ADP 2004 Annual Report Download - page 30

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Automatic Data Processing, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
We also recognize revenues associated with the sale of
software systems and associated software licenses. For a major-
ity of our software sales arrangements, which provide hardware,
software licenses, installation and post customer support,
revenues are recognized ratably over the software license term as
vendor-specific objective evidence of the fair values of the
individual elements in the sales arrangement does not exist.
Changes to the elements in an arrangement and the ability to
establish vendor-specific objective evidence for those elements
could affect the timing of the revenue recognition.
The majority of our revenues are generated from a fee
for service model (e.g., fixed fee per transaction processed) in
which revenue is recognized when the related services have been
rendered under written price quotations or service agreements
having stipulated terms and conditions which do not require
management to make any significant judgments or assumptions
regarding any potential uncertainties.
We assess collectibility of our revenues based primarily on
the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customer’s payment history.
We do not believe that our assumptions utilized in the collectibil-
ity would result in a material change to revenues as no one cus-
tomer accounts for a significant portion of our revenues.
Goodwill. We review the carrying value of all our goodwill
in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, “Goodwill and Other Intangible
Assets,” by comparing the carrying value of our reporting units
to their fair values. We are required to perform this comparison
at least annually or more frequently if circumstances indicate
possible impairment. When determining fair value, we utilize a
discounted future cash flow approach using various assump-
tions, including projections of revenues, based on assumed long-
term growth rates, estimated costs, and appropriate discount
rates based on the particular businesses’ weighted average cost
of capital. Our estimates of long-term growth and costs are based
on historical data, various internal estimates and a variety of
external sources, and are developed as part of our routine long-
range planning process. The estimated fair value of the
Company’s reporting units exceeds the carrying value of the
reporting units. We had approximately $2.2 billion of goodwill as
of June 30, 2004. Given the significance of our goodwill, an
adverse change to the fair value could result in an impairment
charge, which could be material to our consolidated earnings.
Income Taxes. We account for income taxes in accordance
with SFAS No. 109, “Accounting for Income Taxes,” which
establishes financial accounting and reporting standards for the
effect of income taxes. The objectives of accounting for income
taxes are to recognize the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in
an entity’s financial statements or tax returns. Judgment is
required in addressing the future tax consequences of events
that have been recognized in our financial statements or tax
returns (e.g., realization of deferred tax assets, changes in tax
laws or interpretations thereof). In addition, we are subject to the
continuous examination of our income tax returns by the Internal
Revenue Service and other tax authorities. A change in the
assessment of the outcomes of such matters could materially
impact our consolidated financial statements.
Market Price, Dividend Data and Other
The market price of our common stock (symbol: ADP) based on
New York Stock Exchange composite transactions and cash div-
idends per share declared during the past two years have been:
Price Per Share Dividends
High Low Per Share
Fiscal 2004 quarter ended
June 30 $47.31 $41.63 $.1400
March 31 $44.68 $39.61 $.1400
December 31 $39.88 $35.86 $.1400
September 30 $40.70 $33.45 $.1200
Fiscal 2003 quarter ended
June 30 $36.08 $30.80 $.1200
March 31 $40.81 $27.24 $.1200
December 31 $45.96 $33.76 $.1200
September 30 $43.75 $31.15 $.1150
As of June 30, 2004, there were approximately 37,547 holders
of record of our common stock. As of such date, approximately
323,273 additional holders had their stock in “street name.”