ADP 2008 Annual Report Download - page 19

Total Expenses
Our consolidated expenses increased $778.2 million, from $5,610.2 million in fiscal 2006, to $6,388.4 million in fiscal 2007. The
percentage increase in our consolidated expenses was proportionate to the increase in our revenues. Additionally, the increase was due to
higher pass-through costs associated with our PEO business revenues, which have pass-through operating expenses, an increase in our
salesforce and implementation personnel, higher expenses associated with our Employer Services’ new business sales and implementation and
the impact of acquisitions. Consolidated expenses also increased $79.8 million, or 1%, due to fluctuations in foreign currency exchange rates.
Our total costs of revenues increased $483.6 million, to $4,087.3 million in fiscal 2007, from $3,603.7 million in fiscal 2006, due to
increases in our operating expenses. Operating expenses increased $421.8 million due to the increase in revenues described above, including
the increases in PEO revenues, which have pass-through costs that are re-
b
illable, and higher compensation expenses associated with additional
implementation and service personnel. The pass-through costs for our PEO revenues were $640.7 million in fiscal 2007, as compared to $511.0
million in fiscal 2006. In addition, operating expenses in fiscal 2007 increased approximately $136.0 million as a result of higher compensation
expenses associated with additional implementation and service personnel, including approximately $47.0 million of spending on new business
opportunities in Employer Services and PEO Services. Our new business opportunities relate to our Human Resource Business Process
Outsourcing (“HR BPO”) opportunities, which focus on the outsourcing of integrated multiple processes – such as payroll, HR, and benefits
administration. This spending was targeted at expanding our Comprehensive Outsourcing Services (“COS”) product for larger employers, our
PEO Services business, our ADP Resource® product, which is an integrated, flexible HR and payroll-based service offering, and GlobalView®,
which is our outsourcing offering for multi-national and global organizations. Lastly, our operating expenses increased $30.0 million due to
fluctuations in foreign currency rates and increased approximately $64.6 million due to the operating costs of new businesses acquired.
Systems development and programming costs increased $20.4 million due to the increase in headcount and the additional expenses associated
with our new businesses acquired and increased $6.1 million due to fluctuations in foreign currency exchange rates. These increases in systems
development and programming costs were offset by lower compensation expenses of approximately $16.0 million associated with the
increased resources at our off-shore locations and smartshoring facilities. In addition, depreciation and amortization expenses increased $48.0
million due to increased amortization expenses of $28.2 million resulting from the intangible assets acquired with new businesses and the
purchases of software and software licenses in fiscal 2007. In addition, depreciation and amortization expenses increased due to fiscal 2006
capital expenditures of approximately $100 million related to the consolidation of our data center facilities.
Selling, general and administrative expenses increased $272.5 million, to $2,206.2 million in fiscal 2007, due to higher selling expenses in
Employer Services and PEO Services, which resulted in an increase in expenses of approximately $97.5 million and $18.3 million,
respectively. The $97.5 million increase in expenses in Employer Services included approximately $13 million for expenses relating to our HR
BPO opportunities discussed above. Selling, general and administrative expenses also increased approximately $73.8 million due to the selling,
general and administrative expenses related to our business acquisitions in fiscal 2007 and increased $20.1 million due to fluctuations in
foreign currency rates. Additionally, we had an increase in restructuring charges of $21.5 million, which primarily related to severance.
Interest expense increased $22.1 million in fiscal 2007 as a result of higher average borrowings and higher interest rates on our short-term
commercial paper program. In fiscal 2007 and 2006, the Company’ s average borrowings under the commercial paper program were $1.5
billion and $1.4 billion, respectively, at a weighted average interest rate of 5.3% and 4.1%, respectively.
Other Income, net
Other income, net, increased $76.1 million in fiscal 2007 due to a gain of $38.6 million on the sale of a minority investment, an increase of
$7.5 million of realized gains on our available-for-sale securities and a decrease of $5.4 million of realized losses on our available-for-sale
securities. Additionally, other income, net, included an increase in interest income on corporate funds of $24.6 million as a result of the higher
average interest rates earned on our corporate balances, which increased to 4.6% in fiscal 2007 as compared to 4.0% in the prior year and our
average corporate balances increased to $3.6 billion in fiscal 2007 as compared to $3.5 billion in the prior year.
E
arnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased $262.3 million, or 19%, to $1,623.5 million in fiscal 2007 due to the
increase in revenues and expenses discussed above. Overall margin increased from 20% in fiscal 2006 to 21% in fiscal 2007.
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