10-Q 1 q3fy1710-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
______________

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2017

OR

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

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

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

The number of shares outstanding of the registrant’s common stock as of April 28, 2017 was 447,410,344.



Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
Statements of Consolidated Earnings
Three and nine months ended March 31, 2017 and 2016
 
 
 
 
Statements of Consolidated Comprehensive Income
Three and nine months ended March 31, 2017 and 2016
 
 
 
 
Consolidated Balance Sheets
At March 31, 2017 and June 30, 2016
 
 
 
 
Statements of Consolidated Cash Flows
Nine Months Ended March 31, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
REVENUES:
 
 
 
 
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
$
2,329.8

 
$
2,283.8

 
$
6,444.4

 
$
6,196.6

Interest on funds held for clients
111.6

 
102.8

 
292.6

 
280.0

PEO revenues (A)
969.4

 
862.0

 
2,577.9

 
2,292.9

TOTAL REVENUES
3,410.8

 
3,248.6

 
9,314.9

 
8,769.5

 
 
 
 
 
 
 
 
EXPENSES:
 

 
 

 
 

 
 

Costs of revenues:
 

 
 

 
 

 
 

Operating expenses
1,701.5

 
1,611.6

 
4,793.4

 
4,530.9

Systems development and programming costs
153.3

 
147.3

 
460.6

 
453.0

Depreciation and amortization
56.2

 
53.8

 
168.4

 
157.8

TOTAL COSTS OF REVENUES
1,911.0

 
1,812.7

 
5,422.4

 
5,141.7

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
665.0

 
634.4

 
1,953.6

 
1,866.7

Interest expense
16.8

 
16.3

 
57.2

 
38.1

TOTAL EXPENSES
2,592.8

 
2,463.4

 
7,433.2

 
7,046.5

 
 
 
 
 
 
 
 
Other income, net
(9.9
)
 
(9.6
)
 
(261.0
)
 
(84.7
)
 
 
 
 
 
 
 
 
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
827.9

 
794.8

 
2,142.7

 
1,807.7

 
 
 
 
 
 
 
 
Provision for income taxes
240.0

 
262.3

 
675.1

 
596.3

NET EARNINGS FROM CONTINUING OPERATIONS
$
587.9

 
$
532.5

 
$
1,467.6

 
$
1,211.4

 
 
 
 
 
 
 
 
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES

 

 

 
(1.4
)
Benefit for income taxes

 

 

 
(0.5
)
NET LOSS FROM DISCONTINUED OPERATIONS
$

 
$

 
$

 
$
(0.9
)
 
 
 
 
 
 
 
 
NET EARNINGS
$
587.9

 
$
532.5

 
$
1,467.6

 
$
1,210.5

 
 
 
 
 
 
 
 
Basic Earnings Per Share from Continuing Operations
$
1.32

 
$
1.17

 
$
3.27

 
$
2.64

Basic Loss Per Share from Discontinued Operations

 

 

 

BASIC EARNINGS PER SHARE
$
1.32

 
$
1.17

 
$
3.27

 
$
2.64

 
 
 
 
 
 
 
 
Diluted Earnings Per Share from Continuing Operations
$
1.31

 
$
1.17

 
$
3.25

 
$
2.63

Diluted Loss Per Share from Discontinued Operations

 

 

 

DILUTED EARNINGS PER SHARE
$
1.31

 
$
1.17

 
$
3.25

 
$
2.63

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
446.5

 
454.4

 
448.9

 
458.2

Diluted weighted average shares outstanding
449.2

 
456.9

 
451.3

 
460.6

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.570

 
$
0.530

 
$
1.670

 
$
1.550


(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $9,207.2 million and $8,374.8 million for the three months ended March 31, 2017 and 2016, respectively, and $26,040.3 million and $23,613.0 million for the nine months ended March 31, 2017 and 2016, respectively.

See notes to the Consolidated Financial Statements.

3



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

 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
587.9

 
$
532.5

 
$
1,467.6

 
$
1,210.5

 
 
 
 
 
 
 
 
Other comprehensive income/loss:
 
 
 
 
 
 
 
Currency translation adjustments
20.3

 
41.2

 
(23.9
)
 
(5.2
)
 
 
 
 
 
 
 
 
Unrealized net gains/(losses) on available-for-sale securities
46.3

 
271.8

 
(438.3
)
 
150.8

Tax effect
(16.5
)
 
(95.9
)
 
155.1

 
(53.3
)
Reclassification of net losses/(gains) on available-for-sale securities to net earnings
0.2

 
0.1

 
(1.1
)
 
3.9

Tax effect
(0.1
)
 
(0.1
)
 
0.3

 
(1.3
)
 
 
 
 
 
 
 
 
Reclassification of pension liability adjustment to net earnings
5.1

 
3.0

 
15.3

 
8.9

Tax effect
(1.8
)
 
(1.0
)
 
(5.5
)
 
(3.2
)
 
 
 
 
 
 
 
 
Other comprehensive income/(loss), net of tax
53.5

 
219.1

 
(298.1
)
 
100.6

Comprehensive income
$
641.4

 
$
751.6

 
$
1,169.5

 
$
1,311.1































See notes to the Consolidated Financial Statements.

4


Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
 
March 31,
 
June 30,
 
 
2017
 
2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,995.5

 
$
3,191.1

Accounts receivable, net of allowance for doubtful accounts of $48.0 and $38.1, respectively
 
1,811.5

 
1,742.8

Other current assets
 
820.3

 
725.3

Total current assets before funds held for clients
 
5,627.3

 
5,659.2

Funds held for clients
 
33,887.1

 
33,841.2

Total current assets
 
39,514.4

 
39,500.4

Long-term receivables, net of allowance for doubtful accounts of $0.8 and $0.5, respectively
 
27.0

 
27.1

Property, plant and equipment, net
 
750.6

 
685.0

Other assets
 
1,242.4

 
1,241.3

Goodwill
 
1,726.7

 
1,682.0

Intangible assets, net
 
594.8

 
534.2

Total assets
 
$
43,855.9

 
$
43,670.0

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
126.5

 
$
152.3

Accrued expenses and other current liabilities
 
1,336.2

 
1,246.8

Accrued payroll and payroll-related expenses
 
527.1

 
616.7

Dividends payable
 
251.0

 
238.4

Short-term deferred revenues
 
227.2

 
233.2

Income taxes payable
 
133.8

 
28.2

Total current liabilities before client funds obligations
 
2,601.8

 
2,515.6

Client funds obligations
 
33,816.7

 
33,331.8

Total current liabilities
 
36,418.5

 
35,847.4

Long-term debt
 
2,002.5

 
2,007.7

Other liabilities
 
836.1

 
701.1

Deferred income taxes
 
108.9

 
251.1

Long-term deferred revenues
 
386.8

 
381.1

Total liabilities
 
39,752.8

 
39,188.4

 
 
 
 
 
Commitments and contingencies (Note 14)
 


 


 
 
 
 
 
Stockholders' equity:
 
 

 
 

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

 

Common stock, $0.10 par value: authorized, 1,000.0 shares; issued, 638.7 shares at March 31, 2017 and June 30, 2016;
outstanding, 447.9 and 455.7 shares at March 31, 2017 and June 30, 2016, respectively
 
63.9

 
63.9

Capital in excess of par value
 
833.5

 
768.1

Retained earnings
 
14,717.7

 
14,003.3

Treasury stock - at cost: 190.8 and 183.0 shares at March 31, 2017 and June 30, 2016, respectively
 
(10,998.8
)
 
(10,138.6
)
Accumulated other comprehensive loss
 
(513.2
)
 
(215.1
)
Total stockholders’ equity
 
4,103.1

 
4,481.6

Total liabilities and stockholders’ equity
 
$
43,855.9

 
$
43,670.0




See notes to the Consolidated Financial Statements.

5

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


 
 
Nine Months Ended
 
 
March 31,
 
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
1,467.6

 
$
1,210.5

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

 
 

Depreciation and amortization
 
233.6

 
214.7

Deferred income taxes
 
22.2

 
22.4

Stock-based compensation expense
 
101.2

 
102.4

Net pension expense
 
18.1

 
13.2

Net amortization of premiums and accretion of discounts on available-for-sale securities
 
66.1

 
71.0

Gain on sale of building
 

 
(13.9
)
Gain on sale of divested businesses, net of tax
 
(121.4
)
 
(21.8
)
Other
 
24.8

 
22.9

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

 
 

Increase in accounts receivable
 
(90.1
)
 
(545.8
)
Increase in other assets
 
(152.9
)
 
(206.7
)
(Decrease) / Increase in accounts payable
 
(29.5
)
 
2.3

Increase in accrued expenses and other liabilities
 
129.0

 
363.2

Net cash flows provided by operating activities
 
1,668.7

 
1,234.4

 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Purchases of corporate and client funds marketable securities
 
(3,470.0
)
 
(4,240.9
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
 
2,704.6

 
4,061.2

Net decrease / (increase) in restricted cash and cash equivalents held to satisfy client funds obligations
 
87.7

 
(15,969.9
)
Capital expenditures
 
(174.5
)
 
(127.6
)
Additions to intangibles
 
(162.1
)
 
(160.1
)
Acquisitions of businesses, net of cash acquired
 
(86.7
)
 

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

 
15.7

Proceeds from the sale of divested businesses
 
234.0

 
162.2

Net cash flows used in investing activities
 
(867.0
)
 
(16,259.4
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Net increase in client funds obligations
 
636.7

 
16,098.1

Net proceeds from debt issuance
 

 
1,998.3

Payments of debt
 
(1.5
)
 
(1.0
)
Repurchases of common stock
 
(956.8
)
 
(1,091.0
)
Net proceeds from stock purchase plan and stock-based compensation plans
 
74.5

 
52.7

Dividends paid
 
(739.4
)
 
(701.2
)
Other
 

 
(23.3
)
Net cash flows (used in) / provided by financing activities
 
(986.5
)
 
16,332.6

 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(10.8
)
 
(5.5
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(195.6
)
 
1,302.1

 
 
 
 
 
Cash and cash equivalents, beginning of period
 
3,191.1

 
1,639.3

Cash and cash equivalents, end of period
 
$
2,995.5

 
$
2,941.4

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
69.8

 
$
34.0

Cash paid for income taxes, net of income tax refunds
 
$
569.2

 
$
420.3


See notes to the Consolidated Financial Statements.

6


Automatic Data Processing, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
(Unaudited)
Note 1.  Basis of Presentation

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

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto.  Actual results may differ from those estimates. The Consolidated Financial Statements and all relevant footnotes have been adjusted for all businesses that qualify as a discontinued operation. The Interim Financial Data by Segment has been adjusted to reflect a change in the Company's segment profitability measure for all periods presented. Refer to Note 16 for further information.

Interim financial results are not necessarily indicative of financial results for a full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (“fiscal 2016”).

Note 2.  New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In July 2016, the Company adopted Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718)." As a result of this standard, the Company prospectively recorded income tax benefits and deficiencies with respect to stock-based compensation as income tax expense or benefit in the income statement for periods beginning after July 1, 2016. This resulted in a $9.5 million and $29.9 million benefit in our income tax expense for the three and nine months ended March 31, 2017, respectively. The Company retrospectively classified excess tax benefits as an operating activity on the Statements of Consolidated Cash Flows, which increased operating cash flows and decreased financing cash flows by $33.6 million for the nine months ended March 31, 2016. Refer to Note 13 for the impact of the prospective adoption of the excess tax benefits in the income statement for the three and nine months ended March 31, 2017.

In July 2016, the Company prospectively adopted ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." The update provides guidance on whether a cloud computing arrangement includes a software license. For new and materially modified cloud computing arrangements that include a software license entered into after July 1, 2016, the Company accounted for the software license element consistent with the acquisition of other software licenses. If the new or materially modified cloud computing arrangement did not include a software license, the Company accounted for the arrangement as a service contract. The adoption of ASU 2015-05 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.

In July 2016, the Company prospectively adopted ASU 2015-04, "Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets." The update allows an entity to remeasure their pension and other post-retirement benefit plan assets and liabilities at the month-end closest to a significant event such as a plan amendment, curtailment, or settlement. The adoption had no impact on the Company's consolidated results of operations, financial condition, or cash flows as presented, however the future impact of ASU 2015-04 will be dependent upon the nature of future significant events impacting the Company's pension plans, if any.
 
Recently Issued Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. ASU 2017-08 will be effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company has not yet determined the impact of ASU 2017-08 on its consolidated results of operations, financial condition, or cash flows.

7



In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost." ASU 2017-07 requires reporting the service cost component in the same line item or items as other compensation costs arising during the period in the Statements of Consolidated Earnings. The other components of net periodic pension cost are required to be presented in the Statements of Consolidated Earnings separately from the service cost component. Such changes are to be applied retrospectively from the date of adoption. The ASU also allows only the service cost component to be eligible for capitalization, when applicable, prospectively from the date of adoption. ASU 2017-07 will be effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company has not yet determined the impact of ASU 2017-07 on its consolidated results of operations, financial condition, or cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairments.” ASU 2017-04 establishes a one-step process for testing goodwill for a decrease in value, requiring a goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. The guidance eliminates the second step of the current two-step process that requires the impairment to be measured as the difference between the implied value of a reporting unit’s goodwill with the goodwill’s carrying amount. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual impairment tests after January 1, 2017. ASU 2017-04 is not expected to have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business," to clarify the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The future impact of ASU 2017-01 will be dependent upon the nature of future acquisitions or dispositions made by the Company, if any.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Accordingly, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statements of Consolidated Cash Flows. ASU 2016-18 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company expects to retrospectively adopt the new standard in its fiscal year beginning on July 1, 2017. ASU 2016-18 will not have a material impact on the Company's consolidated results of operations or financial condition.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This update amends the existing accounting standards for lease accounting, and requires lessees to recognize most lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet determined the impact of ASU 2016-02 on its consolidated results of operations, financial condition, or cash flows.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance, and has since issued additional amendments to ASU 2014-09. These new standards require an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standards will also result in enhanced revenue related disclosures. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statements of Consolidated Financial Position. The new standards are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company expects to adopt the new standard in its fiscal year beginning on July 1, 2018 and anticipates applying the guidance under the full retrospective approach. The Company has not fully determined the impact of these new revenue recognition standards on its consolidated results of operations, financial condition, or cash flows; however, the Company expects the provisions to primarily impact the manner in which it treats certain costs to fulfill contracts (i.e., implementation costs) and costs to acquire new contracts (i.e., selling costs). Generally, as it relates to these two items, the provisions of the new standard will result in the Company deferring additional costs on the Consolidated Balance Sheets and subsequently amortizing them to the Statements of Consolidated Earnings over the expected client life.


8


Note 3. Acquisitions

The Company acquired two businesses during the nine months ended March 31, 2017 for total cash consideration of approximately $90.0 million and contingent consideration of up to $35.0 million, which is payable over the next three years, subject to the achievement of specified financial metrics and/or other conditions. The Company determined the fair value of the contingent consideration on the acquisition date using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. The acquisitions were not material to the Company's results of operations, financial position, or cash flows and, therefore, the pro forma impact of these acquisitions is not presented. The results of the acquisitions will be reported within the Company’s Employer Services segment.

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

Note 4. Divestitures

On November 28, 2016, the Company completed the sale of its Consumer Health Spending Account ("CHSA") and Consolidated Omnibus Reconciliation Act ("COBRA") businesses for a pre-tax gain of $205.4 million, and recorded such gain within Other income, net on the Statements of Consolidated Earnings. The historical results of operations of these businesses are included in the Employer Services segment. 

On September 1, 2015, the Company completed the sale of its AdvancedMD ("AMD") business for a pre-tax gain of $29.1 million, and recorded such gain within Other income, net on the Statements of Consolidated Earnings. The historical results of operations of this business are included in the Other segment. 

The Company determined that the CHSA, COBRA and AMD divestitures did not meet the criteria for reporting discontinued operations under ASU 2014-08 as the disposition of these businesses does not represent a strategic shift that has a major effect on the Company's operations or financial results.

Note 5. Service Alignment Initiative

On July 28, 2016, the Company announced a Service Alignment Initiative that is intended to simplify the Company's service organization by aligning the Company's service operations to its strategic platforms and locations. In fiscal 2016, the Company entered into leases in Norfolk, Virginia and Maitland, Florida, and in October 2016, the Company entered into a lease in Tempe, Arizona as part of this effort. The Company began incurring charges for this initiative during the first quarter of the fiscal year and expects to continue to incur charges throughout the year ended June 30, 2017 ("fiscal 2017") and the year ended June 30, 2018 ("fiscal 2018") as the initiative is executed. The charges primarily relate to employee separation benefits recognized under Accounting Standards Codification ("ASC") 712, and also include charges for the relocation of certain current Company employees, lease termination costs, and accelerated depreciation of fixed assets. The Company expects to recognize pre-tax restructuring charges in the range of $100 million to $125 million through fiscal 2018, consisting primarily of cash expenditures for employee separation benefits in the range of $75 million to $85 million, and other initiative costs in the range of $25 million to $40 million.

The table below summarizes the composition of the Company's Service Alignment Initiative charges:
 
Three Months Ended
 
Nine Months Ended
 
Cumulative amount from inception through
 
March 31,
 
March 31,
 
March 31,
 
2017
 
2017
 
2017
Employee separation benefits (a)
$
(0.1
)
 
$
37.2

 
$
37.2

Other initiative costs (b)
0.7

 
4.4

 
4.4

Total (c)
$
0.6

 
$
41.6

 
$
41.6


9




Activity for the Service Alignment Initiative liability for the nine months ended March 31, 2017 was as follows:
 
Employee
separation benefits
 
Other initiative costs
 
Total
Balance at June 30, 2016
$

 
$

 
$

Charged to expense
37.2

 
4.4

 
41.6

Cash payments
(4.9
)
 
(2.4
)
 
(7.3
)
Non-cash utilization

 
(1.6
)
 
(1.6
)
Balance at March 31, 2017
$
32.3


$
0.4


$
32.7


(a) - Charges are recorded in selling, general and administrative expenses on the Statements of Consolidated Earnings.
(b) - Other initiative costs include costs to relocate certain current Company employees to new locations, lease termination charges (both included within selling, general and administrative expenses on the Statements of Consolidated Earnings), and accelerated depreciation on fixed assets (included within depreciation and amortization on the Statements of Consolidated Earnings).
(c) - All charges are included within the Other segment.

Note 6.  Earnings per Share (“EPS”)
 
 
Basic
 
Effect of Employee Stock Option Shares
 
Effect of
Employee
Restricted
Stock
Shares
 
Diluted
Three Months Ended March 31, 2017
 
 

 
 

 
 

 
 

Net earnings from continuing operations
 
$
587.9

 
 

 
 

 
$
587.9

Weighted average shares (in millions)
 
446.5

 
1.1

 
1.6

 
449.2

EPS from continuing operations
 
$
1.32

 
 

 
 

 
$
1.31

Three Months Ended March 31, 2016
 
 

 
 

 
 

 
 

Net earnings from continuing operations
 
$
532.5

 
 

 
 

 
$
532.5

Weighted average shares (in millions)
 
454.4

 
1.0

 
1.5

 
456.9

EPS from continuing operations
 
$
1.17

 
 

 
 

 
$
1.17

 
 
 
 
 
 
 
 
 
Nine Months Ended March 31, 2017
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
1,467.6

 
 

 
 

 
$
1,467.6

Weighted average shares (in millions)
 
448.9

 
0.9

 
1.5

 
451.3

EPS from continuing operations
 
$
3.27

 
 

 
 

 
$
3.25

Nine Months Ended March 31, 2016
 
 

 
 

 
 

 
 

Net earnings from continuing operations
 
$
1,211.4

 
 

 
 

 
$
1,211.4

Weighted average shares (in millions)
 
458.2

 
0.9

 
1.5

 
460.6

EPS from continuing operations
 
$
2.64

 
 

 
 

 
$
2.63


Options to purchase 0.9 million shares of common stock for the three months ended March 31, 2016, and 0.9 million and 1.7 million shares of common stock for the nine months ended March 31, 2017 and 2016, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.


10



Note 7. Other Income, Net
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Interest income on corporate funds
$
(10.1
)
 
$
(9.7
)
 
$
(54.5
)
 
$
(45.6
)
Realized gains on available-for-sale securities
(0.6
)
 
(2.0
)
 
(3.1
)
 
(3.5
)
Realized losses on available-for-sale securities
0.8

 
2.1

 
2.0

 
7.4

Gain on sale of businesses (see Note 4)

 

 
(205.4
)
 
(29.1
)
Gain on sale of building

 

 

 
(13.9
)
Other income, net
$
(9.9
)
 
$
(9.6
)
 
$
(261.0
)
 
$
(84.7
)

During the nine months ended March 31, 2016, the Company sold a building and, as a result, recorded a gain of $13.9 million in Other income, net, on the Statements of Consolidated Earnings.

Note 8. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at March 31, 2017 and June 30, 2016 were as follows:
 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Market Value (A)
Type of issue:
 
 
 
 
 
 
 
Money market securities, cash and other cash equivalents
$
15,105.0

 
$

 
$

 
$
15,105.0

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate bonds
9,380.8

 
86.4

 
(35.0
)
 
9,432.2

U.S. government agency securities
3,731.6

 
22.4

 
(16.5
)
 
3,737.5

Asset-backed securities
4,384.9

 
13.4

 
(13.3
)
 
4,385.0

Canadian government obligations and
Canadian government agency obligations
984.1

 
4.7

 
(4.3
)
 
984.5

Canadian provincial bonds
741.3

 
16.3

 
(0.8
)
 
756.8

U.S. Treasury securities
1,389.1

 
2.2

 
(18.0
)
 
1,373.3

Municipal bonds
615.7

 
10.2

 
(2.9
)
 
623.0

Other securities
490.2

 
7.5

 
(1.6
)
 
496.1

 
 
 
 
 
 
 
 
Total available-for-sale securities
21,717.7

 
163.1

 
(92.4
)
 
21,788.4

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
36,822.7

 
$
163.1

 
$
(92.4
)
 
$
36,893.4

                                                            
(A) Included within available-for-sale securities are corporate investments with fair values of $10.8 million and funds held for clients with fair values of $21,777.6 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

11



 
June 30, 2016
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Market Value (B)
Type of issue:
 

 
 

 
 

 
 

Money market securities, cash and other cash equivalents
$
15,458.6

 
$

 
$

 
$
15,458.6

Available-for-sale securities:
 

 
 

 
 

 
 

Corporate bonds
9,429.2

 
261.8

 
(0.6
)
 
9,690.4

U.S. government agency securities
4,298.8

 
91.3

 

 
4,390.1

Asset-backed securities
3,761.9

 
59.0

 
(0.3
)
 
3,820.6

Canadian government obligations and
Canadian government agency obligations
995.1

 
12.8

 

 
1,007.9

Canadian provincial bonds
735.4

 
30.8

 
(0.1
)
 
766.1

U.S. Treasury securities
746.9

 
16.3

 

 
763.2

Municipal bonds
594.2

 
23.9

 
(0.3
)
 
617.8

Other securities
533.3

 
15.8

 
(0.2
)
 
548.9

 
 
 
 
 
 
 
 
Total available-for-sale securities
21,094.8

 
511.7

 
(1.5
)
 
21,605.0

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
36,553.4

 
$
511.7

 
$
(1.5
)
 
$
37,063.6


(B) Included within available-for-sale securities are corporate investments with fair values of $31.3 million and funds held for clients with fair values of $21,573.7 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for fiscal 2016. The Company did not transfer any assets between Levels during the nine months ended March 31, 2017 or fiscal 2016. In addition, the Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 1 or Level 3 at March 31, 2017.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of March 31, 2017, are as follows: 
 
March 31, 2017
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(35.0
)
 
$
2,986.3

 
$

 
$
7.4

 
$
(35.0
)
 
$
2,993.7

U.S. government agency securities
(16.5
)
 
2,093.3

 

 

 
(16.5
)
 
2,093.3

Asset-backed securities
(13.3
)
 
2,261.3

 

 
12.4

 
(13.3
)
 
2,273.7

Canadian government obligations and
Canadian government agency obligations
(4.3
)
 
468.3

 

 

 
(4.3
)
 
468.3

Canadian provincial bonds
(0.8
)
 
121.7

 

 

 
(0.8
)
 
121.7

U.S. Treasury securities
(18.0
)
 
1,167.2

 

 

 
(18.0
)
 
1,167.2

Municipal bonds
(2.8
)
 
143.1

 
(0.1
)
 
4.3

 
(2.9
)
 
147.4

Other securities
(1.4
)
 
117.2

 
(0.2
)
 
8.9

 
(1.6
)
 
126.1

 
$
(92.1
)
 
$
9,358.4

 
$
(0.3
)
 
$
33.0

 
$
(92.4
)
 
$
9,391.4



12



The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2016, are as follows:
 
June 30, 2016
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(0.5
)
 
$
138.0

 
$
(0.1
)
 
$
35.1

 
$
(0.6
)
 
$
173.1

U.S. government agency securities

 

 

 

 

 

Asset-backed securities
(0.1
)
 
58.8

 
(0.2
)
 
154.8

 
(0.3
)
 
213.6

Canadian government obligations and
Canadian government agency obligations

 
53.2

 

 

 

 
53.2

Canadian provincial bonds
(0.1
)
 
19.1

 

 
7.8

 
(0.1
)
 
26.9

U.S. Treasury securities

 
3.4

 

 
1.6

 

 
5.0

Municipal bonds

 
12.9

 
(0.3
)
 
10.6

 
(0.3
)
 
23.5

Other securities
(0.1
)
 
10.5

 
(0.1
)
 
8.0

 
(0.2
)
 
18.5

 
$
(0.8
)
 
$
295.9

 
$
(0.7
)
 
$
217.9

 
$
(1.5
)
 
$
513.8


At March 31, 2017, corporate bonds include investment-grade debt securities, which include a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from April 2017 through March 2025.

At March 31, 2017, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $2,727.1 million and $801.8 million, respectively. U.S. government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's and AA+ by Standard & Poor's with maturities ranging from June 2017 through February 2025.

At March 31, 2017, asset-backed securities include AAA rated senior tranches of securities with predominantly prime collateral of fixed-rate credit card, auto loan, equipment lease, and rate reduction receivables with fair values of $2,324.1 million, $1,402.5 million, $418.4 million, and $239.9 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables.  The primary risk associated with these securities is the collection risk of the underlying receivables.  All collateral on such asset-backed securities has performed as expected through March 31, 2017.

At March 31, 2017, other securities and their fair value primarily represent: AAA and AA rated sovereign bonds of $168.5 million, AAA and AA rated supranational bonds of $138.3 million, and AA rated mortgage-backed securities of $95.6 million that are guaranteed primarily by Federal National Mortgage Association ("Fannie Mae"). The Company's mortgage-backed securities represent an undivided beneficial ownership interest in a group or pool of one or more residential mortgages. These securities are collateralized by the cash flows of 15-year and 30-year residential mortgages and are guaranteed by Fannie Mae as to the timely payment of principal and interest.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 
 
March 31,
 
June 30,
 
 
2017
 
2016
Corporate investments:
 
 
 
 
Cash and cash equivalents
 
$
2,995.5

 
$
3,191.1

Short-term marketable securities (a)
 
3.2

 
23.5

Long-term marketable securities (b)
 
7.6

 
7.8

Total corporate investments
 
$
3,006.3

 
$
3,222.4

 
(a) - Short-term marketable securities are included within Other current assets on the Consolidated Balance Sheets.

13



(b) - Long-term marketable securities are included within Other assets on the Consolidated Balance Sheets.

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

Funds held for clients have been invested in the following categories:
 
 
March 31,
 
June 30,
 
 
2017
 
2016
Funds held for clients:
 
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
 
$
12,109.5

 
$
12,267.5

Restricted short-term marketable securities held to satisfy client funds obligations
 
3,003.3

 
3,032.1

Restricted long-term marketable securities held to satisfy client funds obligations
 
18,774.3

 
18,541.6

Total funds held for clients
 
$
33,887.1

 
$
33,841.2


Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll and tax payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients.  The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date.  The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $33,816.7 million and $33,331.8 million at March 31, 2017 and June 30, 2016, respectively.  The Company has classified funds held for clients as a current asset since these funds are held solely for the purposes of satisfying the client funds obligations.  The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows.  The Company has reported the cash inflows and outflows related to client funds investments with original maturities of ninety days or less on a net basis within net increase in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations in the investing section of the Statements of Consolidated Cash Flows.  The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.

Approximately 81% of the available-for-sale securities held a AAA or AA rating at March 31, 2017, as rated by Moody's, Standard & Poor's and, for Canadian securities, DBRS.  All available-for-sale securities were rated as investment grade at March 31, 2017.
 
Expected maturities of available-for-sale securities at March 31, 2017 are as follows:
One year or less
$
3,006.6

One year to two years
2,562.6

Two years to three years
4,923.3

Three years to four years
5,231.7

After four years
6,064.2

Total available-for-sale securities
$
21,788.4



14



Note 9. Goodwill and Intangibles Assets, net

Changes in goodwill for the nine months ended March 31, 2017 are as follows:
 
Employer
Services
 
PEO
Services
 
Total
Balance at June 30, 2016
$
1,677.2

 
$
4.8

 
$
1,682.0

Additions and other adjustments, net
79.5

 

 
79.5

Currency translation adjustments
(13.4
)
 

 
(13.4
)
Disposition of CHSA and COBRA businesses
(21.4
)
 

 
(21.4
)
Balance at March 31, 2017
$
1,721.9

 
$
4.8

 
$
1,726.7


Components of intangible assets, net, are as follows:
 
 
March 31,
 
June 30,
 
 
2017
 
2016
Intangible assets:
 
 
 
 
Software and software licenses
 
$
1,912.2

 
$
1,811.6

Customer contracts and lists
 
607.4

 
603.7

Other intangibles
 
230.1

 
207.8

 
 
2,749.7

 
2,623.1

Less accumulated amortization:
 
 

 
 

Software and software licenses
 
(1,453.1
)
 
(1,403.8
)
Customer contracts and lists
 
(496.3
)
 
(486.4
)
Other intangibles
 
(205.5
)
 
(198.7
)
 
 
(2,154.9
)
 
(2,088.9
)
Intangible assets, net
 
$
594.8

 
$
534.2


Other intangibles consist primarily of purchased rights, purchased content, trademarks and trade names (acquired directly or through acquisitions).  All intangible assets have finite lives and, as such, are subject to amortization.  The weighted average remaining useful life of the intangible assets is 5 years (4 years for software and software licenses, 8 years for customer contracts and lists, and 4 years for other intangibles).  Amortization of intangible assets was $40.4 million and $39.6 million for the three months ended March 31, 2017 and 2016, respectively, and $125.8 million and $113.3 million for the nine months ended March 31, 2017 and 2016, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:
 
Amount
Three months ending June 30, 2017
$
44.8

Twelve months ending June 30, 2018
$
162.7

Twelve months ending June 30, 2019
$
127.0

Twelve months ending June 30, 2020
$
95.7

Twelve months ending June 30, 2021
$
74.3

Twelve months ending June 30, 2022
$
57.0



15



Note 10. Short-term Financing

The Company has a $3.25 billion, 364-day credit agreement that matures in June 2017 with a one year term-out option.  The Company also has a $2.25 billion five-year credit facility that matures in June 2020 that also contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. In addition, the Company has a five-year $3.75 billion credit facility maturing in June 2021 that contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments.  The interest rate applicable to committed borrowings is tied to LIBOR, the effective federal funds rate, or the prime rate, depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing.  The Company is also required to pay facility fees on the credit agreements.  The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary.  The Company had no borrowings through March 31, 2017 under the credit agreements.

The Company's 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. This commercial paper program provides for the issuance of up to $9.25 billion in aggregate maturity value. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 by Moody’s.  These ratings denote the highest quality commercial paper securities.  Maturities of commercial paper can range from overnight to up to 364 days. At March 31, 2017 and June 30, 2016, the Company had no commercial paper outstanding. For the three months ended March 31, 2017 and 2016, the Company had average daily borrowings of $1.1 billion and $1.3 billion, respectively, at weighted average interest rates of 0.7% and 0.4%, respectively. For the nine months ended March 31, 2017 and 2016, the Company had average daily borrowings of $3.2 billion and $2.7 billion, respectively, at weighted average interest rates of 0.5% and 0.2%, respectively. The weighted average maturity of the Company’s commercial paper during the three and nine months ended March 31, 2017 was approximately one day and two days, respectively.
        
The Company’s U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.  These agreements generally have terms ranging from overnight to up to five business days. At March 31, 2017 and June 30, 2016, there were no outstanding obligations related to the reverse repurchase agreements. For the three months ended March 31, 2017 and 2016, the Company had average outstanding balances under reverse repurchase agreements of $145.0 million and $128.0 million, respectively, at weighted average interest rates of 0.5%. For the nine months ended March 31, 2017 and 2016, the Company had average outstanding balances under reverse repurchase agreements of $258.1 million and $316.9 million, respectively, at weighted average interest rates of 0.5% and 0.4%, respectively.

Note 11. Long-term Debt

The Company has fixed-rate notes with 5-year and 10-year maturities for an aggregate principal amount of $2.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
The principal amounts and associated effective interest rates of the Notes and other debt as of March 31, 2017 and June 30, 2016, are as follows:
Debt instrument
Effective Interest Rate
 
March 31, 2017
 
June 30,
2016
Fixed-rate 2.250% notes due September 15, 2020
2.37%
 
$
1,000.0

 
$
1,000.0

Fixed-rate 3.375% notes due September 15, 2025
3.47%
 
1,000.0

 
1,000.0

Other
 
 
20.9

 
22.3

 
 
 
2,020.9

 
2,022.3

Less: current portion
 
 
(7.8
)
 
(2.5
)
Less: unamortized discount and debt issuance costs
 
 
(10.6
)
 
(12.1
)
Total long-term debt
 
 
$
2,002.5

 
$
2,007.7

The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.

16



As of March 31, 2017, the fair value of the Notes, based on Level 2 inputs, was $2,043.4 million. For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party service, see Note 1 "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for fiscal 2016.

Note 12. Employee Benefit Plans

A.  Stock-based Compensation Plans
    
The Company's share-based compensation consists of stock options, time-based restricted stock, time-based restricted stock units, performance-based restricted stock, and performance-based restricted stock units. The Company also offers an employee stock purchase plan for eligible employees.

See the Company's Annual Report on Form 10-K for fiscal 2016 for a detailed description of the Company's stock-based compensation awards and employee stock purchase plan, including information related to vesting terms, service and performance conditions, and payout percentages. Also, see the Company's Annual Report on Form 10-K for fiscal 2016 for a discussion of the Company's process for estimating the fair value of stock options granted.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards.  From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.  The Company repurchased 1.9 million and 3.8 million shares in the three months ended March 31, 2017 and 2016, respectively and repurchased 10.4 million and 13.2 million shares in the nine months ended March 31, 2017 and 2016, respectively. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

The following table represents stock-based compensation expense and related income tax benefits for the three months ended March 31, 2017 and 2016, respectively:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Operating expenses
$
4.6

 
$
5.3

 
$
16.4

 
$
17.0

Selling, general and administrative expenses
25.1

 
22.6

 
71.0

 
72.7

System development and programming costs
4.6

 
3.8

 
13.8

 
12.7

Total pre-tax stock-based compensation expense
$
34.3

 
$
31.7

 
$
101.2

 
$
102.4

 
 
 
 
 
 
 
 
Income tax benefit
$
12.5

 
$
11.2

 
$
36.3

 
$
37.0


As of March 31, 2017, the total remaining unrecognized compensation cost related to unvested stock options, restricted stock units, and restricted stock awards amounted to $16.3 million, $32.5 million, and $80.9 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.5 years, 1.4 years, and 1.3 years, respectively.


17



During the nine months ended March 31, 2017, the following activity occurred under the Company’s existing plans:

Stock Options:
 
 

Number
of Options
(in thousands)
 

Weighted
Average Price
(in dollars)
Options outstanding at July 1, 2016
 
4,869

 
$
65

Options granted
 
1,234

 
$
91

Options exercised
 
(1,529
)
 
$
56

Options canceled/forfeited
 
(202
)
 
$
79

Options outstanding at March 31, 2017
 
4,372

 
$
75


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

Number of Shares
(in thousands)
 

Number of Units
(in thousands)
Restricted shares/units outstanding at July 1, 2016
 
1,889

 
434

Restricted shares/units granted
 
884

 
202

Restricted shares/units vested
 
(855
)
 
(202
)
Restricted shares/units forfeited
 
(127
)
 
(36
)
Restricted shares/units outstanding at March 31, 2017
 
1,791

 
398


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

Number of Shares
(in thousands)
 
Number of Units
(in thousands)
Restricted shares/units outstanding at July 1, 2016
 
574

 
811

Restricted shares/units granted
 
172

 
313

Restricted shares/units vested
 
(311
)
 
(272
)
Restricted shares/units forfeited
 
(24
)
 
(77
)
Restricted shares/units outstanding at March 31, 2017
 
411

 
775


The fair value for stock options granted was estimated at the date of grant using the following assumptions:
 
 
Nine Months Ended
 
 
March 31,
 
 
2017
 
2016
Risk-free interest rate
 
1.2
%
 
1.6
%
Dividend yield
 
2.3
%
 
2.6
%
Weighted average volatility factor
 
23.2
%
 
25.6
%
Weighted average expected life (in years)
 
5.4

 
5.4

Weighted average fair value (in dollars)
 
$
14.36

 
$
13.16



18



B.  Pension Plans

The components of net pension expense were as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Service cost – benefits earned during the period
$
20.2

 
$
17.6

 
$
60.6

 
$
52.8

Interest cost on projected benefits
14.9

 
16.8

 
45.0

 
50.6

Expected return on plan assets
(33.9
)
 
(32.8
)
 
(101.9
)
 
(98.5
)
Net amortization and deferral
4.8

 
2.8

 
14.4

 
8.3

Net pension expense
$
6.0

 
$
4.4

 
$
18.1

 
$
13.2


Note 13. Income Taxes

The effective tax rate for the three months ended March 31, 2017 and 2016 was 29.0% and 33.0%, respectively. The decrease in the effective tax rate is due to tax incentives associated with the domestic production activity deduction and research tax credit for prior tax years which decreased the Company's effective tax rate by 630 basis points and the adoption of ASU 2016-09 related to the new accounting guidance for excess tax benefits on stock-based compensation (as further explained in Note 2), which decreased the Company's effective tax rate by 120 basis points. These decreases were partially offset by tax reserves recorded for uncertain tax positions, a lower benefit from adjustments to the tax liability in the three months ended March 31, 2017 and the usage of foreign tax credits during the three months ended March 31, 2016.

The effective tax rate for the nine months ended March 31, 2017 and 2016 was 31.5% and 33.0%, respectively. The decrease in the effective tax rate is due to tax incentives associated with the domestic production activity deduction and research tax credit for prior tax years which decreased the Company's effective tax rate by 240 basis points and the adoption of ASU 2016-09 related to the new accounting guidance for excess tax benefits on stock-based compensation (as further explained in Note 2), which decreased the Company's effective tax rate by 140 basis points in the nine months ended March 31, 2017. These decreases were partially offset by the impact of the sale of the CHSA and COBRA businesses, a lower benefit related to the usage of foreign tax credits and a lower benefit from adjustments to the tax liability in the nine months ended March 31, 2017, and the reversal of a valuation allowance during the nine months ended March 31, 2016.

Note 14. Commitments and Contingencies

In July 2016, Uniloc USA, Inc. and Uniloc Luxembourg, S.A. (“Uniloc”) filed a lawsuit against the Company in the United States District Court for the Eastern District of Texas alleging that Company products and services infringe four patents.  Uniloc alleges infringement of its patents concerning centralized management of application programs on a network, distribution of application programs to a target station on a network, management of configurable application programs on a network, and license use management on a network.  The complaint seeks unspecified monetary damages, costs, and injunctive relief.  This litigation is still in its early stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to this matter. The Company intends to vigorously defend against this lawsuit.

The Company is subject to various claims, litigation and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims, litigation and regulatory compliance matters against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.

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


19



In October 2016, the Company entered into a lease agreement in Tempe, Arizona in support of the Service Alignment Initiative (see Note 5), resulting in incremental obligations as follows:
Years ending June 30,
 
 
 
2018
$
1.4

2019
5.4

2020
5.5

2021
5.7

Thereafter
41.9

 
$
59.9


Note 15. Reclassifications out of Accumulated Other Comprehensive Income ("AOCI")

Changes in AOCI by component are as follows:

 
Three Months Ended
 
March 31, 2017
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive (Loss)/Income
Balance at December 31, 2016
$
(298.0
)
 
$
19.9

 
$
(288.6
)
 
$
(566.7
)
Other comprehensive income
before reclassification adjustments
20.3

 
46.3

 

 
66.6

Tax effect

 
(16.5
)
 

 
(16.5
)
Reclassification adjustments to
net earnings

 
0.2

(A)
5.1

(B)
5.3

Tax effect

 
(0.1
)
 
(1.8
)
 
(1.9
)
Balance at March 31, 2017
$
(277.7
)
 
$
49.8

 
$
(285.3
)
 
$
(513.2
)
 
Three Months Ended
 
March 31, 2016
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive (Loss)/Income
Balance at December 31, 2015
$
(274.7
)
 
$
68.1

 
$
(172.5
)
 
$
(379.1
)
Other comprehensive income
   before reclassification adjustments
41.2

 
271.8

 

 
313.0

Tax effect

 
(95.9
)
 

 
(95.9
)
Reclassification adjustments to
    net earnings

 
0.1

(A)
3.0

(B)
3.1

Tax effect

 
(0.1
)
 
(1.0
)
 
(1.1
)
Balance at March 31, 2016
$
(233.5
)
 
$
244.0

 
$
(170.5
)
 
$
(160.0
)

20




Nine Months Ended

March 31, 2017

Currency Translation Adjustment

Net Gains/Losses on Available-for-sale Securities

Pension Liability

Accumulated Other Comprehensive (Loss)/Income
Balance at June 30, 2016
$
(253.8
)
 
$
333.8

 
$
(295.1
)
 
$
(215.1
)
Other comprehensive loss
before reclassification adjustments
(23.9
)
 
(438.3
)
 

 
(462.2
)
Tax effect

 
155.1

 

 
155.1

Reclassification adjustments to
net earnings

 
(1.1
)
(A)
15.3

(B)
14.2

Tax effect

 
0.3

 
(5.5
)
 
(5.2
)
Balance at March 31, 2017
$
(277.7
)
 
$
49.8

 
$
(285.3
)
 
$
(513.2
)

 
Nine Months Ended
 
March 31, 2016
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive (Loss)/Income
Balance at June 30, 2015
$
(228.3
)
 
$
143.9

 
$
(176.2
)
 
$
(260.6
)
Other comprehensive (loss)/income
before reclassification adjustments
(5.2
)
 
150.8

 

 
145.6

Tax effect

 
(53.3
)
 

 
(53.3
)
Reclassification adjustments to
net earnings

 
3.9

(A)
8.9

(B)
12.8

Tax effect

 
(1.3
)
 
(3.2
)
 
(4.5
)
Balance at March 31, 2016
$
(233.5
)
 
$
244.0

 
$
(170.5
)
 
$
(160.0
)


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

(B) Reclassification adjustments out of AOCI are included in net pension expense (see Note 12).

Note 16. Interim Financial Data by Segment

Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two reportable segments: Employer Services and PEO Services. The primary components of the “Other” segment are non-recurring gains and losses, miscellaneous processing services, the elimination of intercompany transactions, interest expense, the results of operations of ADP Indemnity (a wholly-owned captive insurance company that provides workers’ compensation and employee’s liability deductible reimbursement insurance protection for PEO Services’ worksite employees), certain charges and expenses that have not been allocated to the reportable segments, and the historical results of the AMD business. Beginning in the first quarter of fiscal 2017, the Company's chief operating decision maker began reviewing the Company's results with stock-based compensation included in the Company's operating segments. This change, as well as changes to the allocation methodology for certain allocations, has been adjusted in both the current period and the prior period in the table below, and did not materially affect reportable segment results.

Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons.  Other costs are recorded based on management responsibility.  There is a reconciling item for the difference between actual interest income

21



earned on invested funds held for clients and interest credited to Employer Services and PEO Services at a standard rate of 4.5%.  This allocation is made for management reasons so that the reportable segments' results are presented on a consistent basis without the impact of fluctuations in interest rates. This reconciling adjustment to the reportable segments' revenues and earnings from continuing operations before income taxes is eliminated in consolidation.

Segment Results:
 
Revenues from
Continuing Operations
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Employer Services
$
2,627.2

 
$
2,576.7

 
$
7,197.8

 
$
6,920.1

PEO Services
974.4

 
866.3

 
2,592.0

 
2,305.2

Other
(2.1
)
 
(2.8
)
 
(8.2
)
 
5.0

Reconciling item:
 
 
 
 
 
 
 
Client fund interest
(188.7
)
 
(191.6
)
 
(466.7
)
 
(460.8
)
 
$
3,410.8

 
$
3,248.6

 
$
9,314.9

 
$
8,769.5

  
 
Earnings from Continuing Operations
before Income Taxes
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Employer Services
$
963.7

 
$
956.2

 
$
2,302.1