ADP 2004 Annual Report Download - page 44

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Automatic Data Processing, Inc. and Subsidiaries
The long-term expected rate of return on assets assumption
is 7.25%. This percentage has been determined based on histor-
ical and expected future rates of return on plan assets consider-
ing the target asset mix and the long-term investment strategy.
Plan Assets
The Company’s pension plans’ weighted average asset allocations
at June 30, 2004 and 2003, by asset category were as follows:
2004 2003
United States Fixed Income Securities 31% 41%
United States Equity Securities 54% 46%
International Equity Securities 15% 13%
Total 100% 100%
The Company’s pension plans’ asset investment strategy is
designed to ensure prudent management of assets, consistent
with long-term return objectives and the prompt fulfillment of all
pension plan obligations. The investment strategy and asset mix
were developed in coordination with an asset liability study con-
ducted by external consultants to maximize the funded ratio with
the least amount of volatility.
The pension plans’ assets are currently invested in various
asset classes with differing expected rates of return, correlations
and volatilities including large capitalization and small capitaliza-
tion U.S. equities, international equities, and U.S. fixed income
securities and cash.
The target asset allocation ranges are as follows:
United States Fixed Income Securities 30 – 40%
United States Equity Securities 45 – 55%
International Equity Securities 12 – 20%
Total Equities 60 – 70%
The pension plans’ fixed income portfolio is designed to
match the duration and liquidity characteristics of the pension
plans’ liabilities. In addition, the pension plans invest only in
investment-grade debt securities to ensure preservation of capi-
tal. The pension plans’ equity portfolios are subject to diversifica-
tion guidelines to reduce the impact of losses in single
investments. Investment managers are prohibited from buying or
selling commodities, futures or option contracts, and from short
selling of securities.
None of the assets of the pension plans are directly invested
in the Company’s stock, although the pension plans may hold a
minimal amount of Company stock to the extent of the Company’s
participation in the S&P 500 Index.
Contributions
The minimum required contributions to the Company’s pension
plans is $0 in fiscal 2005; however, the Company expects to con-
tribute approximately $25 million.
Estimated Future Benefit Payments
The benefits expected to be paid in each year from fiscal 2005 to
2009 are $17 million, $18 million, $24 million, $26 million and
$32 million, respectively. The aggregate benefits expected to be
paid in the five fiscal years from 2010 to 2014 are $276 million.
The expected benefits to be paid are based on the same assump-
tions used to measure the Company’s pension plans’ benefit
obligation at June 30, 2004 and include estimated future
employee service.
C. Retirement and Savings Plan. The Company has a 401(k)
retirement and savings plan, which allows eligible employees to
contribute up to 20% of their compensation annually and allows
highly compensated employees to contribute up to 10% of their
compensation annually. The Company matches a portion of
employee contributions, which amounted to approximately $35
million, $34 million and $35 million for calendar years 2003,
2002 and 2001, respectively.
NOTE 11 Income Taxes
Earnings before income taxes shown below are based on the geo-
graphic location to which such earnings are attributable.
Years ended June 30, 2004 2003 2002
Earnings before
income taxes:
United States $1,307,465 $1,474,915 $1,618,885
Foreign 187,065 170,285 168,085
$1,494,530 $1,645,200 $1,786,970
The provision for income taxes consists of the following com-
ponents:
Years ended June 30, 2004 2003 2002
Current:
Federal $350,265 $496,920 $542,980
Foreign 78,450 84,180 67,380
State 21,090 61,725 67,160
Total current 449,805 642,825 677,520
Deferred:
Federal 100,125 430 6,525
Foreign (13,720) (16,350) (20)
State 22,750 145 2,175
Total deferred 109,155 (15,775) 8,680
Total provision $558,960 $627,050 $686,200
A reconciliation between the Company’s effective tax rate
and the U.S. federal statutory rate is as follows:
Years ended June 30, 2004 % 2003 % 2002 %
Provision for taxes at
U.S. statutory rate
$523,086 35.0 $575,820 35.0 $625,415 35.0
Increase (decrease)
in provision from:
State taxes, net
of federal tax
benefit
28,495 1.9 40,215 2.4 45,070 2.5
Other 7,379 0.5 11,015 0.7 15,715 0.9
$558,960 37.4 $627,050 38.1 $686,200 38.4
The significant components of deferred income tax assets
and liabilities and their balance sheet classifications are as follows:
Notes to Consolidated Financial Statements