ADP 2012 Annual Report Download - page 39

Download and view the complete annual report

Please find page 39 of the 2012 ADP annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 125

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125

There are inherent risks and uncertainties involving our investment strategy relating to our client funds assets. Such risks include liquidity risk,
including the risk associated with our ability to liquidate, if necessary, our available-for-
sale securities in a timely manner in order to satisfy our
client funds obligations. However, our investments are made with the safety of principal, liquidity, and diversification as the primary goals to
minimize the risk of not having sufficient funds to satisfy all of our client funds obligations. We also believe we have significantly reduced the
risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity,
including our corporate cash balances, available borrowings under our $6.75 billion commercial paper program (rated A-1+ by Standard and
Poor’s and Prime-1 (P1) by Moody’s, the highest possible credit rating), our ability to execute reverse repurchase transactions ($3.0 billion of
which is available on a committed basis) and available borrowings under our $6.75 billion committed revolving credit facilities. However, the
reduced availability of financing during periods of economic turmoil, even to borrowers with the highest credit ratings, may limit our ability to
access short-term debt markets to meet the liquidity needs of our business. In addition to liquidity risk, our investments are subject to interest
rate risk and credit risk, as discussed below.
We have established credit quality, maturity, and exposure limits for our investments. The minimum allowed credit rating at time of purchase
for corporate and Canadian provincial bonds is BBB, for asset-
backed securities is AAA, and for municipal bonds is A. The maximum maturity
at time of purchase for BBB rated securities is 5 years, for single A rated securities is 7 years, and for AA rated and AAA rated securities is 10
years. Commercial paper and time deposits must be rated A1/P1.
Details regarding our overall investment portfolio are as follows:
We are exposed 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 50 basis points, from 3.1% for fiscal 2011 to 2.6% for fiscal 2012. 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
$10 million impact to earnings before income taxes over the ensuing twelve-
month period ending June 30, 2013. 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, 2013.
37
(Dollars in millions)
Years ended June 30,
2012
2011
2010
Average investment balances at cost:
Corporate investments
$
4,024.6
$
3,467.6
$
3,839.2
Funds held for clients
17,898.2
16,865.4
15,194.5
Total $
21,922.8
$
20,333.0
$
19,033.7
Average interest rates earned exclusive of
realized gains/(losses) on:
Corporate investments
2.1
%
2.6
%
2.6
%
Funds held for clients
2.8
%
3.2
%
3.6
%
Total
2.6
%
3.1
%
3.4
%
Realized gains on available-for-sale securities $
32.1
$
38.0
$
15.0
Realized losses on available-for-sale securities
(7.7
)
(3.6
)
(13.4
)
Net realized gains on available
-for-sale securities $
24.4
$
34.4
$
1.6
Impairment losses on available-for-sale securities $
(5.8
) $ - $
(14.4
)
As of June 30:
Net unrealized pre
-tax gains on available-for-sale securities $
710.5
$
570.9
$
710.9
Total available-for-sale securities at fair value $
18,093.4
$
16,927.5
$
15,517.0