ADP 2004 Annual Report Download - page 22

Automatic Data Processing, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
and services and our salesforce. Our associate retention is good
at almost 90% retention worldwide. Client retention is excellent
across all businesses and especially in Dealer Services and
Employer Services. In Employer Services, we improved retention
almost one percentage point in fiscal 2004 compared to record
levels a year ago. We are gaining momentum in sales, particularly
in Employer Services and Dealer Services where, in both busi-
nesses, we finished fiscal 2004 strong and have double-digit
sales growth expectations for fiscal 2005.
Our fiscal 2005 guidance is for mid-single digit revenue
growth and double-digit earnings per share growth. The forecast
is based on current economic conditions. We are assuming no
further improvement in “pays per control,” and a 3% increase in
investor communications pieces delivered with lower mutual
fund mailings related to regulatory activity. At the end of fiscal
2004, we reached an agreement to acquire the U.S. Clearing
and BrokerDealer Services divisions of Bank of America
Corporation, which provide third-party clearing operations. We
anticipate closing this acquisition before the end of the calendar
year with about $.01 dilution in fiscal 2005.
Although we are forecasting double-digit earnings per
share growth for fiscal 2005, we expect to start the year slower
with lower growth early in the year. We expect earnings growth to
accelerate throughout the year as we anticipate more favorable
interest rate comparisons and we anniversary investment spend-
ing levels that increased throughout fiscal 2004.
Results of Operations
Analysis of Consolidated Operations
(In millions, except per share amounts)
Years ended June 30, Change
2004 2003 2002 2004 2003 2002
Total revenues $7,755 $ 7,147 $ 7,004 9% 2% 2%
Total expenses $6,260 $ 5,502 $ 5,217 14% 5% (2)%
Earnings before
income taxes $1,495 $ 1,645 $ 1,787 (9)% (8)% 17%
Margin 19.3% 23.0% 25.5%
Provision for
income taxes $ 559 $ 627 $ 686 (11)% (9)% 14%
Effective tax rate 37.4% 38.1% 38.4%
Net earnings $ 936 $ 1,018 $ 1,101 (8)% (8)% 19%
Diluted earnings
per share $ 1.56 $ 1.68 $ 1.75 (7)% (4)% 22%
Fiscal 2004 Compared to Fiscal 2003
Revenues
Our consolidated revenues for the year ended June 30, 2004
grew 9% to $7.8 billion primarily due to increases in Employer
Services of 10% to $4.8 billion, Dealer Services of 9% to $890
million and Brokerage Services of 3% to $1.7 billion. Our con-
solidated revenues, excluding the impact of acquisitions and
divestitures, grew 6% in the fiscal year ending June 30, 2004
as compared with the prior year. Revenue growth for the fiscal
year was also favorably impacted by $144 million, or 2%, due to
fluctuations in foreign currency exchange rates.
Our fiscal 2004 consolidated revenues include interest on
funds held for clients of $355 million, as compared to $369
million in fiscal 2003. The decrease in the consolidated interest
earned on funds held for clients resulted from the decrease in
interest rates in the current year, offset by the increase of 24%
in our average client fund balances to $11.1 billion. The differ-
ence between the 4.5% standard rate allocation in Employer
Services and the actual interest earned is a reconciling item that
eliminates in consolidation and reduces revenues by $140 mil-
lion in fiscal 2004 and $41 million in fiscal 2003.
Expenses
Our consolidated expenses for fiscal 2004 increased by $759
million, from $5.5 billion to $6.3 billion. The increase in our
consolidated expenses is primarily due to our increase in rev-
enues, including the additional expenses related to acquisitions,
and expenses relating to our incremental investments of $170
million. The incremental investments were targeted at revenue
growth opportunities as well as costs to scale back or exit lower
growth areas. These expenses consisted primarily of $45 million
of employer of choice initiatives (mostly associate compensa-
tion), $35 million of expenses relating to our salesforce (mostly
additional salesforce, training, sales meetings and marketing
expenses), $30 million of severance and facility exit costs, and
expenses relating to maintaining our products and services. In
addition, consolidated expenses increased by $115 million, or
2%, due to fluctuations in foreign currency exchange rates.
Operating expenses increased by $429 million, or 14%, prima-
rily due to the increase in consolidated revenues. Selling, gener-
al and administrative expenses increased by $145 million to
$1.9 billion primarily due to the additional compensation
expenses incurred relating to our employer of choice initiatives
and the additional salesforce added during fiscal 2004. Systems
development and programming costs increased by $82 million to
$581 million due to continued investments in sustaining our
products, primarily in our Employer Services business, and the
maintenance of our existing technology throughout all of our
businesses. Depreciation and amortization expenses increased
by $32 million to $307 million due to an increase in amortiza-
tion of intangible assets primarily from the increase in software
licenses acquired with our fiscal 2004 and fiscal 2003 acquisi-
tions. In addition, other income, net, decreased $71 million due
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