ADP 2004 Annual Report Download - page 28

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Automatic Data Processing, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Company’s U.S. and Canadian short-term funding
requirements related to client funds obligations are sometimes
obtained on a secured basis through the use of repurchase
agreements, which are collateralized principally by government
and government agency securities. These agreements generally
have terms ranging from overnight up to five business days. At
June 30, 2004 and 2003, there were no outstanding repurchase
agreements. For fiscal 2004 and 2003, the Company had an
average outstanding balance of $32.0 million and $6.1 million,
respectively, at a weighted average interest rate of 1.8% and
3.0%, respectively.
Capital expenditures during 2004 were $204 million, as
compared to $134 million in 2003 and $146 million in 2002.
The capital expenditures in fiscal 2004 related primarily to tech-
nology assets, buildings, furniture and equipment and leasehold
improvements to support our operations. Capital expenditures in
fiscal 2005 should be approximately $225 to $245 million.
The following table provides a summary of our contractual
obligations as of June 30, 2004:
(In thousands) Payments due by period
Contractual Less than 1-3 3-5 More than
Obligations 1 year years years 5 years Total
Debt
Obligations (1) $ 515 $ 746 $ 16,535 $ 58,919 $ 76,715
Operating Lease
and Software
License
Obligations (2) 290,901 364,018 158,229 117,617 930,765
Purchase
Obligations (3) 46,121 31,976 10,581 — 88,678
Other long-term
liabilities
reflected on
our Consolidated
Balance Sheets:
Compensation
and Benefits (4) 13,262 82,238 39,379 74,957 209,836
Total $350,799 $478,978 $224,724 $251,493 $1,305,994
(1) These amounts represent the principal repayments of our debt and are
included in our Consolidated Balance Sheets. See Note 8 to the
Consolidated Financial Statements for additional information about our
debt and related matters.
(2) Included in these amounts are various facilities and equipment leases, and
software license agreements. We enter into operating leases in the normal
course of business relating to facilities and equipment as well as the
licensing of software. The majority of our lease agreements have fixed pay-
ment terms based on the passage of time. Certain facility and equipment
leases require payment of maintenance and real estate taxes and contain
escalation provisions based on future adjustments in price indices. Our
future operating lease obligations could change if we exit certain contracts
and if we enter into additional operating lease agreements.
(3) Purchase obligations primarily relate to maintenance agreements on our
software, equipment and other assets.
(4) Compensation and benefits primarily relates to amounts associated with
our employee benefit plans and other compensation arrangements.
In addition to the obligations quantified in the table above,
we have obligations for the remittance of funds relating to our
payroll and payroll tax filing services. As of June 30, 2004, the
obligations relating to these matters, which are expected to be
paid in fiscal 2005, total $12.8 billion and are recorded in
client fund obligations on our Consolidated Balance Sheets. We
have $12.9 billion of funds recorded in funds held for clients on
our Consolidated Balance Sheets that have been impounded
from our clients to satisfy such obligations.
On June 22, 2004, our Brokerage Services Group
announced plans to implement a new business process outsourc-
ing (BPO) strategy that is intended to strengthen its service
offerings to meet the needs of a broader array of firms in the
financial services marketplace. As part of this BPO strategy, we
have reached an agreement to acquire the U.S. Clearing and
BrokerDealer Services divisions of Bank of America Corporation,
which provide third-party clearing operations. The transaction is
subject to regulatory review and is expected to close before the
end of the calendar year. On July 21, 2004, the Federal Trade
Commission granted early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, with respect to the transaction. When the
acquisition of U.S. Clearing and BrokerDealer Services is com-
pleted, we will offer a traditional clearing service to retail and
institutional broker/dealers in the United States that want to out-
source their entire back-office function.
In June 2003, we formed a new wholly-owned subsidiary,
ADP Indemnity, Inc. The primary purpose of this subsidiary is to
provide workers’ compensation insurance coverage, as well as
coverage for occupational disease or employer liability, for our
PEO worksite employees. This insurance was previously provided
by a third-party insurance company. The Company has specific
reinsurance with a third-party insurance company for aggregate
losses between $75 million and $85 million in a policy year and
also has stop loss insurance at $120 million of aggregated loss-
es in a policy year. The Company utilizes historical loss experi-
ence and actuarial judgment to determine the estimated insur-
ance liability for these services. The Company reviews the
assumptions and obtains valuations provided by an independent
third-party actuary to determine the adequacy of the workers’
compensation liabilities. During the fiscal year ending June 30,
2004, we received premiums of $57 million and paid claims of
$7 million. At June 30, 2004, our cash balance is approximate-
ly $64 million to cover potential future workers’ compensation
claims for the policy year that the PEO worksite employees were
covered. We believe that the level of funding is adequate to cover
the future workers’ compensation claims for the PEO worksite
employees covered.
It is not our business practice to enter into off-balance
sheet arrangements. However, in the normal course of business,
we do enter into contracts in which we make certain representa-
tions and warranties that guarantee the performance of our prod-
ucts and services. There have historically been no material loss-
es related to such guarantees and we do not expect there to be