10-Q 1 q1fy1610q.htm Q1FY16 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
______________

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2015

OR

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

AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
______________
 
Delaware
22-1467904
(State or other jurisdiction of incorporation or
organization)
(IRS Employer Identification No.)
 
One ADP Boulevard, Roseland, New Jersey
07068 
(Address of principal executive offices) 
(Zip Code)

Registrant’s telephone number, including area code: (973) 974-5000
______________
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý       No   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
    Large accelerated filer x
 
Accelerated filer o
    Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  ý

The number of shares outstanding of the registrant’s common stock as of October 31, 2015 was 461,206,624.




Table of Contents

 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
Statements of Consolidated Earnings
Three months ended September 30, 2015 and 2014
 
 
 
 
Statements of Consolidated Comprehensive Income
Three months ended September 30, 2015 and 2014
 
 
 
 
Consolidated Balance Sheets
At September 30, 2015 and June 30, 2015
 
 
 
 
Statements of Consolidated Cash Flows
Three Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 
September 30,
 
2015
 
2014
REVENUES:
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
$
1,928.7

 
$
1,884.4

Interest on funds held for clients
87.8

 
90.2

PEO revenues (A)
697.5

 
591.5

TOTAL REVENUES
2,714.0

 
2,566.1

 
 
 
 
EXPENSES:
 

 
 

Costs of revenues:
 

 
 

Operating expenses
1,439.8

 
1,361.2

Systems development and programming costs
156.1

 
145.6

Depreciation and amortization
50.6

 
51.5

TOTAL COSTS OF REVENUES
1,646.5

 
1,558.3

 
 
 
 
Selling, general, and administrative expenses
605.3

 
576.0

Interest expense
4.9

 
1.9

TOTAL EXPENSES
2,256.7

 
2,136.2

 
 
 
 
Other income, net
(47.7
)
 
(20.5
)
 
 
 
 
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
505.0

 
450.4

 
 
 
 
Provision for income taxes
167.5

 
153.8

NET EARNINGS FROM CONTINUING OPERATIONS
$
337.5

 
$
296.6

 
 
 
 
(LOSS)/EARNINGS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES
(1.4
)
 
67.7

(Benefit)/Provision for income taxes
(0.5
)
 
69.1

NET LOSS FROM DISCONTINUED OPERATIONS
$
(0.9
)
 
$
(1.4
)
 
 
 
 
NET EARNINGS
$
336.6

 
$
295.2

 
 
 
 
Basic Earnings Per Share from Continuing Operations
$
0.73

 
$
0.62

Basic Loss Per Share from Discontinued Operations

 

BASIC EARNINGS PER SHARE
$
0.73

 
$
0.62

 
 
 
 
Diluted Earnings Per Share from Continuing Operations
$
0.72

 
$
0.62

Diluted Loss Per Share from Discontinued Operations

 

DILUTED EARNINGS PER SHARE
$
0.72

 
$
0.61

 
 
 
 
Basic weighted average shares outstanding
462.4

 
478.4

Diluted weighted average shares outstanding
465.7

 
481.7

 
 
 
 
Dividends declared per common share
$
0.490

 
$
0.480


(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $6,865.3 million and $5,736.2 million for the three months ended September 30, 2015 and 2014, respectively.

See notes to the Consolidated Financial Statements.

3





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

 
Three Months Ended
 
September 30,
 
2015
 
2014
Net earnings
$
336.6

 
$
295.2

 
 
 
 
Other comprehensive income/(loss):
 
 
 
Currency translation adjustments
(22.0
)
 
(108.9
)
 
 
 
 
Unrealized net gains/(losses) on available-for-sale securities
53.4

 
(94.1
)
Tax effect
(20.0
)
 
34.0

Reclassification of net gains on available-for-sale securities to net earnings

 
(0.8
)
Tax effect

 
0.3

 
 
 
 
Reclassification of pension liability adjustment to net earnings
2.9

 
8.2

Tax effect
(1.1
)
 
(2.8
)
 
 
 
 
Other comprehensive income/(loss), net of tax
13.2

 
(164.1
)
Comprehensive income
$
349.8

 
$
131.1































See notes to the Consolidated Financial Statements.

4


Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
 
September 30,
 
June 30,
 
 
2015
 
2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
3,184.7

 
$
1,639.3

Short-term marketable securities
 
27.2

 
26.6

Accounts receivable, net
 
1,565.2

 
1,546.9

Other current assets
 
890.3

 
731.1

Total current assets before funds held for clients
 
5,667.4

 
3,943.9

Funds held for clients
 
24,508.7

 
24,865.3

Total current assets
 
30,176.1

 
28,809.2

Long-term marketable securities
 
21.3

 
28.9

Long-term receivables, net
 
32.6

 
32.2

Property, plant and equipment, net
 
680.3

 
672.7

Other assets
 
1,309.2

 
1,270.8

Goodwill
 
1,684.6

 
1,793.5

Intangible assets, net
 
476.2

 
503.2

Total assets
 
$
34,380.3

 
$
33,110.5

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
146.5

 
$
194.5

Accrued expenses and other current liabilities
 
1,252.2

 
1,159.2

Accrued payroll and payroll-related expenses
 
405.6

 
627.3

Dividends payable
 
225.7

 
226.4

Short-term deferred revenues
 
218.1

 
228.6

Income taxes payable
 
99.0

 
27.2

Total current liabilities before client funds obligations
 
2,347.1

 
2,463.2

Client funds obligations
 
24,240.2

 
24,650.5

Total current liabilities
 
26,587.3

 
27,113.7

Long-term debt
 
1,995.2

 
9.2

Other liabilities
 
648.0

 
644.3

Deferred income taxes
 
162.9

 
172.1

Long-term deferred revenues
 
356.7

 
362.7

Total liabilities
 
$
29,750.1

 
$
28,302.0

 
 
 
 
 
Commitments and contingencies (Note 13)
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 

 
 

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

 

Common stock, $0.10 par value: authorized, 1,000.0 shares; issued 638.7 shares at September 30, 2015 and June 30, 2015;
outstanding, 463.4 and 466.4 shares at September 30, 2015 and June 30, 2015, respectively
 
63.9

 
63.9

Capital in excess of par value
 
659.6

 
663.3

Retained earnings
 
13,568.6

 
13,460.3

Treasury stock - at cost: 175.3 and 172.3 shares at September 30, 2015 and June 30, 2015, respectively
 
(9,414.5
)
 
(9,118.4
)
Accumulated other comprehensive loss
 
(247.4
)
 
(260.6
)
Total stockholders’ equity
 
4,630.2

 
4,808.5

Total liabilities and stockholders’ equity
 
$
34,380.3

 
$
33,110.5





See notes to the Consolidated Financial Statements.

5

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


 
 
Three Months Ended
 
 
September 30,
 
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
336.6

 
$
295.2

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

 
 

Depreciation and amortization
 
68.8

 
67.7

Deferred income taxes
 
29.4

 
9.3

Stock-based compensation expense
 
34.7

 
38.7

Excess tax benefit related to exercise of stock options and restricted stock
 
(15.9
)
 
(44.2
)
Net pension expense
 
4.4

 
5.8

Net amortization of premiums and accretion of discounts on available-for-sale securities
 
24.1

 
25.3

Gain on sale of divested businesses, net of tax
 
(21.8
)
 

Other
 
5.8

 
(6.9
)
Changes in operating assets and liabilities, net of effects from acquisitions
and divestitures of businesses:
 
 

 
 

(Increase) / decrease in accounts receivable
 
(32.3
)
 
27.8

Increase in other assets
 
(249.2
)
 
(224.4
)
Decrease in accounts payable
 
(19.5
)
 
(9.1
)
Decrease in accrued expenses and other liabilities
 
(71.9
)
 
(12.4
)
Proceeds from the sale of notes receivable
 

 
207.2

Operating activities of discontinued operations
 

 
(1.8
)
Net cash flows provided by operating activities
 
93.2

 
378.2

 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Purchases of corporate and client funds marketable securities
 
(859.8
)
 
(894.2
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
 
1,255.3

 
595.2

Net (increase) / decrease in restricted cash and cash equivalents held to satisfy client funds obligations
 
(137.8
)
 
1.5

Capital expenditures
 
(55.6
)
 
(36.1
)
Additions to intangibles
 
(45.4
)
 
(43.9
)
Acquisitions of businesses, net of cash acquired
 

 
(8.1
)
Proceeds from the sale of property, plant, and equipment and other assets
 

 
23.6

Dividend received from CDK Global, Inc.
 

 
825.0

Cash retained by CDK Global, Inc.
 

 
(180.0
)
Proceeds from the sale of divested businesses
 
162.5

 

Investing activities of discontinued operations
 

 
(15.9
)
Net cash flows provided by investing activities
 
319.2

 
267.1

 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Net (decrease) / increase in client funds obligations
 
(275.1
)
 
47.3

Net proceeds from debt issuance
 
1,986.4

 

Payments of debt
 
(0.6
)
 
(0.6
)
Repurchases of common stock
 
(308.1
)
 
(61.2
)
Net proceeds from stock purchase plan and stock-based compensation plans
 
(22.0
)
 
16.5

Excess tax benefit related to exercise of stock options and restricted stock
 
15.9

 
44.2

Dividends paid
 
(229.0
)
 
(229.8
)
Net repayments of commercial paper borrowings
 

 
(236.0
)
Other
 
(23.4
)
 

Financing activities of discontinued operations
 

 
1.6

Net cash flows provided by / (used in) financing activities
 
1,144.1

 
(418.0
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(11.1
)
 
(35.2
)
 
 
 
 
 
Net change in cash and cash equivalents
 
1,545.4

 
192.1

 
 
 
 
 
Cash and cash equivalents, beginning of period
 
1,639.3

 
1,983.6

Cash and cash equivalents, end of period
 
3,184.7

 
2,175.7

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

 
2.2

Cash and cash equivalents of continuing operations, end of period
 
$
3,184.7

 
$
2,173.5

See notes to the Consolidated Financial Statements.

6


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

Note 1.  Basis of Presentation

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

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto.  Actual results may differ from those estimates. The Consolidated Financial Statements and all relevant footnotes have been adjusted for all businesses that qualify as a discontinued operation (see Note 3). The Interim Financial Data by Segment has also been adjusted to reflect the historical results of the AdvancedMD (“AMD”) business within the Other segment (see Note 15).

Interim financial results are not necessarily indicative of financial results for a full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (“fiscal 2015”).

Note 2.  New Accounting Pronouncements

In July 2015, the Company adopted Accounting Standards Update ("ASU") 2015-03, "Simplifying the Presentation of Debt Issuance Costs." Debt issuance costs have been presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. ASU 2015-03 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.

In July 2015, the Company adopted 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 a discontinued operation. As a result of ASU 2014-08, the Company did not classify AMD as a discontinued operation. The businesses classified as a discontinued operation prior to June 30, 2015 continue to be classified as a discontinued operation (see Note 3).

In September 2015, the Company adopted ASU 2015-16, "Simplifying the Accounting for Measurement Period Adjustments." The update eliminates the need to retrospectively adjust prior period information in the financial statement for acquisition adjustments to goodwill during the measurement period. The impact of ASU 2015-16 will be dependent on any future acquisitions, if any.

In April 2015, the Financial Accounting Standards Board ("FASB") issued 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 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company has not yet determined the impact of ASU 2015-05 on its 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 the Company's pension plans, if any.


7


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. The Company has not yet determined the impact of ASU 2014-09 on its consolidated results of operations, financial condition, or cash flows.

Note 3. Divestitures

A. Disposition

On September 1, 2015, the Company completed the sale of its AMD business for a pre-tax gain of $29.1 million, less costs to sell, and recorded such gain within Other income, net on the Statements of Consolidated Earnings. The Company determined that the disposition did not meet the criteria for reporting discontinued operations under ASU 2014-08, which was adopted prospectively on July 1, 2015, as the disposition of this business does not represent a strategic shift that has a major effect on the Company's operations or financial results. Beginning in the first quarter of the fiscal year ending June 30, 2016 ("fiscal 2016"), the historical results of AMD are being reported in the Other segment (see Note 15).

B. Discontinued Operations

On June 26, 2015, the Company completed the sale of its Procure-to-Pay business ("P2P"), which was previously reported in the Employer Services segment, for a pre-tax gain of $100.9 million, less costs to sell, and recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings.

On September 30, 2014, the Company completed the tax free spin-off of its former Dealer Services business, which was a separate reportable segment, into an independent publicly traded company called CDK Global, Inc. ("CDK"). As a result of the spin-off, ADP stockholders of record on September 24, 2014 (the "record date") received one share of CDK common stock on September 30, 2014, par value $0.01 per share, for every three shares of ADP common stock held by them on the record date and cash for any fractional shares of CDK common stock. ADP distributed approximately 160.6 million shares of CDK common stock in the distribution. During the three months ended September 30, 2015, the Company became aware that 1.0 million of the 160.6 million shares of CDK stock distributed at the distribution date were inadvertently issued and distributed with respect to certain unvested Company equity awards.  The 1.0 million shares were canceled during the three months ended September 30, 2015.  Such shares distributed as part of the spin-off did not have any impact to previously reported results of operations, financial condition, or cash flows. The spin-off was made without the payment of any consideration or the exchange of any shares by ADP stockholders. The spin-off, transitional, and on-going relationships between ADP and CDK are governed by the Separation and Distribution Agreement entered into between ADP and CDK and certain other ancillary agreements.

Incremental costs associated with the spin-off of CDK of $42.8 million for the three months ended September 30, 2014 are included in discontinued operations on the Statements of Consolidated Earnings.


8



In conjunction with the spin-off of CDK and the sale of P2P, the Company has classified the operating results of these businesses as discontinued operations for all periods presented. Results for discontinued operations were as follows:
 
Three Months Ended
 
September 30,
 
2015
 
2014
Revenues
$

 
$
516.6

 
 
 
 
Earnings from discontinued operations before income taxes

 
67.7

Provision for income taxes

 
69.1

Net loss from discontinued operations before gain on disposal of discontinued operations

 
(1.4
)
 
 
 
 
Adjustment of gain on disposal of P2P
(1.4
)
 

Provision for income taxes
(0.5
)
 

Net adjustment of gain on disposal of P2P
(0.9
)
 

 
 
 
 
Net loss from discontinued operations
$
(0.9
)
 
$
(1.4
)

Note 4.  Earnings per Share (“EPS”)
 
 
Basic
 
Effect of Employee Stock Option Shares
 
Effect of
Employee
Restricted
Stock
Shares
 
Diluted
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
337.5

 
 

 
 

 
$
337.5

Weighted average shares (in millions)
 
462.4

 
1.3

 
2.0

 
465.7

EPS from continuing operations
 
$
0.73

 
 

 
 

 
$
0.72

Three Months Ended September 30, 2014
 
 

 
 

 
 

 
 

Net earnings from continuing operations
 
$
296.6

 
 

 
 

 
$
296.6

Weighted average shares (in millions)
 
478.4

 
2.2

 
1.1

 
481.7

EPS from continuing operations
 
$
0.62

 
 

 
 

 
$
0.62


Options to purchase 1.3 million and 1.4 million shares of common stock for the three months ended September 30, 2015 and 2014, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Note 5. Other Income, Net
 
Three Months Ended
 
September 30,
 
2015
 
2014
Interest income on corporate funds
$
(18.6
)
 
$
(18.3
)
Realized gains on available-for-sale securities
(0.9
)
 
(1.0
)
Realized losses on available-for-sale securities
0.9

 
0.2

Gain on the sale of notes receivable (see Note 7)

 
(1.4
)
Gain on sale of AMD (see Note 3)
(29.1
)
 

Other income, net
$
(47.7
)
 
$
(20.5
)
 

9



Note 6. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at September 30, 2015 and June 30, 2015 were as follows:

 
September 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Value (A)
Type of issue:
 
 
 
 
 
 
 
Money market securities, cash and other cash equivalents
$
7,367.1

 
$

 
$

 
$
7,367.1

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate bonds
9,250.8

 
125.7

 
(22.1
)
 
9,354.4

U.S. Treasury and direct obligations of
U.S. government agencies
5,300.6

 
74.9

 
(2.2
)
 
5,373.3

Asset-backed securities
2,660.8

 
24.6

 
(1.7
)
 
2,683.7

Canadian government obligations and
Canadian government agency obligations
902.1

 
13.1

 
(0.2
)
 
915.0

Canadian provincial bonds
704.9

 
25.8

 
(0.6
)
 
730.1

Municipal bonds
588.4

 
17.4

 
(0.5
)
 
605.3

Other securities
697.3

 
16.0

 
(0.3
)
 
713.0

 
 
 
 
 
 
 
 
Total available-for-sale securities
20,104.9

 
297.5

 
(27.6
)
 
20,374.8

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
27,472.0

 
$
297.5

 
$
(27.6
)
 
$
27,741.9

 
(A) Included within available-for-sale securities are corporate investments with fair values of $48.5 million and funds held for clients with fair values of $20,326.3 million. All available-for-sale securities were included in Level 2.
 
June 30, 2015
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value (B)
Type of issue:
 

 
 

 
 

 
 

Money market securities, cash and other cash equivalents
$
5,686.3

 
$

 
$

 
$
5,686.3

Available-for-sale securities:
 

 
 

 
 

 
 

Corporate bonds
9,497.5

 
115.7

 
(29.6
)
 
9,583.6

U.S. Treasury and direct obligations of
U.S. government agencies
5,764.3

 
64.6

 
(9.8
)
 
5,819.1

Asset-backed securities
2,442.4

 
11.1

 
(6.1
)
 
2,447.4

Canadian government obligations and
Canadian government agency obligations
923.2

 
15.4

 
(0.2
)
 
938.4

Canadian provincial bonds
723.9

 
27.9

 
(0.8
)
 
751.0

Municipal bonds
586.6

 
14.3

 
(1.4
)
 
599.5

Other securities
719.4

 
16.1

 
(0.7
)
 
734.8

 
 
 
 
 
 
 
 
Total available-for-sale securities
20,657.3

 
265.1

 
(48.6
)
 
20,873.8

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
26,343.6

 
$
265.1

 
$
(48.6
)
 
$
26,560.1


(B) Included within available-for-sale securities are corporate investments with fair values of $55.5 million and funds held for clients with fair values of $20,818.3 million. All available-for-sale securities were included in Level 2.


10



For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for fiscal 2015. The Company did not transfer any assets between Level 1 and Level 2 during the three months ended September 30, 2015 or fiscal 2015. In addition, the Company did not adjust the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 1 or Level 3 as of September 30, 2015 or June 30, 2015.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of September 30, 2015, are as follows: 
 
September 30, 2015
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Unrealized
Losses
 
Fair Market
Value
 
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(20.4
)
 
$
1,803.0

 
$
(1.7
)
 
$
213.2

 
$
(22.1
)
 
$
2,016.2

U.S. Treasury and direct obligations of
U.S. government agencies
(1.3
)
 
383.7

 
(0.9
)
 
375.8

 
(2.2
)
 
759.5

Asset-backed securities
(0.5
)
 
310.5

 
(1.2
)
 
424.4

 
(1.7
)
 
734.9

Canadian government obligations and
Canadian government agency obligations
(0.2
)
 
55.6

 

 

 
(0.2
)
 
55.6

Canadian provincial bonds
(0.6
)
 
84.0

 

 
10.0

 
(0.6
)
 
94.0

Municipal bonds
(0.4
)
 
42.4

 
(0.1
)
 
3.4

 
(0.5
)
 
45.8

Other securities
(0.2
)
 
30.0

 
(0.1
)
 
13.6

 
(0.3
)
 
43.6

 
$
(23.6
)
 
$
2,709.2

 
$
(4.0
)
 
$
1,040.4

 
$
(27.6
)
 
$
3,749.6


The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2015, are as follows: 
 
June 30, 2015
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Unrealized
Losses
 
Fair Market
Value
 
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(27.3
)
 
$
2,403.5

 
$
(2.3
)
 
$
228.1

 
$
(29.6
)
 
$
2,631.6

U.S. Treasury and direct obligations of U.S. government agencies
(7.2
)
 
865.1

 
(2.6
)
 
374.0

 
(9.8
)
 
1,239.1

Asset-backed securities
(3.2
)
 
606.8

 
(2.9
)
 
443.6

 
(6.1
)
 
1,050.4

Canadian government obligations and
Canadian government agency obligations
(0.2
)
 
85.8

 

 

 
(0.2
)
 
85.8

Canadian provincial bonds
(0.8
)
 
101.5

 

 
10.0

 
(0.8
)
 
111.5

Municipal bonds
(1.2
)
 
143.6

 
(0.2
)
 
6.0

 
(1.4
)
 
149.6

Other securities
(0.4
)
 
36.6

 
(0.3
)
 
13.7

 
(0.7
)
 
50.3

 
$
(40.3
)
 
$
4,242.9

 
$
(8.3
)
 
$
1,075.4

 
$
(48.6
)
 
$
5,318.3


At September 30, 2015, Corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, that primarily carry credit ratings of A and above, and have maturities ranging from October 2015 to June 2023.

At September 30, 2015, U.S. Treasury and direct obligations of U.S. government agencies primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $3,968.5 million and $1,006.8 million,

11



respectively. U.S. Treasury and direct obligations of U.S. government agencies represent senior, unsecured, non-callable debt that primarily carries a credit rating of Aaa, as rated by Moody's, and AA+, as rated by Standard & Poor's, and have maturities ranging from November 2015 through August 2025.

At September 30, 2015, asset-backed securities include AAA rated senior tranches of securities with predominantly prime collateral of fixed rate credit card, auto loan, and rate reduction receivables with fair values of $1,806.1 million, $455.4 million, and $239.4 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables.  The primary risk associated with these securities is the collection risk of the underlying receivables.  All collateral on such asset-backed securities has performed as expected through September 30, 2015.

At September 30, 2015, other securities and their fair value primarily represent: AAA and AA rated sovereign bonds of $331.0 million, AAA and AA rated supranational bonds of $254.2 million, and AA rated mortgage-backed securities of $92.6 million that are guaranteed primarily by Federal National Mortgage Association ("Fannie Mae"). The Company's mortgage-backed securities represent an undivided beneficial ownership interest in a group or pool of one or more residential mortgages. These securities are collateralized by the cash flows of 15-year and 30-year residential mortgages and are guaranteed by Fannie Mae as to the timely payment of principal and interest.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 
 
September 30,
 
June 30,
 
 
2015
 
2015
Corporate investments:
 
 
 
 
Cash and cash equivalents
 
$
3,184.7

 
$
1,639.3

Short-term marketable securities
 
27.2

 
26.6

Long-term marketable securities
 
21.3

 
28.9

Total corporate investments
 
$
3,233.2

 
$
1,694.8

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

Funds held for clients have been invested in the following categories:
 
 
September 30,
 
June 30,
 
 
2015
 
2015
Funds held for clients:
 
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
 
$
4,182.4

 
$
4,047.0

Restricted short-term marketable securities held to satisfy client funds obligations
 
4,143.1

 
4,497.7

Restricted long-term marketable securities held to satisfy client funds obligations
 
16,183.2

 
16,320.6

Total funds held for clients
 
$
24,508.7

 
$
24,865.3


Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll and tax payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients.  The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date.  The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $24,240.2 million and $24,650.5 million as of September 30, 2015 and June 30, 2015, respectively.  The Company has classified funds held for clients as a current asset since these funds are held solely for the purposes of satisfying the client funds obligations.  The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows.  The Company has reported the cash inflows and outflows related to client funds investments with original maturities of ninety days or less on a net basis within net increase in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations in the investing section of the Statements of Consolidated Cash Flows.  The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.


12



Approximately 80% of the available-for-sale securities held a AAA or AA rating at September 30, 2015, as rated by Moody's, Standard & Poor's and, for Canadian securities, Dominion Bond Rating Service.  All available-for-sale securities were rated as investment grade at September 30, 2015.
 
Expected maturities of available-for-sale securities at September 30, 2015 are as follows:
One year or less
$
4,170.3

One year to two years
3,219.6

Two years to three years
2,314.3

Three years to four years
3,470.7

After four years
7,199.9

 
 

Total available-for-sale securities
$
20,374.8


Note 7. Receivables

Accounts receivable, net, includes the Company's trade receivables, which are recorded based upon the amount the Company expects to receive from its clients, net of an allowance for doubtful accounts. The Company's receivables also include notes receivable for the implementation and transition costs for ADP's products and services. Notes receivable are recorded based upon the amount the Company expects to receive from its clients, net of an allowance for doubtful accounts and unearned income. The allowance for doubtful accounts is the Company's best estimate of probable credit losses related to trade receivables and notes receivable based upon the aging of the receivables, historical collection data, and internal assessments of credit quality, as well as the economy as a whole. The Company charges off uncollectable amounts against the reserve in the period in which it determines they are uncollectable. Unearned income on notes receivable is amortized using the effective interest method.
  
The Company’s receivables, whose carrying value approximates fair value, are as follows:
 
September 30, 2015
 
June 30, 2015
 
Current
 
Long-term
 
Current
 
Long-term
Trade receivables
$
1,583.4

 
$

 
$
1,564.6

 
$

Notes receivable
19.8

 
34.5

 
18.8

 
34.0

Less:
 
 
 
 
 
 
 
Allowance for doubtful accounts - trade receivables
(36.6
)
 

 
(35.1
)
 

Allowance for doubtful accounts - notes receivable
(0.4
)
 
(0.7
)
 
(0.4
)
 
(0.6
)
Unearned income - notes receivable
(1.0
)
 
(1.2
)
 
(1.0
)
 
(1.2
)
 
$
1,565.2

 
$
32.6

 
$
1,546.9

 
$
32.2


During the three months ended September 30, 2014, the Company sold notes receivable related to Dealer Services financing arrangements for $207.2 million. Although the sale of the notes receivable transfers the majority of the risk to the purchaser, the Company does retain a minimal level of credit risk on the sold receivables. The cash received in exchange for the notes receivable sold was recorded within the operating activities on the Statements of Consolidated Cash Flows and the gain on sale realized was recorded within Other income, net on the Statements of Consolidated Earnings (see Note 5).



13





Note 8. Goodwill and Intangibles Assets, net

Changes in goodwill for the three months ended September 30, 2015 are as follows:
 
Employer
Services
 
PEO
Services
 
Other
 
Total
Balance at June 30, 2015 (A)
$
1,788.7

 
$
4.8

 
$

 
$
1,793.5

  Transfer of AMD goodwill (see Note 15)
(100.4
)
 

 
100.4

 

Currency translation adjustments
(8.5
)
 

 

 
(8.5
)
  Disposition of AMD

 

 
(100.4
)
 
(100.4
)
Balance at September 30, 2015
$
1,679.8

 
$
4.8

 
$

 
$
1,684.6


(A) The goodwill balance at June 30, 2015 is net of accumulated impairment losses of $42.7 million related to the Employer Services segment.

Components of intangible assets, net, are as follows:
 
 
September 30,
 
June 30,
 
 
2015
 
2015
Intangible assets:
 
 
 
 
Software and software licenses
 
$
1,652.5

 
$
1,648.7

Customer contracts and lists
 
604.3

 
625.4

Other intangibles
 
208.1

 
209.0

 
 
2,464.9

 
2,483.1

Less accumulated amortization:
 
 

 
 

Software and software licenses
 
(1,319.6
)
 
(1,308.7
)
Customer contracts and lists
 
(475.6
)
 
(478.6
)
Other intangibles
 
(193.5
)
 
(192.6
)
 
 
(1,988.7
)
 
(1,979.9
)
Intangible assets, net
 
$
476.2

 
$
503.2


Other intangibles consist primarily of purchased rights, covenants, patents, and trademarks (acquired directly or through acquisitions).  All of the intangible assets have finite lives and, as such, are subject to amortization.  The weighted average remaining useful life of the intangible assets is 5 years (3 years for software and software licenses, 9 years for customer contracts and lists, and 2 years for other intangibles).  Amortization of intangible assets was $35.7 million and $37.2 million for the three months ended September 30, 2015 and 2014, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:
 
Amount
Nine months ending June 30, 2016
$
106.5

Twelve months ending June 30, 2017
$
124.2

Twelve months ending June 30, 2018
$
80.7

Twelve months ending June 30, 2019
$
49.6

Twelve months ending June 30, 2020
$
38.7

Twelve months ending June 30, 2021
$
29.4



14



Note 9. Short-term Financing

The Company has a $2.75 billion, 364-day credit agreement with a group of lenders that matures in June 2016.  In addition, the Company has a five-year $3.25 billion credit facility maturing in June 2019 that contains an accordion feature under which the aggregate commitment can be increased by $500.0 million, subject to the availability of additional commitments.  The Company also has a $2.25 billion five-year credit facility that matures in June 2020 that also contains an accordion feature under which the aggregate commitment can be increased by $500.0 million, subject to the availability of additional commitments.  The interest rate applicable to committed borrowings is tied to LIBOR, the 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 facilities.  The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary.  The Company had no borrowings through September 30, 2015 under the credit facilities.

The Company’s U.S. short-term funding requirements related to client funds are sometimes obtained through a commercial paper program, which provides for the issuance of up to $8.25 billion in aggregate maturity value of commercial paper, rather than liquidating investments in available-for-sale securities related to previously-collected client funds. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 by Moody’s.  These ratings denote the highest quality commercial paper securities.  Maturities of commercial paper can range from overnight to up to 364 days. At September 30, 2015 and June 30, 2015, the Company had no commercial paper outstanding. For the three months ended September 30, 2015 and 2014, the Company had average daily borrowings of $3.5 billion and $3.1 billion, respectively, at a weighted average interest rate of 0.2% and 0.1%, respectively. The weighted average maturity of the Company’s commercial paper during the three months ended September 30, 2015 was approximately two days.

The Company’s U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating investments in available-for-sale securities related to previously-collected client funds.  These agreements generally have terms ranging from overnight to up to five business days. At September 30, 2015 and June 30, 2015, there were no outstanding obligations related to the reverse repurchase agreements. For the three months ended September 30, 2015 and 2014, the Company had average outstanding balances under reverse repurchase agreements of $485.6 million and $570.7 million, respectively, at weighted average interest rates of 0.4%. In addition, the Company has $3.25 billion available on a committed basis under the U.S. reverse repurchase agreements.


Note 10. Long-term Debt

In September 2015, the Company issued fixed-rate notes with 5-year and 10-year maturities for an aggregate principal amount of $2.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
The principal amounts and associated effective interest rates of the Notes and other debt as of September 30, 2015, are as follows. Debt outstanding at the comparative period of June 30, 2015 was not significant.
Debt instrument
September 30, 2015
 
Effective Interest Rate
Fixed-rate 2.250% notes due September 15, 2020
$
1,000.0

 
2.39
%
Fixed-rate 3.375% notes due September 15, 2025
1,000.0

 
3.48
%
Other
11.6

 
 
 
2,011.6

 
 
Less: current portion
(2.8
)
 
 
Less: unamortized discount and debt issuance costs
(13.6
)
 
 
Total long-term debt
$
1,995.2

 
 
The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.
As of September 30, 2015, the fair value of the Notes, based on level 2 inputs, was $2,021.7 million. The Company’s Notes are valued utilizing a variety of inputs obtained from an independent pricing service, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. For

15



a description of the fair value hierarchy and the Company's fair value methodologies see Note 1 "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for fiscal 2015.

Note 11. Employee Benefit Plans

A.  Stock-based Compensation Plans
    
Stock-based compensation consists of the following:

Stock Options.  Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant.  Stock options are issued under a graded vesting schedule and have a term of 10 years.  Options granted prior to July 1, 2008 generally vest ratably over five years and options granted after July 1, 2008 generally vest ratably over four years.  Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.

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

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

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

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

16



actual performance against targets. Dividend equivalents are paid on awards settled in stock under the performance-based restricted stock unit program.
Employee Stock Purchase Plan.  The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period.  This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards.  From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.  The Company repurchased 4.2 million shares in the three months ended September 30, 2015 as compared to 0.6 million shares repurchased in the three months ended September 30, 2014. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

The following table represents stock-based compensation expense and related income tax benefits for the three months ended September 30, 2015 and 2014, respectively:
 
Three Months Ended
 
September 30,
 
2015
 
2014
Operating expenses
$
5.9

 
$
7.5

Selling, general and administrative expenses
24.3

 
25.6

System development and programming costs
4.5

 
5.6

Total pre-tax stock-based compensation expense
$
34.7

 
$
38.7

 
 
 
 
Income tax benefit
$
12.6

 
$
13.9


Stock-based compensation expense attributable to employees of the discontinued operations are included in discontinued operations in the Statements of Consolidated Earnings, and therefore not presented in the table above. For the three months ended September 30, 2014, such stock-based compensation expense was $5.2 million.

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

As of September 30, 2015, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $24.5 million, $33.1 million, and $166.2 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.1 years, 1.6 years, and 1.7 years, respectively.


17



During the three months ended September 30, 2015, the following activity occurred under the Company’s existing plans:

Stock Options:
 
 

Number
of Options
(in thousands)
 

Weighted
Average Price
(in dollars)
Options outstanding at July 1, 2015
 
5,888

 
$
55

Options granted
 
1,138

 
$
75

Options exercised
 
(321
)
 
$
37

Options canceled
 
(80
)
 
$
69

Options outstanding at September 30, 2015
 
6,625

 
$
59


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

Number of Shares
(in thousands)
 

Number of Units
(in thousands)
Restricted shares/units outstanding at July 1, 2015
 
2,137

 
486

Restricted shares/units granted
 
951

 
237

Restricted shares/units vested
 
(1,109
)
 
(245
)
Restricted shares/units forfeited
 
(41
)
 
(16
)
Restricted shares/units outstanding at September 30, 2015
 
1,938

 
462


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

Number of Shares
(in thousands)
 
Number of Units
(in thousands)
Restricted shares/units outstanding at July 1, 2015
 
903

 
534

Restricted shares/units granted
 
286

 
302

Restricted shares/units vested
 
(540
)
 
(37
)
Restricted shares/units forfeited
 
(22
)
 
(19
)
Restricted shares/units outstanding at September 30, 2015
 
627

 
780


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


18



The fair value for stock options granted was estimated at the date of grant using the following assumptions:
 
Three Months Ended
 
September 30,
 
2015
 
2014
Risk-free interest rate
1.6
%
 
1.9
%
Dividend yield
2.6
%
 
2.3
%
Weighted average volatility factor
25.6
%
 
22.8
%
Weighted average expected life (in years)
5.4

 
5.4

Weighted average fair value (in dollars) (A)
$
13.16

 
$
12.45


(A) The weighted average fair values of grants issued before September 30, 2014 were adjusted to reflect the impact of the spin-off of CDK.

B.  Pension Plans

The components of net pension expense were as follows:
 
Three Months Ended
 
September 30,
 
2015
 
2014
Service cost – benefits earned during the period
$
17.6

 
$
19.2

Interest cost on projected benefits
16.9

 
15.8

Expected return on plan assets
(32.9
)
 
(32.5
)
Net amortization and deferral
2.8

 
4.4

Curtailments and special termination benefits

 
3.2

Net pension expense
$
4.4

 
$
10.1


Net pension expense for the three months ended September 30, 2014 includes $4.3 million reported within earnings from discontinued operations on the Statements of Consolidated Earnings. Included within pension expense related to discontinued operations for the three months ended September 30, 2014 were total one-time charges of $3.2 million for curtailment charges and special termination benefits directly attributable to the spin-off of CDK.

Note 12. Income Taxes

The effective tax rate for the three months ended September 30, 2015 and 2014 was 33.2% and 34.1%, respectively. The decrease in the effective tax rate is due to an increase in foreign tax credits and the impact of the AMD business sale which had a book basis lower than the tax basis primarily due to a previously recorded non tax-deductible goodwill impairment charge.  This decrease was partially offset by adjustments to the tax liability during the three months ended September 30, 2014 for amounts previously accrued.

Note 13. Commitments and Contingencies

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

The Company is subject to various claims and litigation in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. At this time, the Company is unable to estimate any reasonably possible loss, or range of reasonably possible loss, with respect to the matters described above. This is primarily because these matters involve complex issues subject to inherent uncertainty. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company.


19



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

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

Changes in AOCI by component are as follows:
 
Three Months Ended
 
September 30, 2015
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at June 30, 2015
$
(228.3
)
 
$
143.9

 
$
(176.2
)
 
$
(260.6
)
Other comprehensive (loss)/income
before reclassification adjustments
(22.0
)
 
53.4

 

 
31.4

Tax effect

 
(20.0
)
 

 
(20.0
)
Reclassification adjustments to
net earnings

 

(A)
2.9

(B)
2.9

Tax effect

 

 
(1.1
)
 
(1.1
)
Balance at September 30, 2015
$
(250.3
)
 
$
177.3

 
$
(174.4
)
 
$
(247.4
)

 
Three Months Ended
 
September 30, 2014
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Income/(Loss)
Balance at June 30, 2014
$
99.5

 
$
211.6

 
$
(132.9
)
 
$
178.2

Other comprehensive loss
   before reclassification adjustments
(108.9
)
 
(94.1
)
 

 
(203.0
)
Tax effect

 
34.0

 

 
34.0

Reclassification adjustments to
    net earnings

 
(0.8
)
(A)
8.2

(B)
7.4

Tax effect

 
0.3

 
(2.8
)
 
(2.5
)
Reclassification adjustment to
    retained Earnings
$
(88.2
)
(C)
$

 
$

 
$
(88.2
)
Balance at September 30, 2014
$
(97.6
)
 
$
151.0

 
$
(127.5
)
 
$
(74.1
)

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

(B) Reclassification adjustments out of AOCI are included in net pension expense (see Note 11).

(C) Reclassification adjustment out of AOCI is related to the CDK spin-off and included in retained earnings on the Consolidated Balance Sheets.


20



Note 15. Interim Financial Data by Segment

Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two reportable segments: Employer Services and PEO Services. The primary components of the “Other” segment are the results of operations of ADP Indemnity (a wholly-owned captive insurance company that provides workers’ compensation and employer’s liability deductible reimbursement insurance protection for PEO Services' worksite employees), non-recurring gains and losses, miscellaneous processing services, such as customer financing transactions, the elimination of intercompany transactions, interest expense, certain charges and expenses that have not been allocated to the reportable segments, such as stock based compensation expense, and beginning in the first quarter of fiscal 2016, the historical results of the AMD business, which was previously reported in the Employer Services segment. This change, which is adjusted for both the current period and the prior period in the table below, did not significantly affect reportable segment results and is consistent with the way the chief operating decision maker assesses the performance of the reportable segments.

Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons.  Other costs are recorded based on management responsibility.  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 reconciling adjustment to the reportable segments' revenues and earnings from continuing operations before income taxes is eliminated in consolidation.

Segment Results:
 
Revenues from
Continuing Operations
 
Three Months Ended
 
September 30,
 
2015
 
2014
Employer Services
$
2,130.8

 
$
2,071.9

PEO Services
701.5

 
594.9

Other
10.7

 
19.3

Reconciling item:
 
 
 
Client fund interest
(129.0
)
 
(120.0
)
 
$
2,714.0

 
$
2,566.1

  
 
Earnings from Continuing Operations
before Income Taxes
 
Three Months Ended
 
September 30,
 
2015
 
2014
Employer Services
$
587.2

 
$
580.8

PEO Services
88.4

 
67.0

Other
(41.6
)
 
(77.4
)
Reconciling item:
 
 
 

Client fund interest
(129.0
)
 
(120.0
)
 
$
505.0

 
$
450.4



21


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

FORWARD-LOOKING STATEMENTS

This document and other written or oral statements made from time to time by Automatic Data Processing, Inc. and its subsidiaries ("ADP" or "the Company") may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and 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, retaining, and selling additional services to clients; the pricing of products and services; changes in, or interpretations of, existing legislation or regulations, or compliance with new 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; vulnerability to security breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; changes in technology and data; availability of skilled technical associates; and the impact of new acquisitions and divestitures. These factors are not exhaustive. 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” in our Annual Report on Form 10‑K for the fiscal year ended June 30, 2015 ("fiscal 2015") should be considered in evaluating any forward-looking statements contained herein.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. Our Consolidated Financial Statements and relevant footnotes have been adjusted for discontinued operations.  The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and other comprehensive income.  We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements.  The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances.  Actual amounts and results could differ from these estimates made by management.  Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for fiscal 2015 in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Executive Overview     

We are one of the largest providers of business processing and cloud-based solutions - including payroll, talent management, human resource management, benefits administration and time and attendance - to employers around the world.  As a leading provider of global Human Capital Management ("HCM") solutions, we are focused on driving product innovation and enhancing our distribution and service capabilities.   

During the three months ended September 30, 2015, we further concentrated our focus on our global HCM strategy and our results continue to reflect the strength of our underlying business model, our success in the market, and our focus on future growth. This concentrated focus is evidenced by our investments in product innovation and our sales force, as well as the disposition of the AdvancedMD ("AMD") business. Additionally, during the three months ended September 30, 2015, we changed our capital structure via the issuance of $2 billion in senior notes, the proceeds of which we intend to return to shareholders via share repurchases over the next 12 to 24 months, subject to market conditions. The introduction of long-term debt to our capital structure and anticipated share repurchases are intended to enhance total shareholder return over the longer term.

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 sales force to deliver exceptionally strong new business bookings during the three months ended September 30, 2015. During the quarter, we increased our investments in our sales force and in operational

22



resources to support new business sold. We remain pleased with the solid financial performance of our business segments despite pressure from foreign currency translation and our high-margin client funds interest revenue. Our increased investments in our sales force and operational resources to support new business sold come primarily as a result of our strong new business bookings results in the fourth quarter of fiscal 2015 and the three months ended September 30, 2015, particularly related to selling and implementing clients on products that are designed to assist them in complying with the ACA. We expect the margin pressure from client funds interest revenue to continue through the remainder of the fiscal year ended June 30, 2016 ("fiscal 2016"), while we expect the pressure from foreign currency translation to begin subsiding in the second half of fiscal 2016 and our increased investment in our ACA products to begin producing increased recurring revenue in the second half of fiscal 2016. Both of our business segments have driven solid organic revenue growth in the three months ended September 30, 2015, especially when considering the pressure on Employer Services revenues from foreign currency translation. Revenue retention, which is coming off a historic high in prior periods, declined compared to last year’s first quarter due to elevated losses on our legacy client platforms. This metric continues to be a point of internal focus as we upgrade our clients from legacy platforms to our new cloud-based solutions and monitor increased activity in the market from clients choosing their ACA providers. Despite this decrease in revenue retention, we achieved solid revenue growth, mainly from new business started and the continued increase in the number of employees on our clients' payrolls as measured on a same-store-sales basis utilizing a representative subset of payrolls ranging from small to large businesses that are reflective of a broad range of U.S. geographic regions. This new business started shows the strength of our sales force, the demand for our products, and our ability to execute new client starts.
We have a strong business model with a high percentage of recurring revenues, good margins, the ability to generate consistent, healthy cash flows, strong client retention, and low capital expenditure requirements. Our financial condition and balance sheet remain solid at September 30, 2015, with cash and cash equivalents and marketable securities of approximately $3,233.2 million, which includes the proceeds from our $2 billion senior notes issuance completed in September 2015. 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.

23




Analysis of Consolidated Operations
 
Three Months Ended
 
 
 
 
 
September 30,
 
% Change
 
2015
 
2014
 
As Reported
 
Constant Dollar Basis (Note 1)
Total revenues from continuing operations
$
2,714.0

 
$
2,566.1

 
6
 %
 
9
%
 
 
 
 
 
 
 
 
Costs of revenues:
 

 
 

 
 

 
 
Operating expenses
1,439.8

 
1,361.2

 
6
 %
 
9
%
Systems development and programming costs
156.1

 
145.6

 
7
 %
 
12
%
Depreciation and amortization
50.6

 
51.5

 
(2
)%
 
2
%
Total costs of revenues
1,646.5

 
1,558.3

 
6
 %
 
9
%
 
 
 
 
 
 
 
 
Selling, general and administrative costs
605.3

 
576.0

 
5
 %
 
8
%
Interest expense
4.9

 
1.9

 
158
 %
 
163
%
Total expenses
2,256.7

 
2,136.2

 
6
 %
 
9
%
 
 
 
 
 
 
 
 
Other income, net
(47.7
)
 
(20.5
)
 
n/m

 
n/m

 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
$
505.0

 
$
450.4

 
12
 %
 
14
%
Margin
18.6
%
 
17.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
$
167.5

 
$
153.8

 
9
 %
 
11
%
Effective tax rate
33.2
%
 
34.1
%
 
 

 
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
337.5

 
$
296.6

 
14
 %
 
16
%
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
$
0.72

 
$
0.62

 
16
 %
 
19
%

n/m - not meaningful

Note 1 - Non GAAP Financial Measures

Within the tables above and below, we use the term "constant dollar basis" so that certain financial measures can be viewed without the impact of foreign currency fluctuations to facilitate period-to-period comparisons of business performance. The financial results on a "constant dollar basis" are determined by calculating the current year result using foreign exchange rates consistent with the prior year. We believe "constant dollar basis" provides information that isolates the actual growth of our operations.


24



Additionally, the following table reconciles our reported results to adjusted results that exclude certain interest amounts and a gain on the sale of AMD in the three months ended September 30, 2015. 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 and assess our operating performance against prior periods. Since adjusted earnings from continuing operations before interest and income taxes ("adjusted EBIT"), adjusted provision for income taxes, adjusted net earnings from continuing operations, adjusted diluted earnings per share (“EPS”) from continuing operations and adjusted EBIT margin 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, provision for income taxes, net earnings from continuing operations, and diluted EPS from continuing operations, and they may not be comparable to similarly titled measures used by other companies. The adjusted EBIT performance measure includes interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy. We believe these amounts to be fundamental to the underlying operations of our business model.

 
 
Three Months Ended
 
 
 
 
 
 
September 30,
 
% Change
 
 
2015
 
2014
 
As Reported
 
Constant Dollar Basis
Earnings from continuing operations before income taxes
 
$
505.0

 
$
450.4

 
12
%
 
14
%
Adjustments:
 
 
 
 
 
 
 
 
Interest expense
 
3.0

 
0.4

 
 
 
 
Interest income
 
(2.0
)
 
(2.2
)
 
 
 
 
Gain on sale of business
 
(29.1
)
 

 
 
 
 
Adjusted EBIT
 
$
476.9

 
$
448.6

 
6
%
 
8
%
Adjusted EBIT Margin
 
17.6
%
 
17.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
167.5

 
$
153.8

 
9
%
 
11
%
Adjustment:
 
 
 
 
 
 
 
 
Gain on sale of business
 
(7.3
)
 

 
 
 
 
Adjusted provision for income taxes
 
$
160.2

 
$
153.8

 
4
%
 
6
%
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
337.5

 
$
296.6

 
14
%
 
16
%
Adjustments:
 
 
 
 
 
 
 
 
Gain on sale of business
 
(29.1
)
 

 
 
 
 
Provision for income taxes on gain on sale of business

 
7.3

 

 
 
 
 
Adjusted net earnings from continuing operations
 
$
315.7

 
$
296.6

 
6
%
 
8
%
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
0.72

 
$
0.62

 
16
%
 
19
%
Adjustment:
 
 
 
 
 
 
 
 
Gain on sale of business
 
(0.05
)
 

 
 
 
 
Adjusted diluted earnings per share from continuing operations
 
$
0.68

 
$
0.62

 
10
%
 
11
%

Total Revenues

Our revenues, as reported, increased 6% for the three months ended September 30, 2015, despite pressure from foreign currency translation, primarily due to new business started during the past twelve months 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.

Total revenues for the three months ended September 30, 2015 include interest on funds held for clients of $87.8 million, as compared to $90.2 million for the three months ended September 30, 2014.  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% for the three months ended September 30, 2015, as compared to 1.9% for the three months ended September 30, 2014, partially offset by the increase in our average client funds balance of 3%, to $19,358.9 million, for the three months ended September 30, 2015.

25




Total Expenses

Our total expenses, as reported, increased 6% for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase is primarily due to increased costs to service our expanding client base in support of our growing revenue. Total expenses also increased 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 and high demand for additional HCM solutions, including products that assist businesses in complying with the ACA. These increases were partially offset by the impact of foreign currency translation.

Operating expenses, as reported, increased 6% for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. Operating expenses include the costs directly attributable to servicing our clients and implementing new business. Also, 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 $534.1 million for the three months ended September 30, 2015, which included costs for benefits coverage of $452.7 million and costs for workers’ compensation and payment of state unemployment taxes of $81.4 million.  These pass-through costs were $454.4 million for the three months ended September 30, 2014, which included costs for benefits coverage of $382.9 million and costs for workers’ compensation and payment of state unemployment taxes of $71.5 million. Additionally, operating expenses increased due to higher costs to implement and service our expanding client base in support of our growing revenue, including our ACA products stemming from our exceptionally strong new business bookings finish to fiscal 2015. These increases were partially offset by the impact of foreign currency translation.

Systems development and programming costs, as reported, increased 7% for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014, due to increased investments and costs to develop, support, and maintain our products, partially offset by a higher proportion of capitalized costs of our strategic projects and the impact of foreign currency translation.

Selling, general and administrative expenses, as reported, increased 5% for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014.  The increase was primarily related 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 and particularly high demand for products that are designed to assist businesses in complying with the ACA. Selling, general and administrative expenses also increased due to a $10.0 million reversal of reserves in the three months ended September 30, 2014 related to our former Dealer Services business financing arrangements which were sold to a third party. These increases were partially offset by the impact of foreign currency translation.

Other Income, net
 
Three Months Ended
 
 
 
September 30,
 
 
 
2015
 
2014
 
$ Change
Interest income on corporate funds
$
(18.6
)
 
$
(18.3
)
 
$
0.3

Realized gains on available-for-sale securities
(0.9
)
 
(1.0
)
 
(0.1
)
Realized losses on available-for-sale securities
0.9

 
0.2

 
(0.7
)
Gain on the sale of notes receivable (see Note 7)

 
(1.4
)
 
(1.4
)
Gain on sale of AMD (see Note 3)
(29.1
)
 

 
29.1

Other income, net
$
(47.7
)
 
$
(20.5
)
 
$
27.2


Other income, net, increased $27.2 million for the three months ended September 30, 2015, as compared to the