ADP

Business Context and Reporting Period

Company: Automatic Data Processing, Inc. (ADP)
Filing Type: Form 10-K (Annual Report)
Fiscal Year End: June 30, 2003
Filing Date: September 12, 2003

ADP is a global provider of computerized transaction processing, data communication, and information services. The company operates through four primary segments: Employer Services (payroll, HR, and benefits), Brokerage Services (financial services transaction processing), Dealer Services (automotive dealer management systems), and Claims Services (insurance and auto repair solutions). As of June 30, 2003, ADP employed approximately 41,000 persons and served approximately 500,000 clients globally.

Key Financial Metrics

Note: Specific revenue, profit, cash flow, and debt figures are incorporated by reference to the 2003 Annual Report to Shareholders and are not explicitly detailed in the provided text. The following metrics are available from the filing text:

• Systems Development Investment: $604 million invested in fiscal 2003 (compared to $535 million in 2002 and $584 million in 2001).
• Client Fund Movement: Over $620 billion in client funds moved to taxing authorities and employees via electronic transfer, direct deposit, and ADPCheck in fiscal 2003.
• Market Value: Approximately $23.5 billion aggregate market value of voting and non-voting common equity held by non-affiliates as of the last trading day of the second fiscal quarter.
• Shares Outstanding: 594,883,230 shares of Common Stock as of August 31, 2003.
• Allowance for Doubtful Accounts: Total ending balance of $65.8 million ($54.7 million current + $11.1 million long-term) as of June 30, 2003.
• Deferred Tax Valuation Allowance: $32.2 million as of June 30, 2003.

Material Changes and Operational Highlights

Acquisitions and Expansion:

• Employer Services: Acquired ProBusiness Services, Inc. to expand National Accounts Services; acquired Scudder Investments' retirement services recordkeeping operations (becoming the 4th largest recordkeeper in the U.S.); acquired SMS companies for job tax credit services.
• Brokerage Services: Acquired Vantra Group, Inc., Power Securities Systems, Inc., and Dataphile Software, Ltd. to enhance Web-based and back-office solutions.
• International Growth: Payroll sales to multi-national employers in Europe increased by nearly 36% over the previous fiscal year.

Segment Performance Drivers:

• Employer Services: Continued growth despite weak economic conditions, driven by North America payroll/tax businesses, "beyond payroll" products, and the PEO business (ADP TotalSource).
• Brokerage Services: Experienced weakness due to the broader financial services industry downturn, reducing volume-based processing and investor communications.
• Interest Income: Declining U.S. interest rates significantly impacted interest earnings on client and corporate funds.

Outlook, Risks, and Contingencies

Management Commentary: ADP maintains a leadership position in its major service offerings. The company continues to Web-enable existing products and launch new Web-native solutions (e.g., TotalChoice, EasyPayNet). Management believes no single business unit is subject to unique market risk, though economic conditions can temporarily impact demand.

Legal Proceedings:

• UCS Litigation: ADP and subsidiary Dealer Solutions are defendants in a lawsuit filed by Universal Computer Systems, Inc. alleging trade secret violations regarding the CARMan software product. The case was tried before an arbitration panel in June 2003, with a final decision expected in October 2003. UCS seeks $56 million in damages. ADP believes it has valid defenses and expects to prevail.
• General Litigation: Management believes the resolution of other pending claims will not have a material adverse impact on financial condition.

Risks: The computing services industry is highly competitive based on service responsiveness, product quality, and price. No single client accounts for more than 2% of annual consolidated revenues.

Investor Verification Checklist

• Verify the specific revenue, net income, and cash flow figures in the "Selected Financial Data" and "Consolidated Financial Statements" incorporated by reference, as these are not explicitly listed in the text provided.
• Monitor the outcome of the UCS arbitration regarding the $56 million trade secret claim, expected in October 2003.
• Assess the impact of declining interest rates on future interest income from client funds.
• Review the integration progress of recent acquisitions (ProBusiness, Scudder, Vantra Group) to ensure expected synergies are realized.
• Confirm the continued growth trajectory of the Employer Services segment, which is the primary revenue driver, against the backdrop of weak economic conditions.