10-K 1 q4fy1610kinq4fy16.htm 10-K Document
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, 2016
 
 
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. [x]
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 $33,868,790,841. On July 29, 2016 there were 456,176,951 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2016 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
Item 4.
Mine Safety Disclosures
 
 
 
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 (“HCM”) solutions to employers, offering solutions to businesses of all sizes, whether they have simple or complex needs. We serve more than 650,000 clients in more than 110 countries and territories. 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
ADPs Mission and Strategy
ADP’s mission is to power organizations with insightful solutions that drive business success. 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 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;
grow and scale our market-leading Human Resources (“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.

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.
Employer Services. Our Employer Services segment offers a comprehensive range of HR Business Process Outsourcing and technology-enabled HCM solutions. These offerings include:
Payroll Services
Benefits Administration
Talent Management
HR Management

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Time and Attendance Management
Insurance Services
Retirement Services
Tax and Compliance Services

Employer Services serves clients ranging from single-employee small businesses to large enterprises with multinational operations.
Professional Employer Organization Services. ADP’s PEO business, called ADP TotalSource®, serves approximately 9,700 clients with comprehensive employment administration outsourcing solutions through a 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 439,000 worksite employees in all 50 states.
PRODUCTS AND SERVICES

Employer Services’ Products and Services

Human Capital Management. 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 530,000 clients via ADP’s strategic software as a service (“SaaS”) offerings, commonly referred to as “the cloud.” As a leader in the growing HR Business Process Outsourcing 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 8.1 million of our clients’ employees convenient access to their HR information, via multiple mobile device platforms, around the world and in more than 27 languages. ADP has also opened access to developers and system integrators through certain of our 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 approximately 470,000 small businesses in the United States. It combines a software platform for managing small business payroll, HR 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 more than 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 HCM capabilities within a single solution that unifies the five major areas of HCM: HR management, benefits administration, payroll, time and attendance management, and talent management.

ADP® GlobalView® HCM is a solution for multinational organizations of all sizes. As an integrated and flexible infrastructure supported by a team of experts, ADP GlobalView HCM allows companies of all sizes – from those with small and mid-sized operations to the largest multinational corporations – to standardize their HCM strategies globally (including payroll, HR, talent, time and benefits management) and adapt to changing local needs, while helping to drive overall organizational agility and engagement.

Outside the United States, ADP offers comprehensive HCM solutions on local, country-specific platforms. These suites of services offer various combinations of payroll, HR 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

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a wide range of payroll options, including entering their payroll data online with an internet-based solution or via a mobile device, and outsourcing their entire payroll process to ADP. ADP also enables its clients to connect 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. On behalf of our clients, ADP 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 in the United States, and prepares and files similar reports internationally . 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), Consolidated Omnibus Budget Reconciliation Act (“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 that provides their employees with tools, communications, and other resources they need to understand their benefits options and make informed choices.
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’s Insurance Services business, 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 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.

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Tax and Compliance Services
ADP SmartCompliance. In the United States, the ADP SmartCompliance® solution integrates client data delivered from ADP integrated HCM platforms or 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 teams use the data and work with clients to help them manage changing regulatory landscapes and improve business processes. ADP SmartCompliance integrates several HCM-related compliance processes, including health care reform under the Affordable Care Act, employment tax, wage payments, tax credits, wage garnishments, unemployment claims, and employment verifications.
ADP SmartCompliance Employment Tax. 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, as appropriate, to approximately 7,100 federal, state, and local tax agencies. ADP also responds to inquiries from tax agencies. In addition to our full service employment 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, 2016 (“fiscal 2016”), ADP in the United States processed and delivered approximately 60 million employee year-end tax statements and approximately 53 million employer payroll tax returns and deposits, and moved approximately $1.7 trillion in client funds to taxing and other agencies and our clients’ employees and other payees via electronic transfer, direct deposit, and check.
ADP SmartCompliance Wage Payments. 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, an ATM or a 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 Tax Credits. ADP helps clients in the United States take advantage of tax credit and incentive opportunities as they hire new employees and expand or relocate their business operations, including federal, state, and local tax credits and incentives 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 credits and incentives. Integrating the entire employment tax credits process with clients’ existing hiring programs, ADP 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.
ADP SmartCompliance Wage Garnishments. ADP offers an integrated solution to help our clients manage the wage garnishment process through integration with their payroll systems. In the United States, ADP helps employers process and submit required correspondence and responses to federal and state agencies, courts and third parties. In addition, ADP’s Wage Garnishment services in the United States include wage garnishment order evaluation and processing, disbursement services and a call center to field garnishment-related inquiries from employees, payees, and other third parties.
ADP SmartCompliance 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.
ADP SmartCompliance Employment Verification. ADP offers an automated solution to securely provide credentialed verifiers with information to verify employment and income such as when an employee applies for a loan, credit card, lease or government assistance.
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.

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Professional Employer Organization Services’ Products and Services
ADP TotalSource, ADP’s PEO business, offers small and mid-sized businesses a comprehensive HR outsourcing solution through a co-employment model. As a PEO, ADP TotalSource provides complete HR management services while the client continues to direct the day-to-day job-related duties of the employees. ADP TotalSource combines 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 9,700 clients and approximately 439,000 worksite employees in all 50 states.
MARKETS AND SALES
Employer Services’ HCM solutions are offered in more than 110 countries and territories. 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, HR 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.
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.

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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 HR outsourcing solutions in the world. Employer Services competes with other business outsourcing companies, companies providing ERP services, providers of cloud-based HCM solutions and financial institutions. PEO Services competes with other PEOs providing similar services, as well as business outsourcing companies, companies providing ERP services and providers of cloud-based HCM solutions. Other competitive factors include a company’s 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 U.S. and foreign laws and regulations. In addition, many of our solutions are designed to assist clients with their compliance with certain U.S. and foreign 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 operations and client solutions, including dedicated compliance personnel and training programs.
As one of the world’s largest providers of HR 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. For instance, in the United States, the Health Insurance Portability and Accountability Act of 1996 applies to our COBRA, flexible spending account and insurance services businesses, and ADP TotalSource. We are also subject to federal, state and foreign 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, including the invalidation in the European Union of the Safe Harbor Principles for the transfer of personal data between the European Union and the United States and the adoption by the European Union of a general data protection regulation, will 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, prepaid access 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. In addition, our U.S. prepaid access offering is subject to the anti-money laundering and reporting provisions of The Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2000 (the “BSA”). Elements of our money transmission activities outside of the United States are subject to similar licensing and anti-money laundering and reporting laws and requirements in the countries in which we provide such services. Our employee screening and selection services business offers background checking services that are subject to the Fair Credit Reporting Act. 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 be subject to 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 U.S. and foreign laws and regulations that apply to them. Although these 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 help our clients 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.
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

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information regarding changes in laws and regulations that could have a materially adverse effect on our reputation, results of operations or financial condition or have other adverse consequences.
CLIENTS AND CLIENT CONTRACTS
ADP provides its services to more than 650,000 clients. In fiscal 2016, 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 client or other large, complicated implementation. Although we monitor sales that have not yet been installed, we do not view this metric as material to an understanding of our overall business in light of the recurring nature of our business. This metric is not a reported number, but it is used by management as a planning tool to allocate resources needed to install services, and as a means of assessing our performance against the expectations of our clients. In addition, some of our products and services are sold under longer term contracts with initial terms ranging from two to seven years. However, this anticipated future revenue under contract is not a significant portion of ADP’s expected future revenue, is not a meaningful indicator of our future performance and is not used by management internally to estimate ADP’s future revenue.
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 11 years in Employer Services, and approximately 7 years in PEO Services, and has not varied significantly from period to period.
PRODUCT DEVELOPMENT
ADP continually upgrades, enhances, and expands its solutions and services. In general, new solutions and services supplement rather than replace our existing solutions and services and, given our recurring revenue model, do not have a material and immediate effect on ADP's revenues. ADP believes that our strategic solutions and services have significant remaining life cycles.
SYSTEMS DEVELOPMENT AND PROGRAMMING
During the fiscal years ended June 30, 2016, 2015, and 2014, ADP invested approximately $818 million, $767 million, and $686 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.
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 57,000 persons as of June 30, 2016.

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

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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 U.S. and foreign laws and regulations, including, but not limited to, the laws and regulations described in the “Industry Regulation” section in Part I, Item 1 of this Annual Report on Form 10-K. Failure to comply with laws and regulations applicable to our operations or client solutions 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 average client balances and, thereby 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.  Health care 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 health care 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 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 anti-corruption laws and regulations, anti-money laundering laws and regulations, economic and trade sanctions, 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 has resulted 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, 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 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 and procedures to monitor and address compliance with applicable anti-corruption, economic and trade sanctions and anti-money laundering laws and regulations, and we are continuously in the process of

10


reviewing, upgrading and enhancing certain of our policies and procedures; however, there can be no assurance that none of our employees, consultants or agents will take actions in violation of our policies, for which we may be ultimately responsible, or that our policies and procedures will be adequate or will be determined to be adequate by regulators.  Any violations of applicable anti-corruption, economic and trade sanctions or anti-money laundering laws or regulations 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.
Failure to comply with data privacy laws and regulations could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences
The collection, hosting, transfer, disclosure, use, storage and security of personal information required to provide our services is subject to federal, state and foreign data privacy laws. These laws, which are not uniform, do one or more of the following: regulate the collection, transfer (including in some cases, the transfer outside the country of collection), processing, storage, use and disclosure of personal information, require notice to individuals of privacy practices; give individuals certain access and correction rights with respect to their personal information; and prevent the use or disclosure of personal information for secondary purposes such as marketing. Under certain circumstances, some of these laws require us to provide notification to affected individuals, data protection authorities and/or other regulators in the event of a data breach. 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 European Union adopted a comprehensive general data privacy regulation (the “GDPR”) in May 2016 that will replace the current EU Data Protection Directive and related country-specific legislation. The GDPR will become fully effective in May 2018. We are analyzing the GDPR to determine its potential effects on our business practices, and are awaiting anticipated guidance from European Union regulators. Complying with the enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations 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.
Our businesses collect, host, transfer, disclose, use, store and secure 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 collect, host, transfer, disclose, use, store and secure large amounts of personal and business information about our clients, employees of our clients, our vendors and our employees, contractors and temporary staff, including payroll information, health care information, personal and business financial data, social security numbers and their foreign equivalents, bank account numbers, tax information and other sensitive personal and business information.
We are focused on ensuring that we 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 we are 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 collect, host, 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, are increasingly more complex and sophisticated and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate or timely 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

11


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 and to investigate and remediate any security vulnerabilities. In addition, while our operating environments are designed to safeguard and protect personal and business information, we do not have the ability to monitor the implementation or effectiveness of any 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, theft of non-public or other sensitive information, or similar act by a malevolent party, or inadvertent acts by our own employees, contractors or temporary staff, 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 have encountered to date have materially impacted us, 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 losses or claims that may arise in connection with 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.
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 and services to meet client needs and preferences, the demand for our solutions and 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 and client needs and preferences, the demand for our solutions and 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, which may adversely affect our business and financial results.
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. In addition, as part of our client funds investment strategy, we extend the maturities of our investment portfolio for client funds and utilize short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. In order to satisfy these short term funding requirements, we maintain access to various sources of liquidity, including borrowings under our commercial paper program and our committed credit facilities, our ability to execute reverse repurchase transactions and corporate cash balances. A reduction in the availability of any such financing during periods of disruption in the financial

12


markets or otherwise may require us to sell client fund assets to satisfy our short-term funding requirements, which may result in the recognition of losses and adversely impact our results of operations, financial condition and cash flow.
We are dependent upon various large banks to execute electronic payments and wire transfers as part of our client payroll, tax and other money movement 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, tax and other money movement 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 results of operations, financial position and cash flows.
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, investment grade long-term debt ratings 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 adversely impact our results of operations.
If the distribution of CDK Global® 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
On September 30, 2014, the Company completed the tax-free spinoff of its former Dealer Services business through the distribution of all of the issued and outstanding common stock of CDK Global, Inc. (“CDK Global”) to ADP’s stockholders. CDK Global was formed to hold ADP’s former 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. Prior to completing the spinoff of CDK Global, 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 Global. 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 ADP’s stockholders that received CDK Global common stock pursuant to the distribution 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 of ADP common stock that received CDK Global common stock pursuant to the distribution 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 CDK Global common stock received by such holder. In addition, ADP generally would recognize gain with respect to the distribution and certain related transactions, and CDK Global 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 Global or its stockholders were to engage in certain transactions after the distribution. In such cases, ADP or its stockholders that received CDK Global common stock pursuant to the spinoff could incur significant U.S. federal income tax liabilities, and CDK Global could be required to indemnify ADP for any resulting taxes and related expenses, which could be material. CDK Global 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.


13


Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
ADP owns 10 of its processing/print centers, and 17 other operational offices, sales offices, and its corporate headquarters in Roseland, New Jersey, which aggregate approximately 3,458,692 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 6,313,800 square feet worldwide, expire at various times up to the year 2027. 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 ultimate resolution of these matters will not have a materially adverse impact on its financial condition, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable


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, 2016, there were 42,827 holders of record of the Company’s common stock. As of such date, 537,352 additional holders held their common stock in “street name.”

 
Price Per Share
 
Dividends
 
High
     
Low
     
Per Share
Fiscal 2016 quarter ended
 
 
 
 
 
 
June 30
$91.87
 
$84.36
 
$0.530
March 31
$90.00
 
$76.65
 
$0.530
December 31
$90.67
 
$78.74
 
$0.530
September 30
$85.21
 
$64.29
 
$0.490
 
Fiscal 2015 quarter ended
 
 
 
 
 
 
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
$84.68
 
$79.20
 
$0.480

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 Global, Inc. for every three shares of the Company’s common stock. In the table above, stock prices prior to September 30, 2014 have not been adjusted for the impact of the spin off. Stock prices beginning on October 1, 2014 reflect the impact of the spin off.


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, 2016 to
     April 30, 2016
630,085
$89.94
630,000
38,484,415
May 1, 2016 to
     May 31, 2016
765
$87.54
38,484,415
June 1, 2016 to
    June 30, 2016
2,237
$88.02
38,484,415
Total
633,087
 
630,000
 
(1)
     
Pursuant to the terms of the Company’s restricted stock program, the Company purchased 3,087 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
August 2014
 
30 million
August 2015
 
25 million
There is no expiration date for the common stock repurchase plan.

16


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 and the Peer Group Index,(b) assuming an initial investment of $100 on June 30, 2011, with all dividends reinvested. The stock price performance shown on this graph may not be indicative of future performance.


(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.




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. The Company uses certain non-GAAP financial measures that we believe better reflect the underlying operations of our business model, allows investors to assess our performance in a manner similar to the method used by management, and improves our ability to understand and assess our operating performance against prior periods. Refer to (A) below for additional information about our non-GAAP financial measures and our reconciliations to reported results. Additionally, prior period amounts have been adjusted to exclude discontinued operations (refer to Note 2 of our Consolidated Financial Statements for additional information).
 
(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Years ended June 30,
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
11,667.8

 
$
10,938.5

 
$
10,226.4

 
$
9,442.0

 
$
8,897.4

Total costs of revenues
 
$
6,840.3

 
$
6,427.6

 
$
6,041.0

 
$
5,574.1

 
$
5,217.9

Earnings from continuing operations before income taxes
 
$
2,234.7

 
$
2,070.7

 
$
1,879.2

 
$
1,710.1

 
$
1,805.3

Net earnings from continuing operations
 
$
1,493.4

 
$
1,376.5

 
$
1,242.6

 
$
1,122.2

 
$
1,192.2

Adjusted earnings from continuing operations before interest and income taxes (A)
 
$
2,274.2

 
$
2,061.5

 
$
1,870.3

 
$
1,746.5

 
$
1,727.0

Adjusted net earnings from continuing operations (A)
 
$
1,494.8

 
$
1,376.5

 
$
1,242.6

 
$
1,164.9

 
$
1,151.0

 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
 
$
3.27

 
$
2.91

 
$
2.59

 
$
2.32

 
$
2.45

Diluted earnings per share from continuing operations
 
$
3.25

 
$
2.89

 
$
2.57

 
$
2.30

 
$
2.42

Adjusted diluted earnings per share from continuing operations (A)
 
$
3.26

 
$
2.89

 
$
2.57

 
$
2.39

 
$
2.34

Basic weighted average shares outstanding
 
457.0

 
472.6

 
478.9

 
482.7

 
487.3

Diluted weighted average shares outstanding
 
459.1

 
475.8

 
483.1

 
487.1

 
492.2

Cash dividends declared per share
 
$
2.08

 
$
1.95

 
$
1.88

 
$
1.70

 
$
1.55

Return on equity ("ROE") from continuing operations (B)
 
32.2
%
 
24.0
%
 
19.3
%
 
18.2
%
 
19.7
%
 
 
 
 
 
 
 
 
 
 
 
At year end:
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and marketable securities of continuing operations
 
$
3,222.4

 
$
1,694.8

 
$
3,670.3

 
$
1,746.2

 
$
1,416.7

Total assets of continuing operations
 
$
43,670.0

 
$
33,110.5

 
$
29,629.6

 
$
30,041.7

 
$
28,525.6

Total assets
 
$
43,670.0

 
$
33,110.5

 
$
32,059.8

 
$
32,268.1

 
$
30,817.4

Obligations under reverse repurchase agreements
 
$

 
$

 
$

 
$
245.9

 
$

Obligation under commercial paper borrowings
 
$

 
$

 
$
2,173.0

 
$

 
$

Long-term debt
 
$
2,007.7

 
$
9.2

 
$
11.5

 
$
14.7

 
$
16.8

Stockholders’ equity
 
$
4,481.6

 
$
4,808.5

 
$
6,670.2

 
$
6,189.9

 
$
6,114.0

.

(A) Non-GAAP Financial Measures

The following table reconciles our reported results to adjusted results that exclude our provision for income taxes; certain interest amounts; the charges related to our workforce optimization effort in the year ended June 30, 2016 ("fiscal 2016"); the gain on the sale of assets, which includes a building in fiscal 2016 and assets related to rights and obligations to resell a third party expense management platform in the year ended June 30, 2012; the gain on the sale of our AdvancedMD ("AMD") business in fiscal 2016; and a goodwill impairment charge related to our AMD business in the year ended June 30, 2013 ("fiscal 2013"). 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 exclusion of these items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior period, and to plan for future periods by focusing on our underlying operations.  We believe that these adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance.  Generally, the nature of these exclusions are for specific items that are not fundamental to our underlying business operations.  Specifically, we have excluded the impact of certain interest expense (as a result of the issuance of our $2.0 billion fixed-rate notes in September

18



2015 - refer to Note 8 of our Consolidated Financial Statements for additional information), and certain interest income from adjusted earnings from continuing operations before interest and income taxes ("Adjusted EBIT") and have also excluded certain interest expense and certain interest income in prior years for comparability.  However, we continue to include the interest income earned on investments associated with our client funds investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model.  The amounts included as adjustments in the table below represent the interest income and interest expense that is not related to our client funds extended investment strategy and are labeled as "All other interest expense" and "All other interest income." The charges related to our workforce optimization effort represent severance charges.  Severance charges have been taken in the past and not included as an adjustment to get to adjusted results. Unlike severance charges in prior periods, these specific charges relate to a broad-based, company-wide workforce optimization effort. Since Adjusted EBIT, Adjusted net earnings from continuing operations and Adjusted diluted earnings per share (“Adjusted diluted 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, as a substitute for, or superior to 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.

(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Years ended June 30,
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
1,493.4

 
$
1,376.5

 
$
1,242.6

 
$
1,122.2

 
$
1,192.2

Adjustments:
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
741.3

 
694.2

 
636.6

 
587.9

 
613.1

All other interest expense
 
47.9

 
1.5

 
1.6

 
2.3

 
2.7

All other interest income
 
(13.6
)
 
(10.7
)
 
(10.5
)
 
(8.6
)
 
(15.0
)
Gain on sale of AMD
 
(29.1
)
 

 

 

 

Gain on sale of assets
 
(13.9
)
 

 

 

 
(66.0
)
Workforce optimization effort
 
48.2

 

 

 

 

Goodwill impairment charge
 

 

 

 
42.7

 

Adjusted EBIT
 
$
2,274.2

 
$
2,061.5

 
$
1,870.3

 
$
1,746.5

 
$
1,727.0

 
 
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
1,493.4

 
$
1,376.5

 
$
1,242.6

 
$
1,122.2

 
$
1,192.2

Adjustments:
 
 
 
 
 
 
 
 
 
 
Gain on sale of AMD
 
(29.1
)
 

 

 

 

Gain on sale of assets
 
(13.9
)
 

 

 

 
(66.0
)
Workforce optimization effort
 
48.2

 

 

 

 

Goodwill impairment charge (C)
 

 

 

 
42.7

 

Provision for income taxes on gain on sale of AMD (C)
 
7.3

 

 

 

 

Provision for income taxes on gain on sale of assets (C)
 
5.3

 

 

 

 
24.8

Provision for income taxes on workforce optimization effort (C)
 
(16.4
)
 

 

 

 

Adjusted net earnings from continuing operations
 
$
1,494.8

 
$
1,376.5

 
$
1,242.6

 
$
1,164.9

 
$
1,151.0

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
3.25

 
$
2.89

 
$
2.57

 
$
2.30

 
$
2.42

Adjustments:
 
 
 
 
 
 
 
 
 
 
Gain on sale of AMD
 
(0.05
)
 

 

 

 

Gain on sale of assets
 
(0.02
)
 

 

 

 
(0.08
)
Workforce optimization effort
 
0.07

 

 

 

 

Goodwill impairment charge
 

 

 

 
0.09

 

Adjusted diluted earnings per share from continuing operations
 
$
3.26

 
$
2.89

 
$
2.57

 
$
2.39

 
$
2.34



19



(B) Return on Equity

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 2016 includes the gain on the sale of assets, the gain on the sale of AMD, and the charges related to our workforce optimization effort which did not significantly impact the ROE calculation. 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%.

(C) Provision for Income Taxes

To calculate the provision for income taxes on non-GAAP adjustments to arrive at an Adjusted net earnings from continuing operations we use the marginal tax rate in effect during the quarter of the adjustment and then adjust for differences in the book vs. tax basis. The goodwill impairment charge in fiscal 2013 was non tax-deductible.

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” “is designed to” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and depend upon or refer to future events or conditions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements or that could contribute to such difference include: ADP's success in obtaining, and retaining clients, and selling additional services to clients; the pricing of products and services; compliance with existing or new legislation or regulations; changes in, or interpretations of, existing legislation or regulations; overall market, political and economic conditions, including interest rate and foreign currency trends; competitive conditions; our ability to maintain our current credit ratings and the impact on our funding costs and profitability; security or 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, except as required by law. These risks and uncertainties, along with the risk factors discussed under “Item 1A. Risk Factors,” and in other written or oral statements made from time to time by ADP, should be considered in evaluating any forward-looking statements contained herein.

EXECUTIVE OVERVIEW

We are one of the largest providers of cloud-based Human Capital Management ("HCM") solutions - including payroll, talent management, Human Resources and benefits administration, and time and attendance management - to employers around the world. As a leader in this industry, we are focused on driving product innovation, enhancing our distribution and service capabilities, and assisting our clients with their HCM needs in the face of ever increasing regulatory complexity.

Highlights from our 2016 fiscal year include:

New business bookings grew 12% from the year ended June 30, 2015 ("fiscal 2015")
Revenue grew 7%; 8% on a constant dollar basis
Pre-tax margin increased 20 basis points to 19.2%; Adjusted EBIT margin increased 60 basis points to 19.5%
Net earnings from continuing operations increased 8%; Adjusted net earnings from continuing operations grew 9%
Diluted earnings per share from continuing operations increased to $3.25 from $2.89 in the prior year; Adjusted diluted earnings per share from continuing operations increased to $3.26 from $2.89 in the prior year
Enhanced our capital structure by issuing $2 billion of senior notes
Continued our shareholder friendly actions by returning $1.2 billion via share repurchases and over $900 million via dividends, which increased on a per-share basis for the 41st consecutive year
Delivered nearly 10 million Form 1095-Cs to client employees to assist with the Affordable Care Act ("ACA") reporting requirements


20



During the year ended June 30, 2016 ("fiscal 2016"), we continued to focus on our global HCM strategy and our results reflect the strength of our underlying business model, our success in the market, and our focus on growth. This focus is evidenced by our investments in product innovation, service, and our sales force, as well as the disposition of the Advanced MD ("AMD") business.
Our focus on product innovation, the high demand for additional HCM solutions (including products that assist businesses in complying with the ACA), investments in and productivity of our salesforce, and continued positive economic growth in the United States of America ("U.S."), led our sales force to deliver strong new business bookings during fiscal 2016. Our sales force's ability to sell to new and existing clients as well as our implementation team's ability to implement new clients on our solutions and implement new services to existing clients drove solid revenue growth during fiscal 2016. In the second half of fiscal year 2016, we began to see a contribution to revenue growth from our ACA compliance solutions, as our upfront investments in selling and implementation of these products in late fiscal 2015 and throughout fiscal 2016 began to translate into recurring revenue.
This revenue growth was apparent within both of our business segments during fiscal 2016 despite pressure on Employer Services revenues from foreign currency translation. Revenue retention declined compared to fiscal 2015 primarily 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 modern cloud-based solutions and focus on improving the client experience. Our revenue growth also benefited from the continued increase in our pays per control metric, 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 U.S. geographic regions.
During the fourth quarter of fiscal 2016, we incurred a $48 million charge for a broad-based workforce optimization effort undertaken during the period. Additionally, in July 2016, we announced a multi-year service alignment initiative intended to align our client service operations with our platform simplification strategy. In connection with this service alignment initiative, we anticipate incurring pre-tax charges of $100 million to $125 million through the year ended June 30, 2018.
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 June 30, 2016, with cash and cash equivalents and marketable securities of approximately $3.2 billion. Additionally, during fiscal 2016, we changed our capital structure via the issuance of $2 billion in senior notes, the proceeds of which we have begun to return to shareholders via share repurchases. The introduction of long-term debt to our capital structure and the anticipated share repurchases are intended to enhance total shareholder return over the longer term.
Fiscal 2016 was another exciting and dynamic year that showcased our agility as we continued to adapt to the evolving needs of our clients and the changing regulatory environment within our HCM industry as evidenced by our ability to respond to the challenges presented by the ACA.  We continue to be pleased with the success of our sales operations, our ability to continuously innovate and offer new and exciting products to our clients, and the ability of our service organization to adapt to these new services and strategic platforms.  Exiting fiscal 2016, we believe that our efforts during the fiscal year, in conjunction with our service alignment initiative announced in July, positions us well as we head into fiscal 2017.
    



21



RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS

Prior period amounts have been adjusted to exclude discontinued operations (refer to Note 2 of our Consolidated Financial Statements for additional information).

(In millions, except per share amounts)

 
 
Years Ended
 
% Change
 
 
June 30,
 
As Reported
 
Constant Dollar Basis
 
 
2016
 
2015
 
2014
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues from continuing operations
 
$
11,667.8

 
$
10,938.5

 
$
10,226.4

 
7
%
 
7
%
 
8
%
 
9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of revenues:
 
 

 
 

 
 
 
 

 
 

 
 
 
 
Operating expenses
 
6,025.0

 
5,625.3

 
5,290.8

 
7
%
 
6
%
 
9
%
 
8
%
Systems development and programming costs
 
603.7

 
595.4

 
551.2

 
1
%
 
8
%
 
4
%
 
11
%
Depreciation and amortization
 
211.6

 
206.9

 
199.0

 
2
%
 
4
%
 
5
%
 
6
%
Total costs of revenues
 
6,840.3

 
6,427.6

 
6,041.0

 
6
%
 
6
%
 
5
%
 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative costs
 
2,637.0

 
2,496.9

 
2,370.3

 
6
%
 
5
%
 
7
%
 
7
%
Interest expense
 
56.2

 
6.5

 
6.1

 
n/m

 
n/m

 
n/m

 
n/m

Total expenses
 
9,533.5

 
8,931.0

 
8,417.4

 
7
%
 
6
%
 
8
%
 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income, net
 
(100.4
)
 
(63.2
)
 
(70.2
)
 
n/m

 
n/m

 
n/m

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
 
$
2,234.7

 
$
2,070.7

 
$
1,879.2

 
8
%
 
10
%
 
9
%
 
12
%
Margin
 
19.2
%
 
18.9
%
 
18.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
741.3

 
$
694.2

 
$
636.6

 
7
%
 
9
%
 
8
%
 
11
%
Effective tax rate
 
33.2
%
 
33.5
%
 
33.9
%
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
1,493.4

 
$
1,376.5

 
$
1,242.6

 
8
%
 
11
%
 
10
%
 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share ("EPS") from continuing operations
 
$
3.25

 
$
2.89

 
$
2.57

 
12
%
 
12
%
 
13
%
 
14
%
n/m - not meaningful

22




Note 1. Non-GAAP 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. Our constant dollar results are not measures of performance calculated in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and should not be considered in isolation from, as a substitute for, or superior to the U.S. GAAP measures presented.

The following table reconciles our reported results to adjusted results that exclude our provision for income taxes; certain interest amounts; the charges related to our workforce optimization effort; the gain on the sale of a building; and the gain on the sale of our AMD business in fiscal 2016. 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 exclusion of these items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior period, and to plan for future periods by focusing on our underlying operations.  We believe that these adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance.  Generally, the nature of these exclusions are for specific items that are not fundamental to our underlying business operations.  Specifically, we have excluded the impact of certain interest expense (as a result of the issuance of our $2.0 billion fixed-rate notes in September 2015 - refer to Note 8 of our Consolidated Financial Statements for additional information), and interest income from adjusted earnings from continuing operations before interest and income taxes ("Adjusted EBIT") and have also excluded certain interest expense and certain interest income in prior years for comparability.  However, we continue to include the interest income earned on investments associated with our client funds investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model.  The amounts included as adjustments in the table below represent the interest income and interest expense that is not related to our client funds extended investment strategy and are labeled as "All other interest expense" and "All other interest income." The charges related to our workforce optimization effort represent severance charges.  Severance charges have been taken in the past and not included as an adjustment to get to adjusted results. Unlike severance charges in prior periods, these specific charges relate to a broad-based, company-wide workforce optimization effort. Since Adjusted EBIT, Adjusted provision for income taxes, Adjusted net earnings from continuing operations, Adjusted diluted earnings per share ("Adjusted diluted EPS") from continuing operations and Adjusted EBIT margin are not measures of performance calculated in accordance with U.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to 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.


23



 
 
Years Ended
 
% Change
 
 
June 30,
 
As Reported
 
Constant Dollar Basis
 
 
2016
 
2015
 
2014
 
2016
 
2015
 
2016
 
2015
Net earnings from continuing operations
 
$
1,493.4

 
$
1,376.5

 
$
1,242.6

 
8
%
 
11
%
 
10
%
 
12
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
741.3

 
694.2

 
636.6

 
 
 
 
 
 
 
 
All other interest expense
 
47.9

 
1.5

 
1.6

 
 
 
 
 
 
 
 
All other interest income
 
(13.6
)
 
(10.7
)
 
(10.5
)
 
 
 
 
 
 
 
 
Gain on sale of AMD
 
(29.1
)
 

 

 
 
 
 
 
 
 
 
Gain on sale of building
 
(13.9
)
 

 

 
 
 
 
 
 
 
 
Workforce optimization effort
 
48.2

 

 

 
 
 
 
 
 
 
 
Adjusted EBIT
 
$
2,274.2

 
$
2,061.5

 
$
1,870.3

 
10
%
 
10
%
 
11
%
 
12
%
Adjusted EBIT Margin
 
19.5
%
 
18.8
%
 
18.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
741.3

 
$
694.2

 
$
636.6

 
7
%
 
9
%
 
8
%
 
11
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of AMD (a)
 
(7.3
)
 

 

 
 
 
 
 
 
 
 
Gain on sale of building (b)
 
(5.3
)
 

 

 
 
 
 
 
 
 
 
Workforce optimization effort (b)
 
16.4

 

 

 
 
 
 
 
 
 
 
Adjusted provision for income taxes
 
$
745.1

 
$
694.2

 
$
636.6

 
7
%
 
9
%
 
8
%
 
11
%
Adjusted effective tax rate (c)
 
33.3
%
 
33.5
%
 
33.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
1,493.4

 
$
1,376.5

 
$
1,242.6

 
8
%
 
11
%
 
10
%
 
12
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of AMD
 
(29.1
)
 

 

 
 
 
 
 
 
 
 
Gain on sale of building
 
(13.9
)
 

 

 
 
 
 
 
 
 
 
Workforce optimization effort
 
48.2

 

 

 
 
 
 
 
 
 
 
Provision for income taxes on gain on sale of AMD (a)
 
7.3

 

 

 
 
 
 
 
 
 
 
Provision for income taxes on gain on sale of building (b)
 
5.3

 

 

 
 
 
 
 
 
 
 
Income tax benefit for workforce optimization effort (b)
 
(16.4
)
 

 

 
 
 
 
 
 
 
 
Adjusted net earnings from continuing operations
 
$
1,494.8

 
$
1,376.5

 
$
1,242.6

 
9
%
 
11
%
 
10
%
 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS from continuing operations
 
$
3.25

 
$
2.89

 
$
2.57

 
12
%
 
12
%
 
13
%
 
14
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of AMD
 
(0.05
)
 

 

 
 
 
 
 
 
 
 
Gain on sale of building
 
(0.02
)
 

 

 
 
 
 
 
 
 
 
Workforce optimization effort
 
0.07

 

 

 
 
 
 
 
 
 
 
Adjusted diluted EPS from continuing operations
 
$
3.26

 
$
2.89

 
$
2.57

 
13
%
 
12
%
 
14
%
 
14
%

(a) - The tax on the gain on the sale of the AMD business was calculated based on the marginal rate in effect during the quarter of the adjustment adjusted for a book vs. tax basis difference primarily due to a previously recorded non tax-deductible goodwill impairment charge.

(b) - The tax provision/benefit on the gain on the sale of the building and the workforce optimization effort was calculated based on the marginal rate in effect during the quarter of the adjustment.

(c) - The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings from continuing operations plus our Adjusted provision for income taxes.


24



Fiscal 2016 Compared to Fiscal 2015

Total Revenues

Our revenues, as reported, increased 7% in fiscal 2016, despite two percentage points of combined pressure from foreign currency translation and the disposition of the AMD business in September 2015, 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 Professional Employer Organization ("PEO") Services.

Total revenues in fiscal 2016 include interest on funds held for clients of $377.3 million, as compared to $377.7 million in fiscal 2015.  The decrease in the consolidated interest earned on funds held for clients resulted from the decrease in the average interest rate earned in fiscal 2016, as compared to fiscal 2015, partially offset by the increase in our average client funds balances of 2.8% to $22,418.7 million in fiscal 2016.

Total Expenses

Our total expenses, as reported, increased 7% in fiscal 2016, as compared to the same period in the prior year. The increase is primarily due to an increase in PEO services pass-through costs as well as an increase in selling and implementation expenses to support our growth in new business bookings as we experienced continued demand for additional HCM solutions, including products that assist businesses in complying with the ACA. Total expenses also increased due to increased costs to service our client base in support of our growing revenue, and an increase in severance expenses, primarily related to our workforce optimization effort. These increases were partially offset by the impact of foreign currency translation.

Operating expenses, as reported, increased 7% in fiscal 2016, as compared to fiscal 2015. PEO Services pass-through costs were $2,336.3 million for fiscal 2016, which included costs for benefits coverage of $1,906.0 million and costs for workers’ compensation and payment of state unemployment taxes of $430.3 million.  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. Additionally, operating expenses increased due to higher costs to implement and service our client base in support of our growing revenue, including products that assist with ACA compliance which contributed to our strong new business bookings over the past several quarters. These increases were partially offset by the impact of foreign currency translation.

Systems development and programming costs, as reported, increased 1% in fiscal 2016, when compared to the same period in the prior year, 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 6% in fiscal 2016, as compared to fiscal 2015.  The increase was primarily related to an increase in selling expenses to support our growth in new business bookings as we experienced continued demand for our HCM products, particularly those that are designed to assist businesses in complying with the ACA. Selling, general and administrative expenses also increased due to $57.6 million of additional severance charges, of which $48.2 million relate to our workforce optimization effort, and a $10.7 million reversal of reserves in fiscal 2015 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
(In millions)
 
 
 
 
 
 
Years ended June 30,
 
2016
 
2015
 
$ Change
Interest income on corporate funds
 
$
(62.4
)
 
$
(56.9
)
 
$
5.5

Realized gains on available-for-sale securities
 
(5.1
)
 
(6.8
)
 
(1.7
)
Realized losses on available-for-sale securities
 
10.1

 
1.9

 
(8.2
)
Gain on sale of notes receivable
 

 
(1.4
)
 
(1.4
)
Gain on sale of AMD
 
(29.1
)
 

 
29.1

Gain on sale of building
 
(13.9
)
 

 
13.9

Other income, net
 
$
(100.4
)
 
$
(63.2
)
 
$
37.2



25



Other income, net, increased $37.2 million in fiscal 2016, as compared to fiscal 2015. The increase was primarily due to the gain on the sale of the AMD business of $29.1 million and the gain on the sale of a building of $13.9 million.

Earnings from Continuing Operations before Income Taxes

Earnings from continuing operations before income taxes increased 8% 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 18.9% in fiscal 2015 to 19.2% in fiscal 2016 due to the gain on the sale of the AMD business, the gain on the sale of the building and decreased selling expenses in the fourth quarter of fiscal 2016 as compared to fiscal 2015. These increases were offset by an increase in interest expense related to our September 2015 $2.0 billion senior note issuance, investments in implementation and operational resources to support our revenue growth, and the charges related to our workforce optimization effort.

Adjusted EBIT

Adjusted EBIT, which excludes certain interest amounts, the impact of the AMD business sale, the gain on the sale of a building and the charges related to our workforce optimization effort, increased 10% due to the increases in revenues and expenses discussed above. Overall Adjusted EBIT margin increased from 18.8% in fiscal 2015 to 19.5% in fiscal 2016 due to lower selling expenses in the fourth quarter of fiscal 2016 as compared to fiscal 2015, partially offset by investments in implementation and operational resources to support our revenue growth.

Provision for Income Taxes

The effective tax rate in fiscal 2016 and 2015 was 33.2% and 33.5%, respectively. The decrease in the effective tax rate was due to the usage of foreign tax credits in a repatriation of foreign earnings in fiscal 2016, partially offset by the resolution of certain tax matters in fiscal 2015.

Adjusted Provision for Income Taxes

The effective tax rate, adjusted for the impact of the workforce optimization effort, sale of the AMD business, and a gain on the sale of a building, for fiscal 2016 and 2015 was 33.3% and 33.5%, respectively. The decrease in the Adjusted effective tax rate was due to the usage of foreign tax credits in a repatriation of foreign earnings in fiscal 2016, partially offset by the resolution of certain tax matters during fiscal 2015.

Net Earnings from Continuing Operations and Diluted EPS from Continuing Operations

Net earnings from continuing operations increased 8% 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 2016. Diluted EPS from continuing operations increased 12% to $3.25 in fiscal 2016, as compared to $2.89 in fiscal 2015. Diluted EPS growth was unfavorably impacted one percentage point due to foreign currency translation in fiscal 2016, as compared to fiscal 2015.
 
In fiscal 2016, our diluted EPS 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 13.8 million shares in fiscal 2016 and 18.2 million shares in fiscal 2015, partially offset by the issuances of shares under our employee benefit plans.


Adjusted Net Earnings from Continuing Operations and Adjusted Diluted EPS from Continuing Operations

Adjusted net earnings from continuing operations increased 9% in fiscal 2016 due to the increase in revenues and expenses described above and the impact of the lower Adjusted effective tax rate when compared to fiscal 2015.

For fiscal 2016, our Adjusted diluted EPS from continuing operations reflects the increase in Adjusted net earnings from continuing operations and the impact of fewer shares outstanding as a result of the repurchase of 13.8 million shares during fiscal 2016 and the repurchase of 18.2 million shares in fiscal 2015, offset by shares issued under our employee benefit plans.


26



Fiscal 2015 Compared to Fiscal 2014

Total Revenues

Despite pressure from foreign currency translation, our total revenue increased 7% in fiscal 2015, as compared to the year ended June 30, 2014 ("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 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.
 
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.


27



Earnings from Continuing Operations before Income Taxes

Earnings from continuing operations before income taxes increased 10% due to increases in revenue 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.

Adjusted EBIT

Adjusted EBIT, which excludes certain interest amounts, increased 10% due to the increases in revenues and expenses discussed above. Overall Adjusted EBIT margin increased to 18.8% in fiscal 2015 from 18.3% in fiscal 2014 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 rates in fiscal 2015 and 2014 were 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 tax law during fiscal 2015, partially offset by the resolution of certain tax matters during fiscal 2014.

Net Earnings from Continuing Operations and Diluted EPS 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.
 
In fiscal 2015, our diluted EPS 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 issuance of shares under our stock-based compensation programs.

ANALYSIS OF REPORTABLE SEGMENTS

Revenues from Continuing Operations

(In millions)

 
 
Years Ended
 
% Change
 
 
June 30,
 
As Reported
 
Constant Dollar Basis
 
 
2016
 
2015
 
2014
 
2016
 
2015
 
2016
 
2015
Employer Services
 
$
9,211.9

 
$
8,815.1

 
$
8,437.6

 
5
%
 
4
%
 
6
%
 
7
%
PEO Services
 
3,073.1

 
2,647.2

 
2,270.9

 
16
%
 
17
%
 
16
%
 
17
%
Other
 
1.9

 
69.8

 
67.5

 
n/m

 
n/m

 
n/m

 
n/m

Reconciling item:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Client fund interest
 
(619.1
)
 
(593.6
)
 
(549.6
)
 
n/m

 
n/m

 
n/m

 
n/m

 
 
$
11,667.8

 
$
10,938.5

 
$
10,226.4

 
7
%
 
7
%
 
8
%
 
9
%
 

28



Earnings from Continuing Operations before Income Taxes

(In millions)

 
 
Years Ended
 
% Change
 
 
June 30,
 
As Reported
 
Constant Dollar Basis
 
 
2016
 
2015
 
2014
 
2016
 
2015
 
2016
 
2015
Employer Services
 
$
2,867.9

 
$
2,693.0

 
$
2,521.2

 
6
%
 
7
%
 
7
%
 
8
%
PEO Services
 
371.7

 
302.8

 
233.6

 
23
%
 
30
%
 
23
%
 
30
%
Other
 
(385.8
)
 
(331.5
)
 
(326.0
)
 
n/m

 
n/m

 
n/m

 
n/m

Reconciling item:
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Client fund interest
 
(619.1
)
 
(593.6
)
 
(549.6
)
 
n/m

 
n/m

 
n/m

 
n/m

 
 
$
2,234.7

 
$
2,070.7

 
$
1,879.2

 
8
%
 
10
%
 
9
%
 
12
%

Employer Services

Fiscal 2016 Compared to Fiscal 2015

Revenues

Employer Services' revenues, as reported, increased 5% in fiscal 2016, as compared to fiscal 2015, despite a negative impact of one percentage point from foreign currency translation. Revenues increased due to new business started from new business bookings, the impact of price increases, and an increase in the number of employees on our clients’ payrolls as our U.S. pays per control increased 2.5% in fiscal 2016 as compared to fiscal 2015.  These increases were partially offset by the impact of client losses and foreign currency translation. Our worldwide client revenue retention rate for fiscal 2016 decreased 100 basis points to 90.5% as compared to our rate for fiscal 2015 primarily due to elevated losses on our legacy platforms.

Earnings from Continuing Operations before Income Taxes

Employer Services’ earnings from continuing operations before income taxes, as reported, increased 6% in fiscal 2016, as compared to fiscal 2015.  The increase was due to increased revenues discussed above, which was partially offset by an increase in expenses of $221.9 million.  The increase in expenses is related to increased costs of servicing our clients, as well as increased selling and implementation expenses due to new business bookings and associated implementation costs, including an increase in costs related to assisting our clients with ACA compliance. These increases were partially offset by the impact of foreign currency translation.

Employer Services' overall margin increased from 30.5% to 31.1% for fiscal 2016, as compared to fiscal 2015. This increase is due to lower selling expenses in the fourth quarter of fiscal 2016 as compared to fiscal 2015 as well as an increase of 30 basis points from foreign currency translation, partially offset by investments in implementation and operational resources to support our revenue growth.

Fiscal 2015 Compared to Fiscal 2014

Revenues from continuing operations

Employer Services' revenues from continuing operations increased 4% 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


29



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 $377.5 million discussed above, partially offset by an increase in expenses of $205.7 million.  This growth includes an unfavorable impact from foreign currency translation of one percentage point. Expenses increased in fiscal 2015, as compared to fiscal 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 60 basis points from 29.9% to 30.5% 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.

PEO Services

Fiscal 2016 Compared to Fiscal 2015

Revenues

PEO Services' revenues as reported increased 16% in fiscal 2016, as compared to fiscal 2015. Such revenues include pass-through costs of $2,336.3 million for fiscal 2016 and $2,015.9 million for fiscal 2015 associated with benefits coverage, workers' compensation coverage, and state unemployment taxes for worksite employees. The increase in revenues was due to a 13% increase in the average number of worksite employees, driven by an increase in the number of new PEO Services clients and growth in our existing clients, as well as higher client participation and higher benefit pass-through costs in our PEO benefit offerings.

Earnings from Continuing Operations before Income Taxes

PEO Services’ earnings from continuing operations before income taxes increased 23% in fiscal 2016, as compared to fiscal 2015. The increase was due to increased revenues discussed above, which was partially offset by an increase in expenses of $357.0 million. This increase in expenses is primarily related to an increase in pass-through costs of $320.4 million described above. Overall margin increased from 11.4% to 12.1% for fiscal 2016, as compared to fiscal 2015, due to operating efficiencies, as our operating costs related to servicing our clients increased slower than our revenues, and sales efficiencies.
    
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 11.4% 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.


30



Other

The primary components of the “Other” segment are the results of operations of ADP Indemnity, non-recurring gains and losses, miscellaneous processing services, 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 above, 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.

ADP Indemnity provides workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' worksite employees up to $1 million per occurrence.  PEO Services has secured a workers’ compensation and employer’s liability insurance policy that has a $1 million per occurrence retention and, in fiscal years 2012 and prior, aggregate stop loss insurance that covers any aggregate losses within the $1 million retention that collectively exceed a certain level, from an admitted and licensed insurance company of AIG.  We utilize historical loss experience and actuarial judgment to determine the estimated claim liability for the PEO Services business.  Premiums are charged by ADP Indemnity 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.  For the fiscal years 2013 to 2017, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited ("Chubb"), to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limits our overall exposure incurred up to a certain limit. We believe the likelihood of ultimate losses exceeding this limit is remote. During fiscal 2016, ADP Indemnity paid a premium of $202.0 million to cover substantially all losses incurred by ADP Indemnity for the fiscal 2016 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 $221.0 million in July 2016 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the year ended June 30, 2017 ("fiscal 2017") policy year on terms substantially similar to the fiscal 2016 reinsurance policy.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

For corporate liquidity, we expect existing cash, cash equivalents, short-term marketable securities, long-term marketable securities, and cash flow from operations together with our $9.25 billion of committed credit facilities and our ability to access both long-term and short-term debt financing from the capital markets will be adequate to meet our operating, investing, and financing activities such as regular quarterly dividend, share repurchases, and capital expenditures.

For client funds liquidity, we have the ability to borrow through our financing arrangements under our U.S. short-term commercial paper program and our U.S. and Canadian short-term reverse repurchase agreements together with our $9.25 billion of committed credit facilities and our ability to use corporate liquidity when necessary to meet short-term funding requirements related to client funds obligations. Please see Quantitative and Qualitative Disclosures about Market Risk for a further discussion of the risks of our client funds investment strategy. See Note 7 of our consolidated financial statements for a description of our short-term financing including commercial paper.

As of June 30, 2016, cash and short-term marketable securities were $3,214.6 million, which were primarily invested in time deposits, money market funds and asset-backed commercial paper.

Operating, Investing and Financing Cash Flows

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the years ended 2016, 2015, and 2014, are summarized as follows:

31



(In millions)
 
Years ended June 30,
 
$ Change
 
 
2016
 
2015
 
2014
 
2016
 
2015
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
1,859.9

 
$
1,905.6

 
$
1,821.4

 
$
(45.7
)
 
$
84.2

Investing activities
 
(9,087.2
)
 
(3,760.3
)
 
813.3

 
(5,326.9
)
 
(4,573.6
)
Financing activities
 
8,790.1

 
1,616.7

 
(2,358.2
)
 
7,173.4

 
3,974.9

Effect of exchange rate changes on cash and cash equivalents
 
(11.0
)
 
(106.3
)
 
8.0

 
95.3

 
(114.3
)
Net change in cash and cash equivalents
 
$
1,551.8

 
$
(344.3
)
 
$
284.5

 
$
1,896.1

 
$
(628.8
)

Fiscal 2016 Compared to Fiscal 2015

Net cash flows provided by operating activities decreased due to $226.7 million received from the sale of notes receivable related to Dealer Services financing arrangements during fiscal 2015.

Net cash flows used in investing activities increased due to the timing of receipts and disbursements of restricted cash and cash equivalents held to satisfy client funds obligations of $5,257.6 million and the receipt of the CDK Global, Inc.("CDK") dividend during fiscal 2015, partially offset by the timing of purchases of and proceeds from corporate and client funds marketable securities of $545.7 million.

Net cash flows provided by financing activities increased due to the net increase in client funds obligations of $2,728.9 million, as a result of the timing of cash received and payments made related to client funds, proceeds from our $2.0 billion September 2015 debt issuance, a decrease in our repurchases of common stock, and the timing of borrowings and repayments of commercial paper. We purchased approximately 13.8 million shares of our common stock at an average price per share of $82.88 during fiscal 2016 as compared to purchases of 18.2 million shares at an average price per share of $85.28 during fiscal 2015. 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. 

Fiscal 2015 Compared to Fiscal 2014

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.

Capital Resources and Client Fund Obligations

In September 2015, we issued $2.0 billion of senior unsecured notes with maturity dates in 2020 and 2025. We may from time to time revisit the long-term debt market to refinance existing debt, finance investments including acquisitions for our growth, and maintain the appropriate capital structure. However, there can be no assurance that volatility in the global capital and credit markets would not impair our ability to access these markets on terms acceptable to us, or at all. See Note 8 of our consolidated financial statements for a description of our long-term financing including this fiscal 2016 debt issuance.

Our U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. During the majority of fiscal 2016, this commercial paper program provided for the issuance of up to $8.25 billion in aggregate maturity value and in June 2016, we increased our commercial paper program to

32



$9.25 billion. 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 2016, our average daily borrowings were $2.7 billion at a weighted average interest rate of 0.3%. The weighted average maturity of the Company’s commercial paper during fiscal 2016 was approximately two days.  At June 30, 2016 and 2015, we had no outstanding obligations under our short-term commercial paper program.

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 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, 2016 and 2015, there were no outstanding obligations related to the reverse repurchase agreements. For fiscal 2016 and 2015, we had average outstanding balances under reverse repurchase agreements of $341.0 million and $421.2 million, respectively, at weighted average interest rates of 0.4%. See Note 4 of our consolidated financial statements for client fund investments used as collateral for reverse repurchase agreements.

We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a $3.25 billion, 364-day credit agreement with a group of lenders that matures in June 2017 with a one year term-out option. In addition, we have a five-year $2.25 billion credit facility and a five-year $3.75 billion credit facility maturing in June 2020 and June 2021, respectively, each with an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary.  We had no borrowings through June 30, 2016 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 $9.25 billion available to us under the revolving credit agreements. See Note 7 of our consolidated financial statements for a description of our short-term financing including credit facilities.

Our investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages, alternative-A mortgages, sub-prime auto loans or sub-prime home equity loans, collateralized debt obligations, collateralized loan obligations, credit default swaps, derivatives, auction rate securities, structured investment vehicles or non-investment grade fixed-income securities. We own AAA rated senior tranches of fixed rate credit card, auto loan, equipment lease, 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. See Note 4 of our consolidated financial statements for a description of our corporate investments and funds held for clients.

Capital expenditures for continuing operations for fiscal 2016 were $165.7 million, as compared to $171.2 million for fiscal 2015. We expect capital expenditures in fiscal 2017 to be about $250 million.


33



Contractual Obligations

    The following table provides a summary of our contractual obligations with a future life of greater than one year at June 30, 2016.
(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)
 
$
58.2

 
$
121.9

 
$
1,105.3

 
$
1,158.8

 
$

 
$
2,444.2

Operating Lease and Software
     License Obligations (2)
 
$
106.2

 
$
185.0

 
$
99.1

 
$
100.8

 
$

 
$
491.1

Purchase Obligations (3)
 
$
331.1

 
$
199.7

 
$
94.4

 
$

 
$

 
$
625.2

Obligations Related to Unrecognized
     Tax Benefits (4)
 
$

 
$

 
$

 
$

 
$
27.4

 
$
27.4

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

 
$
231.2

 
$
121.8

 
$
262.7

 
$
91.4

 
$
710.6

Total
 
$
499.0

 
$
737.8

 
$
1,420.6

 
$
1,522.3

 
$
118.8

 
$
4,298.5



(1)
These amounts represent the principal and interest payments of our debt.

(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 $221.0 million reinsurance premium with Chubb for the fiscal 2017 policy year, as well as obligations related to purchase and maintenance agreements on our software, equipment, and other assets.

(4)
We are unable to make reasonably reliable estimates as to the period 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 $11.0 million in fiscal 2017

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, 2016, the obligations relating to these matters, which are expected to be paid in fiscal 2017, total $33,331.8 million and were recorded in client funds obligations on our Consolidated Balance Sheets. We had $33,841.2 million of cash and cash equivalents 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, 2016.

Separately, ADP Indemnity paid a premium of $221.0 million in July 2016 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2017 policy year on terms substantially similar to the fiscal 2016 reinsurance policy. At June 30, 2016, ADP Indemnity had total assets of $456.2 million to satisfy the actuarially estimated unpaid losses of $416.5 million for the policy years since July 1, 2003. ADP Indemnity paid claims of $8.3 million and $26.0 million, net of insurance recoveries, in fiscal 2016 and 2015, respectively. Refer to the "Analysis of Reportable Segments - Other" above for additional information regarding ADP Indemnity.

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).

34




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

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

There are inherent risks and uncertainties involving our investment strategy relating to our client funds assets.  Such risks include liquidity risk, including the risk associated with our ability to liquidate, if necessary, our available-for-sale securities in a timely manner in order to satisfy our client funds obligations.  However, our investments are made with the safety of principal, liquidity, and diversification as the primary goals to minimize the risk of not having sufficient funds to satisfy all of our client funds obligations.  We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our $9.25 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), ability to engage in reverse repurchase agreements and available borrowings under our $9.25 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.


35



Details regarding our overall investment portfolio are as follows:
(In millions)
 
 
 
 
 
 
Years ended June 30,
 
2016
 
2015
 
2014
Average investment balances at cost:
 
 
 
 
 
 
Corporate investments
 
$
5,610.1

 
$
4,560.4

 
$
4,072.4

Funds held for clients
 
22,418.7

 
21,798.4

 
20,726.5

Total
 
$
28,028.8

 
$
26,358.8

 
$
24,798.9