately $21.6 million in cash. The
Commercial business was previously reported in the Dealer Services segment. In
connection with the disposal of this business, the Company has classified the
results of this business as discontinued operations for all periods presented.
Additionally, in fiscal 2010, the Company reported a gain of $5.6 million, or
$1.0 million after taxes, within earnings from discontinued operations on the
Statements of Consolidated Earnings.
During fiscal
2010, the Company recorded net charges of $0.5 million within earnings from
discontinued operations related to a change in estimated taxes on the
divestitures of businesses of $0.8 million, partially offset by a change in
professional fees incurred in connection with the divestitures of businesses of
$0.3 million. During fiscal 2009, the Company recorded a net gain of $2.8
million, net of taxes, within earnings from discontinued operations related to a
change in estimated taxes on the divestitures of business of $2.6 million and a
change in professional fees incurred in connection with the divestitures of
businesses of $0.2 million. During fiscal 2008, the Company recorded a net gain
of $10.2 million, net of taxes, within earnings from discontinued operations
related to a change in estimated taxes on the divestitures of businesses of
$11.3 million, partially offset by professional fees incurred in connection with
the divestitures of businesses of $1.1 million.
On June 30,
2007, the Company entered into a definitive agreement to sell its Travel
Clearing business for approximately $116.0 million in cash. The Company
completed the sale of its Travel Clearing business on July 6, 2007. The Travel
Clearing business was previously reported in the “Other” segment. In connection
with the disposal of this business, the Company classified the results of this
business as discontinued operations for all periods presented. During fiscal
2008, the Company reported a gain of $95.8 million, or $62.2 million after
taxes, within earnings from discontinued operations on the Statements of
Consolidated Earnings.
On January 23,
2007, the Company completed the sale of Sandy Corporation, a business within the
Dealer Services segment, which specializes in sales and marketing training, for
approximately $4.0 million in cash and the assumption of certain liabilities by
the buyer, plus additional earn-out payments if certain revenue targets are
achieved. The Company classified the results of operations of this business as
discontinued operations for all periods presented. Additionally, during fiscal
2007, the Company reported a gain of $11.2 million, or $6.9 million after tax,
within earnings from discontinued operations on the Statements of Consolidated
Earnings. In March 2008 and April 2009, the Company received two additional
payments of $2.5 million during each period, which represented purchase price
adjustments for the sale of Sandy Corporation. The Company recorded additional
gains of $2.5 million, or $1.6 million net of tax, within earnings from
discontinued operations during both fiscal 2008 and fiscal 2009 for the payments
received.
Operating
results for all discontinued operations were as follows:
Years ended June 30, |
|
2010 |
|
2009 |
|
2008 |
Revenues |
|
$ |
17.2 |
|
$ |
28.7 |
|
$ |
42.8 |
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued
operations before income taxes |
|
|
5.2 |
|
|
4.6 |
|
|
8.6 |
Provision for income
taxes |
|
|
1.6 |
|
|
1.5 |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued
operations before gain |
|
|
|
|
|
|
|
|
|
on disposal of discontinued
operations |
|
|
3.6 |
|
|
3.1 |
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
Gain on disposal of
discontinued operations, net of |
|
|
|
|
|
|
|
|
|
provision (benefit) for income
taxes of $5.4, $(0.8) and |
|
|
|
|
|
|
|
|
|
$23.2 for fiscal 2010, 2009
and 2008, respectively |
|
|
0.5 |
|
|
4.4 |
|
|
74.0 |
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued
operations |
|
$ |
4.1 |
|
$ |
7.5 |
|
$ |
80.0 |
|
45
There were no
assets or liabilities of discontinued operations as of June 30, 2010. The
following are the major classes of assets and liabilities related to
discontinued operations as of June 30, 2009:
|
|
June 30, |
|
|
2009 |
Assets: |
|
|
|
Accounts receivable,
net |
|
$
|
4.7 |
Other current assets |
|
|
2.2 |
Property, plant and equipment,
net |
|
|
0.2 |
Intangible assets,
net |
|
|
1.4 |
|
Total |
|
$ |
8.5 |
|
Liabilities: |
|
|
|
Accrued expenses and other
liabilities |
|
$ |
0.9 |
Deferred revenues |
|
|
6.8 |
|
Total |
|
$ |
7.7 |
|
46
NOTE 5. CORPORATE INVESTMENTS AND
FUNDS HELD FOR CLIENTS
Corporate
investments and funds held for clients at June 30, 2010 and 2009 are as
follows:
|
|
June 30, 2010 |
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
|
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and
other cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents |
|
$ |
5,091.1 |
|
$ |
- |
|
$ |
- |
|
|
$ |
5,091.1 |
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and direct
obligations of |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
|
5,631.0 |
|
|
280.7 |
|
|
(0.2 |
) |
|
|
5,911.5 |
Corporate bonds |
|
|
5,080.7 |
|
|
261.2 |
|
|
(9.0 |
) |
|
|
5,332.9 |
Asset-backed
securities |
|
|
923.5 |
|
|
45.3 |
|
|
- |
|
|
|
968.8 |
Canadian government
obligations and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian government agency obligations |
|
|
998.6 |
|
|
33.9 |
|
|
- |
|
|
|
1,032.5 |
Other securities |
|
|
2,172.3 |
|
|
100.0 |
|
|
(1.0 |
) |
|
|
2,271.3 |
|
Total available-for-sale
securities |
|
|
14,806.1 |
|
|
721.1 |
|
|
(10.2 |
) |
|
|
15,517.0 |
|
Total corporate investments
and funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
held for clients |
|
$ |
19,897.2 |
|
$ |
721.1 |
|
$ |
(10.2 |
) |
|
$ |
20,608.1 |
|
|
|
June 30,
2009 |
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair
Value |
Type of issue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and
other cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents |
|
$ |
4,077.5 |
|
$ |
- |
|
$ |
- |
|
|
$ |
4,077.5 |
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and direct
obligations of |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
|
5,273.0 |
|
|
268.3 |
|
|
(1.4 |
) |
|
|
5,539.9 |
Corporate bonds |
|
|
4,647.6 |
|
|
135.9 |
|
|
(35.3 |
) |
|
|
4,748.2 |
Asset-backed
securities |
|
|
1,482.2 |
|
|
44.2 |
|
|
(4.7 |
) |
|
|
1,521.7 |
Canadian government
obligations and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian government agency obligations |
|
|
929.2 |
|
|
41.4 |
|
|
(0.1 |
) |
|
|
970.5 |
Other securities |
|
|
1,961.6 |
|
|
48.2 |
|
|
(59.9 |
) |
|
|
1,949.9 |
|
Total available-for-sale
securities |
|
|
14,293.6 |
|
|
538.0 |
|
|
(101.4 |
) |
|
|
14,730.2 |
|
Total corporate investments
and funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
held for clients |
|
$ |
18,371.1 |
|
$ |
538.0 |
|
$ |
(101.4 |
) |
|
$ |
18,807.7 |
|
At June 30,
2010, U.S. Treasury and direct obligations of U.S. government agencies primarily
include debt directly issued by Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association
(“Fannie Mae”) with fair values of $2,615.5 million, $1,136.1 million and $933.6
million, respectively. At June 30, 2009, U.S. Treasury and direct obligations of
U.S. government agencies primarily include debt directly issued by Federal Home
Loan Banks, Freddie Mac and Fannie Mae with fair values of $1,906.4 million,
$1,463.6 million and $1,352.5 million, respectively. U.S. Treasury and direct
obligations of U.S. government agencies represent senior, unsecured,
non-callable debt that primarily carries a credit rating of AAA, as rated by
Moody’s and Standard and Poor’s and has maturities ranging from July 2010
through May 2020.
At June 30,
2010, asset-backed securities include AAA rated senior tranches of securities
with predominately prime collateral of fixed rate credit card, rate reduction
and auto loan receivables with fair values of $548.6 million, $307.8 million and
$112.4 million, respectively. At June 30, 2009, asset-backed securities include
senior tranches of securities with predominately prime collateral of fixed rate
credit card, rate reduction, auto loan, student loan and equipment lease
receivables with fair values of $808.4 million, $384.2 million, $244.9 million,
$49.8 million and $34.4 million, respectively. These securities are
collateralized by the cash flows of the underlying pools of receivables. The
primary risk associated with these securities is the collection risk of the
underlying receivables. All collateral on such asset-backed securities has
performed as expected through June 30, 2010.
47
At June 30,
2010, other securities and their fair value primarily represent AAA rated
commercial mortgage-backed securities of $707.4 million, municipal bonds of
$469.5 million, supranational bonds of $322.7 million, Canadian provincial bonds
of $308.5 million, sovereign bonds of $181.8 million, corporate bonds backed by
the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee
Program of $131.3 million and AAA rated mortgage-backed securities of $131.0
million that are guaranteed by Fannie Mae and Freddie Mac. At June 30, 2009,
other securities and their fair value primarily represent AAA rated commercial
mortgage-backed securities of $759.3 million, municipal bonds of $462.0 million,
supranational bonds of $160.0 million, Canadian provincial bonds of $170.2
million, sovereign bonds of $51.8 million, corporate bonds backed by the Federal
Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program of $137.6
million and AAA rated mortgage-backed securities of $186.8 million that are
guaranteed by Fannie Mae and Freddie Mac. The Company’s AAA rated
mortgage-backed securities represent an undivided beneficial ownership interest
in a group or pool of one or more residential mortgages. These securities are
collateralized by the cash flows of 15-year and 30-year residential mortgages
and are guaranteed by Fannie Mae and Freddie Mac as to the timely payment of
principal and interest.
Classification
of corporate investments on the Consolidated Balance Sheets is as
follows:
June 30, |
|
2010 |
|
2009 |
Corporate
investments: |
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
1,643.3 |
|
$ |
2,265.3 |
Short-term marketable
securities |
|
|
27.9 |
|
|
30.8 |
Long-term marketable
securities |
|
|
104.3 |
|
|
92.4 |
Total corporate
investments |
|
$ |
1,775.5 |
|
$ |
2,388.5 |
|
Funds held for
clients represent assets that, based upon the Company’s intent, are restricted
for use solely for the purposes of satisfying the obligations to remit funds
relating to our payroll and payroll tax filing services, which are classified as
client funds obligations on our Consolidated Balance Sheets. Funds held for
clients have been invested in the following categories:
June 30, |
|
2010 |
|
2009 |
Funds held for
clients: |
|
|
|
|
|
|
Restricted cash and cash
equivalents held to |
|
|
|
|
|
|
satisfy client funds obligations |
|
$ |
3,447.8 |
|
$ |
1,812.2 |
Restricted short-term
marketable securities held |
|
|
|
|
|
|
to satisfy client funds obligations |
|
|
2,768.7 |
|
|
2,564.6 |
Restricted long-term
marketable securities held |
|
|
|
|
|
|
to satisfy client funds obligations |
|
|
12,616.1 |
|
|
12,042.4 |
Total funds held for
clients |
|
$ |
18,832.6 |
|
$ |
16,419.2 |
|
Client funds
obligations represent the Company’s contractual obligations to remit funds to
satisfy clients’ payroll and tax payment obligations and are recorded on the
Consolidated Balance Sheets at the time that the Company impounds funds from
clients. The client funds obligations represent liabilities that will be repaid
within one year of the balance sheet date. The Company has reported client funds
obligations as a current liability on the Consolidated Balance Sheets totaling
$18,136.7 million and $15,992.6 million as of June 30, 2010 and 2009,
respectively. The Company has classified funds held for clients as a current
asset since these funds are held solely for the purposes of satisfying the
client funds obligations. The Company has reported the cash flows related to the
purchases of corporate and client funds marketable securities and related to the
proceeds from the sales and maturities of corporate and client funds marketable
securities on a gross basis in the investing section of the Statements of
Consolidated Cash Flows. The Company has reported the cash inflows and outflows
related to client funds investments with original maturities of 90 days or less
on a net basis within net increase in restricted cash and cash equivalents and
other restricted assets held to satisfy client funds obligations in the
investing section of the Statements of Consolidated Cash Flows. The Company has
reported the cash flows related to the cash received from and paid on behalf of
clients on a net basis within net increase in client funds obligations in the
financing section of the Statements of Consolidated Cash Flows.
48
Approximately
85% of the available-for-sale securities held an AAA or AA rating at June 30,
2010, as rated by Moody’s, Standard & Poor’s and, for Canadian securities,
Dominion Bond Rating Service. All available-for-sale securities were rated as
investment grade at June 30, 2010.
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 $15,194.5 million, $15,162.4 million and $15,654.3
million in fiscal 2010, 2009 and 2008, respectively.
The unrealized
losses and fair values of 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, 2010 are as follows:
|
|
Unrealized |
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
losses |
|
Fair market |
|
losses |
|
Fair market |
|
Total gross |
|
|
|
|
|
less than |
|
value less than |
|
greater than |
|
value greater |
|
unrealized |
|
Total fair |
|
|
12
months |
|
12
months |
|
12
months |
|
than 12 months |
|
losses |
|
market value |
U.S. Treasury and direct
obligations of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
agencies |
|
$ |
- |
|
|
$ |
28.0 |
|
$ |
(0.2 |
) |
|
$ |
6.5 |
|
$ |
(0.2 |
) |
|
$ |
34.5 |
Corporate bonds |
|
|
(9.0 |
) |
|
|
210.5 |
|
|
- |
|
|
|
- |
|
|
(9.0 |
) |
|
|
210.5 |
Asset backed
securities |
|
|
- |
|
|
|
2.4 |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
2.4 |
Other securities |
|
|
(1.0 |
) |
|
|
22.7 |
|
|
- |
|
|
|
- |
|
|
(1.0 |
) |
|
|
22.7 |
|
|
|
$ |
(10.0 |
) |
|
$ |
263.6 |
|
$ |
(0.2 |
) |
|
$ |
6.5 |
|
$ |
(10.2 |
) |
|
$ |
270.1 |
|
Expected
maturities of available-for-sale securities at June 30, 2010 are as
follows:
Maturity Dates: |
|
|
|
Due in one year or
less |
|
$ |
2,796.6 |
Due after one year up to two
years |
|
|
3,268.0 |
Due after two years up to
three years |
|
|
3,346.7 |
Due after three years up to
four years |
|
|
1,795.9 |
Due after four years |
|
|
4,309.8 |
|
Total available-for-sale
securities |
|
$ |
15,517.0 |
|
The Company
had an investment in a money market fund called the Reserve Fund. During the
quarter ended September 30, 2008, the net asset value of the Reserve Fund
decreased below $1 per share as a result of the full write-off of the Reserve
Fund’s holdings in debt securities issued by Lehman Brothers Holdings, Inc.,
which filed for bankruptcy protection on September 15, 2008. In fiscal 2009, the
Company reclassified $211.1 million of its investment from cash and cash
equivalents to short-term marketable securities on the Consolidated Balance
Sheet due to the fact that these assets no longer met the definition of a cash
equivalent. Additionally, the Company reflected the impact of such
reclassification on the Statements of Consolidated Cash Flows for fiscal 2009 as
reclassification from cash equivalents to short-term marketable securities.
During fiscal 2009, the Company recorded an $18.3 million loss to other income,
net, on the Statement of Consolidated Earnings to recognize its pro-rata share
of the estimated losses of the Reserve Fund. During fiscal 2010, the Company had
received distributions in excess of what was previously recognized in short-term
marketable securities, net of previously recognized losses, in the amount of
$15.2 million. As such, in fiscal 2010, the Company recorded a gain of $15.2
million to other income, net on the Statements of Consolidated
Earnings.
At September
30, 2009 and June 30, 2010, the Company concluded that it had the intent to sell
certain securities for which unrealized losses of $5.3 million and $9.1 million,
respectively, were previously recorded in accumulated other comprehensive income
on the Consolidated Balance Sheets. As such, the Company realized impairment
losses of $14.4 million in other income, net on the Statements of Consolidated
Earnings in fiscal 2010.
49
For the
securities in an unrealized loss position of $10.2 million at June 30, 2010, the
Company concluded that it did not have the intent to sell such securities and
that it was not more likely than not that the Company would be required to sell
such securities before recovery. At June 30, 2010, the Company evaluated the
unrealized losses of $10.2 million related to the debt securities in an
unrealized loss position, for which the Company did not have the intent to sell
such securities and that it was not more likely than not that the Company would
be required to sell such securities before recovery, in order to determine
whether such losses were due to credit losses. The securities with unrealized
losses of $10.2 million were primarily comprised of corporate bonds. The Company
evaluated such securities utilizing a variety of quantitative and qualitative
factors including whether the Company expects to collect all amounts due under
the contractual terms of the security, information about current and past events
of the issuer, and the length of time and the extent to which the fair value has
been less than the cost basis. At June 30, 2010, the Company concluded that
unrealized losses on available-for-sale securities held at June 30, 2010 were
not credit losses and were attributable to other factors, including changes in
interest rates. As a result, the Company concluded that the $10.2 million in
unrealized losses on such securities should be recorded in accumulated other
comprehensive income on the Consolidated Balance Sheets at June 30,
2010.
NOTE 6. FAIR VALUE
MEASUREMENTS
On July 1,
2008, the Company adopted ASC 820-10, “Fair Value Measurements and Disclosures”
for assets and liabilities recognized or disclosed at fair value on a recurring
basis. On July 1, 2009, the Company adopted ASC 820-10 for non-financial assets
that are recognized or disclosed on a non-recurring basis. The guidance in ASC
820-10 clarifies the definition of fair value, establishes a framework for
measuring fair value, and expands the disclosures on fair value measurements.
ASC 820-10 defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants. ASC 820-10 establishes market or observable inputs
as the preferred source of fair value, followed by assumptions based on
hypothetical transactions in the absence of market inputs.
In January
2010, the Company adopted ASU 2010-6. The guidance in ASU 2010-6 amends the
disclosure requirements in ASC 820.10 and requires new disclosures regarding
transfers in and out of Level 1 and 2 asset categories as well as more detailed
information for the Level 3 reconciliation of activity, if required. Since we
adopted ASC 820.10, we have not had any transfers in or out of Level 1 or Level
2, nor have we had any Level 3 assets or liabilities. ASU 2010-6 also clarifies
existing disclosure requirements regarding the level of disaggregation expected,
valuation techniques and inputs to fair value measurements.
The valuation
techniques required by ASC 820-10 are based upon observable and unobservable
inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect our market assumptions. These two types of
inputs create the following three-level hierarchy to prioritize the inputs used
in measuring fair value. The levels within the hierarchy are described below
with Level 1 having the highest priority and Level 3 having the lowest
priority.
|
Level 1 |
|
Fair value is determined based
upon closing prices for identical instruments that are traded on active
exchanges. |
|
|
|
Level 2 |
|
Fair value is determined based
upon quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; or model-derived valuations whose inputs are observable or whose
significant value drivers are observable. |
|
|
|
Level 3 |
|
Fair value is determined based
upon significant inputs to the valuation model that are
unobservable. |
Available-for-sale securities included in Level 1 are valued using
closing prices for identical instruments that are traded on active exchanges.
Available-for-sale securities included in Level 2 are valued utilizing inputs
obtained from an independent pricing service. To determine the fair value of our
Level 2 investments, a variety of inputs are utilized, including benchmark
yields, reported trades, non-binding broker/dealer quotes, issuer spreads,
two-sided markets, benchmark securities, bids, offers, reference data, new issue
data, and monthly payment information. Over 99% of our Level 2 investments are
valued utilizing inputs obtained from a pricing service. The Company reviews the
values generated by the independent pricing service for reasonableness by
comparing the valuations received from the independent pricing service to
valuations from at least one other observable source. The Company has not
adjusted the prices
obtained from the independent pricing service. The Company has no
available-for-sale securities included in Level 3.
50
The Company’s
assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the classification of assets and
liabilities within the fair value hierarchy. In certain instances, the inputs
used to measure fair value may meet the definition of more than one level of the
fair value hierarchy. The significant input with the lowest level priority is
used to determine the applicable level in the fair value hierarchy.
The following
table presents the Company’s assets measured at fair value on a recurring basis
at June 30, 2010. Included in the table are available-for-sale securities within
corporate investments of $132.2 million and funds held for clients of $15,384.8
million. Refer to Note 5 for additional disclosure in relation to corporate
investments and funds held for clients.
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
U.S Treasury and direct
obligations of |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
agencies |
|
$ |
- |
|
$ |
5,911.4 |
|
$ |
- |
|
$ |
5,911.4 |
Corporate bonds |
|
|
- |
|
|
5,332.9 |
|
|
- |
|
|
5,332.9 |
Asset-backed
securities |
|
|
- |
|
|
968.9 |
|
|
- |
|
|
968.9 |
Canadian government
obligations and |
|
|
|
|
|
|
|
|
- |
|
|
|
Canadian government agency
obligations |
|
|
- |
|
|
1,032.5 |
|
|
- |
|
|
1,032.5 |
Other securities |
|
|
8.0 |
|
|
2,263.3 |
|
|
- |
|
|
2,271.3 |
Total available-for-sale
securities |
|
$ |
8.0 |
|
$ |
15,509.0 |
|
$ |
- |
|
$ |
15,517.0 |
|
NOTE 7. RECEIVABLES
The Company’s
receivables include notes receivable for the financing of the sale of computer
systems, most of which are due from automotive, truck and powersports dealers.
These notes receivable are reflected on the Consolidated Balance Sheets as
follows:
June 30, |
|
2010 |
|
2009 |
|
|
Current |
|
Long-term |
|
Current |
|
Long-term |
Receivables |
|
$ |
110.3 |
|
|
$ |
155.0 |
|
|
$ |
136.8 |
|
|
$ |
193.4 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts |
|
|
(9.4 |
) |
|
|
(16.1 |
) |
|
|
(9.9 |
) |
|
|
(18.0 |
) |
Unearned income |
|
|
(9.9 |
) |
|
|
(9.5 |
) |
|
|
(13.3 |
) |
|
|
(12.8 |
) |
|
|
|
$ |
91.0 |
|
|
$ |
129.4 |
|
|
$ |
113.6 |
|
|
$ |
162.6 |
|
|
Long-term receivables at June
30, 2010 mature as follows: |
|
2012 |
|
$ |
70.0 |
2013 |
|
|
48.7 |
2014 |
|
|
27.5 |
2015 |
|
|
8.5 |
2016 |
|
|
0.3 |
|
|
|
$ |
155.0 |
|
|
Accounts
receivable, net is recorded based upon the gross amount the Company expects to
receive from its clients, which is net of an allowance for doubtful accounts of
$49.0 million and $47.8 million at June 30, 2010 and 2009, respectively.
Long-term receivables, net represent our notes receivable that are recorded
based upon the gross amount the Company expects to receive from its clients,
which is net of an allowance for doubtful accounts of $16.1 million and $18.0
million at June 30, 2010 and 2009, respectively, and unearned income of $9.5
million and $12.8 million at June 30, 2010 and 2009, respectively, and
represents the excess of the gross receivables over the sales price of the
computer systems financed. The unearned income is amortized using the effective
interest method. The carrying value of notes receivable approximates fair
value.
51
NOTE 8. PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment at cost and accumulated depreciation at June 30, 2010 and
2009 are as follows:
June 30, |
|
2010 |
|
2009 |
Property, plant and
equipment: |
|
|
|
|
|
|
|
|
Land and buildings |
|
$ |
700.1 |
|
|
$ |
721.1 |
|
Data processing
equipment |
|
|
731.3 |
|
|
|
770.2 |
|
Furniture, leaseholds and
other |
|
|
397.4 |
|
|
|
417.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,828.8 |
|
|
|
1,908.9 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated
depreciation |
|
|
(1,155.0 |
) |
|
|
(1,174.6 |
) |
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net |
|
$ |
673.8 |
|
|
$ |
734.3 |
|
|
Depreciation
of property, plant and equipment was $152.6 million, $155.8 million and $166.3
million for fiscal 2010, 2009 and 2008, respectively.
NOTE 9. ASSETS HELD FOR SALE
During fiscal
2009, the Company reclassified assets related to three buildings as assets held
for sale on the Consolidated Balance Sheets. Such assets were previously
reported in property, plant and equipment, net on the Consolidated Balance
Sheets. The Company sold two of the buildings as of June 30, 2010. Additionally,
during fiscal 2010, the Company reclassified assets related to one other
building as assets held for sale on the Consolidated Balance Sheets. At June 30,
2010, the Company had $11.8 million classified as assets held for sale on the
Consolidated Balance Sheets. During July 2010, the Company completed the sale of
the two buildings previously classified as assets held for sale at June 30,
2010.
NOTE 10. GOODWILL AND INTANGIBLE
ASSETS, NET
Changes in
goodwill for the fiscal year ended June 30, 2010 and 2009 are as
follows:
|
|
Employer |
|
PEO |
|
Dealer |
|
|
|
|
Services |
|
Services |
|
Services |
|
Total |
Balance as of June 30,
2008 |
|
$ |
1,615.7 |
|
|
$ |
4.8 |
|
$ |
806.2 |
|
|
$ |
2,426.7 |
|
Additions and other
adjustments, net |
|
|
4.5 |
|
|
|
- |