Automatic Data Processing, Inc., also known as ADPยฎ, is a leading global technology company providing human capital management (HCM) solutions. With over 1.1 million clients, ADP is considered a leading provider of HR services such as talent, time management, benefits and payroll.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1998 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 (I.R.S. Employer incorporation or organization) Identification Number) One ADP Boulevard, Roseland, New Jersey 07068 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code (973) 994-5000 ----------------------------- No change - - -------------------------------------------------------------------------------- Former name, former address & former fiscal year, if changed since last report. Indicate by check mark whether the Registrant (1) has filed all annual, quarterly and other reports required to be filed with the commission and (2) has been subject to the filing requirements for at least the past 90 days. X Yes No - - ------------------------------------ ------------------------------------ As of January 31, 1999 there were 609,042,989 common shares outstanding.
Form 10Q Part I. Financial Information STATEMENTS OF CONSOLIDATED EARNINGS ----------------------------------- (In thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended December 31, December 31, --------------------- ---------------------- 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues $1,274,864 $1,148,026 $2,485,191 $2,186,524 ---------- ---------- ---------- ---------- Operating expenses 535,572 490,202 1,065,429 933,585 General, administrative and selling expenses 284,430 286,427 607,403 575,873 Depreciation and amortization 68,032 58,193 136,939 115,623 Systems development and programming costs 105,356 91,361 206,096 178,650 Interest expense 5,554 7,303 11,154 14,813 ---------- ---------- ---------- ---------- 998,944 933,486 2,027,021 1,818,544 ---------- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 275,920 214,540 458,170 367,980 Provision for income taxes 107,530 67,150 166,580 115,180 ---------- ---------- ---------- ---------- NET EARNINGS $ 168,390 $ 147,390 $ 291,590 $ 252,800 ========== ========== ========== ========== BASIC EARNINGS PER SHARE $ .28 $ .25 $ .48 $ .43 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE $ .27 $ .24 $ .47 $ .42 ========== ========== ========== ========== Dividends per share $ .07625 $ .06625 $ .1425 $ .12375 ========== ========== ========== ========== </TABLE> See notes to consolidated statements.
Form 10Q CONSOLIDATED BALANCE SHEETS --------------------------- (IN THOUSANDS) <TABLE> <CAPTION> December 31, June 30, Assets 1998 1998 - - ------ ----------- ---------- <S> <C> <C> Cash and cash equivalents $ 699,283 $ 752,240 Short-term marketable securities 196,712 144,936 Accounts receivable 757,585 727,936 Other current assets 199,522 204,192 ----------- ---------- Total current assets 1,853,102 1,829,304 ----------- ---------- Long-term marketable securities 781,874 765,272 ----------- ---------- Long-term receivables 196,243 177,946 ----------- ---------- Land and buildings 389,979 386,745 Data processing equipment 571,342 696,424 Furniture, leaseholds and other 438,826 432,654 ----------- ---------- 1,400,147 1,515,823 Less accumulated depreciation (837,942) (932,150) ----------- ---------- 562,205 583,673 Other assets 239,050 166,112 ----------- ---------- Intangibles 1,666,729 1,653,048 ----------- ---------- $ 5,299,203 $5,175,355 =========== ========== Liabilities and Shareholders' Equity Notes payable $ 89,430 $ 239,811 Accounts payable 71,298 119,803 Accrued expenses & other current liabilities 766,532 806,297 Income taxes 83,998 55,130 ----------- ---------- Total current liabilities 1,011,258 1,221,041 ----------- ---------- Long-term debt 165,796 192,063 ----------- ---------- Other liabilities 126,945 103,056 ----------- ---------- Deferred income taxes 165,198 147,397 ----------- ---------- Deferred revenue 107,612 105,347 ----------- ---------- Shareholders' equity: Common stock 62,858 62,858 Capital in excess of par value 611,011 586,329 Retained earnings 3,579,591 3,374,729 Treasury stock (485,458) (515,845) Accumulated other comprehensive income (45,608) (101,620) ----------- ---------- 3,722,394 3,406,451 ----------- ---------- $ 5,299,203 $5,175,355 =========== ========== </TABLE> See notes to consolidated statements.
Form 10Q CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS ----------------------------------------------- (IN THOUSANDS) <TABLE> <CAPTION> Six Months Ended December 31, 1998 1997 --------- --------- <S> <C> <C> Cash Flows From Operating Activities: Net earnings $ 291,590 $ 252,800 Expenses not requiring outlay of cash 134,420 133,842 Changes in operating net assets (30,218) 39,657 --------- --------- Net cash flows from operating activities 395,792 426,299 --------- --------- Cash Flows From Investing Activities: Purchase of marketable securities (209,179) (239,835) Proceeds from sale of marketable securities 145,462 232,612 Capital expenditures (81,648) (79,853) Other changes to property, plant and equipment 6,738 4,052 Additions to intangibles (35,243) (48,676) Net dispositions (acquisitions) of businesses 17,671 (176,606) --------- --------- Net cash flows from investing activities (156,199) (308,306) --------- --------- Cash Flows From Financing Activities: Proceeds from issuance of notes payable 98,471 61,043 Proceeds from issuance of common stock 48,939 30,241 Repurchases of common stock (85,364) (40,907) Dividends paid (86,727) (72,719) Repayments of debt (267,869) (180) --------- --------- Net cash flows from financing activities (292,550) (22,522) --------- --------- Net change in cash and cash equivalents (52,957) 95,471 Cash and cash equivalents, at beginning of period 752,240 590,578 --------- --------- Cash and cash equivalents, at end of period $ 699,283 $ 686,049 ========= ========= </TABLE> See notes to consolidated statements.
Form 10Q NOTES TO CONSOLIDATED STATEMENTS -------------------------------- The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. Adjustments are of a normal recurring nature. These statements should be read in conjunction with the annual financial statements and related notes of the Company for the year ended June 30, 1998. Note A - The results of operations for the six months ended December 31, 1998 may not be indicative of the results to be expected for the year ending June 30, 1999. Note B - The Board of Directors declared a two-for-one common stock split effective on January 1, 1999 to shareholders of record on the close of business on December 11, 1998. Note C - A reconciliation of the income and weighted average shares used in the basic and diluted earnings per share calculations follows: (In thousands, except EPS) <TABLE> <CAPTION> Periods ended December 31, 1998 ---------------------------------------------------- Three month period Six month period ------------------------- ------------------------ Income Shares EPS Income Shares EPS ------ ------ --- ------ ------ --- <S> <C> <C> <C> <C> <C> <C> Basic EPS $168,390 604,750 $ 0.28 $291,590 605,025 $ 0.48 Effect of zero coupon subordinated notes 929 6,147 1,981 6,638 Effect of stock options - 15,319 - 15,054 ------------------------- ------------------------- Diluted EPS $169,319 626,216 $ 0.27 $293,571 626,717 $ 0.47 ========================= ======================== <CAPTION> Periods ended December 31, 1997 ---------------------------------------------------- Three month period Six month period ------------------------- ------------------------ Income Shares EPS Income Shares EPS ------ ------ --- ------ ------ --- <S> <C> <C> <C> <C> <C> <C> Basic EPS $147,390 587,264 $0.25 $252,800 586,256 $0.43 Effect of zero coupon subordinated notes 2,464 17,326 5,218 14,280 Effect of stock options - 12,504 - 12,002 ------------------------- -------------------------- Diluted EPS $149,854 617,094 $0.24 $258,018 612,538 $0.42 ========================= ========================= </TABLE>
Form 10Q Note D - Effective July 1, 1998, the Company adopted FASB Statement No. 130 "Reporting Comprehensive Income." Comprehensive income for the three and six months ended December 31, 1998 and 1997 follows: (In thousands) <TABLE> <CAPTION> Three months ended Six months ended December 31 December 31 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net earnings $168,390 $147,390 $291,590 $252,800 Other comprehensive income: Foreign currency translation adjustments 25,182 (8,221) 58,055 (14,611) Unrealized gains (losses) on securities (107) (17) (2,043) 1,825 -------- -------- -------- -------- Comprehensive income $193,465 $139,152 $347,602 $240,014 ======== ======== ======== ======== </TABLE> Note E - In November 1998 the Company sold its "front-office" market data business to Bridge Information Systems, Inc. The transaction gave rise to a pretax gain of $22 million and a $25 million provision for income taxes, resulting in a net loss of $3 million. Note F - In December 1998 the Company entered into an agreement to acquire The Vincam Group for approximately 7.4 million shares of ADP common stock in a pooling of interests transaction. Vincam, with net revenues of approximately $125 million, is a leading Professional Employer Organization providing a suite of human resource functions to small and medium sized employers on an outsourced basis. The transaction is subject to Vincam shareholder and various regulatory approvals and is expected to close during the quarter ending March 31, 1999. Note G - In February 1999 the Company reached a definitive agreement to sell its Peachtree Software business to The Sage Group plc, for $145 million. The agreement is subject to regulatory approvals and is expected to close during the quarter ending March 31, 1999.
Form 10Q MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OPERATING RESULTS Revenues and earnings again reached record levels during the quarter ended December 31, 1998. Revenues and revenue growth by ADP's major business units are shown below: <TABLE> <CAPTION> Revenues ---------------------------------- 3 Months Ended 6 Months Ended December 31, December 31, -------------- -------------- 1998 1997 1998 1997 ------ ------- ------ ------- ($ in millions) <S> <C> <C> <C> <C> Employer Services $ 770 $ 667 $1,465 $1,254 Brokerage Services 221 232 473 455 Dealer Services 186 173 367 339 Other 98 76 180 139 ------ ------ ------ ------ $1,275 $1,148 $2,485 $2,187 ====== ====== ====== ====== <CAPTION> Revenue Growth ---------------------------------- 3 Months Ended 6 Months Ended December 31, December 31, -------------- -------------- 1998 1997 1998 1997 ------ ------- ------ ------- <S> <C> <C> <C> <C> Employer Services 15% 21% 17% 20% Brokerage Services (5) 16 4 17 Dealer Services 8 7 8 8 Other 29 (8) 29 (14) ----- ----- ----- ----- 11% 15% 14% 15% ===== ===== ===== ===== </TABLE> Consolidated revenues for the quarter grew 11% from last year to $1,275 million. Revenue growth in Employer and Dealer Services was 15% and 8%, respectively. Brokerage Services revenue, down 5%, was impacted by the sale of the "front office" market data business in the quarter. Excluding the sale of the front office business, Brokerage Services revenue grew 14%. The primary components of "Other" revenues are claims services, interest income, foreign exchange differences and miscellaneous processing services. In addition, "Other" revenues have been reduced to adjust for the difference between actual interest income earned on invested tax filing funds and income credited to Employer Services at a standard rate of 6%. The sale of the front office business resulted in a $22 million pretax gain, a $25 million provision for taxes and a $3 million net loss. Pretax earnings for the quarter increased 29% from last year, helped by the gain on the "front office" sale. Prior to the one-time impact of the front office sale, pretax earnings increased 18%. Systems development and programming investments increased to accelerate automation, migrate to new computing technologies, and develop new products.
Form 10Q Net earnings for the quarter, after a higher effective tax rate, increased 14% to $168 million. Excluding the impact of the front office sale, net earnings increased 16%. The effective tax rate of 39.0% increased from 31.3% in the comparable quarter last year. Excluding the impact of the front office sale, the effective tax rate increased to 32.6% this quarter, primarily as a result of the greater weighting of taxable versus non-taxable earnings. Diluted earnings per share grew 13% to $0.27 from $0.24 last year. Excluding the front office sale, diluted earnings per share increased 17%. The Company expects double digit revenue growth for the full year and diluted earnings per share growth of 13-16%. FINANCIAL CONDITION The Company's financial condition and balance sheet remain exceptionally strong, and operations continue to generate a strong cash flow. At December 31, 1998, the Company had cash and marketable securities of $1.7 billion. Shareholders' equity was $3.7 billion and the ratio of long-term debt to equity was 4%. Capital expenditures for fiscal 1999 are expected to approximate $200 million, compared to $199 million in fiscal 1998. During the first half of fiscal 1999, ADP purchased 2.6 million shares of common stock for treasury at an average price of approximately $33. The Company has remaining Board authorization to purchase up to 14.5 million additional shares to fund equity related employee benefit plans. During the first half of fiscal 1999,the Company's zero coupon convertible subordinated notes were converted to 1.6 million shares of common stock. The Company's investment portfolio for corporate and client funds consists primarily of fixed income securities subject to interest rate risk, including reinvestment risk. The Company has historically had the ability to hold these investments until maturity and, therefore, this has not had an adverse impact on income or cash flows. OTHER MATTERS The majority of the Company's services involve computer processing and, as such, the Year 2000 could have a significant impact on the Company's products and services. As a result, the Company has worked for several years addressing both internal and third-party Year 2000 compliance issues. The majority of the Company's mission-critical systems are Year 2000 compliant and the few remaining systems, primarily from recent acquisitions, are expected to be compliant by March 31, 1999. In addition, the Company has been actively working with external agencies and partners, including government agencies, to determine and conform to their Year 2000 compliance plans. Third party interface testing and resolution of Year 200 issues with external agencies and partners is dependent upon those third parties completing their own Year 2000 remediation efforts.
Form 10Q The Year 2000 remediation is not expected to have a material adverse effect on the Company's overall results, as these costs are not expected to be substantially different from normal recurring costs that are incurred for systems development and implementation. This report contains "forward-looking statements" based on management's expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ from those expressed. Factors that could cause differences include: ADP's success in obtaining, retaining and selling additional services to clients; the pricing of products and services; overall economic trends, including interest rate and foreign currency trends; impact of Year 2000; stock market activity; auto sales and related industry changes; employment levels; changes in technology; availability of skilled technical associates and the impact of new acquisitions. PART II. OTHER INFORMATION Except as noted below, all other items are inapplicable or would result in negative responses and, therefore, have been omitted. Item 4. Submission of Matters to a Vote of Security Holders All share and vote results are prior to the stock split. The Company's Annual Meeting of the Stockholders was held on November 10, 1998. The following members were elected to the Company's Board of Directors to hold office for the ensuing year. Nominee In Favor Withheld ------- -------- -------- Gary C. Butler 248,065,729 1,597,079 Joseph A. Califano, Jr. 247,872,536 1,790,272 Leon G. Cooperman 248,083,612 1,579,196 George H. Heilmeier 248,060,799 1,602,009 Ann Dibble Jordan 247,999,348 1,663,460 Harvey M. Krueger 245,468,769 4,194,039 Frederic V. Malek 247,982,439 1,680,369 Henry Taub 247,927,042 1,735,766 Laurence A. Tisch 247,650,299 2,012,509 Arthur F. Weinbach 248,051,128 1,611,680 Josh S. Weston 247,824,586 1,838,222 The result of the voting on the following additional item was as follows: (a) Ratify an amendment to the Company's Employees' Savings-Stock Purchase Plan approved by the Board of Directors increasing by five million shares the number of shares of Common Stock of the Company that may be acquired by employees under such plan.
Form 10Q PART II. OTHER INFORMATION, continued The votes of the stockholders on this ratification were as follows: In Favor Opposed Abstained -------- ------- --------- 237,283,659 10,979,070 1,400,079 (b) Ratify an amendment to the Restated Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock of the Company to one billion shares. The votes of the stockholders on this ratification were as follows: In Favor Opposed Abstained -------- ------- --------- 233,808,508 14,894,015 960,285 (c) Ratify the appointment of Deloitte & Touche LLP to serve as the Company's independent certified public accountants for the fiscal year begun on July 1, 1998. The votes of the stockholders on this ratification were as follows: In Favor Opposed Abstained -------- ------- --------- 248,202,359 254,705 1,205,744 Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Number Exhibit ------- ------- 3.1 Amended and Restated Certificate of Incorporation of Automatic Data Processing 27.1 Financial Data Schedule SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTOMATIC DATA PROCESSING, INC. ------------------------------- (Registrant) Date: February 10, 1999 /s/ Richard J. Haviland ------------------------------- Richard J. Haviland Chief Financial Officer (Principal Financial Officer) ------------------------------- (Title)