10-K 1 q4fy1510k.htm 10-K Q4FY15 10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2015
 
 
OR
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
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
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
Common Stock, $0.10 Par Value
(voting)

NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [x] No [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [x]
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 the filing requirements for the past 90 days. Yes [x] No [ ]
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 [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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 [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $39,778,918,109. On July 31, 2015 there were 465,810,128 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2015 Annual Meeting of Stockholders.
Part III



Table of Contents

 
 
 
 
 
Page
Part I
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
 
 
 
Part II
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
Part III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
 
 
 
Part IV.
 
 
Item 15.
Exhibits, Financial Statement Schedules
Signatures
 
 
 
 
 
 
 

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Part I
Item 1. Business
CORPORATE BACKGROUND
General

ADP® was founded in 1949 on an innovative idea to help business owners focus on core business activities by relieving them of certain administrative tasks such as payroll. Automatic Data Processing, Inc. was incorporated in the State of Delaware in June 1961 and completed its initial public offering in September 1961. A pioneer in business process outsourcing, today we are one of the world’s leading providers of human capital management solutions to employers, offering solutions to businesses of all sizes, whether they have simple or complex needs. We serve more than 630,000 clients in more than 100 countries. Our common stock is listed on the NASDAQ Global Select Market® under the symbol “ADP”.
When we refer to “we,” “us,” “our,” “ADP,” or the “Company” in this Annual Report on Form 10-K, we mean Automatic Data Processing, Inc. and its consolidated subsidiaries.
Available Information
Our corporate website, www.adp.com, provides materials for investors and information about our services. ADP’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders are made available, free of charge, on our corporate website as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission (SEC) and are also available at the SEC’s website at www.sec.gov. The content on any website referenced in this filing is not incorporated by reference into this filing unless expressly noted otherwise.
BUSINESS OVERVIEW
ADP's Mission and Strategy

For 66 years, ADP’s mission has been to help organizations unlock their business potential with our insightful solutions. Our commitment to service excellence lies at the core of our relationship with each of our clients, whether a small, mid-sized or large organization, in one or multiple countries. We innovate to deliver new solutions that anticipate client needs in all of our markets. We help businesses focus on and optimize the most important investment they make - their investment in their people. From recruitment to talent management to retirement, our combination of expertise and technology offers insights that help our clients leverage human capital management (HCM) to drive better business results.
Our business strategy is based upon the following three strategic pillars, which are designed to position ADP as the global market leader in technology-enabled HCM services:
grow a complete suite of cloud-based HCM solutions;
invest to grow and scale our market leading HR Business Process Outsourcing (BPO) solutions by leveraging our platforms and processes; and
leverage our global presence to offer clients HCM solutions where they do business.

Reportable Segments
ADP’s two reportable business segments are Employer Services and Professional Employer Organization (PEO) Services. For financial data by segment and by geographic area, see Note 13 to the “Consolidated Financial Statements” contained in this Annual Report on Form 10-K.
Prior to October 1, 2014, ADP had three reportable segments, which included our former Dealer Services business. On September 30, 2014, the Company completed the tax-free spinoff of the Dealer Services business through the distribution of all of the issued and outstanding common stock of CDK Global, Inc. (“CDK”) to the Company’s stockholders. CDK was formed to hold the Company’s Dealer Services business and, as a result of the distribution, became an independent public company trading under the symbol “CDK” on the NASDAQ Global Select Market.

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Employer Services. Our Employer Services segment offers a comprehensive range of business outsourcing and technology-enabled HCM solutions. These offerings include:
Payroll Services
Benefits Administration
Recruiting and Talent Management
Human Resources Management
Time and Attendance Management
Insurance Services
Retirement Services
Payment and Compliance Solutions

Employer Services’ approach to the market is to deliver solutions and services that best meet clients’ requirements. Employer Services serves clients ranging from small businesses to large enterprises with multinational operations.
Professional Employer Organization (PEO) Services. ADP’s PEO business, called ADP TotalSource®, has 63 offices located in 31 states and serves approximately 8,700 clients with comprehensive employment administration outsourcing solutions through a co-employment relationship in which employees who work at a client’s location (referred to as “worksite employees”) are co-employed by us and the client. ADP TotalSource is the largest PEO in the United States based on the number of worksite employees, serving approximately 387,000 worksite employees in all 50 states.
PRODUCTS AND SERVICES

Employer Services’ Products and Services
Human Capital Management (HCM). In order to serve the unique needs of diverse types of businesses, ADP provides a range of solutions, via a software- and service-based delivery model, which businesses of all sizes can use to recruit, staff, pay, manage, and retain employees. We serve approximately 500,000 clients via ADP’s software as a service (SaaS) offerings, commonly referred to as “the cloud.” As a leader in the growing HR Business Process Outsourcing (BPO) market, we also offer seamless outsourcing solutions that enable our clients to outsource their HR, time and attendance management, payroll, and benefits administration functions to ADP. In addition, our mobile applications enable businesses to process their payroll, and give more than 5 million of our clients’ employees convenient access to their HR information, via multiple mobile device platforms, around the world and in more than 30 languages. ADP has also opened access to developers and system integrators through certain of our strategic platforms’ Application Programming Interface Libraries. This access enables the exchange of data housed in ADP's databases in order to create a unified HCM ecosystem informed by a single repository of workforce data.
Integrated HCM Solutions. Our premier suite of HCM products offers complete solutions to assist employers of all sizes in all stages of the employment cycle from recruitment to retirement:
RUN Powered by ADP® is used by more than 440,000 small businesses in the United States. It combines a software platform for managing small business payroll, human resources management and tax compliance administration, with 24/7 service and support from our team of small business experts. RUN Powered by ADP also integrates with other available ADP services, such as time and attendance tracking, workers’ compensation insurance premium payment plans, and certain retirement plans.

ADP Workforce Now® is a flexible HCM solution used by approximately 60,000 mid-sized businesses to manage their employees. More businesses use ADP Workforce Now than any other HCM solution designed for mid-sized businesses.

ADP Vantage HCM® is a solution for large enterprises in the United States. It offers a comprehensive set of human capital management capabilities within a single solution that unifies the five major areas of HCM: human resources management, benefits administration, payroll, time and attendance management, and talent management.

ADP GlobalView® and ADP Streamline® are HCM solutions for multinational companies. Available alone or together depending on client needs, GlobalView and ADP Streamline allow companies of all sizes-from those

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with small and mid-sized operations to the largest multinational corporations-to standardize their HCM strategies across geographical regions, including multi-country payroll and human resources management, talent management, and time and attendance management.

Outside the United States, ADP offers comprehensive HCM solutions on local, country-specific platforms. These suites of services offer various combinations of payroll, human resources management, time and attendance management and talent management, depending on the country in which the solution is provided.

Payroll Services. ADP provides flexible payroll services to employers of all sizes, including the preparation of employee paychecks, pay statements, supporting journals, summaries, and management reports. ADP provides employers with a wide range of payroll options, ranging from manually calling in their payroll requirements to our specialists; entering their payroll data online with an internet-based solution or via a mobile device; or outsourcing their entire payroll process to ADP. ADP also enables its largest clients to interface their major enterprise resource planning (ERP) applications with ADP’s outsourced payroll services. Employers can choose a variety of payroll payment options ranging from professionally printed checks to ADP’s electronic wage payment and, in the United States, payroll card solutions. ADP also prepares and files federal, state and local payroll tax returns and quarterly and annual Social Security, Medicare, and federal, state and local income tax withholding reports on our clients’ behalf in the United States, and prepares and files similar reports internationally on behalf of our clients. In addition, as part of our payroll services globally, ADP supplies year-end regulatory and legislative tax statements and other forms to our clients’ employees. For those clients who choose to process payroll in-house, in the United States, ADP also delivers our Payment and Compliance Solutions described below.
Benefits Administration. In the United States, ADP provides flexible solutions for outsourced employee benefits administration. Employee benefits administration options in the United States include health and welfare administration, spending account management (health care spending accounts, dependent care spending accounts, health reimbursement arrangements, health savings accounts, commuter benefits, and employee reimbursement services), COBRA administration, direct bill services, leave administration services, insurance carrier enrollment services, employee communication services, and dependent verification services. In addition, ADP benefits administration solutions offer employers an efficient cloud-based eligibility and enrollment system. It provides their employees with tools, communications, and other resources they need to understand their benefits options and make informed choices.
Recruiting and Talent Management. ADP’s Talent Management solutions simplify the talent acquisition and performance management process from recruitment to ongoing employee development. ADP’s proprietary recruiting automation platform helps employers find, recruit, and hire talent quickly and cost effectively. Employers can also meet their hiring needs by outsourcing their internal recruitment function to ADP. ADP’s pre-employment services enable employers to track candidates, screen candidate backgrounds, and integrate data to facilitate the onboarding process for new hires. ADP’s performance and compensation management applications provide tools to automate the entire performance management process, from goal planning to employee evaluations and help employers align compensation with employee performance within budgetary constraints. When combined with ADP’s performance management applications, ADP’s career development and succession management solutions offer tools that allow employees to build and update their employee profiles, search for potential positions within the organization, and create forward looking career paths, while enabling managers to identify and mitigate potential retention risks. In addition, ADP’s learning management solutions provide a single point of access to learning and knowledge management capabilities via multiple online delivery methods.
Human Resources Management. Commonly referred to as Human Resource Information Systems (HRIS), ADP’s Human Resources Management Solutions provide employers with a single system of record to support the entry, validation, maintenance, and reporting of data required for effective HR management, such as employee names, addresses, job types, salary grades, employment history, and educational background. ADP’s Human Resources Management Solutions can also be combined with ADP’s Talent Management Solutions and other HCM offerings.
Time and Attendance Management. ADP offers multiple options for employers of all sizes to collect employee time and attendance information, including electronic timesheets, badge cards, biometric and touch screen time clocks, telephone/interactive voice response, and mobile smartphones and tablets. ADP’s time and attendance tracking tools simplify employee scheduling and automate the calculation and reporting of hours worked, helping employers enforce leave and attendance policies more consistently, control overtime, and manage compliance with wage and hour regulations.
Insurance Services. ADP Insurance Services, in conjunction with our licensed insurance agency, Automatic Data Processing Insurance Agency, Inc., facilitates access in the United States to workers’ compensation and group health insurance for small and mid-sized clients through a variety of insurance carriers. ADP’s automated Pay-by-Pay® premium payment

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program calculates and collects workers’ compensation premium payments each pay period in order to simplify this task for employers.
Retirement Services. ADP Retirement Services helps employers in the United States administer various types of retirement plans, such as 401(k) (including “safe harbor” 401(k) and Roth 401(k)), profit sharing (including new comparability), SIMPLE IRA, and executive deferred compensation plans. ADP Retirement Services offers a full service 401(k) plan program, which provides recordkeeping and administrative services, combined with an investment platform offered through ADP Broker-Dealer, Inc. that gives our clients’ employees access to a wide range of non-proprietary investment options and online tools to monitor the performance of their investments. ADP Retirement Services also offers trustee services through a third-party.
Payment and Compliance Solutions
Employment Tax Services. As part of ADP’s employment tax services in the United States, ADP prepares and files employment tax returns on our clients’ behalf with federal, state, and local tax agencies. In connection with these services, ADP collects federal, state, and local employment taxes from clients and remits these taxes to the appropriate taxing agencies via an electronic interface with over 7,000 federal, state, and local tax agencies. ADP also responds to inquiries from tax agencies and assists with filing tax protests on clients’ behalf. In addition to our full service payroll tax solution, ADP offers a software solution for do-it-yourself employment tax management that can complement a client’s in-house payroll system. In our fiscal year ended June 30, 2015 (“fiscal 2015”), ADP in the United States processed and delivered approximately 56 million employee year-end tax statements and approximately 47 million employer payroll tax returns and deposits, and moved approximately $1.7 trillion in client funds to taxing agencies and our clients’ employees via electronic transfer, direct deposit, and ADPCheck.TM 
Tax Credit. Tax Credit Services helps clients in the United States take advantage of tax credit opportunities as they hire new employees, including federal, state, and local tax credits based on geography, demographics, and other criteria, including work opportunity tax credits, federal empowerment zone employment credits, economic development incentives, training grants, and many other incentives. Integrating the entire process with clients’ existing hiring programs, ADP Tax Credit Services helps clients screen job applicants and process eligibility forms, monitor and manage screening and form compliance, submit forms to state agencies for tax credit certification, calculate credits, and produce a detailed audit trail.
Wage Garnishment. ADP offers an integrated solution to help our clients manage the wage garnishment process through integration with the client’s payroll system. As part of an enhanced version of this service in the United States, ADP also helps process required correspondence to payee agencies, lien processing and order evaluation, and notices. ADP’s wage garnishment services in the United States also include a call center to field garnishment-related inquiries from employees, payees, and other third parties.
Unemployment Claims. ADP offers a single-source solution to help manage the entire unemployment claims process in the United States, including pre-separation planning, claim protests and administration, appeal processing, hearing representation, and audits of benefit charges.
Wage Payment and Pay Card. In the United States, in addition to ADPCheck, ADP’s traditional payroll check offering, ADP offers electronic payroll disbursement options that can be integrated with the client’s payroll systems and ERP applications. With ALINE Pay by ADP®, payroll can be disbursed via ALINE Check by ADP®, direct deposit, or the ALINE Card by ADP®, a network-branded payroll card. ALINE Check by ADP provides employees with the ability to receive wages from a self-completed payroll check that includes the standard features available with a traditionally-issued payroll check. Using the ALINE Card by ADP, employees can access their payroll funds immediately in several ways, including via a network member bank or an ATM or point of sale terminal. The ALINE Card by ADP can also be used to make purchases or pay bills. Additional features of the ALINE Card by ADP include the ability to load additional funds onto the card, receive electronic payments such as government benefits or tax refunds, and transfer funds from the card to a bank account in the United States.
ADP SmartCompliance. The ADP SmartCompliance® solution integrates client data delivered from ADP integrated HCM platforms or certified third-party payroll, HR and financial systems into a single, cloud-based platform enabling clients to consolidate their data in one location. ADP’s specialized team analyzes the data and works with clients to manage changing regulatory landscapes and improve business processes. ADP SmartCompliance integrates several HCM-related compliance processes, including healthcare reform, employment tax, tax credits, wage payments, employment verification, unemployment claims and wage garnishments.

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ADP Health Compliance. ADP Health Compliance helps businesses manage crucial employer-related elements of the U.S. Patient Protection and Affordable Care Act, including determining offer of coverage eligibility, assessing affordability, and providing a critical regulatory management solution. The solution helps clients identify and address compliance issues that may result from interactions with government agencies.
Professional Employer Organization (PEO) Services’ Products and Services
ADP TotalSource, ADP’s PEO business, offers small and mid-sized businesses a comprehensive human resources outsourcing solution through a co-employment model. As a PEO, ADP TotalSource provides complete human resources management services while the client continues to direct the day-to-day job-related duties of the employees. ADP TotalSource includes key HR management and employee benefits functions, including HR administration, employee benefits, and employer liability management, into a single-source solution:
HR Administration. ADP TotalSource offers a variety of comprehensive HR administration services, such as:
employee recruitment and selection
payroll and tax administration
time and attendance management
benefits administration
employee training and development
online HR management tools
employee leave administration

Employee Benefits. Through the co-employment model, ADP TotalSource provides eligible worksite employees with access to:
group health, dental and vision coverage
a 401(k) retirement savings plan
health savings accounts
flexible spending accounts
group term life and disability coverage
an employee assistance program

Employer Liability Management. ADP TotalSource helps clients manage and limit employment related risks and related costs by providing:
a workers’ compensation program
unemployment claims management
safety compliance guidance and access to safety training
access to employment practices liability insurance
guidance on compliance with federal, state and local employment laws and regulations

The scale of ADP TotalSource allows us to deliver a variety of benefits and services with efficiency and value typically out of reach to small and mid-sized businesses. ADP TotalSource serves approximately 8,700 clients and approximately 387,000 worksite employees in all 50 states.

MARKETS AND MARKETING METHODS
Employer Services’ HCM solutions are offered in more than 100 countries. The most material markets for our HCM solutions are the United States, Canada and Europe and, for each market, we have both country-specific solutions and solutions based on our multi-country offerings, for employers of different sizes and complexities. The major components of our HCM offering throughout these geographies are payroll, human resource outsourcing and time and attendance management. In addition, we offer wage and tax collection and remittance services in the United States, Canada, the United Kingdom, the Netherlands, France, Australia, India and China. PEO Services offers services exclusively in the United States.

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We market our solutions primarily through our direct sales force. Employer Services also markets its solutions through indirect sales channels, such as marketing relationships with banks and certified public accountants, among others. None of ADP’s major business groups has a single homogenous client base or market. While concentrations of clients exist in specific industries, no one client or industry group is material to ADP’s overall revenues. ADP enjoys a leadership position in each of its major service offerings and does not believe any major service or major business unit of ADP is subject to unique market risk.
COMPETITION
The industries in which ADP operates are highly competitive. ADP knows of no reliable statistics by which it can determine the number of its competitors, but it believes that it is one of the largest providers of business outsourcing solutions in the world. Employer Services and PEO Services compete with other independent business outsourcing companies, companies providing enterprise resource planning services, software companies and financial institutions. In addition, another competitive factor in the industries in which Employer Services and PEO Services operate is a company’s use of third-party software applications or a captive in-house function, whereby a company installs and operates its own business processing systems.
Competition for business outsourcing solutions is primarily based on service and product quality, reputation, ease of use and accessibility of technology, breadth of services and products, and price. We believe that ADP is competitive in each of these areas and that our commitment to service excellence, together with our leading-edge technology, distinguishes us from our competitors.
INDUSTRY REGULATION
Our business is subject to a wide range of complex laws and regulations. In addition, many of our solutions are designed to assist clients with their compliance with certain laws and regulations that apply to them. We have, and continue to enhance, compliance programs and policies to monitor and address the legal and regulatory requirements applicable to our solutions and operations, including dedicated compliance personnel and training programs.
As one of the world’s largest providers of business outsourcing solutions, our systems contain a significant amount of sensitive data related to clients, employees of our clients, vendors and our employees. We are, therefore, subject to compliance obligations under federal, state and foreign privacy and data security-related laws, including in the United States, the Health Insurance Portability and Accountability Act of 1996 with respect to our COBRA business, our flexible spending account and insurance services businesses, ADP's AdvancedMD® and ADP TotalSource. We are also subject to foreign, federal and state security breach notification laws with respect to both our own employee data and client employee data. Additionally, the changing nature of privacy laws in the United States, the European Union and elsewhere could impact our processing of personal information of our employees and on behalf of our clients.
As part of our payroll and payroll tax management services, we move client funds to taxing authorities and our clients’ employees via electronic transfer, direct deposit, and ADPCheck. Certain elements of our U.S. money transmission activities, including our electronic payment and prepaid access (payroll pay card) offerings, are subject to certain licensing requirements. Elements of our money transmission activities outside of the United States are subject to similar laws and requirements in the countries in which we offer such services. In addition, our U.S. prepaid access (payroll card) offering is subject to the anti-money laundering and reporting provisions of The Bank Secrecy Act of 1970. Our employee screening and selection services business offers background checking services that are subject to the Fair Credit Reporting Act. Our PEO business (ADP TotalSource) is subject to various state licensing requirements. Because ADP TotalSource is a co-employer with respect to its clients’ worksite employees, we may assume certain obligations and responsibilities of an employer under federal and state tax, insurance and employment laws.
In addition, many of our businesses offer solutions that assist our clients in complying with certain laws and regulations that apply to them. Although the laws and regulations apply to our clients and not to ADP, changes in such laws or regulations may affect our operations, products and services. For example, our HCM solutions help clients manage their compliance with certain requirements of the Patient Protection and Affordable Care Act in the United States. Our COBRA administration services and flexible spending account services in the United States are designed to comply with relevant federal guidelines relating to, respectively, employers’ benefits continuation obligations and the requirements of Section 125 of the Internal Revenue Code. Similarly, our Tax Credit Services business, which helps clients in the United States take advantage of tax credit opportunities as they hire new employees, is based on federal, state, or local tax laws and regulations allowing for tax credits.

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The foregoing description does not include an exhaustive list of the laws and regulations governing and impacting our business. See the discussion contained in the “Risk Factors” section in Part I, Item 1A of this Annual Report on Form 10-K for information regarding changes in laws and regulations that may decrease our revenues and earnings.

CLIENTS AND CLIENT CONTRACTS
ADP provides its services to more than 630,000 clients. In fiscal 2015, no single client or group of affiliated clients accounted for revenues in excess of 2% of ADP’s annual consolidated revenues.
ADP is continuously in the process of performing implementation services for new clients. Depending on the service agreement and/or the size of the client, the installation or conversion period for new clients could vary from a short period of time for a small Employer Services client (as little as 24 hours) to a longer period for a large Employer Services client with multiple deliverables (generally six to twelve months), and in some cases may exceed two years for a large GlobalView Select client or other large, complicated implementation. Although we monitor sales that have not yet been billed or installed, we do not view this metric as material in light of the recurring nature of our business. This is not a reported number, but it is used by management as a planning tool relating to resources needed to install services, and as a means of assessing our performance against the installation timing expectations of our clients.
Our business is typically characterized by long-term client relationships that result in recurring revenue. Our services are provided under written price quotations or service agreements having varying terms and conditions. No one price quotation or service agreement is material to ADP. ADP’s client retention is estimated at approximately 12 years in Employer Services, and approximately 7 years in PEO Services, and has not varied significantly from period to period.


SYSTEMS DEVELOPMENT AND PROGRAMMING
During the fiscal years ended June 30, 2015, 2014, and 2013, ADP invested approximately $767 million, $686 million, and $596 million, respectively, from continuing operations, in systems development and programming, which includes expenses for activities such as client migrations to our new strategic platforms, the development of new products and maintenance of our existing technologies, including purchases of new software and software licenses.
PRODUCT DEVELOPMENT
ADP continually upgrades, enhances, and expands its existing solutions and services. Generally, no new solution or service has a significant effect on ADP’s revenues or negatively impacts its existing solutions and services, and ADP’s solutions and services have significant remaining life cycles.
LICENSES
ADP is the licensee under a number of agreements for computer programs and databases. ADP’s business is not dependent upon a single license or group of licenses. Third-party licenses, patents, trademarks, and franchises are not material to ADP’s business as a whole.
NUMBER OF EMPLOYEES
ADP employed approximately 55,000 persons as of June 30, 2015.



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Item 1A. Risk Factors
Our businesses routinely encounter and address risks, some of which may cause our future results to be different than we currently anticipate. Risk factors described below represent our current view of some of the most important risks facing our businesses and are important to understanding our business. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk and the consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion includes a number of forward-looking statements. You should refer to the description of the qualifications and limitations on forward-looking statements in the first paragraph under Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K. The level of importance of each of the following risks may vary from time to time, and any of these risks may have a material effect on our business.
Failure to comply with, or changes in, laws and regulations applicable to our businesses could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences

Our business is subject to a wide range of complex laws and regulations. Failure to comply with such laws and regulations could result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and the imposition of consent orders or civil and criminal penalties, including fines, that could damage our reputation and have a materially adverse effect on our results of operation or financial condition.
In addition, changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, may decrease our revenues and earnings and may require us to change the manner in which we conduct some aspects of our business.  For example, a change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to government authorities would adversely impact interest income from investing client funds before such funds are remitted to the applicable taxing authorities.  Changes in taxation regulations could adversely affect our effective tax rate and our net income.  Changes in laws that govern the co-employment arrangement between a professional employer organization and its worksite employees may require us to change the manner in which we conduct some aspects of our PEO business.  Healthcare reform under the U.S. Patient Protection and Affordable Care Act, as amended, related state laws, and the regulations adopted or to be adopted thereunder, have the potential to impact substantially the way that employers provide health insurance to employees and the health insurance market for the small and mid-sized businesses that constitute our PEO business’s clients and prospects.  We are unable to determine the ultimate impact that healthcare reform will have on our PEO business and our ability to attract and retain PEO clients.  Amendments to money transmitter statutes have required us to obtain licenses in some jurisdictions. The adoption of new money transmitter statutes in other jurisdictions, changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, or disagreement by a regulatory authority with our interpretation of such existing statutes or regulations, could require additional registration or licensing, limit certain of our business activities until they are appropriately licensed, and expose us to financial penalties. These occurrences could also require changes to our compliance programs and to the manner in which we conduct some aspects of our money movement business or client funds investment strategy, which could adversely impact interest income from investing client funds before such funds are remitted.

Failure to comply with the U.S. Foreign Corrupt Practices Act, economic and trade sanctions, and anti-money laundering laws and regulations, and similar laws could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences

Regulators worldwide are exercising heightened scrutiny with respect to anti-corruption, economic and trade sanctions, and anti-money laundering laws and regulations. Such heightened scrutiny could result in more aggressive enforcement of such laws and more burdensome regulations, which could adversely impact our business.  We operate our business around the world, including in numerous developing economies where companies and government officials are more likely to engage in business practices that are prohibited by domestic and foreign laws and regulations, including the United States Foreign Corrupt Practices Act (the “FCPA”) and the U.K. Bribery Act. Such laws generally prohibit improper payments or offers of payments to foreign government officials and leaders of political parties, and in some cases, to other persons, for the purpose of obtaining or retaining business. We are also subject to economic and trade sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), which prohibit or restrict transactions or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially designated, including narcotics traffickers and terrorists or terrorist organizations,

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among others.  In addition, some of our businesses in the U.S. and a number of countries in which we operate are subject to anti-money laundering laws and regulations, including, for example, the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001 (the “BSA”). Among other things, the BSA requires certain financial institutions, including banks and money services businesses (such as money transmitters and providers of prepaid access), to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and maintain transaction records. We have registered our payroll card business with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) as a provider of prepaid access pursuant to a FinCEN regulation. 
We have implemented policies to monitor and address compliance with applicable anti-corruption, economic and trade sanctions and anti-money laundering laws and regulations, and we are in the process of upgrading and enhancing certain of our policies and procedures; however, there can be no assurance that all of our employees, consultants or agents will not take actions in violation of our policies, for which we may be ultimately responsible, or that our policies will be determined to be adequate by regulators.  Any violations of applicable anti-corruption, economic and trade sanctions or anti-money laundering laws could limit certain of our business activities until they are satisfactorily remediated and could result in civil and criminal penalties, including fines, that could damage our reputation and have a materially adverse effect on our results of operation or financial condition. Further, bank regulators are imposing additional and stricter requirements on banks to ensure they are meeting their BSA obligations, and banks are increasingly viewing money services businesses, as a class, to be higher risk customers for money laundering. As a result, our banking partners may limit the scope of services they provide to us or may impose additional requirements on us. These regulatory restrictions on banks and changes to banks’ internal risk-based policies and procedures may result in a decrease in the number of banks that may do business with us, may require us to change the manner in which we conduct some aspects of our business, may decrease our revenues and earnings and could have a materially adverse effect on our results of operation or financial condition.

Our businesses host, collect, use, transmit and store personal and business information, and a security or privacy breach may damage or disrupt our businesses, result in the disclosure of confidential information, damage our reputation, increase our costs and cause losses
In connection with our business, we host, collect, use, transmit and store large amounts of personal and business information about our clients, employees of our clients, vendors and our employees, including payroll information, healthcare information, personal and business financial data, social security numbers, bank account numbers, tax information and other sensitive personal and business information.
We are focused on ensuring that our operating environments safeguard and protect personal and business information, and we devote significant resources to maintain and regularly update our systems and processes. Nonetheless, globally, attacks on information technology systems continue to grow in frequency, complexity and sophistication, and the Company is regularly targeted by unauthorized parties using malicious tactics, code and viruses. Although this is a global problem, it may affect our businesses more than other businesses because malevolent third-parties may focus on the amount and type of personal and business information that our businesses host, collect, use, transmit and store.
We have programs in place to prevent, detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third-parties may contain defects in design or manufacture or other problems that could unexpectedly compromise the confidentiality, integrity or availability of data or our systems. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third-parties with whom we do business, through fraud, trickery, or other methods of deceiving our employees, contractors, and temporary staff. As these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. In addition, while our operating environment is designed to safeguard and protect personal and business information, we do not have the ability to monitor the implementation of similar safeguards by our clients, vendors or their respective employees, and, in any event, third-parties may be able to circumvent those security measures.
Any cyber-attack, unauthorized intrusion, malicious software infiltration, network disruption, denial of service, corruption of data, or theft of non-public or other sensitive information, similar act by a malevolent party, or inadvertent acts by our own employees, could result in the disclosure or misuse of confidential or proprietary information, and could have a materially adverse effect on our business operations, or that of our clients, create financial liability, regulatory sanction, or a loss of confidence in our ability to serve clients or cause current or potential clients to choose another service provider. Although we believe that we maintain a robust program of information security and controls and none of the threats that we

11


have encountered to date have materially impacted us, the impact of a data security incident could have a materially adverse effect on our business, results of operations and financial condition. While ADP maintains insurance coverage that, subject to policy terms and conditions and a significant self-insured retention, is designed to address certain aspects of cyber-risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber-risk.
We are also subject to various federal, state and international laws, rules and regulations relating to the collection, use, transmission and security of personal and business information. In many cases, these laws apply not only to third-party transactions, but also to transfers of information among the Company and its subsidiaries. In addition, the possession and use of personal information and data in conducting our business subjects us to laws that may require notification to regulators, clients or employees in the event of a privacy breach. These laws continue to develop, the number of jurisdictions adopting such laws continues to increase, and these laws may be inconsistent from jurisdiction to jurisdiction. The future enactment of more restrictive laws, rules or regulations could have a materially adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in regulatory penalties and significant legal liability. In addition, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase.
Our systems may be subject to disruptions that could have a materially adverse effect on our business and reputation
Many of our businesses are highly dependent on our ability to process, on a daily basis, a large number of complicated transactions. We rely heavily on our payroll, financial, accounting, and other data processing systems. If any of these systems fails to operate properly or becomes disabled even for a brief period of time, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or damage to our reputation, any of which could have a materially adverse effect on our results of operation or financial condition. We have disaster recovery, business continuity, and crisis management plans and procedures designed to protect our businesses against a multitude of events including natural disasters, military or terrorist actions, power or communication failures, or similar events. Despite our preparations, our plans may not be successful in preventing the loss of client data, service interruptions, disruptions to our operations, or damage to our important facilities.
If we fail to adapt our technology to meet client needs and preferences, the demand for our services may diminish
Our businesses operate in industries that are subject to rapid technological advances and changing client needs and preferences. In order to remain competitive and responsive to client demands, we continually upgrade, enhance, and expand our existing solutions and services. If we fail to respond successfully to technology challenges, the demand for our services may diminish.
Political and economic factors may adversely affect our business and financial results
Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and credit markets may experience periods of constriction and volatility. When there is a slowdown in the economy, employment levels and interest rates may decrease with a corresponding impact on our businesses. Clients may react to worsening conditions by reducing their spending on payroll and other outsourcing services or renegotiating their contracts with us. In addition, a reduction in availability of financing during such conditions, even to borrowers with the highest credit ratings, may limit our access to short-term debt markets to meet liquidity needs required by our Employer Services business.
We invest our client funds in liquid, investment-grade marketable securities, money market securities, and other cash equivalents. Nevertheless, our client fund assets are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated, individually or in unison, during periods of unusual financial market volatility.
We are dependent upon various large banks to execute Automated Clearing House and wire transfers as part of our client payroll and tax services. While we have contingency plans in place for bank failures, a systemic shutdown of the banking industry would impede our ability to process funds on behalf of our payroll and tax services clients and could have an adverse impact on our financial results and liquidity.
We derive a significant portion of our revenues and operating income outside of the United States and, as a result, we are exposed to market risk from changes in foreign currency exchange rates that could impact our consolidated results of operations, financial position or cash flows.

12


Change in our credit ratings could adversely impact our operations and lower our profitability
The major credit rating agencies periodically evaluate our creditworthiness and have given us very strong long-term debt and the highest commercial paper ratings. Failure to maintain high credit ratings on long-term and short-term debt could increase our cost of borrowing, reduce our ability to obtain intra-day borrowing required by our Employer Services business, and ultimately reduce our client interest revenue.
If the distribution of CDK common stock to ADP’s stockholders does not qualify as a tax-free spinoff, we could incur substantial liabilities and may not be fully indemnified for such liabilities
Prior to completing the spinoff of CDK, ADP received an opinion from Paul, Weiss, Rifkind, Wharton & Garrison LLP, its counsel, to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the opinion, the distribution qualified as a transaction that is tax-free under Section 355 and other related provisions of the Internal Revenue Code. ADP also received a private letter ruling from the IRS with respect to certain discrete and significant issues arising in connection with the transactions effected in connection with the separation and distribution. The opinion and the ruling were based upon various factual representations and assumptions, as well as certain undertakings made by ADP and CDK. If any of those factual representations or assumptions was untrue or incomplete in any material respect, any undertaking is not complied with, or the facts upon which the opinion and the ruling were based were materially different from the facts at the time of the distribution, the distribution may not qualify for tax-free treatment. Although a private letter ruling from the IRS generally is binding on the IRS, the IRS did not rule that the distribution satisfies every requirement for a tax-free distribution. Opinions of counsel are not binding on the IRS or the courts. As a result, the conclusions expressed in an opinion of counsel could be challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences to stockholders could be materially less favorable.
If the distribution were determined not to qualify as a tax-free transaction under Section 355 of the Code, each United States holder generally would be treated as receiving a distribution taxable as a dividend in an amount equal to the fair market value of the shares of our common stock received by the holder. In addition, ADP generally would recognize gain with respect to the distribution and certain related transactions, and CDK could be required to indemnify ADP for any resulting taxes and related expenses, which could be material. The distribution and certain related transactions could be taxable to ADP if CDK or its stockholders were to engage in certain transactions after the distribution. In such cases, ADP or its stockholders could incur significant U.S. federal income tax liabilities, and CDK could be required to indemnify ADP for any resulting taxes and related expenses, which could be material. CDK may be unable to indemnify us fully for any such taxes and related expenses.
We may be unable to attract and retain qualified personnel
Our ability to grow and provide our clients with competitive services is partially dependent on our ability to attract and retain highly motivated people with the skills to serve our clients. Competition for skilled employees in the outsourcing and other markets in which we operate is intense and, if we are unable to attract and retain highly skilled and motivated personnel, results of our operations may suffer.

Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
ADP owns 11 of its processing/print centers, and 17 other operational offices, sales offices, and its corporate headquarters in Roseland, New Jersey, which aggregate approximately 3,496,692 square feet. None of ADP's owned facilities is subject to any material encumbrances. ADP leases space for some of its processing centers, other operational offices, and sales offices. All of these leases, which aggregate approximately 5,454,924 square feet in North America, Europe, South America, Asia, Australia and Africa, expire at various times up to the year 2024. ADP believes its facilities are currently adequate for their intended purposes and are adequately maintained.

Item 3. Legal Proceedings
In the normal course of business, ADP is subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, ADP believes that it has valid defenses with respect to the legal matters pending against it and that the

13


ultimate resolution of these matters will not have a material adverse impact on its financial condition, results of operations, or cash flows.



14


Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant's Common Equity
The principal market for the Company’s common stock is the NASDAQ Global Select Market under the symbol ADP. The following table sets forth the reported high and low sales prices of the Company’s common stock reported on the NASDAQ Global Select Market and the cash dividends per share of common stock declared during each quarter for the two most recent fiscal years. As of June 30, 2015, there were 44,019 holders of record of the Company’s common stock. As of such date, 519,476 additional holders held their common stock in “street name.”

 
Price Per Share
 
Dividends
 
High
     
Low
     
Per Share
Fiscal 2015 quarter ended (a)(b)
 
 
 
 
 
 
June 30
$88.40
 
$79.80
 
$0.490
March 31
$90.23
 
$81.71
 
$0.490
December 31
$86.54
 
$70.50
 
$0.490
September 30 (c)
$84.68
 
$79.20
 
$0.480
 
Fiscal 2014 quarter ended (a)
 
 
 
 
 
 
June 30
$80.37
 
$73.38
 
$0.480
March 31
$83.00
 
$71.91
 
$0.480
December 31
$83.82
 
$69.91
 
$0.480
September 30
$74.95
 
$68.75
 
$0.435

(a)
The stock prices in the table above, on or prior to September 30, 2014, the date of the completion of the spinoff of our former Dealer Services business, have not been adjusted for the impact of the spinoff.
(b)
The stock prices beginning on October 1, 2014 reflect the impact of the spinoff of our former Dealer Services business.
(c)
On September 30, 2014, we spun off our former Dealer Services business to our stockholders. Each of our stockholders of record after the market close on September 24, 2014 received one share of common stock of CDK for every three shares of the Company’s common stock.


15


Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of the Publicly Announced Common Stock Repurchase Plan (2)
Maximum Number of Shares that may yet be Purchased under the Common Stock Repurchase Plan (2)
April 1, 2015 to
     April 30, 2015
1,575,000
$85.54
1,575,000
30,648,143
May 1, 2015 to
     May 31, 2015
1,787,870
$86.70
1,785,903
28,862,240
June 1, 2015 to
    June 30, 2015
4,920,344
$84.07
1,556,085
27,306,155
Total
8,283,214
 
4,916,988
 
(1)
     
Pursuant to the terms of the Company’s restricted stock program, the Company purchased 3,356 shares at the then market value of the shares in connection with the exercise by employees of their option under such program to satisfy certain tax withholding requirements through the delivery of shares to the Company instead of cash
 
(2)
 
The Company received the Board of Directors' approval to repurchase shares of the Company's common stock as follows:
Date of Approval
 
Shares
March 2001
 
50 million
November 2002
 
35 million
November 2005
 
50 million
August 2006
 
50 million
August 2008
 
50 million
June 2011
 
35 million
August 2014
 
30 million
There is no expiration date for the common stock repurchase plan.
Performance Graph
The following graph compares the cumulative return on the Company’s common stock(a) for the most recent five years with the cumulative return on the S&P 500 Index, a Peer Group Index(b) and the Old Peer Group Index(c), assuming an initial investment of $100 on June 30, 2010, with all dividends reinvested. As a result of the Company’s deepening focus on human capital management, the Company reassessed its peer group. We have determined that the companies included in the S&P 500 Information Technology Index more closely match our Company characteristics than the companies previously included in the Old Peer Group Index. The stock price performance shown on this graph may not be indicative of future performance.


16



(a)On September 30, 2014, the Company completed the spinoff of its former Dealer Services business, into an independent publicly traded company called CDK Global, Inc. The cumulative returns of the Company’s common stock have been adjusted to reflect the spinoff.

(b)     We use the S&P 500 Information Technology Index as our Peer Group Index. The S&P 500 Information Technology Index is a broad index that includes the Company and several competitors.

(c)    * The Old Peer Group Index was:
Insperity, Inc.
     
Paychex, Inc.
Computer Sciences Corporation
 
The Ultimate Software Group, Inc.
Global Payments Inc.
 
Total System Services, Inc.
Intuit Inc.
 
The Western Union Company


17



Item 6. Selected Financial Data

The following selected financial data is derived from our consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Quantitative and Qualitative Disclosures About Market Risk included in this Annual Report on Form 10-K. Prior period amounts have been adjusted to exclude discontinued operations (refer to Note 2 of Item 8 for additional information).
 
(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Years ended June 30,
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
10,938.5

 
$
10,226.4

 
$
9,442.0

 
$
8,897.4

 
$
8,265.0

Total costs of revenues
 
$
6,427.6

 
$
6,041.0

 
$
5,574.1

 
$
5,217.9

 
$
4,807.3

Gross profit
 
$
4,510.9

 
$
4,185.4

 
$
3,867.9

 
$
3,679.5

 
$
3,457.7

Earnings from continuing operations before income taxes
 
$
2,070.7

 
$
1,879.2

 
$
1,710.1

 
$
1,805.3

 
$
1,650.5

Adjusted earnings from continuing operations before income taxes (Note 1)
 
$
2,070.7

 
$
1,879.2

 
$
1,752.8

 
$
1,739.3

 
$
1,650.5

Net earnings from continuing operations
 
$
1,376.5

 
$
1,242.6

 
$
1,122.2

 
$
1,192.2

 
$
1,074.0

Adjusted net earnings from continuing operations (Note 1)
 
$
1,376.5

 
$
1,242.6

 
$
1,164.9

 
$
1,151.0

 
$
1,074.0

 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
 
$
2.91

 
$
2.59

 
$
2.32

 
$
2.45

 
$
2.18

Diluted earnings per share from continuing operations
 
$
2.89

 
$
2.57

 
$
2.30

 
$
2.42

 
$
2.16

Adjusted diluted earnings per share from continuing operations (Note 1)
 
$
2.89

 
$
2.57

 
$
2.39

 
$
2.34

 
$
2.16

Basic weighted average shares outstanding
 
472.6

 
478.9

 
482.7

 
487.3

 
493.5

Diluted weighted average shares outstanding
 
475.8

 
483.1

 
487.1

 
492.2

 
498.3

Cash dividends declared per share
 
$
1.95

 
$
1.88

 
$
1.70

 
$
1.55

 
$
1.42

Return on equity ("ROE") from continuing operations (Note 2)
 
24.0
%
 
19.3
%
 
18.2
%
 
19.7
%
 
18.7
%
 
 
 
 
 
 
 
 
 
 
 
At year end:
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and marketable securities of continuing operations
 
$
1,694.8

 
$
3,670.3

 
$
1,746.2

 
$
1,416.7

 
$
1,179.7

Total assets of continuing operations
 
$
33,110.5

 
$
29,629.6

 
$
30,041.7

 
$
28,525.6

 
$
31,886.3

Total assets
 
$
33,110.5

 
$
32,059.8

 
$
32,268.1

 
$
30,817.4

 
$
34,238.3

Obligations under reverse repurchase agreements
 
$

 
$

 
$
245.9

 
$

 
$

Obligation under commercial paper borrowings
 
$

 
$
2,173.0

 
$

 
$

 
$

Long-term debt
 
$
9.2

 
$
11.5

 
$
14.7

 
$
16.8

 
$
34.2

Stockholders’ equity
 
$
4,808.5

 
$
6,670.2

 
$
6,189.9

 
$
6,114.0

 
$
6,010.4


Note 1. Non-GAAP Financial Measures

The following table reconciles results within our Selected Financial Data to adjusted results that exclude a goodwill impairment charge to our ADP AdvancedMD business for the fiscal year ended June 30, 2013 ("fiscal 2013") and a gain on the sale of assets related to rights and obligations to resell a third-party expense management platform for the fiscal year ended June 30, 2012 ("fiscal 2012"). We use certain adjusted results, among other measures, to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods. We believe that the adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by us and improves our ability to understand our operating performance. Since adjusted earnings from continuing operations before income taxes, adjusted net earnings from continuing operations, and adjusted diluted earnings per share (“EPS”) from continuing operations are not measures of performance calculated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), they should not be considered in isolation from, or as a substitute for, earnings from continuing operations before income taxes, net earnings from continuing operations, and diluted EPS from continuing operations, and they may not be comparable to similarly titled measures employed by other companies.

18



(In millions)
 
 
 
 
 
 
Year ended June 30, 2013
 
As reported
 
Goodwill impairment
 
Adjusted
Earnings from continuing operations before income taxes
 
$
1,710.1

 
$
42.7

 
$
1,752.8

Net earnings from continuing operations
 
$
1,122.2

 
$
42.7

 
$
1,164.9

Diluted earnings per share from continuing operations
 
$
2.30

 
$
0.09

 
$
2.39

Year ended June 30, 2012
 
As reported
 
Gain on sale of assets
 
Adjusted
Earnings from continuing operations before income taxes
 
$
1,805.3

 
$
(66.0
)
 
$
1,739.3

Net earnings from continuing operations
 
$
1,192.2

 
$
(41.2
)
 
$
1,151.0

Diluted earnings per share from continuing operations
 
$
2.42

 
$
(0.08
)
 
$
2.34


Note 2. Return on equity from continuing operations has been calculated as net earnings from continuing operations divided by average total stockholders' equity. Our ROE for fiscal 2013 includes the impact of a goodwill impairment charge which decreased ROE by 0.6%. Our ROE for fiscal 2012 includes the impact from the sale of assets related to rights and obligations to resell a third-party expense management platform which increased ROE by 0.6%.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This document and other written or oral statements made from time to time by ADP may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include: ADP's success in obtaining, and retaining clients, and selling additional services to clients; the pricing of products and services; compliance with existing or new legislation or regulations; changes in, or interpretations of, existing legislation or regulations; overall market, political and economic conditions, including interest rate and foreign currency trends; competitive conditions; our ability to maintain our current credit rating and the impact on our funding costs and profitability; security or privacy breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; and the impact of new acquisitions and divestitures. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These risks and uncertainties, along with the risk factors discussed under "Item 1A.  Risk Factors," should be considered in evaluating any forward-looking statements contained herein.


EXECUTIVE OVERVIEW

Employers around the world rely on us for cloud-based solutions and services to help manage their most important asset - their people. We embrace new technology and innovation to deliver exceptional products and services that meet the needs of our clients across all of our markets. Our commitment to service excellence lies at the core of our relationship with each of our clients, whether a small, midsized or large organization in one or multiple countries. We believe our success in human capital management ("HCM") requires deep expertise and outstanding service to help our clients not just manage their employees, but build better workforces. Our business strategy is based on strategic pillars, which are predicated on our ability to drive innovation and service excellence, and attract, build, and retain the right talent to position ADP as the global market leader in HCM services. Our strategic pillars are to:

grow a complete suite of cloud-based HCM solutions;
invest to grow and scale our HR Business Process Outsourcing solutions by leveraging our platforms and processes; and
leverage our global presence to offer clients HCM solutions where they do business.

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During the twelve months ended June 30, 2015 ("fiscal 2015"), we more narrowly focused our attention on our global HCM strategy and our results continue to reflect the strength of our underlying business model and our success in the market. The increased focus is evidenced by the separation of our former Dealer Services business into its own independent, publicly traded company called CDK Global, Inc. ("CDK") on September 30, 2014 and our investments in product innovation and our salesforce. Our increased focus on product development, the high demand for additional HCM solutions, including products that assist businesses in complying with the Affordable Care Act ("ACA"), improved productivity, and an improving economic backdrop in the United States of America ("U.S."), led our salesforce to deliver exceptionally strong new business bookings, which represent annualized recurring revenues anticipated from sales orders to new and existing clients in Employer Services and Professional Employer Organization ("PEO") Services. We are pleased with the financial performance of our business segments which have driven solid organic revenue growth and pretax margin expansion. This was achieved despite pressure on Employer Services revenues from foreign currency translation, margin pressure from our high-margin client funds interest revenue (which grew at a slower rate than overall revenue), and increased selling expenses which were driven by an exceptionally strong new business booking performance. Revenue retention remains at record levels and we continue to benefit from the strength of the pays per control in our client base, which we measure as the number of employees on our clients' payrolls as measured on a same-store-sales basis utilizing a representative subset of payrolls ranging from small to large businesses that are reflective of a broad range of the U.S. geographic regions.
Consolidated revenues in fiscal 2015 increased 7%, to $10,938.5 million, as compared to the fiscal year ended June 30, 2014 ("fiscal 2014"). Earnings from continuing operations before income taxes increased 10%, to $2,070.7 million, as compared to fiscal 2014 and net earnings from continuing operations increased 11%, to $1,376.5 million, as compared to fiscal 2014. Our diluted earnings per share from continuing operations increased 12% to $2.89 in fiscal 2015, as compared to $2.57 in fiscal 2014.
Despite pressure from foreign currency translation and higher selling expenses to support our exceptionally strong new business bookings in our Employer Services segment, our business segment results were solid. Employer Services' revenues increased 5% to $8,897.3 million and earnings from continuing operations before income taxes increased 7% to $2,694.2 million. PEO Services' revenues increasing 17% to $2,647.2 million and earnings from continuing operations before income taxes increased 30% to $303.6 million in fiscal 2015. Total new business bookings grew 13% worldwide to over $1.6 billion in fiscal 2015. Our key business metrics continue to reflect the core strength of our business model, with our Employer Services' worldwide client revenue retention rate remaining strong at 91.4% and our pays per control increasing 3.0% in fiscal 2015.
Although interest on funds held for clients increased for the first time in seven years, to $377.7 million in fiscal 2015 from $373.4 million in fiscal 2014, we still felt the pressure from declining interest rates on our client funds investment portfolio. This decline in the average interest rate earned to 1.7% in fiscal 2015, as compared to 1.8% in fiscal 2014, was more than offset by growth in average client funds balances of 5% resulting from the continued strength and growth of our Employer Services segment.

We invest our funds held for clients in accordance with ADP's prudent and conservative investment guidelines, where the safety of principal, liquidity, and diversification are the foremost objectives of our investment strategy. The portfolio is predominantly invested in AAA/AA rated fixed-income securities. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio).  This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations.
  
Our financial condition and balance sheet remain solid at June 30, 2015, with cash and cash equivalents and marketable securities of $1.7 billion. Our net cash flows provided by operating activities were $1,905.6 million in fiscal 2015, as compared to $1,821.4 million in fiscal 2014. This increase in cash flows provided by operating activities from fiscal 2014 to fiscal 2015 was due to the sale of notes receivable related to our Dealer Services financing arrangements and lower pension contributions. The change in cash used in investing activities of $4,573.6 million is due to the timing of receipts and disbursements of restricted cash and cash equivalents held to satisfy client funds obligations, partially offset by the receipt of an $825.0 million tax-free dividend received from CDK in connection with the spin-off earlier this fiscal year. The increase in cash provided by financing activities of $3,974.9 million is primarily due to the net change in client fund obligations, partially offset by the timing of cash received and repaid under our commercial paper issuances and an increase in repurchases of common stock in fiscal 2015.

We have a strong business model with a high percentage of recurring revenues with strong client retention, good margins, the ability to generate consistent, healthy cash flows, and low capital expenditure requirements. We continue to enhance value to our shareholders, and in fiscal 2015 paid dividends of $927.6 million and returned $1,557.2 million in cash through our share buyback program. These share repurchases were partially funded by the $825.0 million dividend we received

20



from CDK earlier this fiscal year. In the last five fiscal years, we have reduced our common stock outstanding by approximately 5% through share buybacks, net of the effect of common stock issued under employee stock-based compensation programs. We have also raised the quarterly dividend per share for 40 consecutive years.

RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS

Prior period amounts have been adjusted to exclude discontinued operations (refer to Note 2 of Item 8 for additional information).

(In millions, except per share amounts)

 
Years ended June 30,
 
$ Change
 
% Change
 
2015
 
2014
 
2013
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
10,938.5

 
$
10,226.4

 
$
9,442.0

 
$
712.1

 
$
784.4

 
7
 %
 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of revenues:
 

 
 

 
 
 
 

 
 

 
 

 
 

Operating expenses
5,625.3

 
5,290.8

 
4,883.6

 
334.5

 
407.2

 
6
 %
 
8
 %
Systems development and
    programming costs
595.4

 
551.2

 
496.6

 
44.2

 
54.6

 
8
 %
 
11
 %
Depreciation and amortization
206.9

 
199.0

 
193.9

 
7.9

 
5.1

 
4
 %
 
3
 %
Total costs of revenues
6,427.6

 
6,041.0

 
5,574.1

 
386.6

 
466.9

 
6
 %
 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and
    administrative costs
2,496.9

 
2,370.3

 
2,200.4

 
126.6

 
169.9

 
5
 %
 
8
 %
Goodwill impairment

 

 
42.7

 

 
(42.7
)
 
 %
 
(100
)%
Interest expense
6.5

 
6.1

 
9.1

 
0.4

 
(3.0
)
 
7
 %
 
(33
)%
Total expenses
8,931.0

 
8,417.4

 
7,826.3

 
513.6

 
591.1

 
6
 %
 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income, net
(63.2
)
 
(70.2
)
 
(94.4
)
 
(7.0
)
 
(24.2
)
 
(10
)%
 
(26
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing
    operations before income taxes
$
2,070.7

 
$
1,879.2

 
$
1,710.1

 
$
191.5

 
$
169.1

 
10
 %
 
10
 %
Margin
18.9
%
 
18.4
%
 
18.1
%
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
$
694.2

 
$
636.6

 
$
587.9

 
$
57.6

 
$
48.7

 
9
 %
 
8
 %
Effective tax rate
33.5
%
 
33.9
%
 
34.4
%
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings from continuing
     operations
$
1,376.5

 
$
1,242.6

 
$
1,122.2

 
$
133.9

 
$
120.4

 
11
 %
 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from
    continuing operations
$
2.89

 
$
2.57

 
$
2.30

 
$
0.32

 
$
0.27

 
12
 %
 
12
 %


21



Note 1. Non-GAAP measures
    
The following table reconciles our fiscal 2013 results to adjusted results which exclude a non tax-deductible goodwill impairment charge.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
2013
 
As reported
 
Goodwill impairment
 
Adjusted
Earnings from continuing operations before income taxes
 
$
1,710.1

 
$
42.7

 
$
1,752.8

Net earnings from continuing operations
 
$
1,122.2

 
$
42.7

 
$
1,164.9

Diluted earnings per share from continuing operations
 
$
2.30

 
$
0.09

 
$
2.39


Fiscal 2015 Compared to Fiscal 2014

Total Revenues

Despite pressure from foreign currency translation, our total revenues increased 7% in fiscal 2015, as compared to fiscal 2014, primarily due to new business started during the year from new business bookings growth. Refer to “Analysis of Reportable Segments” for additional discussion of the increases in revenue for both of our reportable segments, Employer Services and PEO Services. For fiscal 2015, total revenue was negatively impacted two percentage points by unfavorable foreign currency translation.

Total revenues in fiscal 2015 include interest on funds held for clients of $377.7 million, as compared to $373.4 million in fiscal 2014.  The increase in the consolidated interest earned on funds held for clients resulted from an increase in our average client funds balance of 5%, to $21.8 billion in fiscal 2015, partially offset by a decrease in the average interest rate earned to 1.7% in fiscal 2015 as compared to 1.8% in fiscal 2014. Total interest on funds held for clients was impacted one percentage point from unfavorable foreign currency translation.

Total Expenses

Total expenses increased 6% in fiscal 2015, as compared to fiscal 2014, primarily due to increased costs to service our expanding client base and support our growing revenue. Total expenses also increased due to additional investments in product innovation and expenses directly related to the increase in new business bookings. For fiscal 2015, our total expense growth decreased two percentage points from foreign currency translation.

Operating expenses include the costs directly attributable to servicing our clients. Additionally, operating expenses include PEO Services pass-through costs that are re-billable and which include costs for benefits coverage, workers’ compensation coverage, and state unemployment taxes for worksite employees.  These pass-through costs were $2,015.9 million for fiscal 2015, which included costs for benefits coverage of $1,627.1 million and costs for workers’ compensation and payment of state unemployment taxes of $388.8 million.  These pass-through costs were $1,736.0 million for fiscal 2014, which included costs for benefits coverage of $1,383.3 million and costs for workers’ compensation and payment of state unemployment taxes of $352.7 million

Systems development and programming costs increased $44.2 million in fiscal 2015, as compared to fiscal 2014, due to increased investment and costs to develop, support, and maintain our products, partially offset by a higher proportion of capitalized costs of our strategic projects.

Selling, general and administrative expenses increased $126.6 million due to an increase in selling expenses to support our growth in new business bookings as we experienced traction from our increased focus on product development, high demand for additional HCM solutions, including products that assist businesses in complying with the ACA, improved productivity, and an improving economic backdrop in the U.S., partially offset by the impact of foreign currency translation.


22



Other Income, net
 
 
 
 
 
 
 
(In millions)
 
 
 
 
 
 
Years ended June 30,
 
2015
 
2014
 
$ Change
Interest income on corporate funds
 
$
(56.9
)
 
$
(53.7
)
 
$
3.2

Realized gains on available-for-sale securities
 
(6.8
)
 
(20.4
)
 
(13.6
)
Realized losses on available-for-sale securities
 
1.9

 
3.9

 
2.0

Gain on sale of notes receivable
 
(1.4
)
 

 
1.4

Other income, net
 
$
(63.2
)
 
$
(70.2
)
 
$
(7.0
)

Other income, net in fiscal 2015 includes a $1.4 million gain on the sale of notes receivable related to our Dealer Services financing agreements. The increase in interest income on corporate funds resulted from higher average daily corporate funds, which increased from $4.1 billion in fiscal 2014 to $4.6 billion in fiscal 2015, partially offset by lower average interest rates of 1.3% in fiscal 2015 as compared to 1.4% in fiscal 2014.

Earnings from Continuing Operations before Income Taxes

Earnings from continuing operations before income taxes increased 10% due to increases in revenues and expenses discussed above and includes an unfavorable impact from foreign currency translation of one percentage point. Overall margin increased from 18.4% in fiscal 2014 to 18.9% in fiscal 2015. This increase was due to our operating costs related to servicing our clients increasing slower than our revenues, partially offset by the impact of higher selling expenses to support our new business bookings.

Provision for Income Taxes

The effective tax rate in fiscal 2015 and 2014 was 33.5% and 33.9%, respectively. The decrease in the effective tax rate was due to adjustments to the tax liability, the usage of foreign tax credits in a planned repatriation of foreign earnings, and a change in the tax law during fiscal 2015, partially offset by the resolution of certain tax matters during fiscal 2014.

Net Earnings from Continuing Operations and Diluted Earnings per Share from Continuing Operations

Net earnings from continuing operations increased 11% on higher earnings from continuing operations before income taxes and a lower effective tax rate, as described above. Net earnings from continuing operations growth was unfavorably impacted one percentage point by foreign currency translation in fiscal 2015, as compared to fiscal 2014. Diluted earnings per share from continuing operations increased 12% to $2.89 in fiscal 2015, as compared to $2.57 in fiscal 2014. Diluted earnings per share growth was unfavorably impacted $0.04 due to foreign currency translation in fiscal 2015, as compared to fiscal 2014.
 
In fiscal 2015, our diluted earnings per share from continuing operations reflects the increase in net earnings from continuing operations and the impact of fewer shares outstanding, resulting from the repurchase of approximately 18.2 million shares in fiscal 2015 and 9.0 million shares in fiscal 2014, partially offset by the issuances of shares under our stock-based compensation programs.

Fiscal 2014 Compared to Fiscal 2013

Total Revenues

Our total revenues increased $784.4 million, or 8%, to $10,226.4 million in fiscal 2014, as compared to fiscal 2013, due to an increase in revenues in Employer Services of 8%, or $607.0 million, to $8,506.0 million and PEO Services of 15%, or $297.7 million, to $2,270.9 million

Total revenues for fiscal 2014 include interest on funds held for clients of $373.4 million, as compared to $420.4 million in fiscal 2013. The decrease in the consolidated interest earned on funds held for clients resulted from the decrease in the average interest rate earned to 1.8% during fiscal 2014, as compared to 2.2% for fiscal 2013, partially offset by an increase in our average client funds balance of 8%, to $20.7 billion in fiscal 2014.  


23



Total Expenses

Our total expenses increased $591.1 million, or 8%, to $8,417.4 million in fiscal 2014, as compared to fiscal 2013. The increase in our total expenses was due to an increase in operating expenses of $407.2 million, an increase in selling, general and administrative expenses of $169.9 million, and an increase in systems development and programming costs of $54.6 million, partially offset by the goodwill impairment charge of $42.7 million in fiscal 2013.

Our total costs of revenues increased 8%, to $6,041.0 million in fiscal 2014, as compared to fiscal 2013, due to an increase in operating expenses of $407.2 million and an increase in systems development and programming costs of $54.6 million.

Operating expenses increased $407.2 million, or 8%, in fiscal 2014, as compared to fiscal 2013, due to the increase in revenues described above, including the increases in PEO Services, which has pass-through costs that are re-billable and which include costs for benefits coverage, workers’ compensation coverage, and state unemployment taxes for worksite employees. These pass-through costs were $1,736.0 million for fiscal 2014, which included costs for benefits coverage of $1,383.3 million and costs for workers’ compensation and payment of state unemployment taxes of $352.7 million. These pass-through costs were $1,513.5 million for fiscal 2013, which included costs for benefits coverage of $1,193.2 million and costs for workers’ compensation and payment of state unemployment taxes of $320.3 million.  The increase in operating expenses is also due to higher labor-related expenses in Employer Services of $65.9 million, as compared to fiscal 2013.

Systems development and programming costs increased $54.6 million, or 11%, in fiscal 2014, as compared to fiscal 2013, due to increased costs to develop, support, and maintain our products, partially offset by a higher proportion of capitalized costs of our strategic projects.

Selling, general and administrative expenses increased $169.9 million, or 8%, in fiscal 2014, as compared to fiscal 2013. The increase in expenses was related to an increase in selling expenses of $81.8 million resulting from investments in our salesforce, an increase in stock-based compensation expense of $35.1 million, and $15.9 million higher severance expenses in fiscal 2014, as compared to fiscal 2013.
 
Other Income, net

(In millions)
 
 
 
 
 
 
Years ended June 30,
 
2014
 
2013
 
$ Change
 
 
 
 
 
 
 
Interest income on corporate funds
 
$
(53.7
)
 
$
(62.9
)
 
$
(9.2
)
Realized gains on available-for-sale securities
 
(20.4
)
 
(32.1
)
 
(11.7
)
Realized losses on available-for-sale securities
 
3.9

 
3.5

 
(0.4
)
Gains on sales of buildings
 

 
(2.2
)
 
(2.2
)
Other, net
 

 
(0.7
)
 
(0.7
)
Other income, net
 
$
(70.2
)
 
$
(94.4
)
 
$
(24.2
)

Other income, net, decreased $24.2 million in fiscal 2014, as compared to fiscal 2013.  The decrease was due to a decrease in realized gains on available-for-sale securities of $11.7 million and a decrease in interest income on corporate funds of $9.2 million in fiscal 2014, as compared to fiscal 2013.  The decrease in interest income on corporate funds resulted from lower average interest rates of 1.5% in fiscal 2013 to 1.4% in fiscal 2014 and lower average daily corporate funds, which decreased from $4.2 billion in fiscal 2013 to $4.1 billion in fiscal 2014. In addition, we recognized gains of $2.2 million pertaining to the sale of two buildings during fiscal 2013.


24



Earnings from Continuing Operations before Income Taxes

Earnings from continuing operations before income taxes increased $169.1 million, or 10%, to $1,879.2 million in fiscal 2014 compared to $1,710.1 million in fiscal 2013, which includes the effect of the $42.7 million goodwill impairment charge in fiscal 2013. Overall margin increased approximately 30 basis points from 18.1% in fiscal 2013 to 18.4% in fiscal 2014. This increase was due to margin improvements in our business segments, partially offset by approximately 80 basis points of margin decline related to the continued decline in interest on funds held for clients discussed above and 30 basis points of margin decline due to increased stock-based compensation costs. Overall margin in fiscal 2014 also benefited approximately 50 basis points from the $42.7 million goodwill impairment charge in fiscal 2013.

Adjusted Earnings from Continuing Operations before Income Taxes

Adjusted earnings from continuing operations before income taxes increased $126.4 million, or 7%, to $1,879.2 million in fiscal 2014, as compared to $1,752.8 million for fiscal 2013 due to increased revenue and margin improvement in our business segments, partially offset by the continued decline in interest on funds held for clients. Margin, adjusted for the the fiscal 2013 goodwill impairment charge related to our ADP AdvancedMD business, decreased 20 basis points from 18.6% to 18.4%. Margin improvements in our business segments were offset primarily by approximately 80 basis points of margin decrease related to the continued decline in interest on fund held for clients discussed above and 30 basis points of margin decline due to increased stock-based compensation costs.
 
Provision for Income Taxes

The effective tax rates in fiscal 2014 and 2013 were 33.9% and 34.4%, respectively. Our effective tax rate for fiscal 2013 includes the effect of a non tax-deductible goodwill impairment charge of $42.7 million that increased our effective tax rate by 0.8 percentage points percentage points in the period. The remaining increase is due to an increase in foreign taxes and reduced foreign tax credits available, partially offset by the resolution of certain tax matters.

Net Earnings from Continuing Operations and Diluted Earnings per Share from Continuing Operations

Net earnings from continuing operations increased $120.4 million, or 11%, to $1,242.6 million in fiscal 2014, compared to $1,122.2 million in fiscal 2013, which includes the effect of the $42.7 million goodwill impairment charge. Diluted earnings per share from continuing operations was $2.57 in fiscal 2014, as compared to $2.30 in fiscal 2013.
 
In fiscal 2014, our diluted earnings per share from continuing operations reflects the increase in net earnings from continuing operations and the impact of fewer shares outstanding resulting from the net impact of cumulative share repurchases, offset by the issuances of shares under our stock-based compensation programs.

Adjusted Net Earnings from Continuing Operations and Adjusted Diluted Earnings per Share from Continuing Operations
    
Adjusted net earnings from continuing operations increased $77.7 million, or 7%, to $1,242.6 million, in fiscal 2014, as compared to $1,164.9 million for fiscal 2013, and the adjusted diluted earnings per share from continuing operations increased 8%, to $2.57 for fiscal 2014, compared to $2.39 for fiscal 2013. The increase in adjusted diluted earnings per share from continuing operations for fiscal 2014 reflects the increase in adjusted net earnings from continuing operations and the impact of fewer shares outstanding resulting from the net impact of cumulative share repurchases, offset by the issuances of shares under our stock-based compensation programs.


25



ANALYSIS OF REPORTABLE SEGMENTS

Revenues from Continuing Operations

(In millions)

 
 
Years ended June 30,
 
$ Change
 
% Change
 
 
2015
 
2014
 
2013
 
2015
 
2014
 
2015
 
2014
Employer Services
 
$
8,897.3

 
$
8,506.0


$
7,899.0

 
$
391.3

 
$
607.0

 
5
%
 
8
%
PEO Services
 
2,647.2

 
2,270.9

 
1,973.2

 
376.3

 
297.7

 
17
%
 
15
%
Other
 
(12.4
)
 
(0.9
)
 
1.7

 
 
 
 
 
 
 
 
Reconciling item:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Client fund interest
 
(593.6
)
 
(549.6
)
 
(431.9
)
 
 
 
 
 
 
 
 
 
 
$
10,938.5

 
$
10,226.4

 
$
9,442.0

 
$
712.1

 
$
784.4

 
7
%
 
8
%
 
Earnings from Continuing Operations before Income Taxes

(In millions)

 
 
Years ended June 30,
 
$ Change
 
% Change
 
 
2015
 
2014
 
2013
 
2015
 
2014
 
2015
 
2014
Employer Services
 
$
2,694.2

 
$
2,517.3

 
$
2,215.7

 
$
176.9

 
$
301.6

 
7
%
 
14
%
PEO Services
 
303.6

 
234.4

 
199.7

 
69.2

 
34.7

 
30
%
 
17
%
Other
 
(333.5
)
 
(322.9
)
 
(273.4
)
 
 
 
 
 
 
 
 
Reconciling item:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Client fund interest
 
(593.6
)
 
(549.6
)
 
(431.9
)
 
 
 
 
 
 
 
 
 
 
$
2,070.7

 
$
1,879.2

 
$
1,710.1

 
$
191.5

 
$
169.1

 
10
%
 
10
%

Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are charged to the reportable segments based on management’s responsibility for the applicable costs.  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%.  This allocation is made for management reasons so that the reportable segments’ results are presented on a consistent basis without the impact of fluctuations in interest rates.  This allocation is a reconciling item to our reportable segments’ revenues from continuing operations and earnings from continuing operations before income taxes and is eliminated in consolidation.

Employer Services

Fiscal 2015 Compared to Fiscal 2014

Revenues from continuing operations

Employer Services' revenues from continuing operations increased 5% due to new business started during the year from new business bookings growth, an increase in the number of employees on our clients’ payrolls, and the impact of price increases.  During fiscal 2015, Employer Services' revenue growth was negatively impacted two percentage points by unfavorable foreign currency translation. Our worldwide client revenue retention rate remained at a record level of 91.4% in fiscal 2015 when compared to fiscal 2014 and our U.S. pays per control increased 3.0% in fiscal 2015


26



Earnings from Continuing Operations before Income Taxes

Employer Services’ earnings from continuing operations before income taxes increased 7% due to the increase in revenues from continuing operations of $391.3 million discussed above, partially offset by an increase in expenses of $214.4 million. This growth includes an unfavorable impact from foreign currency translation of one percentage point.  Expenses increased in fiscal 2015, as compared to 2014, due to labor-related costs to support our growing revenues and an increase in selling expenses as we experienced traction from our increased focus on product development, high demand for additional HCM solutions, including products that assist businesses in complying with the ACA, improved productivity, and an improving economic backdrop in the U.S. Overall margin increased approximately 70 basis points from 29.6% to 30.3% in fiscal 2015, as compared to fiscal 2014, due to our operating costs related to servicing our clients increasing at a slower rate than our revenues, partially offset by an increase in selling expense due to higher new business bookings.

Fiscal 2014 Compared to Fiscal 2013

Revenues from continuing operations

Employer Services' revenues from continuing operations increased $607.0 million, or 8%, to $8,506.0 million in fiscal 2014, as compared to fiscal 2013.  Revenues from continuing operations increased due to new business started during the year from new business bookings growth, an increase in the number of employees on our clients’ payrolls, and the impact of price increases.  Our worldwide client revenue retention rate in fiscal 2014 increased approximately 10 basis points to 91.4%, as compared to our rate in fiscal 2013, and our U.S. pays per control increased 2.8% in fiscal 2014

Earnings from Continuing Operations before Income Taxes

Employer Services' earnings from continuing operations before income taxes increased $301.6 million, or 14%, to $2,517.3 million in fiscal 2014, as compared to fiscal 2013.  The increase was due to the increase in revenues of $607.0 million discussed above, which was partially offset by an increase in expenses of $305.4 million.  In addition to an increase in expenses related to increased revenues, expenses increased in fiscal 2014 due to investments in our salesforce and labor-related costs coupled with the effects of acquisitions.  Overall margin increased approximately 150 basis points from 28.1% to 29.6% in fiscal 2014, as compared to fiscal 2013, due to increased operating scale.

PEO Services

Fiscal 2015 Compared to Fiscal 2014

Revenues

PEO Services' revenues increased 17% in fiscal 2015, as compared to fiscal 2014.  Such revenues include pass-through costs of $2,015.9 million for fiscal 2015 and $1,736.0 million for fiscal 2014 associated with benefits coverage, workers' compensation coverage, and state unemployment taxes for worksite employees.  The increase in revenues was due to a 14% increase in the average number of worksite employees, resulting from an increase in the number of new clients and growth in our existing clients.

Earnings from Continuing Operations before Income Taxes

PEO Services’ earnings from continuing operations before income taxes increased 30% in fiscal 2015, as compared to fiscal 2014.  The increase was due to increased revenues of $376.3 million discussed above, partially offset by an increase in expenses of $307.1 million. This increase in expenses is primarily related to the increase in pass-through costs of $279.9 million described above. Overall margin increased from 10.3% to 11.5% for fiscal 2015 as compared to fiscal 2014, due to sales productivity and increased operating efficiencies, as our costs related to acquiring new business and servicing our clients increased slower than our revenues.

27



    
Fiscal 2014 Compared to Fiscal 2013

Revenues

PEO Services' revenues increased $297.7 million, or 15%, to $2,270.9 million in fiscal 2014, as compared to fiscal 2013.  Such revenues include pass-through costs of $1,736.0 million for fiscal 2014 and $1,513.5 million for fiscal 2013 associated with benefits coverage, workers' compensation coverage, and state unemployment taxes for worksite employees.  The increase in revenues was due to a 15% increase in the average number of worksite employees, resulting from an increase in the number of new clients and growth in our existing clients.

Earnings from Continuing Operations before Income Taxes

PEO Services' earnings from continuing operations before income taxes increased $34.7 million, or 17%, to $234.4 million for fiscal 2014, as compared to fiscal 2013. Earnings from continuing operations before income taxes increased due to growth in earnings related to the increase in the average number of worksite employees.  Overall margin increased approximately 20 basis points from 10.1% to 10.3% for fiscal 2014, as compared to fiscal 2013, resulting from slower growth in pass-through costs.

Other

The primary components of the “Other” segment are the results of operations of ADP Indemnity, non-recurring gains and losses, miscellaneous processing services, such as customer financing transactions, the elimination of intercompany transactions, and certain charges and expenses that have not been allocated to the reportable segments, such as stock-based compensation expense and the fiscal 2013 goodwill impairment charge.

Stock-based compensation expense was $143.2 million, $117.1 million, and $82.0 million in fiscal 2015, 2014, and 2013, respectively.

ADP Indemnity provides workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services worksite employees up to $1 million per occurrence. PEO Services has secured specific per occurrence and aggregate stop loss insurance from a wholly-owned and regulated insurance carrier of AIG that covers all losses in excess of $1 million per occurrence and also any aggregate losses within the $1 million retention that collectively exceed a certain level in certain policy years. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability for the PEO Services business. Premiums are charged to PEO Services to cover the claims expected to be incurred by the PEO Services' worksite employees. Changes in estimated ultimate incurred losses are recognized by ADP Indemnity. During fiscal 2015, ADP Indemnity paid a premium of $167.9 million to enter into a reinsurance arrangement with ACE American Insurance Company to cover substantially all losses incurred by ADP Indemnity for the fiscal 2015 policy year up to $1 million per occurrence related to the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services worksite employees. ADP Indemnity paid a premium of $202.0 million in July 2015 to enter into a reinsurance agreement with ACE American Insurance Company to cover substantially all losses for the fiscal 2016 policy year on terms substantially similar to the fiscal 2015 reinsurance policy.
 
Our net realized gains on the sale of available-for-sale securities were $4.9 million, $16.5 million, and $28.6 million in fiscal 2015, 2014, and 2013, respectively.

In fiscal 2013, we recorded a goodwill impairment charge of $42.7 million related to our ADP AdvancedMD business which is part of the Employer Services segment. There were no goodwill impairment charges in fiscal 2015 or 2014.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2015, cash and marketable securities were $1,694.8 million, stockholders' equity was $4,808.5 million, and the ratio of long-term debt-to-equity was 0.2%.  Working capital before funds held for clients, client funds obligations, and assets and liabilities related to discontinued operations at June 30, 2015 was $1,480.7 million, as compared to $1,202.1 million at June 30, 2014.  The increase in working capital was due to an increase in cash and cash equivalents as well as changes in other elements of working capital which were driven by the timing of receipts and disbursements related to our underlying operations.
 

28



Our principal sources of liquidity for operations are derived from cash generated through operations and through corporate cash and marketable securities on hand. We continued to generate positive cash flows from operations during fiscal 2015, and we held approximately $1.7 billion of cash and marketable securities at June 30, 2015.  We have the ability to borrow through our financing arrangements under our U.S. short-term commercial paper program and our U.S. and Canadian short-term reverse repurchase agreements to meet short-term funding requirements related to client funds obligations.

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the years ended 2015, 2014, and 2013, are summarized as follows:
(In millions)
 
Years ended June 30,
 
$ Change
 
 
2015
 
2014
 
2013
 
2015
 
2014
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
1,905.6

 
$
1,821.4

 
$
1,577.2

 
$
84.2

 
$
244.2

Investing activities
 
(3,760.3
)
 
813.3

 
(1,578.4
)
 
(4,573.6
)
 
2,391.7

Financing activities
 
1,616.7

 
(2,358.2
)
 
151.0

 
3,974.9

 
(2,509.2
)
Effect of exchange rate changes on cash and cash equivalents
 
(106.3
)
 
8.0

 
1.2

 
(114.3
)
 
6.8

Net change in cash and cash equivalents
 
$
(344.3
)
 
$
284.5

 
$
151.0

 
$
(628.8
)
 
$
133.5


Net cash flows provided by operating activities increased due to $226.7 million received from the sale of notes receivable related to Dealer Services financing arrangements and a lower pension contribution of $74.8 million for fiscal 2015, as compared to fiscal 2014.

Net cash flows of investing activities changed due to the timing of receipts and disbursements of restricted cash and cash equivalents held to satisfy client funds obligations of $5,498.4 million, partially offset by the receipt of the CDK dividend during fiscal 2015.

Net cash flows of financing activities changed due to the net increase in client funds obligations of $9,063.9 million, as a result of the timing of cash received and payments made related to client funds, partially offset by an increase in our repurchases of common stock and the timing of borrowings and repayments of commercial paper.
    
We purchased approximately 18.2 million shares of our common stock at an average price per share of $84.96 during fiscal 2015 as compared to purchases of 9.0 million shares at an average price per share of $75.06 during fiscal 2014. The repurchases in fiscal 2015 were partially funded by the $825.0 million dividend received from CDK earlier this fiscal year.  From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.  The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions. 

Our 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 commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. During fiscal 2015, this commercial paper program provided for the issuance of up to $7.5 billion in aggregate maturity value; in July 2015, we increased our U.S. short-term commercial paper program to provide for the issuance of up to $8.25 billion in aggregate maturity value. Our 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.  For fiscal 2015 and 2014, our average daily borrowings were $2.3 billion at a weighted average interest rate of 0.1%. The weighted average maturity of the Company’s commercial paper during fiscal 2015 was approximately two days.  We have successfully borrowed through the use of our commercial paper program on an as needed basis to meet short-term funding requirements related to client funds obligations. At June 30, 2015, we had no outstanding obligations under our short-term commercial paper program. At June 30, 2014, we had $2.2 billion of commercial paper outstanding, which was repaid on July 1, 2014.

Our 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.  We

29



have successfully borrowed through the use of reverse repurchase agreements on an as needed basis to meet short-term funding requirements related to client funds obligations. At June 30, 2015 and 2014, there were no outstanding obligations related to the reverse repurchase agreements. For fiscal 2015 and 2014, we had average outstanding balances under reverse repurchase agreements of $421.2 million and $361.7 million, respectively, at weighted average interest rates of 0.4% and 0.5%, respectively. In addition, we have $3.25 billion available to us on a committed basis under these reverse repurchase agreements. We believe that we currently meet all conditions set forth in the committed reverse repurchase agreements to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the $3.25 billion available to us under the committed reverse repurchase agreements.

We have a $2.75 billion, 364-day credit agreement with a group of lenders that matures in June 2016. In addition, we have a five-year $2.25 billion credit facility and a five-year $3.25 billion credit facility maturing in June 2020 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.  We had no borrowings through June 30, 2015 under the credit agreements. We believe that we currently meet all conditions set forth in the revolving credit agreements to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the $8.25 billion available to us under the revolving credit agreements.

Our investment portfolio does not contain any asset-backed securities with underlying collateral of subprime mortgages, alternative-A mortgages, sub-prime auto loans or sub-prime home equity loans, collateralized debt obligations, collateralized loan obligations, credit default swaps, derivatives, auction rate securities, structured investment vehicles or non-investment grade fixed-income securities. We own AAA rated senior tranches of fixed rate credit card, auto loan, rate reduction, and other asset-backed securities, secured predominately by prime collateral.  All collateral on asset-backed securities is performing as expected.  In addition, we own senior debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks.  We do own mortgage-backed securities, which 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 primarily by Federal National Mortgage Association as to the timely payment of principal and interest.  Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio).  This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations.

Capital expenditures for continuing operations in fiscal 2015 were $171.2 million, as compared to $161.0 million in fiscal 2014 and $129.4 million in fiscal 2013. The capital expenditures in fiscal 2015 related to our data center and other facility improvements were made to support our operations. We expect capital expenditures in fiscal 2016 to be between $225 million and $250 million.

    The following table provides a summary of our contractual obligations as of June 30, 2015:
(In millions)
 
Payments due by period
Contractual Obligations
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
 
Unknown
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Obligations (1)
 
$
2.5

 
$
9.2

 
$

 
$

 
$

 
$
11.7

Operating Lease and Software
     License Obligations (2)
 
$
89.6

 
$
144.2

 
$
66.7

 
$
20.4

 
$

 
$
320.9

Purchase Obligations (3)
 
$
358.7

 
$
209.9

 
$
175.1

 
$

 
$

 
$
743.7

Obligations Related to Unrecognized
     Tax Benefits (4)
 
$
1.0

 
$

 
$

 
$

 
$
26.1

 
$
27.1

Other Long-Term Liabilities Reflected
    on our Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and Benefits (5)
 
$
3.5

 
$
222.6

 
$
109.2

 
$
260.2

 
$
80.5

 
$
676.0

Acquisition-related Obligations (6)
 
$
1.0

 
$
1.0

 
$

 
$

 
$

 
$
2.0

Total
 
$
456.3

 
$
586.9

 
$
351.0

 
$
280.6

 
$
106.6

 
$
1,781.4




30



(1)
These amounts represent the principal repayments of our debt and are included on our Consolidated Balance Sheets. The estimated interest payments due by the corresponding period above are excluded from the above and are not material for any periods presented.

(2)
Included in these amounts are various facilities and equipment leases and software license agreements. We enter into operating leases in the normal course of business relating to facilities and equipment, as well as the licensing of software. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts or if we enter into additional operating lease agreements.

(3)
Purchase obligations are comprised of a $202.0 million reinsurance premium with ACE American Insurance Company for the fiscal 2016 policy year, as well as obligations related to purchase and maintenance agreements on our software, equipment, and other assets.

(4)
We made the determination that net cash payments expected to be paid within the next 12 months, related to unrecognized tax benefits of $27.1 million at June 30, 2015, are expected to be up to $1 million. We are unable to make reasonably reliable estimates as to the period beyond the next 12 months in which cash payments related to unrecognized tax benefits are expected to be paid.

(5)
Compensation and benefits primarily relates to amounts associated with our employee benefit plans and other compensation arrangements.  These amounts exclude the estimated contributions to our defined benefit plans, which are expected to be $10.7 million in fiscal 2016

(6)
Acquisition-related obligations relate to deferred purchase consideration payments at future dates. A liability is established at the time of the acquisition for these fixed payments.

In addition to the obligations quantified in the table above, we had obligations for the remittance of funds relating to our payroll and payroll tax filing services. As of June 30, 2015, the obligations relating to these matters, which are expected to be paid in fiscal 2016, total $24,650.5 million and were recorded in client funds obligations on our Consolidated Balance Sheets. We had $24,865.3 million of cash and marketable securities that have been impounded from our clients to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as of June 30, 2015.

ADP Indemnity provides workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services worksite employees up to $1 million per occurrence. PEO Services has secured specific per occurrence and aggregate stop loss insurance from a wholly-owned and regulated insurance carrier of AIG that covers all losses in excess of $1 million per occurrence and also any aggregate losses within the $1 million retention that collectively exceed a certain level in certain policy years. Should AIG and its wholly-owned insurance company be unable to satisfy their contractual obligations, ADP would also become responsible for satisfying these worksite employee workers' compensation obligations for these claims in excess of $1 million per occurrence. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability for the PEO Services business. Premiums are charged to PEO Services to cover the claims expected to be incurred by the PEO Services' worksite employees. Changes in estimated ultimate incurred losses are recognized by ADP Indemnity. During fiscal 2015, ADP Indemnity paid a premium of $167.9 million to enter into a reinsurance agreement with ACE American Insurance Company to cover substantially all losses incurred by ADP Indemnity for the fiscal 2015 policy year up to $1 million per occurrence related to the workers' compensation and employers' liability deductible reimbursement insurance protection for PEO Services worksite employees. ADP Indemnity paid a premium of $202.0 million in July 2015 to enter into a reinsurance agreement with ACE American Insurance Company to cover substantially all losses for the fiscal 2016 policy year on terms substantially similar to the fiscal 2015 reinsurance policy. At June 30, 2015, ADP Indemnity had total assets of $433.3 million to satisfy the actuarially estimated unpaid losses of $369.8 million for the policy years since July 1, 2003. ADP Indemnity paid claims of $26.0 million and $45.3 million, net of insurance recoveries, in fiscal 2015 and 2014, respectively.

In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the performance of our services and products. We do not expect any material losses related to such representations and warranties.

Quantitative and Qualitative Disclosures about Market Risk

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

Our corporate investments are invested in cash and cash equivalents and highly liquid, investment-grade marketable securities.  These assets are available for repurchases of common stock for treasury and/or acquisitions, as well as other

31



corporate operating purposes.  All of our short-term and long-term fixed-income securities are classified as available-for-sale securities.

Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary objectives. Consistent with those objectives, we also seek to maximize interest income and to minimize the volatility of interest income.  Client funds assets are invested in highly liquid, investment-grade marketable securities, with a maximum maturity of 10 years at the time of purchase, and money market securities and other cash equivalents.  At June 30, 2015, approximately 93% of the available-for-sale securities categorized as U.S. Treasury and direct obligations of U.S. government agencies were invested in senior, unsecured, non-callable debt directly issued by the Federal Home Loan Banks and Federal Farm Credit Banks.
    
We utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations.  Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio).  As part of our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other unrelated client funds obligations, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.  We minimize the risk of not having funds collected from a client available at the time such client’s obligation becomes due by impounding, in virtually all instances, the client’s funds in advance of the timing of payment of such client’s obligation.  As a result of this practice, we have consistently maintained the required level of client funds assets to satisfy all of our obligations.

There are inherent risks and uncertainties involving our investment strategy relating to our client funds assets.  Such risks include liquidity risk, including the risk associated with our ability to liquidate, if necessary, our available-for-sale securities in a timely manner in order to satisfy our client funds obligations.  However, our investments are made with the safety of principal, liquidity, and diversification as the primary goals to minimize the risk of not having sufficient funds to satisfy all of our client funds obligations.  We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our $8.25 billion commercial paper program (rated A-1+ by Standard and Poor’s and Prime-1 (P-1) by Moody’s, the highest possible credit ratings), our ability to execute reverse repurchase transactions ($3.25 billion of which is available on a committed basis), and available borrowings under our $8.25 billion committed credit facilities. The reduced availability of financing during periods of economic turmoil, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business.  In addition to liquidity risk, our investments are subject to interest rate risk and credit risk, as discussed below.

We have established credit quality, maturity, and exposure limits for our investments.  The minimum allowed credit rating at time of purchase for corporate and Canadian provincial bonds is BBB, for asset-backed securities is AAA, and for municipal bonds is A.  The maximum maturity at time of purchase for BBB rated securities is 5 years, for single A rated securities is 7 years, and for AA rated and AAA rated securities is 10 years. Time deposits and commercial paper must be rated A-1 and/or P-1. Money market funds must be rated AAA/Aaa-mf.


32



Details regarding our overall investment portfolio are as follows:
(In millions)
 
 
 
 
 
 
Years ended June 30,
 
2015
 
2014
 
2013
Average investment balances at cost:
 
 
 
 
 
 
Corporate investments
 
$
4,560.4

 
$
4,072.4

 
$
4,200.3

Funds held for clients
 
21,798.4

 
20,726.5

 
19,156.3

Total
 
$
26,358.8

 
$
24,798.9

 
$
23,356.6

 
 
 

 
 

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

 
 

 
 
Corporate investments
 
1.3
%
 
1.4
%
 
1.5
%
Funds held for clients
 
1.7
%
 
1.8
%
 
2.2
%
Total
 
1.7
%
 
1.7
%
 
2.1
%
 
 
 
 
 
 
 
Realized gains on available-for-sale securities
 
$
6.8

 
$
20.4

 
$
32.1

Realized losses on available-for-sale securities
 
(1.9
)
 
(3.9
)
 
(3.5
)
Net realized gains on available-for-sale securities
 
$
4.9

 
$
16.5

 
$
28.6

 
As of June 30:
 
 
 
 
 
 
 
 
 

 
 

 
 
Net unrealized pre-tax gains on
     available-for-sale securities
 
$
216.5

 
$
324.4

 
$
287.4

 
 
 
 
 
 
 
Total available-for-sale securities at fair value
 
$
20,873.8

 
$
20,156.5

 
$
18,838.7

 
We are exposed to interest rate risk in relation to securities that mature, as the proceeds from maturing securities are reinvested.  Factors that influence the earnings impact of interest rate changes include, among others, the amount of invested funds and the overall portfolio mix between short-term and long-term investments.  This mix varies during the fiscal year and is impacted by daily interest rate changes.  The annualized interest rate earned on our entire portfolio remained consistent at 1.7% for fiscal 2015, as compared to fiscal 2014.  A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-term interest rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $12 million impact to earnings from continuing operations before income taxes over the ensuing twelve-month period ending June 30, 2016.  A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated average short-term investment balances and any related short-term borrowings would result in approximately a $4 million impact to earnings from continuing operations before income taxes over the ensuing twelve-month period ending June 30, 2016.

We are exposed to credit risk in connection with our available-for-sale securities through the possible inability of the borrowers to meet the terms of the securities.  We limit credit risk by investing in investment-grade securities, primarily AAA and AA rated securities, as rated by Moody’s, Standard & Poor’s, and for Canadian securities, Dominion Bond Rating Service. Approximately 80% of our available-for-sale securities held a AAA or AA rating at June 30, 2015.  In addition, we limit amounts that can be invested in any security other than U.S. and Canadian government or government agency securities.

We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign currency exchange rates that could impact our consolidated results of operations, financial position, or cash flows. We experienced pressure from foreign currency translation on our revenue and earnings from continuing operations before income taxes in fiscal 2015 and expect this pressure to continue in the early part of fiscal 2016. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We may use derivative financial instruments as risk management tools and not for trading purposes. We had no derivative financial instruments outstanding at June 30, 2015 or 2014.


33



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The update provides guidance on whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU No. 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We have not yet determined the impact of ASU 2015-05 on our consolidated results of operations, financial condition, or cash flows.
    
In April 2015, the FASB issued ASU 2015-04, "Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets." The update allows an entity to remeasure their pension and other post-retirement benefit plan assets and liabilities at the month-end closest to a significant event such as a plan amendment, curtailment, or settlement. ASU 2015-04 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted. The impact of ASU 2015-04 is dependent upon the nature of future significant events impacting our pension plans, if any.

In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The update requires retrospective application. ASU 2015-03 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted. The impact of ASU 2015-03 is dependent upon the nature of future debt issuances, if any.

In May 2014, the FASB issued 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, 2017. Early adoption is permitted. We have not yet determined the impact of ASU 2014-09 on our 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, we 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 our consolidated results of operations, financial condition, or cash flows.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below.

34



Revenue Recognition. Our revenues are primarily attributable to fees for providing services (e.g., Employer Services' payroll processing fees), investment income on payroll funds, payroll tax filing funds and other Employer Services' client-related funds, and fees charged to implement clients on the Company's solutions. We enter into agreements for a fixed fee per transaction (e.g., number of payees or number of payrolls processed). Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured.

We report PEO revenues net of direct pass-through costs, which are costs billed and incurred for PEO Services worksite employees, primarily consisting of payroll wages and payroll taxes. Benefits, workers' compensation, and state unemployment tax fees for worksite employees are included in PEO revenues and the associated costs are included in operating expenses.

We recognize interest income on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.

Client implementation fees are charged to set clients up on our solutions and are deferred until the client has gone live and services have begun. These fees are amortized to revenue over the longer of the contractual term or expected client life, including estimated renewals of client contracts.

We assess the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history.

Goodwill. We account for goodwill in accordance with ASC 350-10, which states that goodwill should not be amortized, but instead tested for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. We perform this impairment test by first comparing the fair value of each reporting unit to its carrying amount. If the carrying value for a reporting unit exceeds its fair value, we then compare the implied fair value of our goodwill to the carrying amount in order to determine the amount of the impairment, if any. We determine the fair value of our reporting units using an equal weighted blended approach, which combines the income approach, which is the present value of expected cash flows, discounted at a risk-adjusted weighted-average cost of capital; and the market approach, which is based on using market multiples of companies in similar lines of business. Significant assumptions used in determining the fair value of our reporting units include projected revenue growth rates, profitability projections, working capital assumptions, the weighted-average cost of capital, the determination of appropriate market comparison companies, and terminal growth rates. We had $1,793.5 million of goodwill as of June 30, 2015. Based on the fair value analysis completed in the fourth quarter of 2015, management concluded that fair value exceeded carrying value for all reporting units and that no reporting units were at risk of goodwill impairment. In completing the annual impairment test for fiscal 2015, we evaluated the reasonableness of differences noted between the fair value and carrying value of each reporting unit. Given the significance of our goodwill, an adverse change to the fair value of goodwill and intangible assets could result in an impairment charge which could be material to our consolidated earnings if we are unable to generate the anticipated revenue growth, synergies and/or cost savings associated with our acquisitions. In fiscal 2014, the Company performed the required annual impairment tests of goodwill and determined that there were no impairments. During the fourth quarter of fiscal 2013, there was an impairment charge of $42.7 million for the ADP AdvancedMD reporting unit.

Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.

There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Specifically, the likelihood of an entity's tax benefits being sustained must be “more likely than not” assuming that those positions will be examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If a tax position drops below the “more likely than not” standard, the benefit can no longer be recognized. Assumptions, judgment and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard could materially impact our consolidated financial statements. As of June 30, 2015 and 2014, the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $27.1 million and $56.5 million, respectively.


35



If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Based on current estimates, favorable settlements related to various jurisdictions and tax periods could increase earnings up to $5 million in the next twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.

Stock-Based Compensation. We measure stock-based compensation expense based on the fair value of the award on the date of grant. We determine the fair value of stock options issued by using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of our 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 option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. Determining these assumptions is subjective and complex, and, therefore, a change in the assumptions utilized could impact the calculation of the fair value of our stock options.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures About Market Risk” under “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
 

36



Item 8.  Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the accompanying consolidated balance sheets of Automatic Data Processing, Inc. and subsidiaries (the “Company”) as of June 30, 2015 and 2014, and the related statements of consolidated earnings, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2015. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a) 2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Automatic Data Processing, Inc. and subsidiaries as of June 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 7, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 7, 2015


37



Statements of Consolidated Earnings
(In millions, except per share amounts)

Years ended June 30,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
 
$
7,928.3

 
$
7,595.4

 
$
7,060.9

Interest on funds held for clients
 
377.7

 
373.4

 
420.4

PEO revenues (A)
 
2,632.5

 
2,257.6

 
1,960.7

TOTAL REVENUES
 
10,938.5

 
10,226.4

 
9,442.0

 
 
 
 
 
 
 
EXPENSES:
 
 

 
 

 
 
Costs of revenues:
 
 

 
 

 
 
Operating expenses
 
5,625.3

 
5,290.8

 
4,883.6

Systems development and programming costs
 
595.4

 
551.2

 
496.6

Depreciation and amortization
 
206.9

 
199.0

 
193.9

TOTAL COSTS OF REVENUES
 
6,427.6

 
6,041.0

 
5,574.1

 
 
 
 
 
 
 
Selling, general, and administrative expenses
 
2,496.9

 
2,370.3

 
2,200.4

Goodwill impairment
 

 

 
42.7

Interest expense
 
6.5

 
6.1

 
9.1

TOTAL EXPENSES
 
8,931.0

 
8,417.4

 
7,826.3

 
 
 
 
 
 
 
Other income, net
 
(63.2
)
 
(70.2
)
 
(94.4
)
 
 
 
 
 
 
 
EARNINGS FROM CONTINUING OPERATIONS
      BEFORE INCOME TAXES
 
2,070.7

 
1,879.2

 
1,710.1

 
 
 
 
 
 
 
Provision for income taxes
 
694.2

 
636.6

 
587.9

NET EARNINGS FROM CONTINUING OPERATIONS
 
$
1,376.5

 
$
1,242.6

 
$
1,122.2

 
 
 
 
 
 
 
EARNINGS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES
 
171.5

 
414.9

 
441.0

Provision for income taxes
 
95.5

 
141.6

 
157.4

NET EARNINGS FROM DISCONTINUED OPERATIONS
 
$
76.0

 
$
273.3

 
$
283.6

 
 
 
 
 
 
 
NET EARNINGS
 
$
1,452.5

 
$
1,515.9

 
$
1,405.8

 
 
 
 
 
 
 
Basic Earnings Per Share from Continuing Operations
 
$
2.91

 
$
2.59

 
$
2.32

Basic Earnings Per Share from Discontinued Operations
 
0.16

 
0.57

 
0.59

BASIC EARNINGS PER SHARE
 
$
3.07

 
$
3.17

 
$
2.91

 
 
 
 
 
 
 
Diluted Earnings Per Share from Continuing Operations
 
$
2.89

 
$
2.57

 
$
2.30

Diluted Earnings Per Share from Discontinued Operations
 
0.16

 
0.57

 
0.58

DILUTED EARNINGS PER SHARE
 
$
3.05

 
$
3.14

 
$
2.89

 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
472.6

 
478.9

 
482.7

Diluted weighted average shares outstanding
 
475.8

 
483.1

 
487.1


(A) As of fiscal 2015, 2014, and 2013, Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $26,674.1 million, $23,192.2 million, and $19,956.2 million, respectively.

See notes to the consolidated financial statements.

38






Statements of Consolidated Comprehensive Income
(In millions)

Years ended June 30,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Net earnings
 
$
1,452.5

 
$
1,515.9

 
$
1,405.8

 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
Currency translation adjustments
 
(239.6
)
 
59.9

 
(2.4
)
 
 
 
 
 
 
 
Unrealized net (losses)/gains on available-for-sale securities
 
(103.0
)
 
53.5

 
(394.6
)
Tax effect
 
38.6

 
(18.2
)
 
138.5

Reclassification of net gains on available-for-sale securities to net earnings
 
(4.9
)
 
(16.5
)
 
(28.6
)
Tax effect
 
1.6

 
6.1

 
10.1

 
 
 
 
 
 
 
Pension net (losses)/gains arising during the period
 
(87.4
)
 
102.8

 
68.2

Tax effect
 
32.7

 
(39.7
)
 
(25.7
)
Reclassification of pension liability adjustment to net earnings
 
17.9

 
20.7

 
31.7

Tax effect
 
(6.5
)
 
(5.8
)
 
(12.0
)
 
 
 
 
 
 
 
Other comprehensive (loss)/income, net of tax
 
(350.6
)
 
162.8

 
(214.8
)
Comprehensive income
 
$
1,101.9

 
$
1,678.7

 
$
1,191.0




























See notes to the consolidated financial statements.

39


Consolidated Balance Sheets
(In millions, except per share amounts)
June 30,
 
2015
 
2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents (A)
 
$
1,639.3

 
$
1,584.0

Short-term marketable securities (A)
 
26.6

 
2,032.2

Accounts receivable, net
 
1,546.9

 
1,498.8

Other current assets
 
731.1

 
689.8

Assets of discontinued operations
 

 
2,430.2

Total current assets before funds held for clients
 
3,943.9