10-Q 1 q2fy1510q.htm 10-Q Q2FY15 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, 2014

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 30, 2015 was 475,152,112.




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,
 
2014
 
2013
 
2014
 
2013
REVENUES:
 
 
 
 
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
$
1,948.1

 
$
1,876.7

 
$
3,840.1

 
$
3,647.6

Interest on funds held for clients
91.0

 
89.2

 
181.3

 
178.4

PEO revenues (A)
622.2

 
527.8

 
1,213.7

 
1,029.7

TOTAL REVENUES
2,661.3

 
2,493.7

 
5,235.1

 
4,855.7

 
 
 
 
 
 
 
 
EXPENSES:
 

 
 

 
 

 
 

Costs of revenues:
 

 
 

 
 

 
 

Operating expenses
1,386.0

 
1,289.8

 
2,749.2

 
2,549.3

Systems development and programming costs
148.8

 
138.5

 
295.6

 
271.0

Depreciation and amortization
52.2

 
50.3

 
104.1

 
99.1

TOTAL COSTS OF REVENUES
1,587.0

 
1,478.6

 
3,148.9

 
2,919.4

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
590.2

 
578.8

 
1,168.3

 
1,116.5

Interest expense
2.2

 
2.0

 
4.1

 
3.9

TOTAL EXPENSES
2,179.4

 
2,059.4

 
4,321.3

 
4,039.8

 
 
 
 
 
 
 
 
Other income, net
(19.2
)
 
(27.7
)
 
(39.8
)
 
(49.7
)
 
 
 
 
 
 
 
 
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
501.1

 
462.0

 
953.6

 
865.6

 
 
 
 
 
 
 
 
Provision for income taxes
167.1

 
147.8

 
321.6

 
286.5

NET EARNINGS FROM CONTINUING OPERATIONS
$
334.0

 
$
314.2

 
$
632.0

 
$
579.1

 
 
 
 
 
 
 
 
(LOSS)/EARNINGS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES
(2.5
)
 
99.1

 
63.1

 
192.8

Provision for income taxes

 
36.3

 
68.4

 
66.3

NET (LOSS)/EARNINGS FROM DISCONTINUED OPERATIONS
$
(2.5
)
 
$
62.8

 
$
(5.3
)
 
$
126.5

 
 
 
 
 
 
 
 
NET EARNINGS
$
331.5

 
$
377.0

 
$
626.7

 
$
705.6

 
 
 
 
 
 
 
 
Basic Earnings Per Share from Continuing Operations
$
0.70

 
$
0.66

 
$
1.32

 
$
1.21

Basic (Loss)/Earnings Per Share from Discontinued Operations
(0.01
)
 
0.13

 
(0.01
)
 
0.26

BASIC EARNINGS PER SHARE
$
0.70

 
$
0.79

 
$
1.31

 
$
1.47

 
 
 
 
 
 
 
 
Diluted Earnings Per Share from Continuing Operations
$
0.70

 
$
0.65

 
$
1.31

 
$
1.20

Diluted (Loss)/Earnings Per Share from Discontinued Operations
(0.01
)
 
0.13

 
(0.01
)
 
0.26

DILUTED EARNINGS PER SHARE
$
0.69

 
$
0.78

 
$
1.30

 
$
1.46

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
476.6

 
478.4

 
477.6

 
479.2

Diluted weighted average shares outstanding
480.3

 
482.8

 
481.0

 
483.6

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.490

 
$
0.480

 
$
0.970

 
$
0.915

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $7,217.4 million and $6,140.4 million for the three months ended December 31, 2014 and 2013, respectively, and $12,953.6 million and $11,087.6 million for the six months ended December 31, 2014 and 2013, 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
 
Six Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
331.5

 
$
377.0

 
$
626.7

 
$
705.6

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Currency translation adjustments
(56.8
)
 
(6.8
)
 
(165.7
)
 
36.5

 
 
 
 
 
 
 
 
Unrealized net gains/(losses) on available-for-sale securities
19.4

 
(74.5
)
 
(74.7
)
 
(59.8
)
Tax effect
(6.1
)
 
25.5

 
27.9

 
20.5

Reclassification of net gains on available-for-sale securities to net earnings
(0.9
)
 
(11.6
)
 
(1.7
)
 
(15.0
)
Tax effect
0.3

 
4.3

 
0.6

 
5.6

 
 
 
 
 
 
 
 
Reclassification of pension liability adjustment to net earnings
5.0

 
5.2

 
13.2

 
10.3

Tax effect
(1.5
)
 
(1.9
)
 
(4.3
)
 
(2.8
)
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax
(40.6
)
 
(59.8
)
 
(204.7
)
 
(4.7
)
Comprehensive income
$
290.9

 
$
317.2

 
$
422.0

 
$
700.9































See notes to the consolidated financial statements.

4


Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
 
December 31,
 
June 30,
 
 
2014
 
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents (A)
 
$
1,850.8

 
$
1,585.9

Short-term marketable securities (A)
 
101.9

 
2,032.2

Accounts receivable, net
 
1,595.6

 
1,503.7

Other current assets
 
860.7

 
690.7

Assets of discontinued operations
 

 
2,409.7

Total current assets before funds held for clients
 
4,409.0

 
8,222.2

Funds held for clients
 
34,707.0

 
19,258.0

Total current assets
 
39,116.0

 
27,480.2

Long-term marketable securities
 
46.3

 
54.1

Long-term receivables, net
 
32.0

 
155.4

Property, plant and equipment, net
 
650.3

 
667.7

Other assets
 
1,325.8

 
1,316.4

Goodwill
 
1,833.4

 
1,887.2

Intangible assets, net
 
499.3

 
498.8

Total assets
 
$
43,503.1

 
$
32,059.8

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
136.4

 
$
152.5

Accrued expenses and other current liabilities
 
1,163.9

 
1,187.6

Accrued payroll and payroll-related expenses
 
502.8

 
607.9

Dividends payable
 
232.0

 
226.9

Short-term deferred revenues
 
232.8

 
251.7

Obligation under commercial paper borrowing (A)
 

 
2,173.0

Income taxes payable
 
41.2

 
20.4

Liabilities of discontinued operations
 

 
581.2

Total current liabilities before client funds obligations
 
2,309.1

 
5,201.2

Client funds obligations
 
34,461.1

 
18,963.4

Total current liabilities
 
36,770.2

 
24,164.6

Long-term debt
 
10.3

 
11.5

Other liabilities
 
629.6

 
619.6

Deferred income taxes
 
238.1

 
218.0

Long-term deferred revenues
 
362.7

 
375.9

Total liabilities
 
38,010.9

 
25,389.6

 
 
 
 
 
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, 2014 and
      June 30, 2014; outstanding, 477.1 and 480.2 shares at December 31, 2014 and June 30, 2014, respectively
 
63.9

 
63.9

Capital in excess of par value
 
584.1

 
545.2

Retained earnings
 
13,090.2

 
13,632.9

Treasury stock - at cost: 161.6 and 158.5 shares at December 31, 2014 and June 30, 2014, respectively
 
(8,131.3
)
 
(7,750.0
)
Accumulated other comprehensive (loss)/income
 
(114.7
)
 
178.2

Total stockholders’ equity
 
5,492.2

 
6,670.2

Total liabilities and stockholders’ equity
 
$
43,503.1

 
$
32,059.8


(A) As of June 30, 2014, $2,015.8 million of short-term marketable securities and $183.8 million of cash and cash equivalents are related to the Company's outstanding commercial paper borrowings (see Note 9).





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,
 
 
2014
 
2013
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
626.7

 
$
705.6

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

 
 

Depreciation and amortization
 
138.0

 
131.0

Deferred income taxes
 
(8.4
)
 
(6.3
)
Stock-based compensation expense
 
75.1

 
56.6

Excess tax benefit related to exercise of stock options and restricted stock
 
(48.4
)
 
(44.9
)
Net pension expense
 
9.8

 
12.4

Net realized gain from the sales of marketable securities
 
(1.7
)
 
(15.0
)
Net amortization of premiums and accretion of discounts on available-for-sale securities
 
50.3

 
46.2

Other
 
(6.7
)
 
11.6

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

 
 

Increase in accounts receivable
 
(185.2
)
 
(106.1
)
Increase in other assets
 
(205.0
)
 
(306.7
)
Decrease in accounts payable
 
(9.7
)
 
(13.0
)
(Decrease)/Increase in accrued expenses and other liabilities
 
(50.7
)
 
4.9

Proceeds from the sale of notes receivable
 
225.5

 

Operating activities of discontinued operations
 
(2.5
)
 
(3.3
)
Net cash flows provided by operating activities
 
607.1

 
473.0

 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Purchases of corporate and client funds marketable securities
 
(1,851.1
)
 
(1,231.9
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
 
1,372.4

 
1,046.1

Net increase in restricted cash and cash equivalents held to satisfy client funds obligations
 
(13,380.9
)
 
(5,842.1
)
Capital expenditures
 
(80.8
)
 
(68.8
)
Additions to intangibles
 
(84.5
)
 
(71.4
)
Acquisitions of businesses, net of cash acquired
 
(8.1
)
 

Proceeds from the sale of property, plant, and equipment and other assets
 
23.6

 

Dividend received from CDK Global, Inc.
 
825.0

 

Cash retained by CDK Global, Inc.
 
(180.0
)
 

Investing activities of discontinued operations
 
(15.4
)
 
(55.7
)
Net cash flows used in investing activities
 
(13,379.8
)
 
(6,223.8
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Net increase in client funds obligations
 
15,721.5

 
6,245.5

Payments of debt
 
(1.2
)
 
(2.1
)
Repurchases of common stock
 
(462.2
)
 
(417.2
)
Proceeds from stock purchase plan and exercises of stock options
 
28.8

 
102.6

Excess tax benefit related to exercise of stock options and restricted stock
 
48.4

 
44.9

Dividends paid
 
(461.3
)
 
(420.8
)
Net repayments of reverse repurchase agreements
 

 
(245.9
)
Net repayments of commercial paper borrowings
 
(2,173.0
)
 

Other
 

 
(1.0
)
Financing activities of discontinued operations
 
1.6

 
11.1

Net cash flows provided by financing activities
 
12,702.6

 
5,317.1

 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(62.7
)
 
1.7

 
 
 
 
 
Net change in cash and cash equivalents
 
(132.8
)
 
(432.0
)
 
 
 
 
 
Cash and cash equivalents, beginning of period
 
1,983.6

 
1,699.1

Cash and cash equivalents, end of period
 
1,850.8

 
1,267.1

Less cash and cash equivalents of discontinued operations, end of period
 

 
315.6

Cash and cash equivalents of continuing operations, end of period
 
$
1,850.8

 
$
951.5

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 presentation 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. The Consolidated Financial Statements and all relevant footnotes have been adjusted for discontinued operations (see Note 3).

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, 2014 (“fiscal 2014”).

Note 2.  New Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. 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 will also result in enhanced revenue related disclosures. ASU 2014-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. The Company has not yet determined the impact of ASU 2014-09 on its consolidated results of operations, financial condition, or cash flows.

In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014. The impact of ASU 2014-08 is dependent upon the nature of dispositions, if any, after adoption.

In July 2014, the Company adopted ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax position. The adoption of ASU 2013-11 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.


7



Note 3. Divestitures

On September 30, 2014, the Company completed the tax free spin-off of its former Dealer Services business, which was a separate reportable segment, into an independent publicly traded company called CDK Global, Inc. ("CDK"). As a result of the spin-off, ADP stockholders of record on September 24, 2014 (the "record date") received one share of CDK common stock on September 30, 2014, par value $0.01 per share, for every three shares of ADP common stock held by them on the record date and cash for any fractional shares of CDK common stock. ADP distributed approximately 160.6 million shares of CDK common stock in the distribution. The spin-off was made without the payment of any consideration or the exchange of any shares by ADP stockholders.

The Company recorded a decrease to retained earnings of $1.5 billion for the reduction in net assets of CDK related to the spin-off, offset by an increase to retained earnings of $825.0 million related to the cash dividend received from CDK as part of the spin-off. The spin-off, transitional, and on-going relationships between ADP and CDK are governed by the Separation and Distribution Agreement entered into between ADP and CDK and certain other ancillary agreements.

Incremental costs associated with the spin-off of $2.5 million for the three months ended December 31, 2014 and $45.3 million for the six months ended December 31, 2014 are included in discontinued operations on the Statements of Consolidated Earnings and are principally related to professional fees.

On February 28, 2014, the Company completed the sale of its Occupational Health and Safety services business ("OHS") for a pre-tax gain of $15.6 million, less costs to sell, and recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings in the three months ended March 31, 2014. OHS was previously reported in the Employer Services segment.

In conjunction with the spin-off of CDK and the sale of OHS, the Company has classified the operating results of these businesses as discontinued operations for all periods presented. The operating results for these businesses were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Revenues
$

 
$
489.1

 
$
508.9

 
$
966.7

 
 
 
 
 
 
 
 
(Losses)/earnings from discontinued operations before income taxes
(2.5
)
 
99.1

 
63.1

 
192.8

Provision for income taxes

 
36.3

 
68.4

 
66.3

Net (loss)/earnings from discontinued operations
$
(2.5
)
 
$
62.8

 
$
(5.3
)
 
$
126.5



8



The following is a summary of the assets and liabilities related to discontinued operations as of June 30, 2014:
 
June 30, 2014
Assets:
 
Cash
$
397.7

Accounts receivable, net
296.7

Property, plant and equipment, net
109.7

Goodwill
1,226.6

Intangible assets, net
133.5

Other assets
245.5

 
 
Total assets
$
2,409.7

 
 
Liabilities:
 
Accounts payable
$
17.2

Accrued expenses and other current liabilities
128.1

Accrued payroll and payroll related expenses
99.2

Deferred revenues
218.2

Deferred income taxes
70.8

Other liabilities
47.7

 
 
Total liabilities
$
581.2


Note 4.  Earnings per Share (“EPS”)

 
 
Basic
 
Effect of Employee Stock Option Shares
 
Effect of
Employee
Restricted
Stock
Shares
 
Diluted
Three Months Ended December 31, 2014
 
 

 
 

 
 

 
 

Net earnings from continuing operations
 
$
334.0

 
 

 
 

 
$
334.0

Weighted average shares (in millions)
 
476.6

 
2.1

 
1.6

 
480.3

EPS from continuing operations
 
$
0.70

 
 

 
 

 
$
0.70

Three Months Ended December 31, 2013
 
 

 
 

 
 

 
 

Net earnings from continuing operations
 
$
314.2

 
 

 
 

 
$
314.2

Weighted average shares (in millions)
 
478.4

 
2.9

 
1.5

 
482.8

EPS from continuing operations
 
$
0.66

 
 

 
 

 
$
0.65

 
 
 
 
 
 
 
 
 
Six Months Ended December 31, 2014
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
632.0

 
 

 
 

 
$
632.0

Weighted average shares (in millions)
 
477.6

 
2.1

 
1.4

 
481.0

EPS from continuing operations
 
$
1.32

 
 

 
 

 
$
1.31

Six Months Ended December 31, 2013
 
 

 
 

 
 

 
 

Net earnings from continuing operations
 
$
579.1

 
 

 
 

 
$
579.1

Weighted average shares (in millions)
 
479.2

 
3.0

 
1.4

 
483.6

EPS from continuing operations
 
$
1.21

 
 

 
 

 
$
1.20



9


Options to purchase 0.1 million shares of common stock for the three months ended December 31, 2013 and 0.1 million shares of common stock for the six months ended December 31, 2013 were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Note 5. Other Income, Net

 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Interest income on corporate funds
$
(18.3
)
 
$
(16.1
)
 
$
(36.7
)
 
$
(34.6
)
Realized gains on available-for-sale securities
(1.7
)
 
(13.2
)
 
(2.7
)
 
(17.5
)
Realized losses on available-for-sale securities
0.8

 
1.6

 
1.0

 
2.5

Gain on the sale of notes receivable

 

 
(1.4
)
 

Other, net

 

 

 
(0.1
)
Other income, net
$
(19.2
)
 
$
(27.7
)
 
$
(39.8
)
 
$
(49.7
)

During the six months ended December 31, 2014, the Company sold notes receivable related to Dealer Services financing arrangements for a gain of $1.4 million. Refer to Note 7 for further information.
 
Note 6. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at December 31, 2014 and June 30, 2014 were as follows:

 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Value (A)
Type of issue:
 
 
 
 
 
 
 
Money market securities, cash and other cash equivalents
$
16,377.8

 
$

 
$

 
$
16,377.8

Available-for-sale securities:
 

 
 

 
 

 
 

Corporate bonds
8,842.0

 
132.7

 
(16.5
)
 
8,958.2

U.S. Treasury and direct obligations of
U.S. government agencies
5,940.2

 
73.8

 
(9.5
)
 
6,004.5

Asset-backed securities
2,190.8

 
6.3

 
(8.8
)
 
2,188.3

Canadian government obligations and
Canadian government agency obligations
968.8

 
9.2

 

 
978.0

Canadian provincial bonds
720.8

 
25.7

 
(1.2
)
 
745.3

Municipal bonds
549.2

 
17.2

 
(0.4
)
 
566.0

Other securities
868.4

 
19.9

 
(0.4
)
 
887.9

 
 
 
 
 
 
 
 
Total available-for-sale securities
20,080.2

 
284.8

 
(36.8
)
 
20,328.2

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
36,458.0

 
$
284.8

 
$
(36.8
)
 
$
36,706.0

 
(A) Included within available-for-sale securities are corporate investments with fair values of $148.2 million and funds held for clients with fair values of $20,180.0 million. All available-for-sale securities were included in Level 2.

10



 
June 30, 2014
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value (B)
Type of issue:
 

 
 

 
 

 
 

Money market securities, cash and other cash equivalents
$
2,773.7

 
$

 
$

 
$
2,773.7

Available-for-sale securities:
 

 
 

 
 

 
 

Corporate bonds
8,720.1

 
171.1

 
(15.0
)
 
8,876.2

U.S. Treasury and direct obligations of
U.S. government agencies
6,051.4

 
107.3

 
(11.7
)
 
6,147.0

Asset-backed securities
1,822.6

 
6.1

 
(6.9
)
 
1,821.8

Canadian government obligations and
Canadian government agency obligations
1,031.4

 
7.6

 
(0.8
)
 
1,038.2

Canadian provincial bonds
747.7

 
25.3

 
(2.5
)
 
770.5

Municipal bonds
543.3

 
19.4

 
(0.5
)
 
562.2

Other securities
915.6

 
25.7

 
(0.7
)
 
940.6

 
 
 
 
 
 
 
 
Total available-for-sale securities
19,832.1

 
362.5

 
(38.1
)
 
20,156.5

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
22,605.8

 
$
362.5

 
$
(38.1
)
 
$
22,930.2


(B) Included within available-for-sale securities are corporate investments with fair values of $2,086.3 million and funds held for clients with fair values of $18,070.2 million. All available-for-sale securities were included in Level 2.

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 2014. The Company did not transfer any assets between Level 1 and Level 2 during the six months ended December 31, 2014 or the year ended June 30, 2014. In addition, the Company did not adjust the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 1 or Level 3 as of December 31, 2014.

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, 2014, are as follows: 
 
December 31, 2014
 
Securities in unrealized loss position less than 12 months
 
Securities in unrealized loss position greater than 12 months
 
Total
 
Unrealized
losses
 
Fair market
value
 
Unrealized
losses
 
Fair market
value
 
Gross
unrealized
losses
 
Fair
market value
Corporate bonds
$
(4.8
)
 
$
1,165.0

 
$
(11.7
)
 
$
836.1

 
$
(16.5
)
 
$
2,001.1

U.S. Treasury and direct obligations of
U.S. government agencies
(1.3
)
 
492.5

 
(8.2
)
 
646.5

 
(9.5
)
 
1,139.0

Asset-backed securities
(2.1
)
 
733.8

 
(6.7
)
 
526.9

 
(8.8
)
 
1,260.7

Canadian government obligations and
Canadian government agency obligations

 
43.3

 

 

 

 
43.3

Canadian provincial bonds
(0.4
)
 
94.6

 
(0.8
)
 
71.5

 
(1.2
)
 
166.1

Municipal bonds
(0.3
)
 
88.7

 
(0.1
)
 
9.0

 
(0.4
)
 
97.7

Other securities

 
5.6

 
(0.4
)
 
30.8

 
(0.4
)
 
36.4

 
$
(8.9
)
 
$
2,623.5

 
$
(27.9
)
 
$
2,120.8

 
$
(36.8
)
 
$
4,744.3



11



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, 2014, are as follows: 
 
June 30, 2014
 
Securities in unrealized loss position less than 12 months
 
Securities in unrealized loss position greater than 12 months
 
Total
 
Unrealized
losses
 
Fair market
value
 
Unrealized
losses
 
Fair market
value
 
Gross
unrealized
losses
 
Fair
market value
Corporate bonds
$
(0.9
)
 
$
313.8

 
$
(14.1
)
 
$
1,026.0

 
$
(15.0
)
 
$
1,339.8

U.S. Treasury and direct obligations of U.S. government agencies
(0.3
)
 
84.6

 
(11.4
)
 
944.8

 
(11.7
)
 
1,029.4

Asset-backed securities
(0.7
)
 
325.4

 
(6.2
)
 
555.5

 
(6.9
)
 
880.9

Canadian government obligations and
Canadian government agency obligations
(0.8
)
 
127.2

 

 

 
(0.8
)
 
127.2

Canadian provincial bonds
(0.9
)
 
75.2

 
(1.6
)
 
118.6

 
(2.5
)
 
193.8

Municipal bonds
(0.1
)
 
42.0

 
(0.4
)
 
22.6

 
(0.5
)
 
64.6

Other securities

 
13.9

 
(0.7
)
 
45.7

 
(0.7
)
 
59.6

 
$
(3.7
)
 
$
982.1

 
$
(34.4
)
 
$
2,713.2

 
$
(38.1
)
 
$
3,695.3


At December 31, 2014, 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 January 2015 to June 2023.

At December 31, 2014, U.S. Treasury and direct obligations of U.S. government agencies primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $4,530.1 million and $1,022.0 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 have maturities ranging from January 2015 through August 2024.

At December 31, 2014, asset-backed securities include AAA rated senior tranches of securities with predominantly prime collateral of fixed rate credit card, auto loan, and rate reduction receivables with fair values of $1,548.2 million, $364.4 million, and $205.3 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, 2014.

At December 31, 2014, other securities and their fair value primarily represent: AAA and AA rated supranational bonds of $383.0 million, AAA and AA rated sovereign bonds of $319.9 million, and AA rated mortgage-backed securities of $100.8 million that are guaranteed primarily by Federal National Mortgage Association ("Fannie Mae"). 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 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,
 
 
2014
 
2014
Corporate investments:
 
 
 
 
Cash and cash equivalents
 
$
1,850.8

 
$
1,585.9

Short-term marketable securities
 
101.9

 
2,032.2

Long-term marketable securities
 
46.3

 
54.1

Total corporate investments
 
$
1,999.0

 
$
3,672.2

 

12



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,
 
 
2014
 
2014
Funds held for clients:
 
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
 
$
14,527.0

 
$
1,187.8

Restricted short-term marketable securities held to satisfy client funds obligations
 
4,595.7

 
1,312.5

Restricted long-term marketable securities held to satisfy client funds obligations
 
15,584.3

 
16,757.7

Total funds held for clients
 
$
34,707.0

 
$
19,258.0


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 $34,461.1 million and $18,963.4 million as of December 31, 2014 and June 30, 2014, 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 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 activities section of the Statements of Consolidated Cash Flows.

Approximately 82% of the available-for-sale securities held a AAA or AA rating at December 31, 2014, 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, 2014.
 
Expected maturities of available-for-sale securities at December 31, 2014 are as follows:
One year or less
$
4,697.5

One year to two years
3,754.4

Two years to three years
3,092.0

Three years to four years
2,098.3

After four years
6,686.0

 
 

Total available-for-sale securities
$
20,328.2



13



Note 7. 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. 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, and internal assessments of credit quality, 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.
  
The Company’s trade and accounts receivables, whose carrying value approximates fair value, are as follows:
 
December 31, 2014
 
June 30, 2014
 
Current
 
Long-term
 
Current
 
Long-term
Trade receivables
$
1,613.7

 
$

 
$
1,457.7

 
$

Notes receivable
18.5

 
33.5

 
94.8

 
169.9

Less:
 

 
 

 
 

 
 

Allowance for doubtful accounts - trade receivables
(35.5
)
 

 
(38.1
)
 

Allowance for doubtful accounts - notes receivable
(0.4
)
 
(0.6
)
 
(4.7
)
 
(8.3
)
Unearned income - notes receivable
(0.7
)
 
(0.9
)
 
(6.0
)
 
(6.2
)
 
$
1,595.6

 
$
32.0

 
$
1,503.7

 
$
155.4


During the six months ended December 31, 2014, the Company sold notes receivable related to Dealer Services financing arrangements for $225.5 million. Although the sale of the notes receivable transfers the majority of the risk to the purchaser, the Company does retain a minimal level of credit risk on the sold receivables. The cash received in exchange for the notes receivable sold was recorded within the operating activities on the Statements of Consolidated Cash Flows and the gain on sale realized was recorded within Other income, net on the Statements of Consolidated Earnings (see Note 5).

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. As of December 31, 2014 and June 30, 2014, there were no notes receivable that were specifically reserved; the entire notes receivable reserve balance was comprised of non-specific reserves.

The rollforward of the allowance for doubtful accounts related to notes receivable is as follows:
 
Current
 
Long-term
Balance at June 30, 2014
$
4.7

 
$
8.3

Net provision
0.3

 
0.6

Chargeoffs
(0.2
)
 
(0.3
)
   Recoveries and other (A)
(4.4
)
 
(8.0
)
Balance at December 31, 2014
$
0.4

 
$
0.6


(A) As a result of the sale of the notes receivable related to Dealer Services financing arrangements, the Company released $10.7 million of non-specific reserves that were accrued on the sold notes receivable, which was recorded in selling, general, and administrative expenses on the Statements of Consolidated Earnings.

The allowance for doubtful accounts as a percentage of notes receivable was approximately 2% as of December 31, 2014 and 5% as of June 30, 2014.

On an ongoing basis, the Company evaluates the credit quality of its financing receivables, utilizing aging of receivables, collection experience, and charge-offs. As events related to a specific client dictate, the credit quality of a client is reevaluated. Approximately 100% of notes receivable were current at December 31, 2014 and June 30, 2014.


14



Note 8. Goodwill and Intangibles Assets, net

Changes in goodwill for the six months ended December 31, 2014 are as follows:
 
Employer
Services
 
PEO
Services
 
Total
Balance at June 30, 2014 (A)
$
1,882.4

 
$
4.8

 
$
1,887.2

Additions and other adjustments, net
6.8

 

 
6.8

Currency translation adjustments
(60.6
)
 

 
(60.6
)
Balance at December 31, 2014 (A)
$
1,828.6

 
$
4.8

 
$
1,833.4


(A) The goodwill balance at June 30, 2014 and December 31, 2014 is net of accumulated impairment losses of $42.7 million related to the Employer Services segment.

Components of intangible assets, net, are as follows:
 
 
December 31,
 
June 30,
 
 
2014
 
2014
Intangible assets:
 
 
 
 
Software and software licenses
 
$
1,582.3

 
$
1,523.2

Customer contracts and lists
 
638.3

 
648.7

Other intangibles
 
209.0

 
208.3

 
 
2,429.6

 
2,380.2

Less accumulated amortization:
 
 

 
 

Software and software licenses
 
(1,267.6
)
 
(1,231.2
)
Customer contracts and lists
 
(473.8
)
 
(467.1
)
Other intangibles
 
(188.9
)
 
(183.1
)
 
 
(1,930.3
)
 
(1,881.4
)
Intangible assets, net
 
$
499.3

 
$
498.8


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 6 years (4 years for software and software licenses, 10 years for customer contracts and lists, and 3 years for other intangibles).  Amortization of intangible assets was $38.2 million and $34.4 million for the three months ended December 31, 2014 and 2013, respectively, and $75.8 million and $70.1 million for the six months ended December 31, 2014 and 2013, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:
 
Amount
Six months ending June 30, 2015
$
71.4

Twelve months ending June 30, 2016
$
129.3

Twelve months ending June 30, 2017
$
100.4

Twelve months ending June 30, 2018
$
52.8

Twelve months ending June 30, 2019
$
39.1

Twelve months ending June 30, 2020
$
30.5



15



Note 9. Short-term Financing

The Company has a $2.25 billion, 364-day credit agreement with a group of lenders that matures in June 2015.  In addition, the Company has a five-year $2.0 billion credit facility and a five-year $3.25 billion credit facility maturing in June 2018 and June 2019, respectively, each with 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 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 December 31, 2014 under the credit agreements.

The Company’s U.S. short-term funding requirements related to client funds are sometimes obtained through a commercial paper program, which provides for the issuance of up to $7.5 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 & 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, 2014, the Company had no commercial paper outstanding. At June 30, 2014, the Company had $2,173.0 million of commercial paper outstanding, which was repaid on July 1, 2014. For the three months ended December 31, 2014 and 2013, the Company's average borrowings were $3.0 billion and $3.3 billion, respectively, at weighted average interest rates of 0.1%. For the six months ended December 31, 2014 and 2013, the Company's average borrowings were $3.1 billion and $3.2 billion, respectively, at weighted average interest rates of 0.1%. The weighted average maturity of the Company’s commercial paper issued during the three and six months ended December 31, 2014 approximated two days.

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, 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 December 31, 2014 and June 30, 2014, the Company had no obligations outstanding related to reverse repurchase agreements. For the three months ended December 31, 2014 and 2013, the Company had average outstanding balances under reverse repurchase agreements of $598.6 million and $402.0 million, respectively, at weighted average interest rates of 0.5% and 0.6%, respectively. For the six months ended December 31, 2014 and 2013, the Company had average outstanding balances under reverse repurchase agreements of $584.7 million and $465.7 million, respectively, at weighted average interest rates of 0.5%. In addition, the Company has $3.25 billion available on a committed basis under the U.S. reverse repurchase agreements.

Note 10. Employee Benefit Plans

A.  Stock-based Compensation Plans
    
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 and have a term of 10 years.  Options granted prior to July 1, 2008 generally vest ratably over five years and options granted after July 1, 2008 generally vest ratably over four years.  Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.

Restricted Stock
Time-Based Restricted Stock and Time-Based Restricted Stock Units Time-based restricted stock and time-based restricted stock units granted prior to the year ended June 30, 2013 ("fiscal 2013") are subject to vesting periods of up to five years and awards granted in fiscal 2013 and later are subject to a vesting period of two years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to receive dividends on shares awarded under the time-based restricted stock program.


16



Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date; and is subsequently remeasured at each reporting date during the vesting period. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.
 
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 26 months. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 150% of the "target awards." Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.

Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.
Performance-based restricted stock units are settled in either cash or stock, depending on the employee's home country, and cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in ADP stock price. Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards settled in stock under the performance-based restricted stock unit program.

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.

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 5.2 million shares in the three months ended December 31, 2014 as compared to 1.4 million shares repurchased in the three months ended December 31, 2013 and the Company repurchased 5.7 million shares in the six months ended December 31, 2014 as compared to 5.6 million shares repurchased in the six months ended December 31, 2013. 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.


17



The following table represents stock-based compensation expense and related income tax benefits for the three and six months ended December 31, 2014 and 2013, respectively:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Operating expenses
$
7.5

 
$
6.3

 
$
15.1

 
$
10.2

Selling, general and administrative expenses
23.3

 
22.1

 
48.9

 
38.8

System development and programming costs
5.5

 
4.9

 
11.1

 
7.6

Total pretax stock-based compensation expense
$
36.3

 
$
33.3

 
$
75.1

 
$
56.6

 
 
 
 
 
 
 
 
Income tax benefit
$
12.8

 
$
11.9

 
$
26.7

 
$
20.3


Stock-based compensation expense attributable to CDK employees are included in discontinued operations and therefore not presented in the table above. For the three months ended December 31, 2013, such stock-based compensation expense was $5.9 million. For the six months ended December 31, 2014 and 2013, such stock-based compensation expense was $5.1 million and $9.8 million, respectively.

As a result of the spin-off of CDK, the number of vested and unvested ADP stock options, their strike price, and the number of unvested performance-based and time-based restricted shares and units were adjusted to preserve the intrinsic value of the awards immediately prior to the spin-off using an adjustment ratio based on the market close price of ADP stock prior to the spin-off and the market open price of ADP stock subsequent to the spin-off. Since these adjustments were considered to be a modification of the awards in accordance to ASC 718, the Company compared the fair value of the awards immediately prior to the spin-off to the fair value immediately after the spin-off to measure potential incremental stock-based compensation expense, if any. The adjustments did not result in an increase in the fair value of the awards and, accordingly, the Company did not record incremental stock-based compensation expense. Unvested ADP stock options, unvested restricted stock, and unvested restricted stock units held by CDK employees were replaced by CDK awards immediately following the spin-off. The stock-based compensation expense associated with the original grant of ADP awards to remaining ADP employees will continue to be recognized within earnings from continuing operations in the Company's Statement of Consolidated Earnings.

As of December 31, 2014, the total remaining unrecognized compensation expense related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $8.3 million, $23.9 million, and $131.0 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 1.7 years, 1.4 years, and 1.6 years, respectively.

During the six months ended December 31, 2014, the following activity occurred under the Company’s existing plans, including the impacts related to the spin-off of CDK, described above.

Stock Options:
 
 

Number
of Options
(in thousands)
 

Weighted
Average Price
(in dollars)
Options outstanding at July 1, 2014
 
7,931

 
$
52

Options granted
 
13

 
$
83

Options exercised
 
(1,258
)
 
$
40

Options canceled
 
(119
)
 
$
57

Options increased for spin-off adjustment ratio
 
849

 
$
47

CDK employee options replaced at spin-off with CDK awards
 
(823
)
 
$
54

Options outstanding at December 31, 2014
 
6,593

 
$
47



18




Time-Based Restricted Stock and Time-Based Restricted Stock Units:
 
 

Number of Shares
(in thousands)
 

Number of Units
(in thousands)
Restricted shares/units outstanding at July 1, 2014
 
2,341

 
571

Restricted shares/units granted
 
903

 
215

Restricted shares/units vested
 
(1,068
)
 
(250
)
Restricted shares/units forfeited
 
(87
)
 
(32
)
Share/unit increase for spin-off adjustment ratio
 
267

 
64

CDK employee restricted shares/units replaced at spin-off with CDK awards
 
(189
)
 
(43
)
Restricted shares/units outstanding at December 31, 2014
 
2,167

 
525


Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:
 
 

Number of Shares
(in thousands)
 
Number of Units
(in thousands)
Restricted shares/units outstanding at July 1, 2014
 
803

 
318

Restricted shares/units granted
 
339

 
217

Restricted shares/units vested
 
(223
)
 
(13
)
Restricted shares/units forfeited
 
(44
)
 
(10
)
Share/unit increase for spin-off adjustment ratio
 
118

 
67

CDK employee restricted shares/units replaced at spin-off with CDK awards
 
(45
)
 
(35
)
Restricted shares/units outstanding at December 31, 2014
 
948

 
544


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,
 
2014
 
2013
Risk-free interest rate
1.9
%
 
1.5
%
Dividend yield
2.3
%
 
2.4
%
Weighted average volatility factor
22.8
%
 
23.6
%
Weighted average expected life (in years)
5.4

 
5.4

Weighted average fair value (in dollars) (A)
$
12.45

 
$
10.94


(A) The weighted average fair values were adjusted to reflect the impact of the spin-off of CDK.


19



B.  Pension Plans

The components of net pension expense were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
Service cost – benefits earned during the period
$
16.5

 
$
16.6

 
$
35.7

 
$
33.2

Interest cost on projected benefits
15.7

 
15.7

 
31.5

 
31.3

Expected return on plan assets
(32.5
)
 
(29.9
)
 
(65.0
)
 
(59.7
)
Net amortization and deferral
4.3

 
5.0

 
8.7

 
10.0

Curtailments and special termination benefits

 

 
3.2

 

Net pension expense
$
4.0

 
$
7.4

 
$
14.1

 
$
14.8


Net pension expense for the three months ended December 31, 2013 includes $1.2 million reported within earnings from discontinued operations on the Statement of Consolidated Earnings and net pension expense for the six months ended December 31, 2014 and 2013 includes $4.3 million and $2.4 million, respectively, reported within earnings from discontinued operations on the Statements of Consolidated Earnings. Included within pension expense related to discontinued operations for the six months ended December 31, 2014 were total one-time charges of $3.2 million for curtailment charges and special termination benefits directly attributable to the spin-off of CDK.

Note 11. Income Taxes

The effective tax rate for the three months ended December 31, 2014 and 2013 was 33.3% and 32.0%, respectively. The increase in the effective tax rate is due to the resolution of certain tax matters during the three months ended December 31, 2013, partially offset by income tax benefits in the three months ended December 31, 2014 related to the usage of foreign tax credits in a planned repatriation of foreign earnings and a change in tax law.

The effective tax rate for the six months ended December 31, 2014 and 2013 was 33.7% and 33.1%, respectively. The increase in the effective tax rate is due to the resolution of certain tax matters during the six months ended December 31, 2013, partially offset by income tax benefits in the six months ended December 31, 2014 related to the usage of foreign tax credits in a planned repatriation of foreign earnings, a change in tax law, and adjustments to the tax liability.

Note 12. Commitments and Contingencies

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.

On July 18, 2011, athenahealth, Inc. filed a complaint against ADP AdvancedMD, Inc. (“ADP AdvancedMD”), a subsidiary of the Company. The complaint alleged 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 infringed two patents owned by athenahealth, Inc. The complaint sought monetary damages, injunctive relief, and costs. In November 2014, the parties entered into a settlement agreement to end this litigation and dismiss all claims and counterclaims.  The terms of the settlement did not have a material adverse impact on the Company's results of operations, financial condition or cash flows.

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. Although the Company currently believes that resolving its outstanding claims, individually or in aggregate, will not have a material adverse impact on the consolidated financial statements, these matters involve complex issues subject to inherent uncertainty and there can be no assurance that these matters will be resolved in a manner 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

20



Company’s services and products.  The Company does not expect any material losses related to such representations and warranties.

As a result of the CDK spin-off, the Company's obligations decreased from those disclosed in the Annual Report on Form 10-K for fiscal 2014 as certain of these obligations were assumed by CDK. The minimum commitments related to CDK on June 30, 2014 for various facilities and equipment leases and software license agreements were as follows:

Years ending June 30,
2015
$
32.0

2016
22.1

2017
12.7

2018
5.2

2019
3.8

Thereafter
5.6

 
$
81.4


CDK also had obligations related to purchase and maintenance agreements on software, equipment, and other assets of which $2.9 million, $4.1 million, and $2.4 million relates to fiscal years ending June 30, 2015, 2016, and 2017, respectively, which were assumed by CDK as part of the spin-off.

The Company has obligations related to purchase and maintenance agreements on the software, equipment, and other assets that were disclosed in its Annual Report on Form 10-K for fiscal 2014. In December 2014, the Company extended the term of a contract, which resulted in incremental obligations of $43.1 million and $87.3 million for the fiscal years ending June 30, 2019 and June 30, 2020, respectively.

Note 13. 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, 2014 or June 30, 2014.


21


Note 14. Reclassifications out of Accumulated Other Comprehensive Income ("AOCI")

Changes in AOCI by component are as follows:

 
Three Months Ended
 
December 31, 2014
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Income
Balance at September 30, 2014
$
(97.6
)
 
$
151.0

 
$
(127.5
)
 
$
(74.1
)
Other comprehensive (loss)/income
before reclassification adjustments
(56.8
)
 
19.4

 

 
(37.4
)
Tax effect

 
(6.1
)
 

 
(6.1
)
Reclassification adjustments to
    net earnings

 
(0.9
)
(A)
5.0

(B)
4.1

Tax effect

 
0.3

 
(1.5
)
 
(1.2
)
Balance at December 31, 2014
$
(154.4
)
 
$
163.7

 
$
(124.0
)
 
$
(114.7
)
 
Three Months Ended
 
December 31, 2013
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Income
Balance at September 30, 2013
$
82.9

 
$
194.3

 
$
(206.7
)
 
$
70.5

Other comprehensive loss
before reclassification adjustments
(6.8
)
 
(74.5
)
 

 
(81.3
)
Tax effect

 
25.5

 

 
25.5

Reclassification adjustments to
    net earnings

 
(11.6
)
(A)
5.2

(B)
(6.4
)
Tax effect

 
4.3

 
(1.9
)
 
2.4

Balance at December 31, 2013
$
76.1

 
$
138.0

 
$
(203.4
)
 
$
10.7




22


 
Six Months Ended
 
December 31, 2014
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Income
Balance at June 30, 2014
$
99.5

 
$
211.6

 
$
(132.9
)
 
$
178.2

Other comprehensive loss
before reclassification adjustments
(165.7
)
 
(74.7
)
 

 
(240.4
)
Tax effect

 
27.9

 

 
27.9

Reclassification adjustments to
net earnings

 
(1.7
)
(A)
13.2

(B)
11.5

Tax effect

 
0.6

 
(4.3
)
 
(3.7
)
Reclassification adjustments to
    retained earnings
(88.2
)
(C)

 

 
(88.2
)
Balance at December 31, 2014
$
(154.4
)
 
$
163.7

 
$
(124.0
)
 
$
(114.7
)

 
Six Months Ended
 
December 31, 2013
 
Currency Translation Adjustment