ADP 2010 Annual Report Download - page 38

Details regarding our overall investment portfolio are as follows:
Our laddering strategy exposes us to interest rate risk in relation to securities that mature, as the proceeds from maturing securities
are reinvested. Factors that influence the earnings impact of the interest rate changes include, among others, the amount of invested
funds and the overall portfolio mix between short
- term and long - term investments. This mix varies during the fiscal year and is
impacted by daily interest rate changes. The annualized interest rates earned on our entire portfolio decreased by 50 basis points,
from 3.9% for fiscal 2009 to 3.4% for fiscal 2010. A hypothetical change in both short
- term interest rates (e.g., overnight interest rates
or the federal funds rate) and intermediate
- term interest rates of 25 basis points applied to the estimated average investment balances
and any related short
- term borrowings would result in approximately a $9 million impact to earnings before income taxes over the
ensuing twelve
- month period ending June 30, 2011. A hypothetical change in only short - term interest rates of 25 basis points applied
to the estimated average short
- term investment balances and any related short - term borrowings would result in approximately a $5
million impact to earnings before income taxes over the ensuing twelve
- month period ending June 30, 2011.
We are exposed to credit risk in connection with our available
- for - sale securities through the possible inability of the borrowers to
meet the terms of the securities. We limit credit risk by investing in investment
- grade securities, primarily AAA and AA rated
securities, as rated by Moody
’ s, Standard & Poor ’ s, and for Canadian securities, Dominion Bond Rating Service. At June 30, 2010,
approximately 85% of our available
- for - sale securities held an AAA or AA rating. In addition, we limit amounts that can be invested
in any security other than US and Canadian government or government agency securities.
We are exposed to market risk from changes in foreign currency exchange rates that could impact our consolidated results of
operations, financial position or cash flows. We manage our exposure to these market risks through our regular operating and
financing activities and, when deemed appropriate, through the use of derivative financial instruments. We use derivative financial
instruments as risk management tools and not for trading purposes.
During fiscal 2010, we were exposed to foreign exchange fluctuations on U.S. Dollar denominated short
- term intercompany amounts
payable by a Canadian subsidiary to a U.S. subsidiary of the Company in the amount of $178.6 million U.S. Dollars. In order to
manage the exposure related to the foreign exchange fluctuations between the Canadian Dollar and the U.S. Dollar, the Canadian
subsidiary entered into a foreign exchange forward contract, which obligated the Canadian subsidiary to buy $178.6 million U.S.
dollars at a rate of 1.15 Canadian Dollars to each U.S. Dollar on December 1, 2009. Upon settlement of such contract on December 1,
2009, an additional foreign exchange forward contract was entered into that obligated the Canadian subsidiary to buy $29.4 million
U.S. Dollars at a rate of 1.06 Canadian dollars to each U.S. Dollar on February 26, 2010. The net loss on the foreign exchange forward
contracts of $15.8 million for the twelve months ended June 30, 2010 was recognized in earnings in fiscal 2010 and substantially
offset the foreign currency mark
- to - market gains on the related short - term intercompany amounts payable. The short - term
(Dollars in millions)
Years ended June 30,
2010
2009
2008
Average investment balances at cost:
Corporate investments
$
3,839.2
$
3,744.7
$
3,387.0
Funds held for clients
15,194.5
15,162.4
15,654.3
Total
$
19,033.7
$
18,907.1
$
19,041.3
Average interest rates earned exclusive of
realized gains/ (losses) on:
Corporate investments
2.6
%
3.6
%
4.4
%
Funds held for clients
3.6
%
4.0
%
4.4
%
Total
3.4
%
3.9
%
4.4
%
Realized gains on available - for - sale securities
$
15.0
$
11.4
$
10.1
Realized losses on available - for - sale securities
(13.4
)
(23.8
)
(11.4
)
Net realized gains/(losses) on available - for - sale securities
$
1.6
$
(12.4
)
$
(1.3
)
As of June 30:
Net unrealized pre - tax gains on available - for - sale securities
$
710.9
$
436.6
$
142.1
Total available - for - sale securities at fair value
$
15,517.0
$
14,730.2
$
15,066.4