10-Q 1 q2fy1310-q.htm 10-Q Q2FY13 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 December 31, 2012

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    Large accelerated filer x
 
Accelerated filer o
    Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company 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

The number of shares outstanding of the registrant’s common stock as of January 31, 2013 was 485,017,174.



Table of Contents

 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
REVENUES:
 
 
 
 
 
 
 
Revenues, other than interest on funds
held for clients and PEO revenues
$
2,183.4

 
$
2,041.7

 
$
4,265.3

 
$
4,032.8

Interest on funds held for clients
101.7

 
117.9

 
208.4

 
239.8

PEO revenues (A)
462.7

 
411.1

 
911.6

 
809.0

TOTAL REVENUES
2,747.8

 
2,570.7

 
5,385.3

 
5,081.6

 
 
 
 
 
 
 
 
EXPENSES:
 

 
 

 
 

 
 

Costs of revenues:
 

 
 

 
 

 
 

Operating expenses
1,401.6

 
1,304.2

 
2,769.1

 
2,593.9

Systems development and programming costs
159.9

 
147.3

 
316.2

 
295.2

Depreciation and amortization
62.8

 
62.2

 
125.6

 
125.0

TOTAL COSTS OF REVENUES
1,624.3

 
1,513.7

 
3,210.9

 
3,014.1

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
624.7

 
574.9

 
1,236.1

 
1,161.8

Interest expense
3.0

 
2.1

 
6.1

 
4.2

TOTAL EXPENSES
2,252.0

 
2,090.7

 
4,453.1

 
4,180.1

 
 
 
 
 
 
 
 
Other income, net
(33.0
)
 
(96.2
)
 
(62.2
)
 
(130.4
)
 
 
 
 
 
 
 
 
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
528.8

 
576.2

 
994.4

 
1,031.9

 
 
 
 
 
 
 
 
Provision for income taxes
176.8

 
203.4

 
340.0

 
358.7

NET EARNINGS FROM CONTINUING OPERATIONS
$
352.0

 
$
372.8

 
$
654.4

 
$
673.2

 
 
 
 
 
 
 
 
EARNINGS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES
62.3

 
3.5

 
66.8

 
7.1

Provision for income taxes
23.4

 
1.3

 
25.1

 
2.6

NET EARNINGS FROM DISCONTINUED OPERATIONS
$
38.9

 
$
2.2

 
$
41.7

 
$
4.5

 
 
 
 
 
 
 
 
NET EARNINGS
$
390.9

 
$
375.0

 
$
696.1

 
$
677.7

 
 
 
 
 
 
 
 
Basic Earnings Per Share from Continuing Operations
$
0.73

 
$
0.77

 
$
1.36

 
$
1.38

Basic Earnings Per Share from Discontinued Operations
0.08

 

 
0.09

 
0.01

BASIC EARNINGS PER SHARE
$
0.81

 
$
0.77

 
$
1.44

 
$
1.39

 
 
 
 
 
 
 
 
Diluted Earnings Per Share from Continuing Operations
$
0.72

 
$
0.76

 
$
1.34

 
$
1.37

Diluted Earnings Per Share from Discontinued Operations
0.08

 

 
0.09

 
0.01

DILUTED EARNINGS PER SHARE
$
0.80

 
$
0.76

 
$
1.43

 
$
1.38

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
482.1

 
486.7

 
482.8

 
487.3

Diluted weighted average shares outstanding
486.8

 
492.4

 
487.7

 
492.8

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.435

 
$
0.395

 
$
0.830

 
$
0.755

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $5,410.9 and $4,810.4 for the three months ended December 31, 2012 and 2011, respectively, and $9,936.7 and $8,745.7 for the six months ended December 31, 2012 and 2011, respectively.
See notes to the consolidated financial statements.

3






Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Comprehensive Income
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net earnings
$
390.9

 
$
375.0

 
$
696.1

 
$
677.7

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Currency translation adjustments
16.0

 
(34.4
)
 
68.5

 
(109.7
)
Unrealized net (losses)/gains on available-for-sale securities
(78.8
)
 
(48.3
)
 
21.2

 
126.2

Reclassification of net (gains) on available-for-sale securities to net earnings
(9.3
)
 
(8.2
)
 
(13.8
)
 
(12.2
)
Reclassification of pension liability adjustment to net earnings
7.9

 
3.7

 
15.8

 
7.7

Other comprehensive (loss)/income, before tax
(64.2
)
 
(87.2
)
 
91.7

 
12.0

Tax benefit (provision)
29.0

 
20.2

 
(7.7
)
 
(39.6
)
Other comprehensive (loss)/income, net of tax
(35.2
)
 
(67.0
)
 
84.0

 
(27.6
)
 
 
 
 
 
 
 
 
Comprehensive income
$
355.7

 
$
308.0

 
$
780.1

 
$
650.1





























See notes to the consolidated financial statement

4




Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
December 31,
 
June 30,
Assets
2012
 
2012
Current assets:
 
 
 
Cash and cash equivalents (A)
$
1,390.9

 
$
1,548.1

Short-term marketable securities (A)
43.9

 
30.4

Accounts receivable, net
1,604.1

 
1,391.7

Other current assets
754.5

 
631.6

Assets held for sale

 
6.7

Assets of discontinued operations

 
125.0

Total current assets before funds held for clients
3,793.4

 
3,733.5

Funds held for clients
23,759.0

 
21,539.1

Total current assets
27,552.4

 
25,272.6

Long-term marketable securities
82.4

 
86.9

Long-term receivables, net
135.6

 
129.8

Property, plant and equipment, net
712.9

 
706.3

Other assets
1,075.4

 
871.5

Goodwill
3,100.7

 
3,062.0

Intangible assets, net
670.6

 
688.3

Total assets
$
33,330.0

 
$
30,817.4

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
141.4

 
$
167.4

Accrued expenses and other current liabilities
1,163.6

 
1,062.5

Accrued payroll and payroll-related expenses
524.5

 
597.0

Dividends payable
206.5

 
188.4

Short-term deferred revenues
298.4

 
312.9

Obligations under reverse repurchase agreements
13.5

 

Income taxes payable
25.9

 
39.3

Liabilities of discontinued operations

 
29.0

Total current liabilities before client funds obligations
2,373.8

 
2,396.5

Client funds obligations
23,064.7

 
20,856.2

Total current liabilities
25,438.5

 
23,252.7

Long-term debt
15.8

 
16.8

Other liabilities
610.1

 
585.9

Deferred income taxes
385.7

 
381.5

Long-term deferred revenues
484.6

 
466.5

Total liabilities
26,934.7

 
24,703.4

 
 
 
 
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 December 31, 2012 and June 30, 2012;
outstanding, 484.7 and 484.2 shares at December 31, 2012
and June 30, 2012, respectively
63.9

 
63.9

Capital in excess of par value
439.8

 
486.4

Retained earnings
12,732.0

 
12,438.3

Treasury stock - at cost: 154.0 and 154.5 shares
at December 31, 2012 and June 30, 2012, respectively
(7,154.6
)
 
(7,104.8
)
Accumulated other comprehensive income
314.2

 
230.2

Total stockholders’ equity
6,395.3

 
6,114.0

Total liabilities and stockholders’ equity
$
33,330.0

 
$
30,817.4

(A) As of December 31, 2012, $13.4 million of short-term marketable securities and $0.1 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements (see Note 11).
See notes to the consolidated financial statements.

5

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

 
Six Months Ended
 
December 31,
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
Net earnings
$
696.1

 
$
677.7

Adjustments to reconcile net earnings to cash flows provided by
 

 
 

operating activities:
 

 
 

Depreciation and amortization
155.6

 
157.1

Deferred income taxes
2.6

 
6.1

Stock-based compensation expense
41.9

 
45.5

Net pension expense
21.8

 
18.3

Net realized gain from the sales of marketable securities
(13.8
)
 
(12.2
)
Net amortization of premiums and accretion of discounts on available-for-sale securities
37.9

 
27.2

Impairment losses on available-for-sale securities

 
5.8

Gain on sale of assets

 
(66.0
)
Gains on sales of buildings
(2.2
)
 

Gain on sale of discontinued businesses, net of tax
(36.7
)
 

Other
13.7

 
0.7

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

 
 

and divestitures of businesses:
 

 
 

(Increase)/decrease in accounts receivable
(210.7
)
 
3.8

Increase in other assets
(328.2
)
 
(122.7
)
Decrease in accounts payable
(29.1
)
 
(16.4
)
Increase in accrued expenses and other liabilities
33.1

 
20.4

Operating activities of discontinued operations
1.4

 
2.6

Net cash flows provided by operating activities
383.4

 
747.9

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Purchases of corporate and client funds marketable securities
(2,160.4
)
 
(2,233.1
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
1,837.2

 
2,031.7

Net (increase)/decrease in restricted cash and cash equivalents held to satisfy client funds obligations
(1,856.4
)
 
1,997.6

Capital expenditures
(75.3
)
 
(66.6
)
Additions to intangibles
(59.0
)
 
(51.2
)
Acquisitions of businesses, net of cash acquired
(0.7
)
 
(176.3
)
Proceeds from the sale of property, plant, and equipment and other assets
10.0

 
66.0

Investing activities of discontinued operations
(0.6
)
 

Proceeds from the sale of businesses included in discontinued operations
161.4

 

Net cash flows (used in) provided by investing activities
(2,143.8
)
 
1,568.1

 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Net increase/(decrease) in client funds obligations
2,143.9

 
(1,805.2
)
Payments of debt
(8.7
)
 
(1.0
)
Repurchases of common stock
(306.9
)
 
(297.9
)
Proceeds from stock purchase plan and exercises of stock options
129.5

 
118.2

Dividends paid
(384.3
)
 
(353.9
)
Net proceeds from reverse repurchase agreements
13.5

 

Net cash flows provided by (used in) financing activities
1,587.0

 
(2,339.8
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
16.2

 
(34.3
)
 
 
 
 
Net change in cash and cash equivalents
(157.2
)
 
(58.1
)
 
 
 
 
Cash and cash equivalents of continuing operations, beginning of period
1,548.1

 
1,389.4

 
 
 
 
Cash and cash equivalents of continuing operations, end of period
$
1,390.9

 
$
1,331.3

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. and its subsidiaries (“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 statement of the Company’s results for the interim periods.

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 other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto.  Actual results may differ from those estimates. All relevant footnotes have been adjusted for discontinued operations.

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 year ended June 30, 2012 (“fiscal 2012”).

Note 2.  New Accounting Pronouncements

In July 2012, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The Company has elected to present net income and other comprehensive income on two separate, but consecutive statements. The adoption of ASU 2011-05 did not have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.

In July 2012, the Company adopted ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that the fair value of a reporting unit is less than its carrying value based upon the qualitative assessment, it is necessary to perform the currently prescribed two-step goodwill impairment test. ASU 2011-08 does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. The adoption of ASU 2011-08 did not have an impact on the Company’s consolidated results of operations, financial condition, other comprehensive income, or cash flows.

7



Note 3.  Earnings per Share (“EPS”)
 
Basic
 
Effect of
Employee
Stock
Option
Shares
 
Effect of
Employee
Restricted
Stock
Shares
 
Diluted
Three Months Ended December 31,
 
 
 
 
 
 
 
2012
 
 
 
 
 
 
 
Net earnings from continuing operations
$
352.0

 
 
 
 
 
$
352.0

Weighted average shares (in millions)
482.1

 
3.2

 
1.5

 
486.8

EPS from continuing operations
$
0.73

 
 

 
 

 
$
0.72

2011
 

 
 

 
 

 
 

Net earnings from continuing operations
$
372.8

 
 

 
 

 
$
372.8

Weighted average shares (in millions)
486.7

 
4.1

 
1.6

 
492.4

EPS from continuing operations
$
0.77

 
 

 
 

 
$
0.76

Six Months Ended December 31,
 

 
 

 
 

 
 

2012
 

 
 

 
 

 
 

Net earnings from continuing operations
$
654.4

 
 

 
 

 
$
654.4

Weighted average shares (in millions)
482.8

 
3.5

 
1.4

 
487.7

EPS from continuing operations
$
1.36

 
 

 
 

 
$
1.34

2011
 

 
 

 
 

 
 

Net earnings from continuing operations
$
673.2

 
 

 
 

 
$
673.2

Weighted average shares (in millions)
487.3

 
4.0

 
1.5

 
492.8

EPS from continuing operations
$
1.38

 
 

 
 

 
$
1.37


Options to purchase 0.9 million and 0.6 million shares of common stock for the three months ended December 31, 2012 and 2011, respectively, and 0.9 million and zero shares of common stock for the six months ended December 31, 2012 and 2011, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market price of outstanding common shares for the respective periods.

Note 4.  Other Income, net
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Interest income on corporate funds
$
(21.5
)
 
$
(27.2
)
 
$
(45.3
)
 
$
(56.8
)
Realized gains on available-for-sale securities
(9.8
)
 
(14.8
)
 
(14.6
)
 
(19.1
)
Realized losses on available-for-sale securities
0.5

 
6.6

 
0.8

 
6.9

Impairment losses on available-for-sale securities

 
5.8

 

 
5.8

Gains on sales of buildings
(2.2
)
 

 
(2.2
)
 

Gain on sale of assets

 
(66.0
)
 

 
(66.0
)
Other, net

 
(0.6
)
 
(0.9
)
 
(1.2
)
Other income, net
$
(33.0
)
 
$
(96.2
)
 
$
(62.2
)
 
$
(130.4
)

During the three months ended December 31, 2012, the Company completed the sale of two buildings that were previously classified as assets held for sale on the Consolidated Balance Sheets and, as a result, recorded gains of $2.2 million in other income, net, on the Statements of Consolidated Earnings for the three and six months ended December 31, 2012.

During the three months ended December 31, 2011, the Company sold assets related to rights and obligations to resell a third-party expense management platform, and, as a result recorded a gain of $66.0 million in other income, net, on the Statements of Consolidated Earnings for the three and six months ended December 31, 2011.


8





At December 31, 2011, the Company concluded that it had the intent to sell certain available-for-sale securities with unrealized losses of $5.8 million. As such, the Company recorded an impairment charge of $5.8 million in other income, net, on the Statements of Consolidated Earnings for the three and six months ended December 31, 2011. As of December 31, 2012, all such securities had been sold.


Note 5.  Acquisitions

Assets acquired and liabilities assumed in business combinations were recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates.  The results of operations of businesses acquired by the Company have been included in the Statements of Consolidated Earnings since their respective dates of acquisition.  The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill.  In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when the Company receives final information, including appraisals and other analysis.  Accordingly, the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes available, but will not exceed twelve months.

The Company did not acquire any businesses during the six months ended December 31, 2012.

The Company acquired five businesses during the six months ended December 31, 2011 for approximately $229.1 million, net of cash acquired. These acquisitions resulted in approximately $149.5 million of goodwill. Intangible assets acquired, which total approximately $71.3 million for these five acquisitions, included customer contracts and lists, software, and trademarks that are being amortized over a weighted average life of approximately 11 years. The Company finalized the purchase price allocation for these five acquisitions during the six months ended December 31, 2012 and adjusted the preliminary values allocated to certain assets and liabilities in order to reflect final information received. As of December 31, 2012, the Company has accrued certain liabilities representing the estimated fair value of contingent consideration expected to be payable for certain specific performance metrics.

In addition, the Company made contingent payments relating to previously consummated acquisitions of $0.5 million during the six months ended December 31, 2012.

Note 6. Divestitures

On December 17, 2012, the Company completed the sale of its Taxware Enterprise Service business ("Taxware") for a pre-tax gain of $58.8 million, less costs to sell, and recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings. In connection with the disposal of Taxware, the Company has classified the results of this business as discontinued operations for all periods presented. Taxware was previously reported in the Employer Services segment.


9



Operating results for discontinued operations were as follows:

 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Revenues
$
10.8

 
$
12.3

 
$
23.7

 
$
23.9

 
 
 
 
 
 
 
 
Earnings from discontinued operations before income taxes
3.5

 
3.5

 
8.0

 
7.1

Provision for income taxes
1.3

 
1.3

 
3.0

 
2.6

Net earnings from discontinued operations before gain on disposal of discontinued operations
2.2

 
2.2

 
5.0

 
4.5

 
 
 
 
 
 
 
 
Gain on disposal of discontinued operations, less costs to sell
58.8

 

 
58.8

 

Provision for income taxes
22.1

 

 
22.1

 

Net gain on disposal of discontinued operations
36.7

 

 
36.7

 

 
 
 
 
 
 
 
 
Net earnings from discontinued operations
$
38.9

 
$
2.2

 
$
41.7

 
$
4.5


There were no assets or liabilities of discontinued operations as of December 31, 2012. The following are the major classes of assets and liabilities related to the discontinued operations as of June 30, 2012:
 
June 30, 2012
Assets:
 
Accounts receivable, net
$
7.6

Goodwill
93.3

Intangible assets, net
22.9

Other assets
1.2

 
 
Total assets
$
125.0

 
 
Liabilities:
 
Accounts payable
$
0.4

Accrued expenses and other current liabilities
0.1

Accrued payroll and payroll related expenses
2.3

Deferred Revenues
22.7

Deferred Income Taxes
3.5

 
 
Total liabilities
$
29.0




10



Note 7.  Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at December 31, 2012 and June 30, 2012 were as follows:
 
 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Value
Type of issue:
 
 
 
 
 
 
 
Money market securities and other cash equivalents
$
6,819.9

 
$

 
$

 
$
6,819.9

Available-for-sale securities:
 

 
 

 
 

 
 

U.S. Treasury and direct obligations of
U.S. government agencies
6,541.9

 
251.8

 
(1.2
)
 
6,792.5

Corporate bonds
7,055.9

 
301.3

 
(1.3
)
 
7,355.9

Canadian provincial bonds
660.1

 
36.3

 
(0.2
)
 
696.2

Asset-backed securities
772.8

 
13.4

 
(0.2
)
 
786.0

Municipal bonds
523.9

 
29.2

 
(0.4
)
 
552.7

Canadian government obligations and
Canadian government agency obligations
1,040.1

 
17.6

 
(1.3
)
 
1,056.4

Other securities
1,143.7

 
73.1

 
(0.2
)
 
1,216.6

 
 
 
 
 
 
 
 
Total available-for-sale securities
17,738.4

 
722.7

 
(4.8
)
 
18,456.3

 
 
 
 
 
 
 
 
Total corporate investments and funds
held for clients
$
24,558.3

 
$
722.7

 
$
(4.8
)
 
$
25,276.2

 
 
 
June 30, 2012
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Type of issue:
 

 
 

 
 

 
 

Money market securities and other cash equivalents
$
5,111.1

 
$

 
$

 
$
5,111.1

Available-for-sale securities:
 

 
 

 
 

 
 

U.S. Treasury and direct obligations of
U.S. government agencies
6,413.8

 
260.9

 
(0.1
)
 
6,674.6

Corporate bonds
7,097.2

 
272.3

 
(1.5
)
 
7,368.0

Canadian provincial bonds
620.8

 
35.4

 
(0.3
)
 
655.9

Asset-backed securities
533.9

 
14.5

 

 
548.4

Municipal bonds
522.0

 
31.0

 
(0.1
)
 
552.9

Canadian government obligations and
Canadian government agency obligations
994.2

 
23.4

 
(0.6
)
 
1,017.0

Other securities
1,201.0

 
75.7

 
(0.1
)
 
1,276.6

 
 
 
 
 
 
 
 
Total available-for-sale securities
17,382.9

 
713.2

 
(2.7
)
 
18,093.4

 
 
 
 
 
 
 
 
Total corporate investments and funds
held for clients
$
22,494.0

 
$
713.2

 
$
(2.7
)
 
$
23,204.5


At December 31, 2012, U.S. Treasury and direct obligations of U.S. government agencies primarily include debt directly issued by Federal Home Loan Banks, Federal Farm Credit Banks, Federal National Mortgage Association ("Fannie Mae"), and Federal Home Loan Mortgage Corporation ("Freddie Mac") with fair values of $4,509.2 million, $1,303.7 million, $289.3 million, and $129.1 million, respectively.  At June 30, 2012, U.S. Treasury and direct obligations of U. S. government agencies

11



primarily include debt directly issued by Federal Home Loan Banks, Federal Farm Credit Banks, Fannie Mae, and Freddie Mac with fair values of $4,189.1 million, $1,134.1 million, $428.6 million, and $384.6 million, respectively.  U.S. Treasury and direct obligations of U.S. government agencies represent senior, unsecured, non-callable debt that primarily carries a credit rating of AAA, as rated by Moody's and AA+, as rated by Standard & Poor's and has maturities ranging from January 2013 through December 2022. Corporate bonds include investment-grade debt securities, which include a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from January 2013 to December 2022.

At December 31, 2012, asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed rate credit card, auto loan receivables, and rate reduction with fair values of $509.4 million, $172.9 million, and $103.4 million, respectively.  At June 30, 2012, asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed rate credit card, auto loan receivables, and rate reduction with fair values of $323.0 million, $85.1 million, and $140.0 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 December 31, 2012.

At December 31, 2012, other securities and their fair value primarily represent: AA and AAA rated supranational bonds of $438.2 million, AA and AAA rated sovereign bonds of $411.8 million, AAA rated commercial mortgage-backed securities of $222.8 million, and AA rated mortgage-backed securities of $121.5 million that are guaranteed by Fannie Mae and Freddie Mac. At June 30, 2012, other securities and their fair value primarily represent: AAA rated supranational bonds of $427.7 million, AA and AAA rated sovereign bonds of $405.0 million, AAA rated commercial mortgage-backed securities of $282.3 million, and AA rated mortgage-backed securities of $135.3 million that are guaranteed by Fannie Mae and Freddie Mac. The Company's mortgage-backed securities represent an undivided beneficial ownership interest in a group or pool of one or more residential mortgages. These securities are collateralized by the cash flows of 15-year and 30-year residential mortgages and are guaranteed by Fannie Mae and Freddie Mac as to the timely payment of principal and interest.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 
December 31,
 
June 30,
 
2012
 
2012
Corporate investments:
 
 
 
Cash and cash equivalents
$
1,390.9

 
$
1,548.1

Short-term marketable securities
43.9

 
30.4

Long-term marketable securities
82.4

 
86.9

Total corporate investments
$
1,517.2

 
$
1,665.4

 
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:
 
December 31,
 
June 30,
 
2012
 
2012
Funds held for clients:
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
$
5,429.0

 
$
3,563.0

Restricted short-term marketable securities held to satisfy client funds obligations
2,071.0

 
2,954.1

Restricted long-term marketable securities held to satisfy client funds obligations
16,259.0

 
15,022.0

Total funds held for clients
$
23,759.0

 
$
21,539.1


Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll and tax 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 $23,064.7 million and $20,856.2 million as of December 31, 2012 and June 30, 2012, respectively.  The Company has classified funds held for clients as a current asset since these funds are held solely for the purposes of satisfying the client funds

12



obligations.  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 inflows and outflows related to client funds investments with original maturities of 90 days or less on a net basis within net increase in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations in the investing section of 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 section of the Statements of Consolidated Cash Flows.

Approximately 84% of the available-for-sale securities held a AAA or AA rating at December 31, 2012, as rated by Moody's, Standard & Poor's and, for Canadian securities, Dominion Bond Rating Service.  All available-for-sale securities were rated as investment grade at December 31, 2012.

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 December 31, 2012, are as follows: 
 
Unrealized
losses
less than
12 months
 
Fair market
value less than
12 months
 
Unrealized
losses
greater than
12 months
 
Fair market
value greater
than 12 months
 
Total gross
unrealized
losses
 
Total fair
market value
U.S. Treasury and direct obligations of
U.S. government agencies
$
(1.2
)
 
$
439.3

 
$

 
$

 
$
(1.2
)
 
$
439.3

Corporate bonds
(1.3
)
 
248.0

 

 

 
(1.3
)
 
248.0

Canadian provincial bonds
(0.2
)
 
35.5

 

 

 
(0.2
)
 
35.5

Asset-backed securities
(0.2
)
 
126.4

 

 

 
(0.2
)
 
126.4

Municipal bonds
(0.4
)
 
45.9

 

 

 
(0.4
)
 
45.9

Canadian government obligations and
Canadian government agency obligations
(1.3
)
 
280.9

 

 

 
(1.3
)
 
280.9

Other securities
(0.2
)
 
33.3

 

 

 
(0.2
)
 
33.3

 
$
(4.8
)
 
$
1,209.3

 
$

 
$

 
$
(4.8
)
 
$
1,209.3


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, 2012 are as follows: 
 
Unrealized
losses
less than
12 months
 
Fair market
value less than
12 months
 
Unrealized
losses
greater than
12 months
 
Fair market
value greater
than 12 months
 
Total gross
unrealized
losses
 
Total fair
market value
U.S. Treasury and direct obligations of U.S. government agencies
$
(0.1
)
 
$
43.6

 
$

 
$

 
$
(0.1
)
 
$
43.6

Corporate bonds
(1.1
)
 
234.8

 
(0.4
)
 
20.2

 
(1.5
)
 
255.0

Canadian provincial bonds
(0.3
)
 
58.5

 

 

 
(0.3
)
 
58.5

Asset-backed securities

 
13.6

 

 

 

 
13.6

Municipal bonds
(0.1
)
 
22.8

 

 

 
(0.1
)
 
22.8

Canadian government obligations and
Canadian government agency obligations
(0.6
)
 
209.4

 

 

 
(0.6
)
 
209.4

Other securities
(0.1
)
 
26.3

 

 

 
(0.1
)
 
26.3

 
$
(2.3
)
 
$
609.0

 
$
(0.4
)
 
$
20.2

 
$
(2.7
)
 
$
629.2

 

13



Expected maturities of available-for-sale securities at December 31, 2012 are as follows:
Due in one year or less
$
2,114.8

Due after one year to two years
2,082.8

Due after two years to three years
4,703.1

Due after three years to four years
3,317.8

Due after four years
6,237.8

 
 

Total available-for-sale securities
$
18,456.3



Note 8.  Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date and is based upon the Company’s principal or most advantageous market for a specific asset or liability.

U.S. GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:

Level 1 Fair value is determined based upon quoted prices for identical assets or liabilities that are traded in active markets.

Level 2 Fair value is determined based upon inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
· quoted prices for similar assets or liabilities in active markets;
· quoted prices for identical or similar assets or liabilities in markets that are not active;
· inputs other than quoted prices that are observable for the asset or liability; or
· inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Fair value is determined based upon inputs that are unobservable and reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based upon the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).

Available-for-sale securities included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. Over 99% of the Company's available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Company's Level 2 investments, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The Company reviews the values generated by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations from at least one other observable source. The Company has not adjusted the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 3.

The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The significant input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.


14



The following table presents the Company's assets measured at fair value on a recurring basis at December 31, 2012.  Included in the table are available-for-sale securities within corporate investments of $126.3 million and funds held for clients of $18,330.0 million. Refer to Note 7 for additional disclosure in relation to corporate investments and funds held for clients.
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. Treasury and direct obligations of
U.S. government agencies
$

 
$
6,792.5

 
$

 
$
6,792.5

Corporate bonds

 
7,355.9

 

 
7,355.9

Canadian provincial bonds

 
696.2

 

 
696.2

Asset-backed securities

 
786.0

 

 
786.0

Municipal bonds

 
552.7

 

 
552.7

Canadian government obligations and
Canadian government agency obligations

 
1,056.4

 

 
1,056.4

Other securities
16.7

 
1,199.9

 

 
1,216.6

Total available-for-sale securities
$
16.7

 
$
18,439.6

 
$

 
$
18,456.3


The following table presents the Company’s assets measured at fair value on a recurring basis at June 30, 2012. Included in the table are available-for-sale securities within corporate investments of $117.3 million and funds held for clients of $17,976.1 million.
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. Treasury and direct obligations of
U.S. government agencies
$

 
$
6,674.6

 
$

 
$
6,674.6

Corporate bonds

 
7,368.0

 

 
7,368.0

Canadian provincial bonds

 
655.9

 

 
655.9

Asset-backed securities

 
548.4

 

 
548.4

Municipal bonds

 
552.9

 

 
552.9

Canadian government obligations and
Canadian government agency obligations

 
1,017.0

 

 
1,017.0

Other securities
20.6

 
1,256.0

 

 
1,276.6

Total available-for-sale securities
$
20.6

 
$
18,072.8

 
$

 
$
18,093.4


Note 9.  Receivables

Accounts receivable, net, includes the Company's trade receivables, which are recorded based upon the amount the Company expects to receive from its clients, net of an allowance for doubtful accounts. The Company's receivables also include notes receivable for the financing of the sale of computer systems, primarily from auto, truck, motorcycle, marine, recreational vehicle and heavy equipment retailers and manufacturers. Notes receivable are recorded based upon the amount the Company expects to receive from its clients, net of an allowance for doubtful accounts and unearned income. The allowance for doubtful accounts is the Company's best estimate of probable credit losses related to trade receivables and notes receivable based upon the aging of the receivables, historical collection data, internal assessments of credit quality and the economic conditions in the automobile industry, as well as in the economy as a whole. The Company charges off uncollectable amounts against the reserve in the period in which it determines they are uncollectable. Unearned income on notes receivable is amortized using the effective interest method.



15



The Company’s receivables, whose carrying value approximates fair value, are as follows:
 
December 31, 2012
 
June 30, 2012
 
Current
 
Long-term
 
Current
 
Long-term
Trade receivables
$
1,573.1

 
$

 
$
1,355.7

 
$

Notes receivable
90.2

 
152.4

 
89.1

 
145.5

Less:
 

 
 

 
 

 
 

Allowance for doubtful accounts - trade receivables
(46.2
)
 

 
(40.7
)
 

Allowance for doubtful accounts - notes receivable
(5.9
)
 
(9.9
)
 
(5.4
)
 
(8.8
)
Unearned income - notes receivable
(7.1
)
 
(6.9
)
 
(7.0
)
 
(6.9
)

$
1,604.1

 
$
135.6

 
$
1,391.7

 
$
129.8


The Company determines the allowance for doubtful accounts related to notes receivable based upon a specific reserve for known collection issues, as well as a non-specific reserve based upon aging, both of which are based upon history of such losses and current economic conditions. Based upon the Company's methodology, the notes receivable balances with specific and non-specific reserves and the specific and non-specific reserves associated with those balances are as follows:
 
December 31, 2012
 
Notes Receivable
 
Reserve
 
Current
 
Long-term
 
Current
 
Long-term
Specific Reserve
$
0.7

 
$
1.2

 
$
0.7

 
$
1.2

Non-specific Reserve
89.5

 
151.2

 
5.2

 
8.7


$
90.2

 
$
152.4

 
$
5.9

 
$
9.9


 
June 30, 2012
 
Notes Receivable
 
Reserve
 
Current
 
Long-term
 
Current
 
Long-term
Specific Reserve
$
0.4

 
$
0.6

 
$
0.4

 
$
0.6

Non-specific Reserve
88.7

 
144.9

 
5.0

 
8.2


$
89.1

 
$
145.5

 
$
5.4

 
$
8.8


The rollforward of the allowance for doubtful accounts related to notes receivable is as follows:
 
Current
 
Long-term
Balance at June 30, 2012
$
5.4

 
$
8.8

Incremental provision
0.8

 
1.3

Recoveries and other

 
0.2

Chargeoffs
(0.3
)
 
(0.4
)
Balance at December 31, 2012
$
5.9

 
$
9.9


The allowance for doubtful accounts as a percentage of notes receivable was approximately 7% as of December 31, 2012 and 6% as of June 30, 2012.

Notes receivable aged over 30 days past due are considered delinquent.  Notes receivable aged over 60 days past due and notes receivable with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status.  Cash payments received on non-accrual receivables are applied towards the principal.  When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes receivable is resumed.  At December 31, 2012, the Company had $1.9 million in notes receivable on non-accrual status, including $0.6 million of notes receivable aged over 60 days past due. At June 30, 2012, the Company had $0.4 million in notes receivable on non-accrual status, including $0.1 million of notes receivable aged over 60 days past due.

On an ongoing basis, the Company evaluates the credit quality of its financing receivables, utilizing aging of receivables, collection experience and charge-offs.  In addition, the Company evaluates economic conditions in the auto industry and

16



specific dealership matters, such as bankruptcy.  As events related to a specific client dictate, the credit quality of a client is reevaluated.

The aging of the notes receivable past due at December 31, 2012 is as follows:
 
Over 30 days to 60 days
 
Over 60 days
Notes Receivable
$
2.2

 
$
0.6

 
At December 31, 2012, approximately 99% of notes receivable are current.
 
The aging of the notes receivable past due at June 30, 2012 is as follows:
 
Over 30 days to 60 days
 
Over 60 days
Notes Receivable
$
0.7

 
$
0.1

 
At June 30, 2012, approximately 100% of notes receivable are current.

Note 10.  Goodwill and Intangible Assets, net

Changes in goodwill for the three months ended December 31, 2012 are as follows:

 
Employer
Services
 
PEO
Services
 
Dealer
Services
 
Total
Balance at June 30, 2012
$
1,887.6

 
$
4.8

 
$
1,169.6

 
$
3,062.0

Additions and other adjustments, net
(0.4
)
 

 
0.8

 
0.4

Currency translation adjustments
23.0

 

 
15.3

 
38.3

Balance at December 31, 2012
$
1,910.2

 
$
4.8

 
$
1,185.7

 
$
3,100.7


Components of intangible assets, net, are as follows:
 
December 31,
 
June 30,
 
2012
 
2012
Intangible assets:
 
 
 
Software and software licenses
$
1,472.5

 
$
1,410.9

Customer contracts and lists
846.2

 
832.7

Other intangibles
241.8

 
241.6

 
2,560.5

 
2,485.2

Less accumulated amortization:
 

 
 

Software and software licenses
(1,199.7
)
 
(1,145.8
)
Customer contracts and lists
(511.7
)
 
(479.1
)
Other intangibles
(178.5
)
 
(172.0
)
 
(1,889.9
)
 
(1,796.9
)
Intangible assets, net
$
670.6

 
$
688.3


Other intangibles consist primarily of purchased rights, covenants, patents, and trademarks (acquired directly or through acquisitions).  All of the intangible assets have finite lives and, as such, are subject to amortization.  The weighted average remaining useful life of the intangible assets is 7 years (4 years for software and software licenses, 10 years for customer contracts and lists, and 7 years for other intangibles).  Amortization of intangible assets was $41.4 million and $42.3 million for the three months ended December 31, 2012 and 2011, respectively, and totaled $83.4 million and $84.6 million for the six months ended December 31, 2012 and 2011, respectively.


17



Estimated future amortization expenses of the Company's existing intangible assets are as follows:
 
Amount
Six months ending June 30, 2013
$
82.8

Twelve months ending June 30, 2014
$
144.6

Twelve months ending June 30, 2015
$
112.7

Twelve months ending June 30, 2016
$
76.4

Twelve months ending June 30, 2017
$
62.2

Twelve months ending June 30, 2018
$
38.1


Note 11.  Short-term Financing

The Company has a $2.0 billion, 364-day credit agreement with a group of lenders that matures in June 2013.  In addition, the Company has a four-year $3.25 billion credit facility maturing in June 2015 that contains an accordion feature under which the aggregate commitment can be increased by $500.0 million, subject to the availability of additional commitments.  The Company also has an existing $1.5 billion five-year credit facility that matures in June 2017 that also contains an accordion feature under which the aggregate commitment can be increased by $500.0 million, subject to the availability of additional commitments.  The interest rate applicable to committed borrowings is tied to LIBOR, the federal funds effective 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 December 31, 2012 under the credit agreements.

The Company’s U.S. short-term funding requirements related to client funds are sometimes obtained through a short-term commercial paper program, which provides for the issuance of up to $6.75 billion in aggregate maturity value of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.   The Company’s commercial paper program is rated A-1+ by Standard and 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 December 31, 2012 and June 30, 2012, the Company had no commercial paper outstanding.  For the three months ended December 31, 2012 and 2011, the Company’s average borrowings were $3.7 billion and $3.3 billion, respectively, at weighted average interest rates of 0.2% and 0.1%, respectively. For the six months ended December 31, 2012 and 2011, the Company's average borrowings were $3.5 billion and $3.2 billion, respectively, at weighted average interest rate of 0.2% and 0.1%, respectively. The weighted average maturity of the Company’s commercial paper during the three and six months ended December 31, 2012 approximated three and two days, respectively.

The Company’s U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.  These agreements are collateralized principally by government and government agency securities.  These agreements generally have terms ranging from overnight to up to five business days.  The Company has $3.0 billion available to it on a committed basis under these reverse repurchase agreements.   At December 31, 2012, the Company had $13.5 million of obligations outstanding related to reverse repurchase agreements. All outstanding reverse repurchase obligations matured by January 2, 2013 and the outstanding obligations were repaid. At June 30, 2012, there were no outstanding obligations under reverse repurchase agreements. For the three months ended December 31, 2012 and 2011, the Company had average outstanding balances under reverse repurchase agreements of $416.8 million and $271.5 million, respectively, at weighted average interest rates of 0.7% and 0.7%, respectively. For the six months ended December 31, 2012 and 2011, the Company has average outstanding balances under reverse repurchase agreements of $475.7 million and $384.2 million, respectively, at weighted average interest rates of 0.7% and 0.5%, respectively.

Note 12.  Employee Benefit Plans

A.  Stock Plans.  The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the date of grant.  Stock-based compensation consists of the following:

Stock Options.  Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant.  Stock options are issued under a graded vesting schedule.  Options granted prior to July 1, 2008 generally vest ratably over five years and have a term of 10 years.  Options granted after July 1, 2008 generally vest ratably over four years and have a term of 10 years.  Compensation expense for

18



stock options is recognized over the requisite service period for each separately vesting portion of the stock option award.

Employee Stock Purchase Plan.  The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period.  This plan has been deemed non-compensatory and therefore, no compensation expense has been recorded.

Restricted Stock.
Time-Based Restricted Stock. The Company has issued time-based restricted stock to certain employees which are subject to vesting periods of up to five years from the date of grant. These shares are restricted as to transfer during the vesting period, and are forfeited if the grantee ceases to be employed by the Company prior to vesting or in certain other circumstances. The Company records stock compensation expense relating to the issuance of restricted stock based on market prices on the date of grant on a straight-line basis over the period in which the transfer restrictions exist.
 
Performance-Based Restricted Stock. The performance-based restricted stock program has a one-year performance period, and a subsequent one-year service period. Under this program, the Company communicates "target awards" to certain key employees at the beginning of the performance period and, as such, dividends are not paid in respect of the "target awards" during the performance period. After the performance period, if the performance targets are achieved, associates are eligible to receive dividends on shares awarded under the program. The performance target is based on earnings per share growth over the performance period, with possible payouts at the end of the performance period ranging from 0% to 150% of the "target awards." Stock-based compensation expense is measured based upon the fair value of the award on the grant date. Compensation expense is recognized on a straight-line basis over the vesting period of approximately 24 months, based upon the probability that the performance target will be met.

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 2.0 million shares in the three months ended December 31, 2012 as compared to 0.9 million shares repurchased in the three months ended December 31, 2011 and the Company repurchased 5.4 million shares in the six months ended December 31, 2012 as compared to 6.2 million shares repurchased in the six months ended December 31, 2011. 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.

Stock-based compensation expense of $24.3 million and $27.1 million was recognized in earnings for the three months ended December 31, 2012 and 2011, respectively, as well as related tax benefits of $9.2 million and $10.0 million, respectively. Stock-based compensation expense of $41.9 million and $45.5 million was recognized in earnings for the six months ended December 31, 2012 and 2011, respectively, as well as related tax benefits of $15.7 million and $16.8 million, respectively.
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Operating expenses
$
4.7

 
$
4.5

 
$
7.6

 
$
7.5

Selling, general and administrative expenses
15.8

 
18.9

 
27.6

 
31.6

System development and programming costs
3.8

 
3.7

 
6.7

 
6.4

Total pretax stock-based compensation expense
$
24.3

 
$
27.1

 
$
41.9

 
$
45.5


As of December 31, 2012, the total remaining unrecognized compensation cost related to non-vested stock options and restricted stock awards amounted to $4.9 million and $93.9 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 1.7 years and 1.7 years, respectively.


19



During the six months ended December 31, 2012, the following activity occurred under the Company’s existing plans:

Stock Options:
 
Number
of Options
(in thousands)
 
Weighted
Average Price
(in dollars)
Options outstanding at July 1, 2012
16,187

 
$
41

Options granted
33

 
$
58

Options exercised
(2,859
)
 
$
38

Options canceled
(145
)
 
$
40

Options outstanding at December 31, 2012
13,216

 
$
41


Performance-Based Restricted Stock:
 
Number of Shares
(in thousands)
Restricted shares outstanding at July 1, 2012
1,474

Restricted shares granted
544

Restricted shares vested
(6
)
Restricted shares forfeited
(139
)
Restricted shares outstanding at December 31, 2012
1,873


Time-Based Restricted Stock:
 
Number of Shares
(in thousands)
Restricted shares outstanding at July 1, 2012
358

Restricted shares granted
1,146

Restricted shares vested
(39
)
Restricted shares forfeited
(13
)
Restricted shares outstanding at December 31, 2012
1,452


The fair value of each stock option issued is estimated on the date of grant using a binomial option pricing model.  The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior.  Expected volatilities utilized in the binomial model are based on a combination of implied market volatilities, historical volatility of the Company’s stock price and other factors.  Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.  The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data.  The expected life of the stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.

The fair value for stock options granted was estimated at the date of grant using the following assumptions:
 
Six Months Ended
 
December 31,
 
2012
 
2011
Risk-free interest rate
0.8
%
 
1.0
%
Dividend yield
2.7
%
 
3.0% - 3.1%

Weighted average volatility factor
24.4
%
 
24.9% - 25.7%

Weighted average expected life (in years)
5.3

 
5.2

Weighted average fair value (in dollars)
$
8.90

 
$
7.00



20



B.  Pension Plans

The components of net pension expense were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Service cost – benefits earned during the period
$
16.8

 
$
14.3

 
$
33.6

 
$
28.6

Interest cost on projected benefits
13.8

 
15.5

 
27.5

 
31.0

Expected return on plan assets
(27.4
)
 
(24.4
)
 
(54.8
)
 
(48.8
)
Net amortization and deferral
7.7

 
3.7

 
15.5

 
7.5

Net pension expense
$
10.9

 
$
9.1

 
$
21.8

 
$
18.3


During the six months ended December 31, 2012, the Company contributed $130.1 million to the pension plans and expects to contribute approximately $4.2 million during the remainder of the fiscal year ended June 30, 2013.

Note 13.  Income Taxes

The effective tax rate for the three months ended December 31, 2012 and 2011 was 33.4% and 35.3%, respectively.  The decrease in the effective tax rate is due to a reduction in foreign taxes and the availability of foreign tax credits during the three month period ended December 31, 2012.

The effective tax rate for the six months ended December 31, 2012 and 2011 was 34.2% and 34.8%, respectively.  The decrease in the effective tax rate is due to a reduction in foreign taxes and the availability of foreign tax credits during the six month period ended December 31, 2012, partially offset by the expiration of certain statutes of limitation during the six month period ended December 31, 2011.


Note 14.  Commitments and Contingencies

On July 18, 2011, athenahealth, Inc. filed a patent infringement lawsuit against ADP AdvancedMD, Inc. (“ADP AdvancedMD”), a subsidiary of the Company, seeking monetary damages, injunctive relief, and costs.  The allegations include a claim that ADP AdvancedMD's activities in providing medical practice management and billing and revenue management software and associated services to physicians and medical practice managers infringe a patent owned by athenahealth, Inc.  The parties are currently engaged in the discovery process.  The Company believes that it has meritorious defenses to this lawsuit and continues to vigorously defend itself against the allegations.

In June 2011, the Company received a Commissioner’s Charge from the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging that the Company has violated Title VII of the Civil Rights Act of 1964 by refusing to recruit, hire, transfer and promote certain persons on the basis of their race, in the State of Illinois from at least the period of January 1, 2007 to the present.  The Company continues to investigate the allegations set forth in the Commissioner’s Charge and is cooperating with the EEOC’s investigation.

The Company is subject to various claims and litigation 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. At this time the Company is unable to estimate any reasonably possible loss, or range of reasonably possible loss, with respect to the matters described above. This is primarily because these matters involve complex issues subject to inherent uncertainty. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company.

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.




21



Note 15.  Foreign Currency Risk Management Programs

The Company transacts business in various foreign jurisdictions and is therefore exposed to market risk from changes in foreign currency exchange rates that could impact its consolidated results of operations, financial position or cash flows.  The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.  The Company does not use derivative financial instruments for trading purposes.  The Company had no derivative financial instruments outstanding at December 31, 2012 or June 30, 2012.

Note 16. Interim Financial Data by Segment

Based upon similar economic characteristics and operational characteristics, the Company’s strategic business units have been aggregated into the following three reportable segments: Employer Services, PEO Services, and Dealer Services.  The primary components of the “Other” segment are the results of operations of ADP Indemnity (a wholly-owned captive insurance company that provides workers’ compensation and employer’s liability deductible reimbursement insurance protection for PEO Services worksite employees), non-recurring gains and losses, miscellaneous processing services, such as customer financing transactions, and certain expenses that have not been charged to the reportable segments, such as stock-based compensation 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.  The prior year reportable segments’ revenues and earnings from continuing operations before income taxes have been adjusted to reflect updated fiscal 2013 budgeted foreign exchange rates.  In addition, there is a reconciling item for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services and PEO Services at a standard rate of 4.5%.  The reportable segments’ results also include an internal cost of capital charge related to the funding of acquisitions and other investments.  All of these adjustments/charges are reconciling items to the Company’s reportable segments’ revenues and/or earnings from continuing operations before income taxes and result in the elimination of these adjustments/charges in consolidation.

Segment Results:
 
Revenues
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Employer Services
$
1,907.7

 
$
1,782.0

 
$
3,726.7

 
$
3,490.9

PEO Services
465.7

 
413.8

 
917.6

 
814.4

Dealer Services
449.8

 
406.9

 
889.6

 
809.5

Other
0.4

 
1.5

 
1.2

 
4.2

Reconciling items:
 

 
 

 
 

 
 

Foreign exchange
13.3

 
23.5

 
13.4

 
68.3

Client fund interest
(89.1
)
 
(57.0
)
 
(163.2
)
 
(105.7
)

$
2,747.8

 
$
2,570.7

 
$
5,385.3

 
$
5,081.6

  

22



 
Earnings from Continuing Operations before Income Taxes
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Employer Services
$
485.0

 
$
441.0

 
$
906.8

 
$
848.2

PEO Services
49.8

 
42.5

 
96.0

 
79.1

Dealer Services
86.2