ADP 2002 Annual Report Download - page 26

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promising opportunities, primarily in new and improved
products and services.
The consolidated pre-tax margin was 25.5% in ’02 com-
pared to 24.4% in ’01 (prior to non-recurring charges), and
21.6% in ’00 adjusted for the pro forma impact of SFAS
No. 142. Pre-tax margin increased over the previous year as
the Company continued to focus on margin improvements
by increasing automation, operating efficiencies and general
expense controls. Systems development and programming
costs decreased due to cost containment initiatives primarily
related to the maintenance of existing applications, while
funding of investments in new products continued. The
impact of transitioning the investment portfolio from tax-
exempt to taxable investments also contributed to the
margin improvements.
During fiscal ’01, the Company recorded a $90 million
($54 million net of tax) write-off of its investment in Bridge
Information Systems, Inc. (Bridge), which is reflected in
“other (income) expense.” This non-cash, non-recurring
write-off represented the Company’s total recorded
investment in Bridge.
During fiscal ’00, the Company transitioned a portion of its
corporate and client fund investments from tax-exempt to
taxable instruments in order to increase liquidity of the
overall portfolio. Approximately $2.6 billion of tax-exempt
investments were sold prior to maturity at a pre-tax loss of
approximately $32 million ($10 million corporate funds,
$22 million funds held for clients), and the proceeds were
reinvested at higher prevailing interest rates.
In July 2001, the Company adopted SFAS No. 142, “Good-
will and Other Intangible Assets,” which requires that
goodwill no longer be amortized, but instead be tested for
impairment at least annually. The decrease in amortization
expense is due to the adoption of SFAS 142. The Company
completed its annual assessment of impairment as of June
2002, which indicated no impairment of goodwill.
In ’02 the Company’s effective tax rate was 38.4% of pre-
tax earnings as compared to 39.4% in ’01 and 34.8% in ’00.
The decrease in the effective tax rate in fiscal ’02 was pri-
marily due to the impact of adopting SFAS No. 142 and the
resulting elimination of goodwill amortization expense in the
current year. Adjusting the prior years for the pro forma
impact of SFAS No. 142 the effective income tax rate was
38.5% in ’01 and 33.9% in ’00. The increased rate in ’01 is
primarily a result of the transition, referred to above, of a
portion of the Company’s investment portfolio to taxable
investments.
For ’03 ADP is forecasting another record year of revenue
and earnings per share growth in the mid-single digits.
MAJOR BUSINESS UNITS
Certain revenues and expenses are charged to business
units at a standard rate for management and motivational
reasons. Other costs are recorded based on management
responsibility. As a result, various income and expense
items, including certain non-recurring gains and losses, are
recorded at the corporate level and certain shared costs are
not allocated. The prior years’ business unit revenues and
pre-tax earnings have been restated to reflect fiscal year
’02 budgeted foreign exchange rates.
EMPLOYER SERVICES
Employer Services’ revenues grew 5% in fiscal ’02, and in
the absence of acquisitions and dispositions, revenue
growth would have been 5% in ’02, 11% in ’01 and 12% in
’00. Employer Services’ revenue growth continued to be
impacted by weak economic conditions, which resulted in
slower sales, lower client retention due primarily to bank-
ruptcies, and fewer employees on our clients’ payrolls.
Employer Services’ operating margin was 27% in ’02, 24%
in ’01 and 22% in ’00. Employer Services’ operating margin
improved due to operating efficiencies, cost containment
initiatives, and continued improvements in Europe, offset by
investments in new products.
Employer Services’ revenues shown above include interest
earned on collected but not yet remitted funds held for
clients at a standard rate of 6%, or $505 million in ’02, $489
million in ’01 and $411 million in ’00.
BROKERAGE SERVICES
Brokerage Services’ revenue growth was 1%. Excluding
acquisitions, fiscal ’02 revenues would have decreased 4%,
compared to increases of 7% in ’01 and 31% in ’00. The mix
of back office client transactions, brokerage industry con-
solidations and pricing pressure resulted in lower revenue
per trade. The continued reduction in discretionary spend-
ing in the financial services industry, particularly in research
and implementation services, also contributed to the decline
in fiscal ’02 revenue growth. Ongoing efforts to transition the
proxy mailing and voting process towards electronic delivery
and the “householding,” or consolidation of customer
accounts resulted in an increase in mailing suppressions.
Suppressed mailings increase service fees, but lower postage
revenues and expenses in the Investor Communications
business.
Management’s Discussion and Analysis (continued)