Annual Statements Open main menu

AUTOMATIC DATA PROCESSING INC - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
______________

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2019

OR

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From          to         
 
Commission File Number 1-5397
__________________________

AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
22-1467904
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
One ADP Boulevard, Roseland, New Jersey
07068 
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code: 973-974-5000
__________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ý       No   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [x]
 
Accelerated filer [ ]
Non-accelerated filer [ ]
 
Smaller reporting company [ ]
Emerging growth company [ ]
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  ý
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.10 Par Value
(voting)
ADP
NASDAQ Global Select Market


The number of shares outstanding of the registrant’s common stock as of April 30, 2019 was 435,228,237.



Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
Statements of Consolidated Earnings
Three and nine months ended March 31, 2019 and 2018
 
 
 
 
Statements of Consolidated Comprehensive Income
Three and nine months ended March 31, 2019 and 2018
 
 
 
 
Consolidated Balance Sheets
At March 31, 2019 and June 30, 2018
 
 
 
 
Statements of Consolidated Cash Flows
Nine months ended March 31, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
 
 

2


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
 
*As Restated
 
 
*As Restated
REVENUES:
 
 
 
 
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
$
2,546.9

 
$
2,495.2

 
$
7,084.7

 
$
6,764.5

Interest on funds held for clients
167.4

 
134.8

 
415.0

 
340.9

PEO revenues (A)
1,133.1

 
1,066.0

 
3,176.8

 
2,906.1

TOTAL REVENUES
3,847.4

 
3,696.0

 
10,676.5

 
10,011.5

 
 
 
 
 
 
 
 
EXPENSES:
 

 
 

 
 

 
 

Costs of revenues:
 

 
 

 
 

 
 

Operating expenses
1,874.5

 
1,845.2

 
5,370.4

 
5,185.0

Systems development and programming costs
160.1

 
163.9

 
474.2

 
481.5

Depreciation and amortization
77.2

 
70.2

 
221.5

 
202.1

TOTAL COSTS OF REVENUES
2,111.8

 
2,079.3

 
6,066.1

 
5,868.6

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
750.4

 
750.1

 
2,209.4

 
2,149.0

Interest expense
21.7

 
18.6

 
96.2

 
74.1

TOTAL EXPENSES
2,883.9

 
2,848.0

 
8,371.7

 
8,091.7

 
 
 
 
 
 
 
 
Other income, net
(21.0
)
 
(27.2
)
 
(67.5
)
 
(107.9
)
 
 
 
 
 
 
 
 
EARNINGS BEFORE INCOME TAXES
984.5

 
875.2

 
2,372.3

 
2,027.7

 
 
 
 
 
 
 
 
Provision for income taxes
230.8

 
214.2

 
554.9

 
283.7

 
 
 
 
 
 
 
 
NET EARNINGS
$
753.7

 
$
661.0

 
$
1,817.4

 
$
1,744.0

 
 
 
 
 
 
 
 
BASIC EARNINGS PER SHARE
$
1.74

 
$
1.50

 
$
4.17

 
$
3.95

 
 
 
 
 
 
 
 
DILUTED EARNINGS PER SHARE
$
1.73

 
$
1.49

 
$
4.15

 
$
3.93

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
434.1

 
441.0

 
435.5

 
441.5

Diluted weighted average shares outstanding
436.6

 
443.4

 
438.1

 
444.1


*See Note 2 for a summary of adjustments.

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $10,798.3 million and $10,176.2 million for the three months ended March 31, 2019 and 2018, respectively, and $32,178.8 million and $29,547.0 million for the nine months ended March 31, 2019 and 2018, respectively.












See notes to the Consolidated Financial Statements.

3



Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Comprehensive Income
(In millions)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
 
*As Restated
 
 
*As Restated
Net earnings
$
753.7

 
$
661.0

 
$
1,817.4

 
$
1,744.0

 
 
 
 
 
 
 
 
Other comprehensive income/loss:
 
 
 
 
 
 
 
Currency translation adjustments
(2.3
)
 
26.8

 
(49.9
)
 
81.8

 
 
 
 
 
 
 
 
Unrealized net gains/(losses) on available-for-sale securities
259.0

 
(240.4
)
 
377.0

 
(400.6
)
Tax effect
(58.0
)
 
53.4

 
(84.8
)
 
109.9

Reclassification of net (gain)/losses on available-for-sale securities to net earnings
(0.1
)
 
0.2

 
1.4

 
1.3

Tax effect

 
0.1

 
(0.2
)
 
(0.2
)
 
 
 
 
 
 
 
 
Reclassification of pension liability adjustment to net earnings
6.1

 
2.3

 
32.5

 
6.9

Tax effect
(1.6
)
 
(0.6
)
 
(8.1
)
 
(2.3
)
 
 
 
 
 
 
 
 
Other comprehensive income/(loss), net of tax
203.1

 
(158.2
)
 
267.9

 
(203.2
)
Comprehensive income
$
956.8

 
$
502.8

 
$
2,085.3

 
$
1,540.8



*See Note 2 for a summary of adjustments.




























See notes to the Consolidated Financial Statements.

4


Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
 
March 31,
 
June 30,
 
 
 
2018
 
 
2019
 
*As Restated
 
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,826.2

 
$
2,170.0

Accounts receivable, net of allowance for doubtful accounts of $50.8 and $51.3, respectively
 
2,485.2

 
1,984.2

Other current assets
 
534.4

 
531.3

Total current assets before funds held for clients
 
4,845.8

 
4,685.5

Funds held for clients
 
36,078.2

 
27,137.8

Total current assets
 
40,924.0

 
31,823.3

Long-term receivables, net of allowance for doubtful accounts of $0.5 and $0.5, respectively
 
25.6

 
25.5

Property, plant and equipment, net
 
765.8

 
793.7

Deferred contract costs
 
2,361.6

 
2,377.4

Other assets
 
740.3

 
699.3

Goodwill
 
2,316.1

 
2,243.5

Intangible assets, net
 
1,062.9

 
886.4

Total assets
 
$
48,196.3

 
$
38,849.1

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
156.3

 
$
135.4

Accrued expenses and other current liabilities
 
1,678.7

 
1,547.6

Accrued payroll and payroll-related expenses
 
607.4

 
667.7

Dividends payable
 
340.0

 
298.9

Short-term deferred revenues
 
228.3

 
225.7

Income taxes payable
 
99.7

 
43.9

Total current liabilities before client funds obligations
 
3,110.4

 
2,919.2

Client funds obligations
 
36,055.6

 
27,493.5

Total current liabilities
 
39,166.0

 
30,412.7

Long-term debt
 
2,002.3

 
2,002.4

Other liabilities
 
759.8

 
728.0

Deferred income taxes
 
615.8

 
522.0

Long-term deferred revenues
 
406.2

 
448.1

Total liabilities
 
42,950.1

 
34,113.2

 
 
 
 
 
Commitments and contingencies (Note 14)
 


 


 
 
 
 
 
Stockholders' equity:
 
 

 
 

Preferred stock, $1.00 par value: authorized, 0.3 shares; issued, none
 

 

Common stock, $0.10 par value: authorized, 1,000.0 shares; issued, 638.7 shares at March 31, 2019 and June 30, 2018;
outstanding, 435.5 and 438.8 shares at March 31, 2019 and June 30, 2018, respectively
 
63.9

 
63.9

Capital in excess of par value
 
1,140.2

 
1,014.8

Retained earnings
 
17,368.6

 
16,546.6

Treasury stock - at cost: 203.2 and 199.9 shares at March 31, 2019 and June 30, 2018, respectively
 
(12,914.6
)
 
(12,209.6
)
Accumulated other comprehensive loss
 
(411.9
)
 
(679.8
)
Total stockholders’ equity
 
5,246.2

 
4,735.9

Total liabilities and stockholders’ equity
 
$
48,196.3

 
$
38,849.1


*See Note 2 for a summary of adjustments.



See notes to the Consolidated Financial Statements.

5

Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In millions)
(Unaudited)



 
 
Nine Months Ended
 
 
March 31,
 
 
2019
 
2018
 
 
 
*As Restated
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
1,817.4

 
$
1,744.0

Adjustments to reconcile net earnings to cash flows provided by operating activities:
 
 

 
 

Depreciation and amortization
 
299.6

 
278.3

Amortization of deferred contract costs
 
655.2

 
623.5

Deferred income taxes
 
4.1

 
(145.5
)
Stock-based compensation expense
 
122.2

 
119.4

Net pension expense
 
41.0

 
8.2

Net amortization of premiums and accretion of discounts on available-for-sale securities
 
38.9

 
55.6

Impairment of intangible assets
 
12.1

 

Other
 
21.2

 
22.0

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 

 
 

Increase in accounts receivable
 
(526.7
)
 
(239.3
)
Increase in other assets
 
(748.9
)
 
(696.1
)
Increase / (decrease) in accounts payable
 
25.4

 
(31.1
)
Increase in accrued expenses and other liabilities
 
194.5

 
71.0

Net cash flows provided by operating activities
 
1,956.0

 
1,810.0

 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Purchases of corporate and client funds marketable securities
 
(2,725.8
)
 
(3,692.7
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
 
2,090.6

 
2,702.5

Capital expenditures
 
(120.3
)
 
(159.6
)
Additions to intangibles
 
(329.9
)
 
(195.8
)
Acquisitions of businesses, net of cash acquired
 
(120.4
)
 
(612.4
)
Proceeds from the sale of property, plant, and equipment
 
7.9

 

Net cash flows used in investing activities
 
(1,197.9
)
 
(1,958.0
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Net increase in client funds obligations
 
8,612.0

 
6,700.2

Payments of debt
 
(1.6
)
 
(6.8
)
Repurchases of common stock
 
(760.6
)
 
(596.2
)
Net proceeds from stock purchase plan and stock-based compensation plans
 
50.5

 
46.1

Dividends paid
 
(949.6
)
 
(785.1
)
Other
 
(5.3
)
 

Net cash flows provided by financing activities
 
6,945.4

 
5,358.2

 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(34.1
)
 
53.1

 
 
 
 
 
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
 
7,669.4

 
5,263.3

 
 
 
 
 
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period
 
6,542.1

 
8,181.6

Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
 
$
14,211.5

 
$
13,444.9

 
 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets
 
 
 
 
Cash and cash equivalents
 
$
1,826.2

 
$
2,293.6

Restricted cash and restricted cash equivalents included in funds held for clients (A)
 
12,385.3

 
11,151.3

Total cash, cash equivalents, restricted cash, and restricted cash equivalents
 
$
14,211.5

 
$
13,444.9

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
108.6

 
$
86.5

Cash paid for income taxes, net of income tax refunds
 
$
437.7

 
$
423.0


*See Note 2 for a summary of adjustments.

(A) See Note 8 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.


See notes to the Consolidated Financial Statements.

6


Automatic Data Processing, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
(Unaudited)
Note 1.  Basis of Presentation

The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc., its subsidiaries and variable interest entity (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  The Consolidated Financial Statements and footnotes thereto are unaudited.  In the opinion of the Company’s management, the Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company’s interim financial results.

The Company has a grantor trust, which holds the majority of the funds provided by its clients pending remittance to employees of those clients, tax authorities, and other payees.  The Company is the sole beneficial owner of the trust.  The trust meets the criteria in Accounting Standards Codification (“ASC”) 810, “Consolidation” to be characterized as a variable interest entity (“VIE”).  The Company has determined that it has a controlling financial interest in the trust because it has both (1) the power to direct the activities that most significantly impact the economic performance of the trust (including the power to make all investment decisions for the trust) and (2) the right to receive benefits that could potentially be significant to the trust (in the form of investment returns) and, therefore, consolidates the trust.  Further information on these funds and the Company’s obligations to remit to its clients’ employees, tax authorities, and other payees is provided in Note 8, “Corporate Investments and Funds Held for Clients.” 

Restatements

Effective July 1, 2018, certain prior period amounts have been restated to conform to the current period presentation in connection with the adoption of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (ASC 606)” and ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Also, in the first quarter of the fiscal year ending June 30, 2019 (“fiscal 2019”), the Company's chief operating decision maker (“CODM”) began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity. Additionally, the CODM reviews results with changes to certain corporate allocations. Refer to Note 2 and Note 17 for additional information.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for a full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (“fiscal 2018”).

Note 2.  New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective July 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)” on a retrospective basis. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 resulted in enhanced revenue-related disclosures. The standard primarily impacted the manner in which it treats certain costs to fulfill contracts (i.e., implementation costs) and costs to acquire new contracts (i.e., selling costs). The provisions of the new standard require the Company to capitalize and amortize additional implementation costs than those capitalized and amortized under previous U.S. GAAP. Under previous U.S. GAAP, the Company immediately expensed all selling expenses. The adoption of the provisions of the new standard did not materially impact the timing or amount of revenue the Company recognized and did not result in significant changes in its business processes or systems. Refer to Note 3 for further details. Refer to the table below for a summary of the restatements required, as a result of this change, on the Company's statements of consolidated earnings for the three and nine months ended March 31, 2018, consolidated balance sheets as of June 30, 2018, and consolidated cash flows for the nine months ended March 31, 2018.
Effective July 1, 2018, the Company adopted ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” ASU 2017-07 requires reporting the service cost component in the same line item or items as other compensation costs arising during the period in the Statements of

7


Consolidated Earnings. The other components of net periodic pension cost are required to be presented in the Statements of Consolidated Earnings separately from the service cost component. The Company retrospectively adopted the new standard, and as a result reclassified the non-service cost components of the net periodic benefit cost from within the respective line items of our Statements of Consolidated Earnings to Other income, net. Refer to the table below for a summary of the reclassification required, as a result of this change, on the Company's consolidated results of operations for the three and nine months ended March 31, 2018. The adoption of the new accounting rules only impacted the classification of expenses on the Statements of Consolidated Earnings and did not impact the Company’s consolidated earnings, balance sheets, or cash flows.
Adoption of ASC 606 and ASU 2017-07 impacted the Company's prior period Statements of Consolidated Earnings, Consolidated Balance Sheets, and Consolidated Cash Flows as follows:

Statements of Consolidated Earnings
 
Three Months Ended
 
March 31, 2018
 
As reported
 
Adjustments
ASC 606
 
Adjustments
ASU 2017-07
 
As restated
Revenues, other than interest on funds held for clients and PEO revenues
$
2,492.9

 
$
2.3

 
$

 
$
2,495.2

Interest on funds held for clients
134.8

 

 

 
134.8

PEO revenues
1,065.3

 
0.7

 

 
1,066.0

TOTAL REVENUES
3,693.0

 
3.0

 

 
3,696.0

Operating expenses
1,844.7

 
(8.8
)
 
9.3

 
1,845.2

Systems development and programming costs
162.5

 

 
1.4

 
163.9

Depreciation and amortization
70.2

 

 

 
70.2

Selling, general, and administrative expenses
755.1

 
(10.8
)
 
5.8

 
750.1

Interest expense
18.6

 

 

 
18.6

Total Expenses
2,851.1

 
(19.6
)
 
16.5

 
2,848.0

Other income, net
(10.7
)
 

 
(16.5
)
 
(27.2
)
EARNINGS BEFORE INCOME TAXES
852.6

 
22.6

 

 
875.2

Provision for income taxes
209.5

 
4.7

 

 
214.2

NET EARNINGS
$
643.1

 
$
17.9

 
$

 
$
661.0


 
Nine Months Ended
 
March 31, 2018
 
As reported
 
Adjustments
ASC 606
 
Adjustments
ASU 2017-07
 
As restated
Revenues, other than interest on funds held for clients and PEO revenues
$
6,762.7

 
$
1.8

 
$

 
$
6,764.5

Interest on funds held for clients
340.9

 

 

 
340.9

PEO revenues
2,903.6

 
2.5

 

 
2,906.1

TOTAL REVENUES
10,007.2

 
4.3

 

 
10,011.5

Operating expenses
5,210.6

 
(53.6
)
 
28.0

 
5,185.0

Systems development and programming costs
477.6

 

 
3.9

 
481.5

Depreciation and amortization
202.1

 

 

 
202.1

Selling, general, and administrative expenses
2,134.8

 
(3.3
)
 
17.5

 
2,149.0

Interest expense
74.1

 

 

 
74.1

Total Expenses
8,099.2

 
(56.9
)
 
49.4

 
8,091.7

Other income, net
(58.5
)
 

 
(49.4
)
 
(107.9
)
EARNINGS BEFORE INCOME TAXES
1,966.5

 
61.2

 

 
2,027.7

Provision / (benefit) for income taxes
454.4

 
(170.7
)
 

 
283.7

NET EARNINGS
$
1,512.1

 
$
231.9

 
$

 
$
1,744.0



8


Consolidated Balance Sheets
 
 
June 30,
 
 
 
June 30,
 
 
2018
 
Adjustments
ASC 606
 
2018
 
 
As reported
 
 
As restated
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Other current assets
 
$
758.0

 
$
(226.7
)
 
$
531.3

Total current assets
 
32,050.0

 
(226.7
)
 
31,823.3

Deferred contract costs
 

 
2,377.4

 
2,377.4

Other assets
 
1,089.6

 
(390.3
)
 
699.3

Total assets
 
$
37,088.7

 
$
1,760.4

 
$
38,849.1

 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Short-term deferred revenues
 
226.5

 
(0.8
)
 
225.7

Total current liabilities
 
30,413.6

 
(0.8
)
 
30,412.7

Deferred income taxes
 
107.3

 
414.7

 
522.0

Long-term deferred revenues
 
377.8

 
70.2

 
448.1

Total liabilities
 
33,629.1

 
484.1

 
34,113.2

 
 
 
 
 
 
 
Stockholders' equity:
 
 

 
 

 
 

Retained earnings
 
15,271.3

 
1,275.3

 
16,546.6

Total stockholders’ equity
 
3,459.6

 
1,276.3

 
4,735.9

Total liabilities and stockholders’ equity
 
$
37,088.7

 
$
1,760.4

 
$
38,849.1


Statements of Consolidated Cash Flows
 
 
Nine Months Ended
 
 
March 31,
 
 
2018
 
Adjustments
ASC 606
 
2018
 
 
As reported
 
 
As restated
Cash Flows from Operating Activities:
 
 
 
 
 
 
Net earnings
 
$
1,512.1

 
$
231.9

 
$
1,744.0

Adjustments to reconcile net earnings to cash flows provided by operating activities:
 
 

 
 

 
 

Amortization of deferred contract costs
 

 
623.5

 
623.5

Deferred income taxes
 
18.0

 
(163.5
)
 
(145.5
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 
 

 
 

 
 

Increase in other assets
 
(38.6
)
 
(657.5
)
 
(696.1
)
Increase in accrued expenses and other liabilities
 
105.4

 
(34.4
)
 
71.0

Net cash flows provided by operating activities
 
$
1,810.0

 
$

 
$
1,810.0

Effective October 1, 2018, the Company prospectively adopted ASU 2018-15, “Intangibles - Goodwill and Other-Internal-Use Software.” ASU 2018-15 clarifies and aligns the accounting and capitalization of implementation costs in cloud computing arrangements that are service arrangements with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40. The adoption of ASU 2018-15 did not have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.

In March 2018, the Company adopted ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) from accumulated other comprehensive income to retained earnings. The Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive income and into retained earnings of $42.3 million. The Company's policy for releasing disproportionate income tax effects from AOCI utilizes the aggregate approach. Refer to Note 16 for additional detail regarding the components of the reclassification. The adoption of ASU 2018-02 did not have an impact on the Company's consolidated results of operations or cash flows.

9




Recently Issued Accounting Pronouncements

The following table summarizes recent ASU's issued by the Financial Accounting Standards Board ("FASB") that could have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
Standard
Description
Effective Date
Effect on Financial Statements or Other Significant Matters
ASU 2018-14 Compensation-Retirement Benefits-Defined Benefit Plans
This update modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amendments in ASU 2018-14 would need to be applied on a retrospective basis. 
July 1, 2021 (“Fiscal 2022”)
The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.
ASU 2018-13 Fair Value Measurement
This update modifies the disclosure requirements on fair value measurements. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis.
July 1, 2020 (“Fiscal 2021”)
The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.
ASU 2018-09 Codification Improvements
This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The transition guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective immediately. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018.
The transition and effective date guidance is based on the facts and circumstances of each amendment.
Clarifications which were effective immediately were not applicable and for other amendments the Company determined the impact of this ASU did not have a material impact on its consolidated results of operations, financial condition, or cash flows.

10


 
Standard
Description
Effective Date
Effect on Financial Statements or Other Significant Matters
 
ASU 2016-02
Leases (Topic 842)
This update amends the existing accounting standards for lease accounting and requires lessees to recognize most lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. In July 2018, the FASB issued Accounting Standards Update 2018-10-Codification Improvements to Topic 842 (Leases), and Accounting Standards Update 2018-11-Leases (Topic 842)-Targeted Improvements, which (i) narrows amendments to clarify how to apply certain aspects of the new lease standard, (ii) provides entities with an additional transition method to adopt the new standard, and (iii) provides lessors with a practical expedient for separating components of a contract. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) to be more general and/or to correct unintended application of guidance.
July 1, 2019 (“Fiscal 2020”)
The Company has been assessing the impacts of the new standard. The Company anticipates using the optional transition method with a cumulative adjustment to retained earnings. The Company has reached a decision as to the systems it will use to manage the accounting for leases, determined the contracts that are considered leases under the new guidance and is currently in the process of implementing the systems and establishing the appropriate controls and procedures. The Company will utilize the transition package of practical expedients permitted within the new guidance which, among other things, will allow the Company to carry forward the historical lease classification.

Upon adoption, the Company anticipates a material impact to its Consolidated Balance Sheets but expects no impact to the Statements of Consolidated Earnings or Statements of Consolidated Cash Flows. The most significant impact will be the recognition of the right-of-use (“ROU”) assets and lease liabilities for operating leases. We estimate the adoption of the guidance will result in the recognition and presentation of total operating lease ROU assets to be approximately $600 million to $700 million and total operating lease liabilities to be approximately $500 million to $600 million, upon the adoption date.
 
 

Note 3.  Revenue

Based upon similar operational and economic characteristics, the Company’s revenues are disaggregated by its three strategic pillars: U.S. Integrated HCM (“HCM”), HR Outsourcing (“HRO”), and Global with separate disaggregation for PEO benefits pass-through revenues and Client Fund Interest revenues.  The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.

HCM provides a suite of product offerings that assist employers of all types and sizes in all stages of the employment cycle, from recruitment to retirement. Global is generally consistent with the types of services provided within HCM but represent geographies outside of the United States and includes our multinational offerings. HCM and Global revenues are primarily attributable to fees for providing solutions for payroll, benefits, talent, retirement services and HR processing and fees charged to implement the Company's solutions for clients.

HRO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions. This revenue is primarily driven by the Professional Employer Organization Services (“PEO”). Amounts collected from PEO worksite employers include payroll, fees for benefits, and an administrative fee that also includes payroll taxes, fees for workers’ compensation and state unemployment taxes. The payroll and payroll taxes collected from the worksite employers are

11


presented in revenue net, as the Company does not retain risk and acts as an agent with respect to this aspect of the PEO arrangement. With respect to the payroll and payroll taxes, the worksite employer is primarily responsible for providing the service and has discretion in establishing wages. The fees collected from the worksite employers for benefits (i.e., PEO benefits pass-throughs), workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as the Company acts as a principal with respect to this aspect of the arrangement. With respect to these fees, the Company is primarily responsible for fulfilling the service and has discretion in establishing price. The Company has further disaggregated HRO to separate out its PEO benefits pass-through revenues.

The Company enters into service agreements with clients that include anywhere from one service to a full suite of services. The Company’s agreements vary in duration having a legally enforceable term of 30 days to 5 years. The performance obligations in the agreements are generally combined into one performance obligation, as they are considered a series of distinct services, and are satisfied over time because the client simultaneously receives and consumes the benefits provided as the Company performs the services. The Company uses the output method based on a fixed fee per employee serviced to recognize revenue, as the value to the client of the goods or services transferred to date (e.g., number of payees or number of payrolls processed) appropriately depicts our performance towards complete satisfaction of the performance obligation. The fees are typically billed in the period in which services are performed.

The Company recognizes client fund interest revenues on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.

Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing. We assess the collectability of revenues based primarily on the creditworthiness of the client as determined by credit checks and analysis, as well as the client's payment history.

The following tables provide details of revenue by our strategic pillars with disaggregation for PEO benefits pass-throughs and client fund interest, and includes a reconciliation to the Company’s reportable segments (in millions):

 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
Types of Revenues
2019
 
2018
 
2019
 
2018
HCM
$
1,771.4

 
$
1,759.4

 
$
4,886.1

 
$
4,696.4

HRO, excluding PEO benefits pass-throughs
678.7

 
661.7

 
1,855.4

 
1,713.6

PEO benefits pass-throughs
684.5

 
626.4

 
2,011.1

 
1,828.7

Global
545.4

 
513.7

 
1,508.9

 
1,431.9

Interest on funds held for clients
167.4

 
134.8

 
415.0

 
340.9

Total Revenues
$
3,847.4

 
$
3,696.0

 
$
10,676.5

 
$
10,011.5


Reconciliation of disaggregated revenue to our reportable segments for the three months ended March 31, 2019:
Types of Revenues
Employer Services
 
PEO
 
Other
 
Total
HCM
$
1,774.7

 
$

 
$
(3.3
)
 
$
1,771.4

HRO, excluding PEO benefits pass-throughs
233.2

 
448.6

 
(3.1
)
 
678.7

PEO benefits pass-throughs

 
684.5

 

 
684.5

Global
545.4

 

 

 
545.4

Interest on funds held for clients
165.8

 
1.6

 

 
167.4

Total Segment Revenues
$
2,719.1

 
$
1,134.7

 
$
(6.4
)
 
$
3,847.4



12


Reconciliation of disaggregated revenue to our reportable segments for the three months ended March 31, 2018:
Types of Revenues
Employer Services
 
PEO
 
Other
 
Total
HCM
$
1,756.3

 
$

 
$
3.1

 
$
1,759.4

HRO, excluding PEO benefits pass-throughs
225.1

 
439.5

 
(2.9
)
 
661.7

PEO benefits pass-throughs

 
626.4

 

 
626.4

Global
513.7

 

 

 
513.7

Interest on funds held for clients
133.4

 
1.4

 

 
134.8

Total Segment Revenues
$
2,628.5

 
$
1,067.3

 
$
0.2

 
$
3,696.0


Reconciliation of disaggregated revenue to our reportable segments for the nine months ended March 31, 2019:
Types of Revenues
Employer Services
 
PEO
 
Other
 
Total
HCM
$
4,891.1

 
$

 
$
(5.0
)
 
$
4,886.1

HRO, excluding PEO benefits pass-throughs
696.6

 
1,165.7

 
(6.9
)
 
1,855.4

PEO benefits pass-throughs

 
2,011.1

 

 
2,011.1

Global
1,508.9

 

 

 
1,508.9

Interest on funds held for clients
411.1

 
3.9

 

 
415.0

Total Segment Revenues
$
7,507.7

 
$
3,180.7

 
$
(11.9
)
 
$
10,676.5


Reconciliation of disaggregated revenue to our reportable segments for the nine months ended March 31, 2018:
Types of Revenues
Employer Services
 
PEO
 
Other
 
Total
HCM
$
4,694.1

 
$

 
$
2.3

 
$
4,696.4

HRO, excluding PEO benefits pass-throughs
642.2

 
1,077.4

 
(6.0
)
 
1,713.6

PEO benefits pass-throughs

 
1,828.7

 

 
1,828.7

Global
1,431.9

 

 

 
1,431.9

Interest on funds held for clients
337.5

 
3.4

 

 
340.9

Total Segment Revenues
$
7,105.7

 
$
2,909.5

 
$
(3.7
)
 
$
10,011.5


Contract Balances

The timing of revenue recognition for our HCM, Global and HRO services is consistent with the invoicing of clients, as invoicing occurs in the period the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Set up fees received from certain clients to implement the Company's solutions are considered a material right. Therefore, the Company defers revenue associated with these set up fees and records them over the period in which such clients are expected to benefit from the material right, which is approximately five to seven years.

Changes in deferred revenue related to set up fees for the nine months ended March 31, 2019 were as follows:
Contract Liability
 
Contract liability, July 1, 2018
$
607.5

Recognition of revenue included in beginning of year contract liability
(136.7
)
Contract liability, net of revenue recognized on contracts during the period
119.3

Currency adjustments
(10.9
)
Contract liability, March 31, 2019
$
579.2



13


Deferred costs
 
Incremental Costs of Obtaining a Contract

Incremental costs of obtaining a contract (e.g., sales commissions) that are expected to be recovered are capitalized and amortized on a straight-line basis over a period of three to eight years, depending on the Company's business unit. Expected renewal periods are only included in the expected client relationship period if commission amounts paid upon renewal are not commensurate with commission amounts paid on the initial contract. Incremental costs of obtaining a contract include only those costs the Company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. These costs are included in selling, general and administrative expenses.

Costs to fulfill a Contract

The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract, ii) are expected to generate resources that will be used to satisfy the Company’s performance obligations under the contract and iii) are expected to be recovered through revenue generated under the contract. Costs incurred to implement clients on our solutions (e.g., direct labor) are capitalized and amortized on a straight-line basis over the expected client relationship period if the Company expects to recover those costs. The expected client relationship period ranges from three to eight years. These costs are included in operating expenses.

The Company has estimated the amortization periods for the deferred costs by using its historical retention by business unit to estimate the pattern during which the service transfers.

Deferred costs are periodically reviewed for impairment. There were no impairment losses incurred during the period. 

The balance is as follows:
 
March 31,
 
2019
Deferred costs to obtain a contract
$
919.8

Deferred costs to fulfill a contract
1,441.8

Total deferred contract costs (1)
$
2,361.6


(1) The amount of total deferred costs amortized during the three and nine months ended March 31, 2019 and March 31, 2018, were $220.6 million and $655.2 million, and $211.2 million and $623.5 million, respectively.

Note 4. Acquisitions

In October 2017, the Company acquired 100% of the outstanding shares of Global Cash Card, Inc. (“GCC”), a leader in digital payments, including paycards and other electronic accounts, for approximately $490 million in cash, net of cash acquired. The acquisition of GCC makes ADP the only human capital management provider with a proprietary digital payments processing platform. The results of GCC are reported within the Company’s Employer Services segment.

The final purchase price allocation for GCC is as follows:
Goodwill
$
406.1

Identifiable intangible assets
132.5

Other assets
0.8

Total assets acquired
$
539.4

 
 
Total liabilities assumed
$
48.4


The Company determined the purchase price allocations for this acquisition based on estimates of the fair value of tangible and intangible assets acquired and liabilities assumed, utilizing recognized valuation techniques, including the income and market approaches. The goodwill recorded as a result of the GCC transaction represents future economic benefits we expect to achieve as a result of the acquisition and expected cost synergies. None of the goodwill resulting from the acquisition is tax deductible.

14


Intangible assets for GCC, which totaled $132.5 million, included technology and software, and customer contracts and lists which are being amortized over a weighted average life of approximately 8 years.

In January 2018, the Company acquired 100% of the outstanding shares of Work Market, Inc. (“WorkMarket”), a leading provider of cloud-based freelance management solutions, for approximately $125 million in cash.

In July 2018, the Company acquired 100% of outstanding shares of Celergo Holdings, Inc. (“Celergo”), a leading provider of multi-country payroll management services.

These acquisitions, individually or in aggregate, were not material to the Company's results of operations, financial position, or cash flows and, therefore, the pro forma impact of these acquisitions is not presented. The results of these acquisitions are reported within the Company’s Employer Services segment.

Note 5. Service Alignment Initiative

On July 28, 2016, the Company announced a Service Alignment Initiative that simplified the Company's service organization by aligning the Company's service operations to its strategic platforms and locations. In fiscal 2016, the Company entered into leases in Norfolk, Virginia and Maitland, Florida, and in fiscal 2017, the Company entered into a lease in Tempe, Arizona as part of this effort. The Company began incurring charges during the first quarter of fiscal 2017. The charges primarily relate to employee separation benefits recognized under ASC 712, and also include charges for the relocation of certain current Company employees, lease termination costs, and accelerated depreciation of fixed assets. The Company does not expect to recognize any additional significant pre-tax restructuring charges related to the Service Alignment Initiative.

The table below summarizes the composition of the Company's Service Alignment Initiative (reversals)/charges:
 
Three Months Ended
 
Nine Months Ended
 
Cumulative amount from inception through
 
March 31,
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
2019
Employee separation benefits (a)
$
(8.2
)
 
$
11.8

 
$
(16.7
)
 
$
8.9

 
$
82.8

Other initiative costs (b)
0.5

 
1.3

 
2.2

 
4.2

 
13.2

Gain on sale of assets (c)

 

 
(4.1
)
 

 
(4.1
)
Total (d)
$
(7.7
)
 
$
13.1

 
$
(18.6
)
 
$
13.1

 
$
91.9


(a) - Net (reversals)/charges are recorded in selling, general and administrative expenses on the Statements of Consolidated Earnings.
(b) - Other initiative costs include costs to relocate certain current Company employees to new locations, lease termination charges (both included within selling, general and administrative expenses on the Statements of Consolidated Earnings), and accelerated depreciation on fixed assets (included within depreciation and amortization on the Statements of Consolidated Earnings).
(c) - During the nine months ended March 31, 2019, the Company sold assets in relation to the Service Alignment Initiative, and as a result recorded a gain of $4.1 million in Other income, net, on the Statement of Consolidated Earnings. Refer to Note 7.
(d) - All charges are included within the Other segment.


15



Activity for the Service Alignment Initiative liability for the nine months ended March 31, 2019 and March 31, 2018, respectively, was as follows:
 
Employee
separation benefits
 
Other initiative costs
 
Total
Balance at June 30, 2018
$
54.0

 
$
0.5

 
$
54.5

Charged to expense
4.1

 
2.2

 
6.3

Reversals
(20.8
)
 

 
(20.8
)
Cash payments
(18.0
)
 
(2.3
)
 
(20.3
)
Balance at March 31, 2019
$
19.3

 
$
0.4

 
$
19.7

 
 
 
 
 
 
Balance at June 30, 2017
$
73.9

 
$
0.5

 
$
74.4

Charged to expense
21.8

 
4.2

 
26.0

Reversals
(12.9
)
 

 
(12.9
)
Cash payments
(25.9
)
 
(3.4
)
 
(29.3
)
Non-cash utilization

 
(0.7
)
 
(0.7
)
Balance at March 31, 2018
$
56.9

 
$
0.6

 
$
57.5


Note 6.  Earnings per Share (“EPS”)
 
 
Basic
 
Effect of Employee Stock Option Shares
 
Effect of
Employee
Restricted
Stock
Shares
 
Diluted
Three Months Ended March 31, 2019
 
 

 
 

 
 

 
 

Net earnings
 
$
753.7

 
 

 
 

 
$
753.7

Weighted average shares (in millions)
 
434.1

 
1.2

 
1.3

 
436.6

EPS
 
$
1.74

 
 

 
 

 
$
1.73

Three Months Ended March 31, 2018
 
 

 
 

 
 

 
 

Net earnings
 
$
661.0

 
 

 
 

 
$
661.0

Weighted average shares (in millions)
 
441.0

 
1.0

 
1.4

 
443.4

EPS
 
$
1.50

 
 

 
 

 
$
1.49

 
 
 
 
 
 
 
 
 
Nine Months Ended March 31, 2019
 
 
 
 
 
 
 
 
Net earnings
 
$
1,817.4

 
 

 
 

 
$
1,817.4

Weighted average shares (in millions)
 
435.5

 
1.3

 
1.3

 
438.1

EPS
 
$
4.17

 
 

 
 

 
$
4.15

Nine Months Ended March 31, 2018
 
 

 
 

 
 

 
 

Net earnings
 
$
1,744.0

 
 

 
 

 
$
1,744.0

Weighted average shares (in millions)
 
441.5

 
1.1

 
1.5

 
444.1

EPS
 
$
3.95

 
 

 
 

 
$
3.93


Options to purchase 0.8 million and 1.1 million shares of common stock for the three months ended March 31, 2019 and 2018, respectively, and 0.6 million and 0.9 million shares of common stock for the nine months ended March 31, 2019 and 2018, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.


16



Note 7. Other Income, Net
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Interest income on corporate funds
$
(15.0
)
 
$
(11.0
)
 
$
(71.6
)
 
$
(59.4
)
Realized gains on available-for-sale securities
(0.6
)
 
(1.3
)
 
(1.2
)
 
(1.9
)
Realized losses on available-for-sale securities
0.5

 
1.6

 
2.6

 
3.2

Impairment of intangible assets

 

 
12.1

 

Gain on sale of assets

 

 
(4.1
)
 
(0.4
)
Non-service components of pension expense, net (see Note 2)
(5.9
)
 
(16.5
)
 
(5.3
)
 
(49.4
)
Other income, net
$
(21.0
)
 
$
(27.2
)
 
$
(67.5
)
 
$
(107.9
)

The charges within non-service components of pension expense, net include $7.8 million and $35.9 million of non-cash settlement charges and of special termination benefits related to the Voluntary Early Retirement Program (“VERP”), for the three and nine months ended March 31, 2019, respectively, partially offset by $13.7 million and $41.2 million related to other components of net periodic pension cost for the three and nine months ended March 31, 2019, respectively. Refer to Note 2 and Note 12 for further information.

During the three months ended September 30, 2018, the Company wrote down $12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition.

During the three months ended December 31, 2018, the Company sold assets in relation to the Service Alignment Initiative and, as a result, recorded a gain of $4.1 million in Other income, net, on the Statement of Consolidated Earnings.

Note 8. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at March 31, 2019 and June 30, 2018 were as follows:
 
March 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Market Value (A)
Type of issue:
 
 
 
 
 
 
 
Money market securities, cash and other cash equivalents
$
14,211.5

 
$

 
$

 
$
14,211.5

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate bonds
10,116.6

 
86.3

 
(39.8
)
 
10,163.1

Asset-backed securities
4,572.8

 
13.1

 
(22.7
)
 
4,563.2

U.S. Treasury securities
2,932.2

 
8.1

 
(33.4
)
 
2,906.9

U.S. government agency securities
2,671.4

 
8.2

 
(18.4
)
 
2,661.2

Canadian government obligations and Canadian government agency obligations
1,117.3

 
4.6

 
(8.0
)
 
1,113.9

Canadian provincial bonds
777.0

 
8.2

 
(1.5
)
 
783.7

Municipal bonds
600.7

 
11.4

 
(0.3
)
 
611.8

Other securities
892.7

 
9.7

 
(2.8
)
 
899.6

 
 
 
 
 
 
 
 
Total available-for-sale securities
23,680.7

 
149.6

 
(126.9
)
 
23,703.4

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
37,892.2

 
$
149.6

 
$
(126.9
)
 
$
37,914.9

                                                            
(A) Included within available-for-sale securities are corporate investments with fair values of $10.5 million and funds held for clients with fair values of $23,692.9 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

17



 
June 30, 2018
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Market Value (B)
Type of issue:
 

 
 

 
 

 
 

Money market securities, cash and other cash equivalents
$
6,542.1

 
$

 
$

 
$
6,542.1

Available-for-sale securities:
 
 
 
 
 
 
 

Corporate bonds
9,819.4

 
20.3

 
(160.9
)
 
9,678.8

Asset-backed securities
4,555.5

 
0.3

 
(64.1
)
 
4,491.7

U.S. Treasury securities
2,678.9

 
0.4

 
(76.9
)
 
2,602.4

US government agency securities
2,787.0

 
4.0

 
(47.7
)
 
2,743.3

Canadian government obligations and Canadian government agency obligations
1,109.0

 
0.4

 
(20.6
)
 
1,088.8

Canadian provincial bonds
724.5

 
5.1

 
(7.4
)
 
722.2

Municipal bonds
584.6

 
3.2

 
(4.3
)
 
583.5

Other securities
873.0

 
3.0

 
(10.5
)
 
865.5

 
 
 
 
 
 
 
 
Total available-for-sale securities
23,131.9

 
36.7

 
(392.4
)
 
22,776.2

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
29,674.0

 
$
36.7

 
$
(392.4
)
 
$
29,318.3


(B) Included within available-for-sale securities are corporate investments with fair values of $10.5 million and funds held for clients with fair values of $22,765.7 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2018. The Company did not transfer any assets between Levels during the nine months ended March 31, 2019 or fiscal 2018. In addition, the Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company had no available-for-sale securities included in Level 1 or Level 3 at March 31, 2019.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of March 31, 2019, are as follows: 
 
March 31, 2019
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(0.7
)
 
$
117.3

 
$
(39.1
)
 
$
5,048.6

 
$
(39.8
)
 
$
5,165.9

Asset-backed securities
(0.1
)
 
25.0

 
(22.6
)
 
3,430.9

 
(22.7
)
 
3,455.9

U.S. Treasury securities

 

 
(33.4
)
 
2,340.9

 
(33.4
)
 
2,340.9

U.S. government agency securities

 

 
(18.4
)
 
2,153.4

 
(18.4
)
 
2,153.4

Canadian government obligations and Canadian government agency obligations
(7.9
)
 
667.1

 
(0.1
)
 
51.0

 
(8.0
)
 
718.1

Canadian provincial bonds
(0.4
)
 
80.4

 
(1.1
)
 
220.2

 
(1.5
)
 
300.6

Municipal bonds

 
4.7

 
(0.3
)
 
46.1

 
(0.3
)
 
50.8

Other securities

 
12.1

 
(2.8
)
 
354.5

 
(2.8
)
 
366.6

 
$
(9.1
)
 
$
906.6

 
$
(117.8
)
 
$
13,645.6

 
$
(126.9
)
 
$
14,552.2



18



The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2018, are as follows:

 
June 30, 2018
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(118.2
)
 
$
7,132.9

 
$
(42.7
)
 
$
994.2

 
$
(160.9
)
 
$
8,127.1

Asset-backed securities
(47.4
)
 
3,515.9

 
(16.7
)
 
867.7

 
(64.1
)
 
4,383.6

U.S. Treasury securities
(46.9
)
 
1,676.8

 
(30.0
)
 
864.0

 
(76.9
)
 
2,540.8

U.S. government agency securities
(31.2
)
 
2,013.8

 
(16.5
)
 
431.1

 
(47.7
)
 
2,444.9

Canadian government obligations and Canadian government agency obligations
(20.6
)
 
1,020.3

 

 

 
(20.6
)
 
1,020.3

Canadian provincial bonds
(6.3
)
 
387.7

 
(1.1
)
 
50.4

 
(7.4
)
 
438.1

Municipal bonds
(3.6
)
 
285.8

 
(0.7
)
 
16.0

 
(4.3
)
 
301.8

Other securities
(9.2
)
 
573.3

 
(1.3
)
 
33.4

 
(10.5
)
 
606.7

 
$
(283.4
)
 
$
16,606.5

 
$
(109.0
)
 
$
3,256.8

 
$
(392.4
)
 
$
19,863.3


At March 31, 2019, Corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from April 2019 through November 2028.

At March 31, 2019, asset-backed securities include AAA rated senior tranches of securities with predominantly prime collateral of fixed-rate credit card, auto loan, equipment lease, and rate reduction receivables with fair values of $1,957.9 million, $1,940.0 million, $489.5 million, and $175.8 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables. The primary risk associated with these securities is the collection risk of the underlying receivables.  All collateral on such asset-backed securities has performed as expected through March 31, 2019.

At March 31, 2019, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $1,798.0 million and $656.1 million, respectively. U.S. government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's, and AA+ by Standard & Poor's, with maturities ranging from May 2019 through January 2029.

At March 31, 2019, other securities and their fair value primarily include U.S. government agency commercial mortgage-backed securities of $398.5 million issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, Aa2 rated United Kingdom Gilt securities of $198.9 million, AAA and AA rated supranational bonds of $117.9 million, and AAA and AA rated sovereign bonds of $77.8 million.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 
 
March 31,
 
June 30,
 
 
2019
 
2018
Corporate investments:
 
 
 
 
Cash and cash equivalents
 
$
1,826.2

 
$
2,170.0

Short-term marketable securities (a)
 
7.3

 
3.3

Long-term marketable securities (b)
 
3.2

 
7.2

Total corporate investments
 
$
1,836.7

 
$
2,180.5

 
(a) - Short-term marketable securities are included within Other current assets on the Consolidated Balance Sheets.
(b) - Long-term marketable securities are included within Other assets on the Consolidated Balance Sheets.


19



Funds held for clients represent assets that, based upon the Company's intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets.

Funds held for clients have been invested in the following categories:
 
 
March 31,
 
June 30,
 
 
2019
 
2018
Funds held for clients:
 
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
 
$
12,385.3

 
$
4,372.1

Restricted short-term marketable securities held to satisfy client funds obligations
 
4,556.2

 
2,521.4

Restricted long-term marketable securities held to satisfy client funds obligations
 
19,136.7

 
20,244.3

Total funds held for clients
 
$
36,078.2

 
$
27,137.8


Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax, and other payee payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients.  The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $36,055.6 million and $27,493.5 million at March 31, 2019 and June 30, 2018, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client funds obligations. Of the Company’s funds held for clients at March 31, 2019 and June 30, 2018, $32,528.8 million and $24,242.9 million, respectively, are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and eliminate in consolidation.

The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash and cash equivalents related to client funds investments with original maturities of ninety days or less, within the beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents. These amounts have been reconciled to the Consolidated Balance Sheets on the Statements of Consolidated Cash Flows. The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.

Approximately 80% of the available-for-sale securities held a AAA or AA rating at March 31, 2019, as rated by Moody's, Standard & Poor's, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial mortgage backed securities.  All available-for-sale securities were rated as investment grade at March 31, 2019.
 
Expected maturities of available-for-sale securities at March 31, 2019 are as follows:
One year or less
$
4,563.5

One year to two years
5,733.7

Two years to three years
4,493.0

Three years to four years
4,327.5

After four years
4,585.7

Total available-for-sale securities
$
23,703.4



20



Note 9. Goodwill and Intangibles Assets, net

Changes in goodwill for the nine months ended March 31, 2019 are as follows:
 
Employer
Services
 
PEO
Services
 
Total
Balance at June 30, 2018
$
2,238.7

 
$
4.8

 
$
2,243.5

Additions and other adjustments
89.1

 

 
89.1

Currency translation adjustments
(16.5
)
 

 
(16.5
)
Balance at March 31, 2019
$
2,311.3

 
$
4.8

 
$
2,316.1


Components of intangible assets, net, are as follows:
 
 
March 31,
 
June 30,
 
 
2019
 
2018
Intangible assets:
 
 
 
 
Software and software licenses
 
$
2,459.6

 
$
2,292.9

Customer contracts and lists
 
855.5

 
708.6

Other intangibles
 
237.9

 
236.5

 
 
3,553.0

 
3,238.0

Less accumulated amortization:
 
 

 
 

Software and software licenses
 
(1,722.4
)
 
(1,606.6
)
Customer contracts and lists
 
(551.5
)
 
(533.4
)
Other intangibles
 
(216.2
)
 
(211.6
)
 
 
(2,490.1
)
 
(2,351.6
)
Intangible assets, net
 
$
1,062.9

 
$
886.4


Other intangibles consist primarily of purchased rights, trademarks and trade names (acquired directly or through acquisitions).  All intangible assets have finite lives and, as such, are subject to amortization.  The weighted average remaining useful life of the intangible assets is 6 years (5 years for software and software licenses, 6 years for customer contracts and lists, and 5 years for other intangibles).  Amortization of intangible assets was $57.1 million and $52.0 million for the three months ended March 31, 2019 and 2018, respectively, and $166.0 million and $150.4 million for the nine months ended March 31, 2019 and 2018, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:
 
Amount
Three months ending June 30, 2019
$
70.8

Twelve months ending June 30, 2020
$
255.7

Twelve months ending June 30, 2021
$
206.5

Twelve months ending June 30, 2022
$
161.1

Twelve months ending June 30, 2023
$
131.3

Twelve months ending June 30, 2024
$
94.6



21



Note 10. Short-term Financing

The Company has a $3.8 billion, 364-day credit agreement that matures in June 2019 with a one year term-out option.  The Company also has a $2.25 billion five year credit facility that matures in June 2022 that also contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. In addition, the Company has a five year $3.75 billion credit facility maturing in June 2023 that contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments.  The interest rate applicable to committed borrowings is tied to LIBOR, the effective federal funds rate, or the prime rate, depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing.  The Company is also required to pay facility fees on the credit agreements.  The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary.  The Company had no borrowings through March 31, 2019 under the credit agreements.

The Company's U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to $9.8 billion in aggregate maturity value. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 by Moody’s.  These ratings denote the highest quality commercial paper securities.  Maturities of commercial paper can range from overnight to up to 364 days. At March 31, 2019 and June 30, 2018, the Company had no commercial paper borrowing outstanding. For the three months ended March 31, 2019 and 2018, the Company had average daily borrowings of $1.1 billion and $1.0 billion, respectively, at weighted average interest rates of 2.4% and 1.5%, respectively. For the nine months ended March 31, 2019 and 2018, the Company had average daily borrowings of $2.9 billion and $2.8 billion, respectively, at weighted average interest rates of 2.2% and 1.2%, respectively. The weighted average maturity of the Company’s commercial paper during the three and nine months ended March 31, 2019 was approximately one day and two days, respectively.
        
The Company’s U.S., Canadian and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.  These agreements generally have terms ranging from overnight to up to five business days. At March 31, 2019 and June 30, 2018, there were no outstanding obligations related to reverse repurchase agreements. For the three months ended March 31, 2019 and 2018, the Company had average outstanding balances under reverse repurchase agreements of $93.1 million and $99.0 million, respectively, at weighted average interest rates of 1.8% and 1.2%, respectively. For the nine months ended March 31, 2019 and 2018, the Company had average outstanding balances under reverse repurchase agreements of $306.1 million and $389.5 million, respectively, at weighted average interest rates of 1.8% and 1.1%, respectively.

Note 11. Long-term Debt

The Company has fixed-rate notes with 5-year and 10-year maturities for an aggregate principal amount of $2.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
The principal amounts and associated effective interest rates of the Notes and other debt as of March 31, 2019 and June 30, 2018, are as follows:
Debt instrument
 
Effective Interest Rate
 
March 31, 2019
 
June 30,
 2018
Fixed-rate 2.25% notes due September 15, 2020
 
2.37%
 
$
1,000.0

 
$
1,000.0

Fixed-rate 3.375% notes due September 15, 2025
 
3.47%
 
1,000.0

 
1,000.0

Other
 
 
 
11.5

 
13.0

 
 
 
 
2,011.5

 
2,013.0

Less: current portion
 
 
 
(2.5
)
 
(2.5
)
Less: unamortized discount and debt issuance costs
 
 
 
(6.7
)
 
(8.1
)
Total long-term debt
 
 
 
$
2,002.3

 
$
2,002.4

The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.


22



As of March 31, 2019, the fair value of the Notes, based on Level 2 inputs, was $2,028.5 million. For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2018.

Note 12. Employee Benefit Plans

A.  Stock-based Compensation Plans

The Company's share-based compensation consists of stock options, time-based restricted stock, time-based restricted stock units, performance-based restricted stock, and performance-based restricted stock units. The Company also offers an employee stock purchase plan for eligible employees.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards.  From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.  The Company repurchased 1.6 million and 1.7 million shares in the three months ended March 31, 2019 and 2018, respectively, and repurchased 5.4 million and 5.3 million shares in the nine months ended March 31, 2019 and 2018, respectively. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

The following table represents pre-tax stock-based compensation expense for the three and nine months ended March 31, 2019 and 2018, respectively:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Operating expenses
$
4.1

 
$
4.8

 
$
12.9

 
$
15.4

Selling, general and administrative expenses
36.1

 
31.8

 
94.6

 
87.9

System development and programming costs
5.0

 
5.1

 
14.7

 
16.1

Total stock-based compensation expense
$
45.2

 
$
41.7

 
$
122.2

 
$
119.4


Beginning September 1, 2018, time-based restricted stock and time-based restricted stock units granted generally vest ratably over 3 years. Performance-based restricted stock and performance-based restricted stock units granted generally vest over a one to three-year performance period and a subsequent service period of up to 38 months. The methods and assumptions used in the determination of the fair value of stock-based awards are generally consistent with those described in the Company's Form 10-K for fiscal 2018 other than the change noted above. See the Company's Form 10-K for fiscal 2018 for a detailed description of the Company's stock-based compensation awards and employee stock purchase plan, including information related to vesting terms, service and performance conditions, payout percentages, and process for estimating the fair value of stock options granted.

B.  Pension Plans

The components of net pension expense were as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Service cost – benefits earned during the period
$
14.9

 
$
18.7

 
$
44.9

 
$
55.9

Interest cost on projected benefits
19.7

 
16.4

 
59.0

 
49.0

Expected return on plan assets
(32.9
)
 
(34.4
)
 
(98.9
)
 
(103.0
)
Net amortization and deferral

 
2.1

 
0.1

 
6.3

Settlement charges and special termination benefits
7.8

 

 
35.9

 

Net pension expense
$
9.5

 
$
2.8

 
$
41.0

 
$
8.2



23



In fiscal 2018, the Company offered a Voluntary Early Retirement Program (“VERP”) to certain eligible U.S.-based associates aged 55 or above with at least 10 years of service. The early retirement offer was made to about 3,500 eligible associates, or approximately 6 percent of the Company’s workforce, with approximately 2,200 ADP associates opting to participate. The Company also extended to all employees participating in VERP the opportunity to continue health care coverage at active employee contribution rates for up to 24 months following retirement. The Company recorded $2.2 million and $23.6 million of expenses within selling, general, and administrative expenses related to the continuing health coverage for VERP participants who exited the Company during the three and nine months ended March 31, 2019, respectively. The Company does not expect to record material charges for the remainder of fiscal 2019.

In addition, for the three and nine months ended March 31, 2019, the Company recorded $7.8 million and $35.9 million of non-cash settlement charges and of special termination benefits, respectively. The Company does not expect to record material charges for the remainder of fiscal 2019, within Other income, net, on the Statements of Consolidated Earnings.

Note 13. Income Taxes

The effective tax rate for the three months ended March 31, 2019 and 2018 was 23.4% and 24.5%, respectively. The decrease in the effective tax rate is primarily due to the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act, partially offset by the loss of qualified production activities tax deductions as a result of the Act in the three months ended March 31, 2019, the release of reserves for uncertain tax positions and the benefit of a tax accounting method change filed with the Internal Revenue Service in the three months ended March 31, 2018.
The effective tax rate for the nine months ended March 31, 2019 and 2018 was 23.4% and 14.0%, respectively. The increase in the effective tax rate is primarily due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the release of reserves for uncertain tax positions during the nine months ended March 31, 2018 and the loss of qualified production activities tax deductions as a result of the Act during the nine months ended March 31, 2019. This is partially offset by reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act.
The Act reduced the U.S. federal corporate income tax rate from 35% to 21%. In accordance with ASC 740, companies re-measured deferred tax balances using the new enacted tax rates. The Act required the Company to pay a one-time transition tax on earnings of the Company's foreign subsidiaries that were previously tax deferred for U.S. income taxes and creates new taxes on the Company's foreign sourced earnings.
At December 31, 2018, the Company has completed its accounting for all of the income tax effects of the Act. The adjustments were as follows:
The Act’s foreign tax credit provisions may limit the Company’s ability to utilize existing foreign tax credits in future periods, accordingly, we have estimated that approximately $19.2 million could expire unutilized. During fiscal 2018, the Company recorded $28.3 million related to foreign withholding taxes on future distributions of earnings and profits (“E&P”) that may not be utilizable as foreign tax credits.
During fiscal 2018, the Company recorded a benefit of $253.3 million (restated for ASC 606) to account for the effects of the rate change on deferred tax balances.

The one-time transition tax is based on the total post-1986 E&P that was previously deferred from U.S. income taxes. During fiscal 2018, the Company recorded an amount for the one-time transition tax liability of $22.9 million for the Company's foreign subsidiaries.

Since June 30, 2018, the Company made no significant adjustments to the amounts recorded during the measurement period.
Note 14. Commitments and Contingencies

In June 2018, a potential class action complaint was filed against ADP in the Circuit Court of Cook County, Illinois.  The complaint asserts that ADP violated the Illinois Biometric Privacy Act, was negligent and unjustly enriched itself in connection with its collection, use and storage of biometric data of employees of its clients who are residents of Illinois in connection with certain services provided by ADP to clients in Illinois.  The complaint seeks statutory and other unspecified monetary damages, injunctive relief and attorney’s fees.  In addition, similar potential class action complaints have been filed in Illinois state courts against ADP and/or certain of its clients with respect to the collection, use and storage of biometric data of the employees of these clients.  All of these claims are still in their earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to these matters.  The Company intends to vigorously defend against these lawsuits.

24




The Company is subject to various claims, litigation and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims, litigation and regulatory compliance matters against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.

It is not the Company’s business practice to enter into off-balance sheet arrangements. In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products.  The Company does not expect any material losses related to such representations and warranties.

Note 15. Stockholders' Equity

Changes in stockholders' equity by component are as follows:
 
Three Months Ended
 
March 31, 2019
 
Common Stock
 
Capital in Excess of Par Value
 
Retained Earnings
 
Treasury Stock
 
AOCI
 
Total
Balance at December 31, 2018
$
63.9

 
$
1,076.1

 
$
16,959.1

 
$
(12,720.2
)
 
$
(615.0
)
 
$
4,763.9

Net earnings

 

 
753.7

 

 

 
753.7

Other comprehensive income

 

 

 

 
203.1

 
203.1

Stock-based compensation expense

 
35.8

 

 

 

 
35.8

Issuances relating to stock compensation plans

 
28.3

 

 
33.6

 

 
61.9

Treasury stock acquired (1.6 shares)

 

 

 
(228.0
)
 

 
(228.0
)
Dividends declared ($0.79 per share)

 

 
(344.2
)
 

 

 
(344.2
)
Balance at March 31, 2019
$
63.9

 
$
1,140.2

 
$
17,368.6

 
$
(12,914.6
)
 
$
(411.9
)
 
$
5,246.2


 
Three Months Ended
 
March 31, 2018
 
Common Stock
 
Capital in Excess of Par Value
 
Retained Earnings
 
Treasury Stock
 
AOCI
 
Total
Balance at December 31, 2017
$
63.9

 
$
903.5

 
$
16,285.0

 
$
(11,663.7
)
 
$
(428.2
)
 
$
5,160.5

Net earnings

 

 
661.0

 

 

 
661.0

Other comprehensive income

 

 

 

 
(158.2
)
 
(158.2
)
Stock-based compensation expense

 
35.5

 

 

 

 
35.5

Issuances relating to stock compensation plans

 
25.1

 

 
39.9

 

 
65.0

Treasury stock acquired (1.7 shares)

 

 

 
(202.3
)
 

 
(202.3
)
Dividends declared ($0.63 per share)

 

 
(279.2
)
 

 

 
(279.2
)
Other (A)

 

 
42.3

 

 
(42.3
)
 

Balance at March 31, 2018
$
63.9

 
$
964.1

 
$
16,709.1

 
$
(11,826.1
)
 
$
(628.7
)
 
$
5,282.3


25




 
Nine Months Ended
 
March 31, 2019
 
Common Stock
 
Capital in Excess of Par Value
 
Retained Earnings
 
Treasury Stock
 
AOCI
 
Total
Balance at June 30, 2018
$
63.9

 
$
1,014.8

 
$
16,546.6

 
$
(12,209.6
)
 
$
(679.8
)
 
$
4,735.9

Net earnings

 

 
1,817.4

 

 

 
1,817.4

Other comprehensive income

 

 

 

 
267.9

 
267.9

Stock-based compensation expense

 
105.4

 

 

 

 
105.4

Issuances relating to stock compensation plans

 
20.0

 

 
117.1

 

 
137.1

Treasury stock acquired (5.4 shares)

 

 

 
(822.1
)
 

 
(822.1
)
Dividends declared ($2.27 per share)

 

 
(995.4
)
 

 

 
(995.4
)
Balance at March 31, 2019
$
63.9

 
$
1,140.2

 
$
17,368.6

 
$
(12,914.6
)
 
$
(411.9
)
 
$
5,246.2


 
Nine Months Ended
 
March 31, 2018
 
Common Stock
 
Capital in Excess of Par Value
 
Retained Earnings
 
Treasury Stock
 
AOCI
 
Total
Balance at June 30, 2017
$
63.9

 
$
867.8

 
$
15,739.3

 
$
(11,303.7
)
 
$
(383.2
)
 
$
4,984.1

Net earnings

 

 
1,744.0

 

 

 
1,744.0

Other comprehensive income

 

 

 

 
(203.2
)
 
(203.2
)
Stock-based compensation expense

 
101.7

 

 

 

 
101.7

Issuances relating to stock compensation plans

 
(5.4
)
 

 
132.4

 

 
127.0

Treasury stock acquired (5.3 shares)

 

 

 
(654.8
)
 

 
(654.8
)
Dividends declared ($1.83 per share)

 

 
(816.5
)
 

 

 
(816.5
)
Other (A)

 

 
42.3

 

 
(42.3
)
 

Balance at March 31, 2018
$
63.9

 
$
964.1

 
$
16,709.1

 
$
(11,826.1
)
 
$
(628.7
)
 
$
5,282.3


(A) During the quarter ended March 31, 2018, the Company adopted ASU 2018-02 and reclassified stranded tax effects attributable to the Act from AOCI to retained earnings. The March 31, 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive income into retained earnings (see Note 2).


26


Note 16. Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”)

Changes in AOCI by component are as follows:
 
Three Months Ended
 
March 31, 2019
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at December 31, 2018
$
(274.6
)
 
$
(181.5
)
 
$
(158.9
)
 
$
(615.0
)
Other comprehensive income/(loss) before reclassification adjustments
(2.3
)
 
259.0

 

 
256.7

Tax effect

 
(58.0
)
 

 
(58.0
)
Reclassification adjustments to
net earnings

 
(0.1
)
(A)
6.1

(B)
6.0

Tax effect

 

 
(1.6
)
 
(1.6
)
Balance at March 31, 2019
$
(276.9
)
 
$
19.4

 
$
(154.4
)
 
$
(411.9
)

 
Three Months Ended
 
March 31, 2018
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at December 31, 2017
$
(179.8
)
 
$
(34.6
)
 
$
(213.8
)
 
$
(428.2
)
Other comprehensive income/(loss) before reclassification adjustments
26.8

 
(240.4
)
 

 
(213.6
)
Tax effect

 
53.4

 

 
53.4

Reclassification adjustments to net earnings

 
0.2

(A)
2.3

(B)
2.5

Tax effect

 
0.1

 
(0.6
)
 
(0.5
)
Reclassification to retained earnings (C)

 
(7.1
)
 
(35.2
)
 
(42.3
)
Balance at March 31, 2018
$
(153.0
)
 
$
(228.4
)
 
$
(247.3
)
 
$
(628.7
)

 
Nine Months Ended
 
March 31, 2019
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at June 30, 2018
$
(227.0
)
 
$
(274.0
)
 
$
(178.8
)
 
$
(679.8
)
Other comprehensive income/(loss) before reclassification adjustments
(49.9
)
 
377.0

 

 
327.1

Tax effect

 
(84.8
)
 

 
(84.8
)
Reclassification adjustments to net earnings

 
1.4

(A)
32.5

(B)
33.9

Tax effect

 
(0.2
)
 
(8.1
)
 
(8.3
)
Balance at March 31, 2019
$
(276.9
)
 
$
19.4

 
$
(154.4
)
 
$
(411.9
)


27


 
Nine Months Ended
 
March 31, 2018
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at June 30, 2017
$
(234.8
)
 
$
68.3

 
$
(216.7
)
 
$
(383.2
)
Other comprehensive income/(loss) before reclassification adjustments
81.8

 
(400.6
)
 

 
(318.8
)
Tax effect

 
109.9

 

 
109.9

Reclassification adjustments to net earnings

 
1.3

(A)
6.9

(B)
8.2

Tax effect

 
(0.2
)
 
(2.3
)
 
(2.5
)
Reclassification to retained earnings (C)

 
(7.1
)
 
(35.2
)
 
(42.3
)
Balance at March 31, 2018
$
(153.0
)
 
$
(228.4
)
 
$
(247.3
)
 
$
(628.7
)

(A) Reclassification adjustments out of AOCI are included within Other income, net, on the Statements of Consolidated Earnings.

(B) Reclassification adjustments out of AOCI are included in net pension expense (see Note 12).

(C) During the quarter ended March 31, 2018, the Company adopted ASU 2018-02 and reclassified stranded tax effects attributable to the Act from AOCI to retained earnings. The March 31, 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive income into retained earnings (see Note 2).

Note 17. Interim Financial Data by Segment

Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two reportable segments: Employer Services and PEO Services. The primary components of the “Other” segment are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense. Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons.  Other costs are recorded based on management responsibility. In the first quarter of fiscal 2019, the Company's CODM began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity. Additionally, the CODM reviews results with changes to certain corporate allocations. These changes represent a change in the measure of segment performance. Effective July 1, 2018, the Company adopted ASC 606 (see Note 2). The segment results in the table below reflect the impacts of adoption of ASC 606, the inclusion of client funds interest in the segments at actual interest rates, the inclusion of ADP Indemnity in the PEO segment, and changes to certain corporate allocations. The Company reflects these new segment measures beginning in the first quarter of fiscal 2019 and prior period segment results are restated for comparability.


28



Segment Results:
 
Revenues
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Employer Services
$
2,719.1

 
$
2,628.5

 
$
7,507.7

 
$
7,105.7

PEO Services
1,134.7

 
1,067.3

 
3,180.7

 
2,909.5

Other
(6.4
)
 
0.2

 
(11.9
)
 
(3.7
)
 
$
3,847.4

 
$
3,696.0

 
$
10,676.5

 
$
10,011.5

  
 
Earnings before Income Taxes
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Employer Services
$
962.1

 
$
870.1

 
$
2,333.0

 
$
1,988.4

PEO Services
155.7

 
147.1

 
458.6

 
403.6

Other
(133.3
)
 
(142.0
)
 
(419.3
)
 
(364.3
)
 
$
984.5

 
$
875.2

 
$
2,372.3

 
$
2,027.7



29


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
(Tabular dollars are presented in millions, except per share amounts)

FORWARD-LOOKING STATEMENTS

This document and other written or oral statements made from time to time by Automatic Data Processing, Inc. and its subsidiaries ("ADP" or "the Company") may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and depend upon or refer to future events or conditions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements or that could contribute to such difference include: ADP's success in obtaining and retaining clients, and selling additional services to clients; the pricing of products and services; the success of our new solutions; compliance with existing or new legislation or regulations; changes in, or interpretations of, existing legislation or regulations; overall market, political and economic conditions, including interest rate and foreign currency trends; competitive conditions; our ability to maintain our current credit ratings and the impact on our funding costs and profitability; security or cyber breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; the impact of new acquisitions and divestitures; and the adequacy, effectiveness and success of our business transformation initiatives. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. These risks and uncertainties, along with the risk factors discussed under “Item 1A. - Risk Factors” in our Annual Report on Form 10‑K for the fiscal year ended June 30, 2018 (“fiscal 2018”), and in other written or oral statements made from time to time by ADP, should be considered in evaluating any forward-looking statements contained herein.

CRITICAL ACCOUNTING POLICIES

Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and other comprehensive income.  We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements.  The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances.  Actual amounts and results could differ from these estimates made by management. Refer to Note 2 of our Consolidated Financial Statements for changes to our accounting policies effective for the fiscal year ended June 30, 2019 (“fiscal 2019”).

RESULTS OF OPERATIONS

Executive Overview     

We are the leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions - including payroll, talent management, Human Resources and benefits administration, and time and attendance management - to employers around the world. As the leader in this industry, we deliver on our global HCM strategy and make investments in highly strategic areas and technology in order to strengthen our underlying business model and prospects for continued growth.

Highlights from the nine months ended March 31, 2019 include:

Employer Services New Business Bookings increased 6%
Average number of Worksite Employees increased 9% to 542,000
Revenues grew 7%
EBIT Margin improved 200 basis points to 22.2% and Adjusted EBIT Margin improved 200 basis points to 23.3%
Diluted earnings per share ("EPS") increased from $3.93 to $4.15; adjusted diluted earnings per share increased from $3.53 to $4.31
Our shareholder friendly actions continued as we returned approximately $950 million via dividends and approximately $760 million via share repurchases
 

30



Recently, we introduced our new brand platform which represents an evolution in our journey to enhance the employee experience through innovation and insights designed with the worker as a central theme. At ADP, we are Always Designing for People and we continue to innovate by anticipating our clients' evolving needs as the world of work changes. We are reshaping the HCM industry with cutting-edge products such as our Next Gen platforms, which are complemented by our strategic acquisitions such as Global Cash Card, WorkMarket and Celergo. With these investments, we are enhancing our position as the leading global HCM provider that can help businesses address the entire worker spectrum from full-time to freelancer through hire to retire. As the HCM market continues to evolve rapidly, we remain focused on rethinking a better, more personalized world at work and helping our clients and their employees achieve their full potential.

Our Employer Services New Business Bookings increased 6% and the PEO Services' average number of Worksite Employees increased 9% to 542,000 in the nine months ended March 31, 2019, compared to the nine months ended March 31, 2018. We continue to grow our business for the long-term and now expect Employer Services New Business Bookings growth of 8% to 9% for fiscal 2019. Given the solid performance of our PEO Services this year, we continue to expect growth of 8% to 9% in the average number of Worksite Employees for fiscal 2019.

Our Voluntary Early Retirement Program (“VERP”), Service Alignment Initiative, client migrations, and other transformation initiatives are yielding improvements in our client satisfaction scores and productivity, keeping us firmly on a path of delivering balanced revenue, profit growth and margin expansion. We continue to focus on improving the client experience and are on track to achieve our goal of improved retention during fiscal 2019.

We have a strong business model and operate in a growing global HCM market. We continue to maintain a high percentage of recurring revenues, healthy and improving margins, and generate consistent strong cash flows. Our financial condition and balance sheet remain solid at March 31, 2019. Through our investments in technology, service, and distribution, we are positioned to maintain our positive momentum for the remainder of the fiscal year.


31



Analysis of Consolidated Operations

 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
March 31,
 
% Change
 
March 31,
 
% Change
 
2019
 
2018
 
As Reported
 
Constant Currency Basis
(Note 1)
 
2019
 
2018
 
As Reported
 
Constant Currency Basis
(Note 1)
 
 
*As Restated
 
 
 
 
*As Restated
 
 
Total revenues
$
3,847.4

 
$
3,696.0

 
4
 %
 
5
%
 
$
10,676.5

 
$
10,011.5

 
7
 %
 
7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of revenues:
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 
Operating expenses
1,874.5

 
1,845.2

 
2
 %
 
3
%
 
5,370.4

 
5,185.0

 
4
 %
 
4
%
Systems development and programming costs
160.1

 
163.9

 
(2
)%
 
%
 
474.2

 
481.5

 
(2
)%
 
1
%
Depreciation and amortization
77.2

 
70.2

 
10
 %
 
11
%
 
221.5

 
202.1

 
10
 %
 
10
%
Total costs of revenues
2,111.8

 
2,079.3

 
2
 %
 
3
%
 
6,066.1

 
5,868.6

 
3
 %
 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
750.4

 
750.1

 
 %
 
1
%
 
2,209.4

 
2,149.0

 
3
 %
 
3
%
Interest expense
21.7

 
18.6

 
n/m

 
n/m

 
96.2

 
74.1

 
n/m

 
n/m

Total expenses
2,883.9

 
2,848.0

 
1
 %
 
2
%
 
8,371.7

 
8,091.7

 
3
 %
 
4
%
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
Other income, net
(21.0
)
 
(27.2
)
 
n/m

 
n/m

 
(67.5
)
 
(107.9
)
 
n/m

 
n/m

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings before income taxes
$
984.5

 
$
875.2

 
12
 %
 
13
%
 
$
2,372.3

 
$
2,027.7

 
17
 %
 
17
%
Margin
25.6
%
 
23.7
%
 
 
 
 
 
22.2
%
 
20.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
$
230.8

 
$
214.2

 
8
 %
 
8
%
 
$
554.9

 
$
283.7

 
96
 %
 
96
%
Effective tax rate
23.4
%
 
24.5
%
 
 
 
 
 
23.4
%
 
14.0
%
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
753.7

 
$
661.0

 
14
 %
 
14
%
 
$
1,817.4

 
$
1,744.0

 
4
 %
 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.73

 
$
1.49

 
16
 %
 
16
%
 
$
4.15

 
$
3.93

 
6
 %
 
6
%
*See Note 2 of the Consolidated Financial Statements for a summary of adjustments.
n/m - not meaningful


32



Note 1 - Non GAAP Financial Measures

In addition to our U.S. GAAP results, we use the adjusted results and other non-GAAP metrics set forth in the table below to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods:
Adjusted Financial Measure
U.S. GAAP Measures
Adjusted EBIT
Net earnings
Adjusted provision for income taxes
Provision for income taxes
Adjusted net earnings
Net earnings
Adjusted diluted earnings per share
Diluted earnings per share
Adjusted effective tax rate
Effective tax rate
Constant Currency Basis
U.S. GAAP P&L line items

We believe that the exclusion of the identified items below helps us reflect the fundamentals of our underlying business model and analyze results against our expectations and against prior period, and to plan for future periods by focusing on our underlying operations.  We believe that the adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance.  The nature of these exclusions are for specific items that are not fundamental to our underlying business operations.  Since these adjusted financial measures and other non-GAAP metrics are not measures of performance calculated in accordance with U.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to their corresponding U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.



33



 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
March 31,
 
% Change
 
March 31,
 
% Change
 
 
2019
 
2018
 
As Reported
 
Constant Currency Basis
(g)
 
2019
 
2018
 
As Reported
 
Constant Currency Basis
(g)
 
 
 
*As Restated
 
 
 
 
*As Restated
 
 
Net earnings
 
$
753.7

 
$
661.0

 
14
%
 
14
%
 
$
1,817.4

 
$
1,744.0

 
4
%
 
4
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
230.8

 
214.2

 
 
 
 
 
554.9

 
283.7

 
 
 
 
All other interest expense (a)
 
14.8

 
14.8

 
 
 
 
 
44.8

 
44.8

 
 
 
 
All other interest income (a)
 
(8.7
)
 
(6.1
)
 
 
 
 
 
(22.9
)
 
(16.7
)
 
 
 
 
Transformation initiatives (b)
 
22.8

 
39.7

 
 
 
 
 
92.3

 
39.7

 
 
 
 
Proxy contest matters (c)
 

 

 
 
 
 
 

 
33.2

 
 
 
 
Adjusted EBIT
 
$
1,013.4

 
$
923.6

 
10
%
 
10
%
 
$
2,486.5

 
$
2,128.7

 
17
%
 
17
%
Adjusted EBIT Margin
 
26.3
%
 
25.0
%
 
 
 
 
 
23.3
%
 
21.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
230.8

 
$
214.2

 
8
%
 
8
%
 
$
554.9

 
$
283.7

 
96
%
 
96
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit for transformation initiatives (d)
 
5.6

 
9.7

 
 
 
 
 
22.8

 
9.6

 
 
 
 
Income tax benefit for proxy contest matters (d)
 

 

 
 
 
 
 

 
10.4

 
 
 
 
Tax Cuts and Jobs Act (e)
 

 
(4.5
)
 
 
 
 
 
0.5

 
228.1

 
 
 
 
Adjusted provision for income taxes
 
$
236.4

 
$
219.4

 
8
%
 
8
%
 
$
578.2

 
$
531.8

 
9
%
 
9
%
Adjusted effective tax rate (f)
 
23.5
%
 
24.0
%
 
 
 
 
 
23.5
%
 
25.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
 
$
753.7

 
$
661.0

 
14
%
 
14
%
 
$
1,817.4

 
$
1,744.0

 
4
%
 
4
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transformation initiatives (b)
 
22.8

 
39.7

 
 
 
 
 
92.3

 
39.7

 
 
 
 
Income tax benefit for transformation initiatives (d)
 
(5.6
)
 
(9.7
)
 
 
 
 
 
(22.8
)
 
(9.6
)
 
 
 
 
Proxy contest matters (c)
 

 

 
 
 
 
 

 
33.2

 
 
 
 
Income tax benefit for proxy contest matters (d)
 

 

 
 
 
 
 

 
(10.4
)
 
 
 
 
Tax Cuts and Jobs Act (e)
 

 
4.5

 
 
 
 
 
(0.5
)
 
(228.1
)
 
 
 
 
Adjusted net earnings
 
$
770.9

 
$
695.5

 
11
%
 
11
%
 
$
1,886.4

 
$
1,568.8

 
20
%
 
20
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
$
1.73

 
$
1.49

 
16
%
 
16
%
 
$
4.15

 
$
3.93

 
6
%
 
6
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transformation initiatives (b) (d)
 
0.04

 
0.07

 
 
 
 
 
0.16

 
0.07

 
 
 
 
Proxy contest matters (c) (d)
 

 

 
 
 
 
 

 
0.05

 
 
 
 
Tax Cuts and Jobs Act (e)
 

 
0.01

 
 
 
 
 

 
(0.51
)
 
 
 
 
Adjusted diluted EPS
 
$
1.77

 
$
1.57

 
13
%
 
13
%
 
$
4.31

 
$
3.53

 
22
%
 
22
%

*See Note 2 of the Consolidated Financial Statements for a summary of adjustments.

(a) We continue to include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model. The adjustments in the table above represent the interest income and interest expense that is not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”

(b) The charges within transformation initiatives are comprised of charges for our VERP, Service Alignment Initiative and other transformation initiatives. Charges related to our VERP in the three and nine months ended March 31, 2019 include $7.8 million and $35.9 million for non-cash pension settlement charge and special termination benefits, and $2.2 million and $23.6 million of expenses related to the continuing health coverage, respectively. We also recorded charges of $20.5 million and

34



$51.4 million related to our other transformation initiatives during the three and nine months ended March 31, 2019, respectively. These charges were partially offset by net reversals of charges and gain on sale of assets related to our Service Alignment Initiative of $7.7 million and $18.6 million for the three and nine months ended March 31, 2019, respectively. Unlike other severance charges which are not included as an adjustment to get to adjusted results, these specific charges relate to actions that are part of our broad-based, company-wide transformation initiative. Refer to Note 5 and Note 12 of the Consolidated Financial Statements for a description of the Service Alignment Initiative and charges associated with VERP, respectively.

(c) Represents non-operational costs relating to proxy contest matters.

(d) The tax benefit on the transformation initiatives and non-operational charges related to proxy contest matters was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.

(e) The net benefit for the nine months ended March 31, 2018 is comprised of the re-measurement of deferred tax balances resulting in a one-time benefit, primarily as a result of ASC 606, using the lower tax rates enacted under the Tax Cuts and Jobs Act (“Act”), adjustments to the one-time transition tax on the earnings and profits of our foreign subsidiaries, foreign withholding taxes, and a valuation allowance against our foreign tax credits which may not be realized under the Act. Refer to Note 13 of our Consolidated Financial statements for additional detail.

(f) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings, plus our Adjusted provision for income taxes.

(g) “Constant currency basis” provides information that isolates the actual growth of our operations. “Constant currency basis” is determined by calculating the current year result using foreign exchange rates consistent with the prior year.

Total Revenues

Our revenues, as reported, increased 4% and 7% for the three and nine months ended March 31, 2019, respectively. For the three months ended March 31, 2019, our revenue growth includes one percentage point of pressure from foreign currency partially offset by benefits from acquisitions. For the nine months ended March 31, 2019, our revenue growth includes one percentage point of pressure from foreign currency offset by benefits from acquisitions. Revenues for the three and nine months ended March 31, 2019 increased primarily due to new business started from New Business Bookings and continued strong retention. Refer to “Analysis of Reportable Segments” for additional discussion of the increases in revenue for both of our reportable segments, Employer Services and Professional Employer Organization (“PEO”) Services.

Total revenues for the three months ended March 31, 2019 include interest on funds held for clients of $167.4 million, as compared to $134.8 million for the three months ended March 31, 2018. The increase in the consolidated interest earned on funds held for clients resulted from an increase in the average interest rate earned to 2.2% for the three months ended March 31, 2019, as compared to 1.9% for the three months ended March 31, 2018, coupled with a increase in our average client funds balance of 4.1% to $30.0 billion for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018.

Total revenues for the nine months ended March 31, 2019 include interest on funds held for clients of $415.0 million, as compared to $340.9 million for the nine months ended March 31, 2018. The increase in the consolidated interest earned on funds held for clients resulted from an increase in the average interest rate earned to 2.2% during the nine months ended March 31, 2019, as compared to 1.9% during the nine months ended March 31, 2018, coupled with an increase in our average client funds balance of 4.5% to $25.2 billion for the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018.

Total Expenses

Our total expenses, as reported, increased 1% for the three months ended March 31, 2019, as compared to the same period in the prior year. The increase is primarily due to an increase in PEO Services benefits pass-through costs, increased selling and marketing expenses and costs related to our acquisitions. The increase was partially offset by the impact of foreign currency, decrease in charges related to transformation initiatives and operating efficiencies as a result of our continued successful execution on our broader transformation initiatives.


35



Our total expenses, as reported, increased 3% for the nine months ended March 31, 2019, as compared to the same period in the prior year. The increase is primarily due to an increase in PEO Services benefits pass-through costs, costs related to our acquisitions, increased selling and marketing expenses and the impact of charges related to our transformation initiatives. The increase was partially offset by the impact of foreign currency, operating efficiencies as a result of our continued successful execution on our broader transformation initiatives and costs related to proxy contest matters in fiscal 2018.

Operating expenses, as reported, increased 2% and 4% for the three and nine months ended March 31, 2019, respectively, as compared to the three and nine months ended March 31, 2018, respectively. PEO Services benefits pass-through costs were $684.5 million and $626.4 million for the three months ended March 31, 2019 and 2018, respectively, and $2,011.1 million and $1,828.7 million for the nine months ended March 31, 2019 and 2018, respectively. Additionally, operating expenses increased due to costs related to our acquisitions partially offset by the impact of foreign currency and operating efficiencies as a result of our continued successful execution on our broader transformation initiatives.

Systems development and programming costs, as reported, decreased 2% for the three and nine months ended March 31, 2019, when compared to the prior year, due to the impact of foreign currency translation and reduced costs as a result of our transformation initiatives partially offset by increased investments in product innovation, primarily in our Next Gen platforms.

Selling, general and administrative expenses, as reported, was flat for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This was primarily due to increased selling and marketing expenses and increased costs related to our acquisitions offset by the decrease in charges related to transformation initiatives and the impact of foreign currency translation for the three months ended March 31, 2019.

Selling, general and administrative expenses, as reported, increased 3% for the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018. The increase was due to increased selling and marketing expenses and increased costs related to our acquisitions and transformation initiatives. These increases were partially offset by efficiencies as a result of our transformation initiatives and the impact of foreign currency translation for the nine months ended March 31, 2019 and costs related to proxy contest matters during the nine months ended March 31, 2018.


Other Income, net
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
March 31,
 
 
 
March 31,
 
 
 
2019
 
2018
 
$ Change
 
2019
 
2018
 
$ Change
Interest income on corporate funds
$
(15.0
)
 
$
(11.0
)
 
$
4.0

 
$
(71.6
)
 
$
(59.4
)
 
$
12.2

Realized gains on available-for-sale securities
(0.6
)
 
(1.3
)
 
(0.7
)
 
(1.2
)
 
(1.9
)
 
(0.7
)
Realized losses on available-for-sale securities
0.5

 
1.6

 
1.1

 
2.6

 
3.2

 
0.6

Impairment of intangible assets

 

 

 
12.1

 

 
(12.1
)
Gain on sale of assets

 

 

 
(4.1
)
 
(0.4
)
 
3.7

Non-service components of pension expense, net
(5.9
)
 
(16.5
)
 
(10.6
)
 
(5.3
)
 
(49.4
)
 
(44.1
)
Other income, net
$
(21.0
)
 
$
(27.2
)
 
$
(6.2
)
 
$
(67.5
)
 
$
(107.9
)
 
$
(40.4
)

During the three and nine months ended March 31, 2019, we adopted Accounting Standards Update ("ASU") 2017-07 and as a result we reclassified the non-service cost components of the net periodic benefit cost from within the respective line items of our Statements of Consolidated Earnings to Other income, net. During the three months ended March 31, 2019, non-service components of pension expense included a $7.8 million non-cash settlement charge and special termination benefits, partially offset by $13.7 million related to other components of net periodic pension cost. During the nine months ended March 31, 2019, non-service components of pension expense included a $35.9 million non-cash settlement charge and special termination benefits, partially offset by $41.2 million related to other components of net periodic pension cost. See Note 2 and Note 12 of our Consolidated Financial Statements for additional detail.

Other income, net, decreased $6.2 million and $40.4 million for the three and nine months ended March 31, 2019, as compared to the three and nine months ended March 31, 2018. The decrease was primarily due to the charges within non-service

36



components of pension expense discussed above partially offset by the gain on sale of assets of $4.1 million in relation to the Service Alignment Initiative during the three months ended December 31, 2018. Additionally, during the three months ended September 30, 2018, we wrote down $12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition.

Earnings before Income Taxes

Earnings before income taxes, as reported, increased 12% and 17% for the three and nine months ended March 31, 2019, respectively, primarily due to the increases in revenues partially offset by increases in expenses discussed above.

Overall margin increased from 23.7% for the three months ended March 31, 2018 to 25.6% for the three months ended March 31, 2019, primarily due to operational efficiencies aided by an increase in interest earned on funds held for clients and a decrease in charges of $16.9 million related to our transformation initiatives, partially offset by incremental pressure from growth in our benefits pass-throughs, increased selling and marketing expenses and costs related to our acquisitions during the three months ended March 31, 2019. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.

Overall margin increased from 20.3% for the nine months ended March 31, 2018 to 22.2% for the nine months ended March 31, 2019, primarily due to operational efficiencies aided by an increase in interest earned on funds held for clients, and the impact of costs related to proxy contest matters in fiscal 2018, partially offset by additional charges of $52.6 million related to our transformation initiatives, incremental pressure from growth in our benefits pass-throughs, increased selling and marketing expenses and costs related to our acquisitions during the nine months ended March 31, 2019. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.

Adjusted EBIT

For the three and nine months ended March 31, 2019, adjusted EBIT increased 10% and 17%, respectively, due to the increases in revenues offset by the increases in expenses discussed above. Overall adjusted EBIT margin increased due to operational efficiencies discussed above, aided by an increase in interest earned on funds held for clients, partially offset by incremental pressure from growth in our benefits pass-throughs, increased selling and marketing expenses and costs related to our acquisitions.

Provision for Income Taxes

The effective tax rate for the three months ended March 31, 2019 and 2018 was 23.4% and 24.5%, respectively. The decrease in the effective tax rate is primarily due to the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act partially offset by the loss of qualified production activities tax deductions as a result of the Act in the three months ended March 31, 2019, the release of reserves for uncertain tax positions and the benefit of a tax accounting method change filed with the IRS in the three months ended March 31, 2018.
The effective tax rate for the nine months ended March 31, 2019 and 2018 was 23.4% and 14.0%, respectively. The increase in the effective tax rate is primarily due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the release of reserves for uncertain tax positions during the nine months ended March 31, 2018 and the loss of qualified production activities tax deductions as a result of the Act during the nine months ended March 31, 2019. This is partially offset by reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act. Refer to Note 13, within the Notes to the Consolidated Financial Statements for further discussion.
Adjusted Provision for Income Taxes

The adjusted effective tax rate for the three months ended March 31, 2019 and 2018 was 23.5% and 24.0%, respectively. The drivers of the decrease in the adjusted effective tax rate are the same as the effective tax rate as discussed above.

The adjusted effective tax rate for the nine months ended March 31, 2019 and 2018 was 23.5% and 25.3%, respectively. The decrease in the adjusted effective tax rate is primarily due to the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1%, partially offset by the loss of qualified production activities tax deductions as a

37



result of the Act in the nine months ended March 31, 2019, the release of reserves for uncertain tax positions and the benefit of a tax accounting method change filed with the IRS in the nine months ended March 31, 2018.

Net Earnings and Diluted Earnings per Share

Net earnings, as reported, increased 14% for the three months ended March 31, 2019 due to an increase in earnings before income taxes combined with the reduction in our effective tax rate described above when compared to the three months ended March 31, 2018.

Net earnings, as reported, increased 4% for the nine months ended March 31, 2019 due to an increase in earnings before income taxes described above partially offset by an increase in our effective tax rate, when compared to the nine months ended March 31, 2018.

For the three and nine months ended March 31, 2019, diluted earnings per share increased 16% and 6%, respectively, as a result of an increase in net earnings and the impact of fewer shares outstanding, resulting from the repurchase of approximately 5.4 million shares during the nine months ended March 31, 2019 and 5.3 million shares for the nine months ended March 31, 2018, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted Earnings per Share

Adjusted net earnings increased 11% for the three months ended March 31, 2019, when compared to the three months ended March 31, 2018, due to the increase in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above.

Adjusted net earnings increased 20% for the nine months ended March 31, 2019, when compared to the nine months ended March 31, 2018, due to the increase in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above.

For the three and nine months ended March 31, 2019, our adjusted diluted EPS increased 13% and 22%, respectively, and reflects the changes described above in our adjusted net earnings and shares outstanding.

Analysis of Reportable Segments

Beginning in the first quarter of fiscal 2019, our chief operating decision maker (“CODM”) reviews segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity. Additionally, the CODM reviews results with the effects of changes to certain corporate allocations. These changes represent a change in the measure of segment performance. Effective July 1, 2018, we adopted ASC 606 (see Note 2 of the Consolidated Financial Statements). The segment results in the table below reflect the impacts of the adoption of ASC 606, the inclusion of client funds interest in our segments at actual interest rates, the inclusion of ADP Indemnity in the PEO segment, and changes to certain corporate allocations. We reflected these new segment measures beginning in the first quarter of fiscal 2019 and prior period segment results are restated for comparability.

 
Revenues
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
March 31,
 
% Change
 
March 31,
 
% Change
 
2019
 
2018
 
As
Reported
 
Constant Currency Basis
 
2019
 
2018
 
As
Reported
 
Constant Currency Basis
Employer Services
$
2,719.1

 
$
2,628.5

 
3
%
 
5
%
 
$
7,507.7

 
$
7,105.7

 
6
%
 
7
%
PEO Services
1,134.7

 
1,067.3

 
6
%
 
6
%
 
3,180.7

 
2,909.5

 
9
%
 
9
%
Other
(6.4
)
 
0.2

 
n/m

 
n/m

 
(11.9
)
 
(3.7
)
 
n/m

 
n/m

 
$
3,847.4

 
$
3,696.0

 
4
%
 
5
%
 
$
10,676.5

 
$
10,011.5

 
7
%
 
7
%


38



 
Earnings before Income Taxes
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
March 31,
 
% Change
 
March 31,
 
% Change
 
2019
 
2018
 
As Reported
 
Constant Currency Basis
 
2019
 
2018
 
As
Reported
 
Constant Currency Basis
Employer Services
$
962.1

 
$
870.1

 
11
%
 
11
%
 
$
2,333.0

 
$
1,988.4

 
17
%
 
17
%
PEO Services
155.7

 
147.1

 
6
%
 
6
%
 
458.6

 
403.6

 
14
%
 
14
%
Other
(133.3
)
 
(142.0
)
 
n/m

 
n/m

 
(419.3
)
 
(364.3
)
 
n/m

 
n/m

 
$
984.5

 
$
875.2

 
12
%
 
13
%
 
$
2,372.3

 
$
2,027.7

 
17
%
 
17
%

n/m - not meaningful

Employer Services

Revenues

Employer Services' revenues, as reported, increased 3% for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. Revenues increased primarily due to new business started from New Business Bookings and continued strong retention. Our revenue growth includes one percentage point of pressure from foreign currency partially offset by benefits from acquisitions. Our revenues also increased due to the interest earned on funds held for clients, which benefited from improvement in the average yield earned on our client fund investments and growth in average client funds balances, and an increase in the number of employees on our clients’ payrolls as our pays per control increased 3.1% for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. Our pays per control metric measures the number of employees on our clients' payrolls as measured on a same-store-sales basis utilizing a representative subset of payrolls ranging from small to large businesses that are reflective of a broad range of U.S. geographic regions.

Employer Services' revenues, as reported, increased 6% for the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018. Revenues increased primarily due to new business started from New Business Bookings and continued strong retention. Our revenue growth includes one percentage point of pressure from foreign currency offset by benefits from acquisitions. Our revenues also increased due to the interest earned on funds held for clients, which benefited from improvement in the average yield earned on our client fund investments and growth in average client funds balances, and an increase in the number of employees on our clients’ payrolls as our pays per control increased 2.3% for the nine months ended March 31, 2019 as compared to the nine months ended March 31, 2018.

Earnings before Income Taxes

Employer Services’ earnings before income taxes, as reported, increased 11% for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This increase was due to increased revenues discussed above combined with decreased expenses primarily due to operating efficiencies and impact from foreign currency partially offset by increased selling and marketing expenses and cost related to our acquisitions.

Employer Services' overall margin increased from 33.1% to 35.4% for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. This increase was primarily due to operating efficiencies aided by an increase in interest earned on funds held for clients, partially offset by increased selling and marketing expenses and costs related to our acquisitions in the three months ended March 31, 2019. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.

Employer Services’ earnings before income taxes, as reported, increased 17% for the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018. This increase was due to increased revenues discussed above and partially offset by an increase in expenses of $57.4 million, which were primarily due to costs related to our acquisitions, increased selling and marketing expenses offset by operating efficiencies and impact from foreign currency.


39



Employer Services' overall margin increased from 28.0% to 31.1% for the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018. This increase was primarily due to operating efficiencies aided by an increase in interest earned on funds held for clients, partially offset by increased selling and marketing expenses and costs related to our acquisitions in the nine months ended March 31, 2019. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.

PEO Services

Revenues

PEO Services' revenues, as reported, increased 6% and 9%, respectively, for the three and nine months ended March 31, 2019, as compared to the three and nine months ended March 31, 2018. PEO Services' revenues, excluding benefits pass-through costs, increased from $440.9 million and $1,080.8 million for the three and nine months ended March 31, 2018, respectively, to $450.2 million and $1,169.6 million for the three and nine months ended March 31, 2019, respectively. The increase was due to an 8% and 9% increase in the average number of Worksite Employees for the three and nine months ended March 31, 2019, respectively, driven by an increase in the number of new PEO Services clients and growth in our existing clients. The increase for the three months ended March 31, 2019 was partially offset by the pull-forward of our State Unemployment Insurance (“SUI”) revenues in the second quarter of fiscal 2019.

PEO Services' revenues include benefits pass-through costs associated with benefits coverage which increased to $684.5 million and $2,011.1 million for the three and nine months ended March 31, 2019, respectively, from $626.4 million and $1,828.7 million for the three and nine months ended March 31, 2018, respectively.

Earnings before Income Taxes

PEO Services' earnings before income taxes increased 6% for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The increase was due to the increased revenues discussed above offset by an increase in expenses of $58.8 million. The increase in expenses was primarily related to an increase in benefits pass-through costs of $58.1 million described above.

PEO Services' overall margin decreased from 13.8% to 13.7% for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, due to increased selling expenses and changes in our estimated incurred losses related to ADP Indemnity in the three months ended March 31, 2019, as compared to the three months ended March 31, 2018.

PEO Services' earnings before income taxes increased 14% for the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018. The increase was due to the increased revenues discussed above offset by an increase in expenses of $216.2 million. The increase in expenses was primarily related to an increase in benefits pass-through costs of $182.4 million described above.

PEO Services' overall margin increased from 13.9% to 14.4% for the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018, due to operating efficiencies partially offset by increased selling expenses and changes in our estimated incurred losses related to ADP Indemnity in the nine months ended March 31, 2019, as compared to the nine months ended March 31, 2018.

ADP Indemnity provides workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' Worksite Employees up to $1 million per occurrence. PEO Services has secured a workers’ compensation and employer’s liability insurance policy that has a $1 million per occurrence retention and, in fiscal years 2012 and prior, aggregate stop loss insurance that covers any aggregate losses within the $1 million retention that collectively exceed a certain level, from an admitted and licensed insurance company of AIG. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability, and changes in estimated ultimate incurred losses are included in the PEO segment. ADP Indemnity recorded a pre-tax benefit of approximately $6.0 million and $16.4 million for the three and nine months ended March 31, 2019, respectively, compared to $9.4 million and $28.4 million for the three and nine months ended March 31, 2018, respectively, which is primarily a result of changes in our estimated incurred losses. For the fiscal years 2013 to 2018, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited, to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limits our overall exposure incurred up to a certain limit. We believe the likelihood of ultimate losses exceeding this limit is remote. For the nine months ended March 31, 2019, ADP Indemnity paid a premium of $218.0

40



million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2019 policy year on terms substantially similar to the fiscal 2018 reinsurance policy.

Other

The primary components of the “Other” segment are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

For corporate liquidity, we expect existing cash, cash equivalents, short-term marketable securities, long-term marketable securities, and cash flow from operations, together with our $9.8 billion of committed credit facilities and our ability to access both long-term and short-term debt financing from the capital markets, will be adequate to meet our operating, investing, and financing activities such as our regular quarterly dividends, share repurchases, and capital expenditures. Additionally, we will benefit from the Act and our estimated fiscal 2019 adjusted effective tax rate is 23.8%.

For client funds liquidity, we have the ability to borrow through our financing arrangements under our U.S. short-term commercial paper program and our U.S., Canadian and United Kingdom short-term reverse repurchase agreements together with our $9.8 billion of committed credit facilities and our ability to use corporate liquidity when necessary to meet short-term funding requirements related to client funds obligations. Please see “Quantitative and Qualitative Disclosures about Market Risk” for a further discussion of the risks of our client funds extended investment strategy. See Note 10 of our Consolidated Financial Statements for a description of our short-term financing including commercial paper.

As of March 31, 2019, cash and cash equivalents were $1.8 billion, which were primarily invested in time deposits and money market funds.

Operating, Investing and Financing Cash Flows

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the nine months ended March 31, 2019 and 2018, respectively, are summarized as follows:
 
 
Nine Months Ended
 
 
 
 
March 31,
 
 
 
 
2019
 
2018
 
$ Change
Cash provided by / (used in):
 
 
 
 
 
 
Operating activities
 
$
1,956.0

 
$
1,810.0

 
$
146.0

Investing activities
 
(1,197.9
)
 
(1,958.0
)
 
760.1

Financing activities
 
6,945.4

 
5,358.2

 
1,587.2

Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(34.1
)
 
53.1

 
(87.2
)
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
 
$
7,669.4

 
$
5,263.3

 
$
2,406.1


Net cash flows provided by operating activities for the nine months ended March 31, 2019 and March 31, 2018 include cash payments for reinsurance agreements of $218.0 million and $235.0 million, respectively, which represent the policy premium for the entire fiscal year. The increase in operating cash provided is primarily due to growth in our business offset by a net decrease in the components of working capital as compared to the nine months ended March 31, 2018.

Net cash flows from investing activities changed primarily due to the timing of net proceeds from corporate and client funds marketable securities of $355.0 million, lower payments made related to acquisitions and reduced capital expenditures partially offset by the payments made related to acquisitions of intangibles in the nine months ended March 31, 2019.


41



Net cash flows from financing activities changed primarily due to a net increase in client fund obligations of $1,911.8 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, more cash returned to shareholders via dividends and share repurchases for the nine months ended March 31, 2019.

We purchased 5.4 million shares of our common stock at an average price per share of $139.11 during the nine months ended March 31, 2019, as compared to purchases of 5.3 million shares at an average price per share of $110.79 during the nine months ended March 31, 2018. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

Capital Resources and Client Funds Obligations

We have $2.0 billion of senior unsecured notes with maturity dates in 2020 and 2025. We may from time to time revisit the long-term debt market to refinance existing debt, finance investments including acquisitions for our growth, and maintain the appropriate capital structure. However, there can be no assurance that volatility in the global capital and credit markets would not impair our ability to access these markets on terms acceptable to us, or at all. See Note 11 of our Consolidated Financial Statements for a description of our long-term financing.

Our U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to $9.8 billion in aggregate maturity value. Our commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 (“P-1”) by Moody’s. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At March 31, 2019 and June 30, 2018, the Company had no commercial paper borrowing outstanding. For the three months ended March 31, 2019 and 2018, our average daily borrowings were $1.1 billion and $1.0 billion, respectively, at weighted average interest rates of 2.4% and 1.5%, respectively. For the nine months ended March 31, 2019 and 2018, our average daily borrowings were $2.9 billion and $2.8 billion, respectively, at weighted average interest rates of 2.2% and 1.2%, respectively. The weighted average maturity of our commercial paper during the three and nine months ended March 31, 2019 was approximately one day and two days, respectively.

Our U.S., Canadian and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. We have successfully borrowed through the use of reverse repurchase agreements on an as-needed basis to meet short-term funding requirements related to client funds obligations. At March 31, 2019 and June 30, 2018, there were no outstanding obligations related to the reverse repurchase agreements. For the three months ended March 31, 2019 and 2018, we had average outstanding balances under reverse repurchase agreements of $93.1 million and $99.0 million, at weighted average interest rates of 1.8% and 1.2%, respectively. For the nine months ended March 31, 2019 and 2018, we had average outstanding balances under reverse repurchase agreements of $306.1 million and $389.5 million, respectively, at weighted average interest rates of 1.8% and 1.1%, respectively.

We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a $3.8 billion, 364-day credit agreement that matures in June 2019 with a one year term-out option. In addition, we have a five-year $2.25 billion credit facility and a five-year $3.75 billion credit facility maturing in June 2022 and June 2023, respectively, each with an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary.  We had no borrowings through March 31, 2019 under the credit facilities. We believe that we currently meet all conditions set forth in the revolving credit agreements to borrow thereunder and we are not aware of any conditions that would prevent us from borrowing part or all of the $9.8 billion available to us under the revolving credit agreements. See Note 10 of our Consolidated Financial Statements for a description of our short-term financing including credit facilities.

Our investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages, alternative-A mortgages, sub-prime auto loans or sub-prime home equity loans, collateralized debt obligations, collateralized loan obligations, credit default swaps, derivatives, auction rate securities, structured investment vehicles or non-investment grade fixed-income securities. We own AAA-rated senior tranches of fixed rate credit card, auto loan, equipment lease and rate

42



reduction receivables, secured predominantly by prime collateral. All collateral on asset-backed securities is performing as expected. In addition, we own senior debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks.  Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations. See Note 8 of our Consolidated Financial Statements for a description of our corporate investments and funds held for clients.

Capital expenditures for the nine months ended March 31, 2019 were $116.8 million, as compared to $143.4 million for the nine months ended March 31, 2018.  Capital expenditures for fiscal 2019 are expected to be about $180 million, as compared to $192 million in fiscal 2018.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, short-term and long-term marketable securities) and client funds assets (funds that have been collected from clients but have not yet been remitted to the applicable tax authorities or client employees).

Our corporate investments are invested in cash and cash equivalents and highly liquid, investment-grade marketable securities. These assets are available for repurchases of common stock for treasury and/or acquisitions, as well as other corporate operating purposes. All of our short-term and long-term fixed-income securities are classified as available-for-sale securities.

Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary objectives. Consistent with those objectives, we also seek to maximize interest income and to minimize the volatility of interest income.  Client funds assets are invested in highly liquid, investment-grade marketable securities, with a maximum maturity of 10 years at the time of purchase, and money market securities and other cash equivalents.  
    
We utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). As part of our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other unrelated client funds obligations, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. We minimize the risk of not having funds collected from a client available at the time such client’s obligation becomes due by impounding, in virtually all instances, the client’s funds in advance of the timing of payment of such client’s obligation. As a result of this practice, we have consistently maintained the required level of client funds assets to satisfy all of our obligations.

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 $9.8 billion commercial paper program (rated A-1+ by Standard and Poor’s and P-1 by Moody’s, the highest possible credit ratings), and ability to engage in reverse repurchase transactions and available borrowings under our $9.8 billion committed credit facilities. 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, Canadian government agency 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. Time deposits and commercial paper must be rated A-1 and/or P-1. Money market funds must be rated AAA/Aaa-mf.


43



Details regarding our overall investment portfolio are as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Average investment balances at cost:
 
 
 
 
 
 
 
Corporate investments
$
2,799.6

 
$
2,976.0

 
$
4,782.6

 
$
5,082.3

Funds held for clients
29,985.0

 
28,817.1

 
25,211.3

 
24,129.6

Total
$
32,784.6

 
$
31,793.1

 
$
29,993.9

 
$
29,211.9

 
 

 
 

 
 

 
 

Average interest rates earned exclusive of realized
   (gains)/losses on:
 

 
 

 
 

 
 

Corporate investments
2.1
%
 
1.5
%
 
2.0
%
 
1.6
%
Funds held for clients
2.2
%
 
1.9
%
 
2.2
%
 
1.9
%
Total
2.2
%
 
1.8
%
 
2.2
%
 
1.8
%
 
 
 
 
 
 
 
 
Realized gains on available-for-sale securities
$
(0.6
)
 
$
(1.3
)
 
$
(1.2
)
 
$
(1.9
)
Realized losses on available-for-sale securities
0.5

 
1.6

 
2.6

 
3.2

Net realized (gains)/losses on available-for-sale securities
$
(0.1
)
 
$
0.3

 
$
1.4

 
$
1.3

 
 
March 31, 2019
 
June 30,
2018
Net unrealized pre-tax losses/(gains) on available-for-sale securities
$
22.7

 
$
(355.7
)
 
 
 
 
Total available-for-sale securities at fair value
$
23,703.4

 
$
22,776.2

 
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 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 increased from 1.8% for the nine months ended March 31, 2018 to 2.2% for the nine months ended March 31, 2019. 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 $12 million impact to earnings before income taxes over the ensuing twelve-month period ending March 31, 2020.  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 March 31, 2020.

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, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial mortgage backed securities. Approximately 80% of our available-for-sale securities held a AAA or AA rating at March 31, 2019. In addition, we limit amounts that can be invested in any security other than U.S. government and government agency, Canadian government, and United Kingdom government securities.

We operate and transact business in various foreign jurisdictions and are therefore 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 may use derivative financial instruments as risk management tools and not for trading purposes. We had no derivative financial instruments outstanding at March 31, 2019.


44



NEW ACCOUNTING PRONOUNCEMENTS

See Note 2, New Accounting Pronouncements, of Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures about Market Risk” under Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4.  Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “evaluation”).  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019 in ensuring that (i) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms.

There was no change in the Company's internal control over financial reporting that occurred during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.  OTHER INFORMATION

Except as noted below, all other items are either inapplicable or would result in negative responses and, therefore, have been omitted.

Item 1.  Legal Proceedings

In the normal course of business, the Company is subject to various claims and litigation.  While the outcome of any litigation is inherently unpredictable, the Company believes it has valid defenses with respect to the legal matters pending against it and the Company believes that the ultimate resolution of these matters will not have a material adverse impact on its financial condition, results of operations, or cash flows.

Item 1A.  Risk Factors

There have been no material changes in our risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

45



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
 
 
Total Number
of Shares Purchased (1)
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of the
Publicly
Announced
Common Stock Repurchase Plan (2)
 
Maximum Number
of Shares that
may yet be
Purchased under
the Common Stock
Repurchase Plan (2)
Period
 
 
 
 
January 1 to 31, 2019
 
1,045,093

 
$
132.63

 
1,040,848

 
11,642,585

 
 
 
 
 
 
 
 

February 1 to 28, 2019
 
298,829

 
$
147.83

 
297,595

 
11,344,990

 
 
 
 
 
 
 
 
 
March 1 to 31, 2019
 
284,902

 
$
154.06

 
273,089

 
11,071,901

Total
 
1,628,824

 
 
 
1,611,532

 
 


(1)  During the three months ended March 31, 2019, pursuant to the terms of the Company's restricted stock program, the Company purchased 17,292 shares at the then market value of the shares in connection with the vesting of restricted shares of employees under such program to satisfy certain tax withholding requirements through the delivery of shares to the Company instead of cash.

(2)  The Company announced the Board of Directors' approval to repurchase the shares of our common stock included in the table above as follows:
Date of Approval
Shares
August 2015
25 million

There is no expiration date for the common stock repurchase plan.

Item 5.  Other Information

In connection with his departure from the Company on June 30, 2019, Jan Siegmund entered into a separation agreement and release, dated April 29, 2019, which sets forth the terms of his separation and release in accordance with the Company’s Corporate Officer Severance Plan.  A copy of the separation agreement and release is filed as Exhibit 10.2 hereto and incorporated herein by reference.


46



Item 6.  Exhibits

Exhibit Number
Exhibit
 
Offer Letter, dated as of March 1, 2019, between Automatic Data Processing, Inc. and Kathleen Winters
Separation Agreement and Release, dated April 29, 2019, by and between Jan Siegmund and Automatic Data Processing, Inc.

Certification by Carlos A. Rodriguez pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
Certification by Kathleen A. Winters pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
Certification by Carlos A. Rodriguez pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Certification by Kathleen A. Winters pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
101.INS
XBRL instance document
 
101.SCH
XBRL taxonomy extension schema document
 
101.CAL
XBRL taxonomy extension calculation linkbase document
 
101.LAB
XBRL taxonomy label linkbase document
 
101.PRE
XBRL taxonomy extension presentation linkbase document
 
101.DEF
XBRL taxonomy extension definition linkbase document


47



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
AUTOMATIC DATA PROCESSING, INC.
(Registrant)
 
 
 
Date:
May 3, 2019
/s/ Kathleen A. Winters
Kathleen A. Winters
 
 
 
 
 
Chief Financial Officer
(Title)


48