10-Q 1 q3fy1810q.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, 2018

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 [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting company [ ]
Emerging growth company [ ]
 
 
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 30, 2018 was 440,522,324.



Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
Statements of Consolidated Earnings
Three and nine months ended March 31, 2018 and 2017
 
 
 
 
Statements of Consolidated Comprehensive Income
Three and nine months ended March 31, 2018 and 2017
 
 
 
 
Consolidated Balance Sheets
At March 31, 2018 and June 30, 2017
 
 
 
 
Statements of Consolidated Cash Flows
Nine Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2018
 
2017
 
2018
 
2017
REVENUES:
 
 
 
 
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
$
2,492.9

 
$
2,329.8

 
$
6,762.7

 
$
6,444.4

Interest on funds held for clients
134.8

 
111.6

 
340.9

 
292.6

PEO revenues (A)
1,065.3

 
969.4

 
2,903.6

 
2,577.9

TOTAL REVENUES
3,693.0

 
3,410.8

 
10,007.2

 
9,314.9

 
 
 
 
 
 
 
 
EXPENSES:
 

 
 

 
 

 
 

Costs of revenues:
 

 
 

 
 

 
 

Operating expenses
1,844.7

 
1,701.5

 
5,210.6

 
4,793.4

Systems development and programming costs
162.5

 
153.3

 
477.6

 
460.6

Depreciation and amortization
70.2

 
56.2

 
202.1

 
168.4

TOTAL COSTS OF REVENUES
2,077.4

 
1,911.0

 
5,890.3

 
5,422.4

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
755.1

 
665.0

 
2,134.8

 
1,953.6

Interest expense
18.6

 
16.8

 
74.1

 
57.2

TOTAL EXPENSES
2,851.1

 
2,592.8

 
8,099.2

 
7,433.2

 
 
 
 
 
 
 
 
Other income, net
(10.7
)
 
(9.9
)
 
(58.5
)
 
(261.0
)
 
 
 
 
 
 
 
 
EARNINGS BEFORE INCOME TAXES
852.6

 
827.9

 
1,966.5

 
2,142.7

 
 
 
 
 
 
 
 
Provision for income taxes
209.5

 
240.0

 
454.4

 
675.1

 
 
 
 
 
 
 
 
NET EARNINGS
$
643.1

 
$
587.9

 
$
1,512.1

 
$
1,467.6

 
 
 
 
 
 
 
 
BASIC EARNINGS PER SHARE
$
1.46

 
$
1.32

 
$
3.42

 
$
3.27

 
 
 
 
 
 
 
 
DILUTED EARNINGS PER SHARE
$
1.45

 
$
1.31

 
$
3.40

 
$
3.25

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
441.0

 
446.5

 
441.5

 
448.9

Diluted weighted average shares outstanding
443.4

 
449.2

 
444.1

 
451.3

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.630

 
$
0.570

 
$
1.830

 
$
1.670


(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $10,176.2 million and $9,207.2 million for the three months ended March 31, 2018 and 2017, respectively, and $29,547.0 million and $26,040.3 million for the nine months ended March 31, 2018 and 2017, 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,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
643.1

 
$
587.9

 
$
1,512.1

 
$
1,467.6

 
 
 
 
 
 
 
 
Other comprehensive income/loss:
 
 
 
 
 
 
 
Currency translation adjustments
21.1

 
20.3

 
67.7

 
(23.9
)
 
 
 
 
 
 
 
 
Unrealized net (losses)/gains on available-for-sale securities
(240.4
)
 
46.3

 
(400.6
)
 
(438.3
)
Tax effect
53.4

 
(16.5
)
 
109.9

 
155.1

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

 
0.2

 
1.3

 
(1.1
)
Tax effect
0.1

 
(0.1
)
 
(0.2
)
 
0.3

 
 
 
 
 
 
 
 
Reclassification of pension liability adjustment to net earnings
2.3

 
5.1

 
6.9

 
15.3

Tax effect
(0.6
)
 
(1.8
)
 
(2.3
)
 
(5.5
)
 
 
 
 
 
 
 
 
Other comprehensive (loss)/income, net of tax
(163.9
)
 
53.5

 
(217.3
)
 
(298.1
)
Comprehensive income
$
479.2

 
$
641.4

 
$
1,294.8

 
$
1,169.5































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,
 
 
2018
 
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,293.6

 
$
2,780.4

Accounts receivable, net of allowance for doubtful accounts of $51.9 and $49.6, respectively
 
2,043.4

 
1,703.6

Other current assets
 
730.3

 
883.2

Total current assets before funds held for clients
 
5,067.3

 
5,367.2

Funds held for clients
 
33,646.7

 
27,291.5

Total current assets
 
38,714.0

 
32,658.7

Long-term receivables, net of allowance for doubtful accounts of $0.4 and $0.8, respectively
 
27.3

 
28.0

Property, plant and equipment, net
 
794.6

 
779.9

Other assets
 
1,391.0

 
1,352.2

Goodwill
 
2,263.3

 
1,741.0

Intangible assets, net
 
875.3

 
620.2

Total assets
 
$
44,065.5

 
$
37,180.0

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
105.7

 
$
149.7

Accrued expenses and other current liabilities
 
1,505.3

 
1,381.9

Accrued payroll and payroll-related expenses
 
595.8

 
562.5

Dividends payable
 
275.1

 
250.5

Short-term deferred revenues
 
235.4

 
232.9

Income taxes payable
 
80.2

 
49.0

Total current liabilities before client funds obligations
 
2,797.5

 
2,626.5

Client funds obligations
 
33,943.7

 
27,189.4

Total current liabilities
 
36,741.2

 
29,815.9

Long-term debt
 
2,002.4

 
2,002.4

Other liabilities
 
795.8

 
830.2

Deferred income taxes
 
105.5

 
163.1

Long-term deferred revenues
 
391.4

 
391.4

Total liabilities
 
40,036.3

 
33,203.0

 
 
 
 
 
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, 2018 and June 30, 2017;
outstanding, 441.7 and 445.0 shares at March 31, 2018 and June 30, 2017, respectively
 
63.9

 
63.9

Capital in excess of par value
 
964.1

 
867.8

Retained earnings
 
15,466.1

 
14,728.2

Treasury stock - at cost: 197.0 and 193.7 shares at March 31, 2018 and June 30, 2017, respectively
 
(11,826.1
)
 
(11,303.7
)
Accumulated other comprehensive loss
 
(638.8
)
 
(379.2
)
Total stockholders’ equity
 
4,029.2

 
3,977.0

Total liabilities and stockholders’ equity
 
$
44,065.5

 
$
37,180.0



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,
 
 
2018
 
2017
*As Adjusted
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
1,512.1

 
$
1,467.6

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

 
 

Depreciation and amortization
 
278.3

 
233.6

Deferred income taxes
 
18.0

 
22.2

Stock-based compensation expense
 
119.4

 
101.2

Net pension expense
 
8.2

 
18.1

Net amortization of premiums and accretion of discounts on available-for-sale securities
 
55.6

 
66.1

Gain on sale of divested businesses, net of tax
 

 
(121.4
)
Other
 
22.0

 
24.8

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

 
 

Increase in accounts receivable
 
(239.3
)
 
(90.1
)
Increase in other assets
 
(38.6
)
 
(152.9
)
Decrease in accounts payable
 
(31.1
)
 
(29.5
)
Increase in accrued expenses and other liabilities
 
105.4

 
129.0

Net cash flows provided by operating activities
 
1,810.0

 
1,668.7

 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Purchases of corporate and client funds marketable securities
 
(3,692.7
)
 
(3,470.0
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
 
2,702.5

 
2,704.6

Capital expenditures
 
(159.6
)
 
(174.5
)
Additions to intangibles
 
(195.8
)
 
(162.1
)
Acquisitions of businesses, net of cash acquired
 
(612.4
)
 
(86.7
)
Proceeds from the sale of divested businesses
 

 
234.0

Net cash flows used in investing activities
 
(1,958.0
)
 
(954.7
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Net increase in client funds obligations
 
6,700.2

 
636.7

Payments of debt
 
(6.8
)
 
(1.5
)
Repurchases of common stock
 
(596.2
)
 
(956.8
)
Net proceeds from stock purchase plan and stock-based compensation plans
 
46.1

 
74.5

Dividends paid
 
(785.1
)
 
(739.4
)
Net cash flows provided by / (used in) financing activities
 
5,358.2

 
(986.5
)
 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 
53.1

 
(81.1
)
 
 
 
 
 
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
 
5,263.3

 
(353.6
)
 
 
 
 
 
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period
 
8,181.6

 
15,458.6

Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
 
$
13,444.9

 
$
15,105.0

 
 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets
 
 
 
 
Cash and cash equivalents
 
$
2,293.6

 
$
2,995.5

Restricted cash and restricted cash equivalents included in funds held for clients (A)
 
11,151.3

 
12,109.5

Total cash, cash equivalents, restricted cash, and restricted cash equivalents
 
$
13,444.9

 
$
15,105.0

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
86.5

 
$
69.8

Cash paid for income taxes, net of income tax refunds
 
$
423.0

 
$
569.2


*See Note 2 for a summary of adjustments.

(A) See Note 8 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.


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., its subsidiaries and variable interest entity (“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.

In the third quarter of fiscal 2018, the Company created a grantor trust, which now holds the majority of the funds provided by its clients pending remittance to employees of those clients, tax authorities, and other payees.  The Company is the sole beneficial owner of the trust.  The trust meets the criteria in ASC 810 “Consolidation” to be characterized as a variable interest entity (“VIE”).  The Company has determined that it has a controlling financial interest in the trust because it has both (1) the power to direct the activities that most significantly impact the economic performance of the trust (including the power to make all investment decisions for the trust) and (2) the right to receive benefits that could potentially be significant to the trust (in the form of investment returns) and therefore, consolidates the trust.  Further information on these funds and the Company’s obligations to remit to its clients’ employees, tax authorities, and other payees is provided in Note 8, “Corporate Investments and Funds Held for Clients.” 

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 Interim Financial Data by Segment footnote reflects changes to the allocation methodology for certain allocations and has been adjusted in both the current period and the prior period and did not materially affect reportable segment results. 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, 2017 (“fiscal 2017”).

Note 2.  New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2018, the Company adopted ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) from accumulated other comprehensive income to retained earnings. The March 31, 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive income and into retained earnings of $42.3 million. The Company's policy for releasing disproportionate income tax effects from AOCI utilizes the aggregate approach. Refer to Note 15 for additional detail regarding the components of the reclassification. The adoption of ASU 2018-02 did not have an impact on the Company's consolidated results of operations or cash flows.

Effective July 1, 2017, the Company adopted Accounting Standards Update ("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. The Company retrospectively adopted the new standard, and as a result included restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the Statements of Consolidated Cash Flows. Accordingly, the statement of cash flows has been revised to include restricted cash and restricted cash equivalents associated with funds held to satisfy client obligations, as a component of cash, cash equivalents, restricted cash and restricted cash equivalents.

As a result of this adoption, the Company adjusted the Statements of Consolidated Cash Flows from previously reported amounts as follows:


7


 
Nine Months Ended
 
March 31, 2017
(unaudited)
 
As previously reported
 
Adjustments
 
As adjusted
Cash Flows from Investing Activities:
 
 
 
 
 
Net decrease / (increase) in restricted cash and cash equivalents held to satisfy client funds obligations
$
87.7

 
$
(87.7
)
 
$

Net cash flows used in investing activities
(867.0
)
 
(87.7
)
 
(954.7
)
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents

(10.8
)
 
(70.3
)
 
(81.1
)
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
(195.6
)
 
(158.0
)
 
(353.6
)
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
$
2,995.5

 
$
12,109.5

 
$
15,105.0

 
Effective July 1, 2017, the Company adopted 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. The adoption of ASU 2017-04 is not expected to have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.

In July 2017, the Company adopted ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business." ASU 2017-01 clarifies 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. The adoption of ASU 2017-01 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.

Recently Issued Accounting Pronouncements

The following table summarizes recent ASU's issued by the Financial Accounting Standards Board ("FASB") that could have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
Standard
Description
Effective Date
Effect on Financial Statements or Other Significant Matters
ASU 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost
This standard 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.
For fiscal years beginning after December 15, 2017. Early adoption is permitted.
The Company will adopt ASU 2017-07 beginning on July 1, 2018. This ASU will be applied retrospectively and will require the reclassification of the non-service cost components of the net periodic benefit cost from within the respective line items of our Statements of Consolidated Earnings to Other income, net. Also, the requirement set forth under this ASU only allows the service cost component of net periodic benefit cost to be capitalized. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s consolidated results of operations, financial condition, or cash flows.
 
 
 
 

8


Standard
Description
Effective Date
Effect on Financial Statements or Other Significant Matters
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. This ASU requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application.
For fiscal years beginning after December 15, 2018. Early adoption is permitted.
The Company will adopt ASU 2016-02 beginning on July 1, 2019. The Company has not yet determined the impact of this ASU on its consolidated results of operations, financial condition, or cash flows.
ASU 2014-09
Revenue from Contracts with Customers (Topic 606)
This standard 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.
For fiscal years beginning after December 15, 2017. Early adoption is permitted.
The Company has been assessing the impact of the new revenue recognition standard on its relationships with its clients. In fiscal 2017, the Company determined it would not early adopt the standard, and instead would adopt the new standard in its fiscal year beginning on July 1, 2018. Further, the Company anticipates applying the guidance under the full retrospective approach. The Company is nearly complete with its comprehensive diagnostic of the measurement and recognition provisions of the new standard and is in the process of finalizing its conclusions and policies. The Company expects the provisions of the new standard 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). The provisions of the new standard will require the Company to capitalize and amortize additional implementation costs than those capitalized and amortized under current U.S. GAAP. Further, under current U.S. GAAP, the Company immediately expenses all selling expenses. The provisions of the new standard will require that the Company capitalize incremental selling expenses such as commissions and bonuses paid to the sales force for obtaining contracts with new clients and/or selling additional business to current clients. These capitalized expenses will be amortized over the expected client life. While the Company grows, the impact of deferring and amortizing additional costs creates higher overall pre-tax income, net earnings, and earnings per share, when compared to current U.S. GAAP. The Company does not expect the provisions of the new standard to materially impact the timing or amount of revenue it recognizes.

The Company is substantially complete in determining the impacts of all the disclosure requirements. The company expects to disaggregate its revenue by its three strategic pillars (U.S. Integrated HCM Solutions, U.S. HRBPO Solutions and Global Solutions) with separate disaggregation for PEO pass-through revenues and Client Fund Interest revenues. Additionally, while the Company is in the process of assessing its accounting and forecasting processes to ensure its ability to record, report, forecast, and analyze results under the new standard, it is not expecting significant changes to its business processes or systems.





9


Note 3. Acquisitions

In October 2017, the Company acquired 100% of the outstanding shares of Global Cash Card, Inc. ("GCC"), a leader in digital payments, including paycards and other electronic accounts, for approximately $490 million in cash, net of cash acquired. The acquisition of GCC makes ADP the only human capital management provider with a proprietary digital payments processing platform. The results of GCC are reported within the Company’s Employer Services segment. Pro forma information has not been presented because the effect of the acquisition is not material to the Company's consolidated financial results.

The preliminary purchase price allocation for GCC is as follows:
Goodwill
$
404.2

Identifiable intangible assets
132.5

Other assets
3.2

Total assets acquired
$
539.9

 
 
Total liabilities acquired
$
48.9


The Company determined the purchase price allocations for this acquisition based on estimates of the fair value of tangible and intangible assets acquired and liabilities assumed, utilizing recognized valuation techniques, including the income and market approaches. The goodwill recorded as a result of the GCC transaction represents future economic benefits we expect to achieve as a result of the acquisition and expected cost synergies. None of the goodwill resulting from the acquisition is tax deductible. Intangible assets for GCC, which totaled $132.5 million, included technology and software, and customer contracts and lists which are being amortized over a weighted average life of approximately 8 years.

In January 2018, the Company acquired 100% of the outstanding shares of WorkMarket, Inc. ("WorkMarket"), a leading provider of cloud-based freelance management solutions, for approximately $125 million in cash. The results of WorkMarket are reported within the Company’s Employer Services segment. The acquisition was 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 preliminary allocation of the purchase price is based upon estimates and assumptions that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to the measurement of certain assets and liabilities, certain tax matters, and residual goodwill. Accordingly, the measurement period for such purchase price allocations will end when the information becomes available but will not exceed twelve months from the date of acquisition.

Note 4. Divestitures

In November 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. 

The Company determined that the CHSA and COBRA 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 the fiscal year ended June 30, 2016 ("fiscal 2016"), the Company entered into leases in Norfolk, Virginia and Maitland, Florida, and in fiscal 2017, the Company entered into a lease in Tempe, Arizona as part of this effort. The Company began incurring charges during the first quarter of fiscal 2017. 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 of about $7 million for the remainder of fiscal 2018, consisting primarily of cash expenditures for employee separation benefits.

10




The table below summarizes the composition of the Company's Service Alignment Initiative charges/(reversals):
 
Three Months Ended
 
Nine Months Ended
 
Cumulative amount from inception through
 
March 31,
 
March 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
 
2018
Employee separation benefits (a)
$
11.8

 
$
(0.1
)
 
$
8.9

 
$
37.2

 
$
93.0

Other initiative costs (b)
1.3

 
0.7

 
4.2

 
4.4

 
10.1

Total (c)
$
13.1

 
$
0.6

 
$
13.1

 
$
41.6

 
$
103.1


Activity for the Service Alignment Initiative liability for the nine months ended March 31, 2018 and March 31, 2017, respectively, was as follows:
 
Employee
separation benefits
 
Other initiative costs
 
Total
Balance at June 30, 2017
$
73.9

 
$
0.5

 
$
74.4

Charged to expense
21.8

 
4.2

 
26.0

Reversals
(12.9
)
 

 
(12.9
)
Cash payments
(25.9
)
 
(3.4
)
 
(29.3
)
Non-cash utilization

 
(0.7
)
 
(0.7
)
Balance at March 31, 2018
$
56.9

 
$
0.6

 
$
57.5

 
 
 
 
 
 
Balance at June 30, 2016
$

 
$

 
$

Charged to expense
37.2

 
4.4

 
41.6

Reversals

 

 

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/(reversals) 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.


11


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, 2018
 
 

 
 

 
 

 
 

Net earnings
 
$
643.1

 
 

 
 

 
$
643.1

Weighted average shares (in millions)
 
441.0

 
1.0

 
1.4

 
443.4

EPS
 
$
1.46

 
 

 
 

 
$
1.45

Three Months Ended March 31, 2017
 
 

 
 

 
 

 
 

Net earnings
 
$
587.9

 
 

 
 

 
$
587.9

Weighted average shares (in millions)
 
446.5

 
1.1

 
1.6

 
449.2

EPS
 
$
1.32

 
 

 
 

 
$
1.31

 
 
 
 
 
 
 
 
 
Nine Months Ended March 31, 2018
 
 
 
 
 
 
 
 
Net earnings
 
$
1,512.1

 
 

 
 

 
$
1,512.1

Weighted average shares (in millions)
 
441.5

 
1.1

 
1.5

 
444.1

EPS
 
$
3.42

 
 

 
 

 
$
3.40

Nine Months Ended March 31, 2017
 
 

 
 

 
 

 
 

Net earnings
 
$
1,467.6

 
 

 
 

 
$
1,467.6

Weighted average shares (in millions)
 
448.9

 
0.9

 
1.5

 
451.3

EPS
 
$
3.27

 
 

 
 

 
$
3.25


Options to purchase 1.1 million shares of common stock for the three months ended March 31, 2018, and 0.9 million shares of common stock for the nine months ended March 31, 2018 and 2017 were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Note 7. Other Income, Net
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
Interest income on corporate funds
$
(11.0
)
 
$
(10.1
)
 
$
(59.4
)
 
$
(54.5
)
Realized gains on available-for-sale securities
(1.3
)
 
(0.6
)
 
(1.9
)
 
(3.1
)
Realized losses on available-for-sale securities
1.6

 
0.8

 
3.2

 
2.0

Gain on sale of assets

 

 
(0.4
)
 

Gain on sale of businesses (see Note 4)

 

 

 
(205.4
)
Other income, net
$
(10.7
)
 
$
(9.9
)
 
$
(58.5
)
 
$
(261.0
)


12



Note 8. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at March 31, 2018 and June 30, 2017 were as follows:
 
March 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Market Value (A)
Type of issue:
 
 
 
 
 
 
 
Money market securities, cash and other cash equivalents
$
13,444.9

 
$

 
$

 
$
13,444.9

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate bonds
9,547.9

 
22.8

 
(134.5
)
 
9,436.2

Asset-backed securities
4,457.0

 
0.4

 
(56.6
)
 
4,400.8

U.S. government agency securities
2,912.9

 
5.6

 
(40.5
)
 
2,878.0

U.S. Treasury securities
2,576.3

 
0.5

 
(66.4
)
 
2,510.4

Canadian government obligations and
Canadian government agency obligations
1,129.9

 
0.8

 
(20.7
)
 
1,110.0

Canadian provincial bonds
735.8

 
6.2

 
(6.4
)
 
735.6

Municipal bonds
592.0

 
3.0

 
(5.3
)
 
589.7

Other securities
847.7

 
3.3

 
(9.0
)
 
842.0

 
 
 
 
 
 
 
 
Total available-for-sale securities
22,799.5

 
42.6

 
(339.4
)
 
22,502.7

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
36,244.4

 
$
42.6

 
$
(339.4
)
 
$
35,947.6

                                                            
(A) Included within available-for-sale securities are corporate investments with fair values of $7.3 million and funds held for clients with fair values of $22,495.4 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
 
June 30, 2017
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Market Value (B)
Type of issue:
 

 
 

 
 

 
 

Money market securities, cash and other cash equivalents
$
8,181.6

 
$

 
$

 
$
8,181.6

Available-for-sale securities:
 

 
 

 
 

 
 

Corporate bonds
9,325.3

 
98.8

 
(22.0
)
 
9,402.1

Asset-backed securities
4,453.1

 
16.9

 
(8.6
)
 
4,461.4

U.S. government agency securities
3,557.7

 
22.2

 
(13.4
)
 
3,566.5

U.S. Treasury securities
1,585.9

 
2.6

 
(14.3
)
 
1,574.2

Canadian government obligations and
Canadian government agency obligations
1,053.6

 
2.9

 
(11.4
)
 
1,045.1

Canadian provincial bonds
746.9

 
14.3

 
(1.4
)
 
759.8

Municipal bonds
582.5

 
11.3

 
(1.3
)
 
592.5

Other securities
493.6

 
7.3

 
(1.4
)
 
499.5

 
 
 
 
 
 
 
 
Total available-for-sale securities
21,798.6

 
176.3

 
(73.8
)
 
21,901.1

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
29,980.2

 
$
176.3

 
$
(73.8
)
 
$
30,082.7


(B) 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 $21,890.3 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

13




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 2017. The Company did not transfer any assets between Levels during the nine months ended March 31, 2018 or fiscal 2017. 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, 2018.

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, 2018, are as follows: 
 
March 31, 2018
 
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
$
(96.7
)
 
$
6,932.3

 
$
(37.8
)
 
$
987.4

 
$
(134.5
)
 
$
7,919.7

Asset-backed securities
(40.1
)
 
3,327.7

 
(16.5
)
 
837.0

 
(56.6
)
 
4,164.7

U.S. government agency securities
(25.8
)
 
2,160.9

 
(14.7
)
 
433.1

 
(40.5
)
 
2,594.0

U.S. Treasury securities
(38.9
)
 
1,584.2

 
(27.5
)
 
867.7

 
(66.4
)
 
2,451.9

Canadian government obligations and
Canadian government agency obligations
(20.7
)
 
927.4

 

 

 
(20.7
)
 
927.4

Canadian provincial bonds
(5.6
)
 
412.3

 
(0.8
)
 
40.1

 
(6.4
)
 
452.4

Municipal bonds
(4.6
)
 
331.8

 
(0.7
)
 
16.0

 
(5.3
)
 
347.8

Other securities
(7.8
)
 
506.7

 
(1.2
)
 
34.0

 
(9.0
)
 
540.7

 
$
(240.2
)
 
$
16,183.3

 
$
(99.2
)
 
$
3,215.3

 
$
(339.4
)
 
$
19,398.6


The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2017, are as follows:
 
June 30, 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
$
(22.0
)
 
$
2,619.9

 
$

 
$
7.4

 
$
(22.0
)
 
$
2,627.3

Asset-backed securities
(8.5
)
 
1,916.1

 
(0.1
)
 
11.3

 
(8.6
)
 
1,927.4

U.S. government agency securities
(13.4
)
 
1,935.3

 

 

 
(13.4
)
 
1,935.3

U.S. Treasury securities
(14.3
)
 
1,317.8

 

 
1.0

 
(14.3
)
 
1,318.8

Canadian government obligations and
Canadian government agency obligations
(11.4
)
 
699.6

 

 

 
(11.4
)
 
699.6

Canadian provincial bonds
(1.4
)
 
179.8

 

 

 
(1.4
)
 
179.8

Municipal bonds
(1.2
)
 
98.8

 
(0.1
)
 
1.2

 
(1.3
)
 
100.0

Other securities
(1.3
)
 
148.0

 
(0.1
)
 
8.9

 
(1.4
)
 
156.9

 
$
(73.5
)
 
$
8,915.3

 
$
(0.3
)
 
$
29.8

 
$
(73.8
)
 
$
8,945.1


At March 31, 2018, 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 2018 through March 2026.


14



At March 31, 2018, 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 $2,050.3 million, $1,685.8 million, $454.2 million, and $210.5 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, 2018.

At March 31, 2018, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $2,045.6 million and $596.8 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 2018 through November 2025.

At March 31, 2018, other securities and their fair value primarily represent: U.S. government agency commercial mortgage-backed securities of $256.9 million issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, Aa2 rated United Kingdom Gilt securities of $210.2 million, AAA and AA rated supranational bonds of $153.2 million, and AAA and AA rated sovereign bonds of $112.3 million.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 
 
March 31,
 
June 30,
 
 
2018
 
2017
Corporate investments:
 
 
 
 
Cash and cash equivalents
 
$
2,293.6

 
$
2,780.4

Short-term marketable securities (a)
 

 
3.2

Long-term marketable securities (b)
 
7.3

 
7.6

Total corporate investments
 
$
2,300.9

 
$
2,791.2

 
(a) - Short-term marketable securities are included within Other current assets on the Consolidated Balance Sheets.
(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,
 
 
2018
 
2017
Funds held for clients:
 
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
 
$
11,151.3

 
$
5,401.2

Restricted short-term marketable securities held to satisfy client funds obligations
 
2,420.5

 
2,918.5

Restricted long-term marketable securities held to satisfy client funds obligations
 
20,074.9

 
18,971.8

Total funds held for clients
 
$
33,646.7

 
$
27,291.5


Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax, and other payee payment obligations 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 $33,943.7 million and $27,189.4 million at March 31, 2018 and June 30, 2017, 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. Of the Company’s funds held for clients at March 31, 2018, $29,879.6 million are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and eliminate in consolidation.

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.  Beginning September 30, 2017, as a result of the adoption of ASU 2016-18 (see Note 2), the Company has reported the cash and cash equivalents related to client funds investments with

15



original maturities of ninety days or less, within the beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents. These amounts have been reconciled to the Consolidated Balance Sheets on the Statements of Consolidated Cash Flows. Refer to Note 2 for a summary of the change in presentation as a result of the adoption of ASU 2016-18. 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 80% of the available-for-sale securities held a AAA or AA rating at March 31, 2018, as rated by Moody's, Standard & Poor's, DBRS for Canadian denominated securities, and Fitch for asset-backed and commercial mortgage backed securities.  All available-for-sale securities were rated as investment grade at March 31, 2018.
 
Expected maturities of available-for-sale securities at March 31, 2018 are as follows:
One year or less
$
2,420.5

One year to two years
4,783.9

Two years to three years
5,690.6

Three years to four years
3,808.7

After four years
5,799.0

Total available-for-sale securities
$
22,502.7


Note 9. Goodwill and Intangibles Assets, net

Changes in goodwill for the nine months ended March 31, 2018 are as follows:
 
Employer
Services
 
PEO
Services
 
Total
Balance at June 30, 2017
$
1,736.2

 
$
4.8

 
$
1,741.0

Additions and other adjustments, net
491.3

 

 
491.3

Currency translation adjustments
31.0

 

 
31.0

Balance at March 31, 2018
$
2,258.5

 
$
4.8

 
$
2,263.3


Components of intangible assets, net, are as follows:
 
 
March 31,
 
June 30,
 
 
2018
 
2017
Intangible assets:
 
 
 
 
Software and software licenses
 
$
2,253.8

 
$
1,975.2

Customer contracts and lists
 
714.3

 
614.1

Other intangibles
 
237.4

 
228.2

 
 
3,205.5

 
2,817.5

Less accumulated amortization:
 
 

 
 

Software and software licenses
 
(1,588.1
)
 
(1,483.7
)
Customer contracts and lists
 
(530.8
)
 
(506.0
)
Other intangibles
 
(211.3
)
 
(207.6
)
 
 
(2,330.2
)
 
(2,197.3
)
Intangible assets, net
 
$
875.3

 
$
620.2


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 6 years for other intangibles).  Amortization of intangible assets was $52.0 million and $40.4 million for the three months ended March 31, 2018 and 2017, respectively, and $150.4 million and $125.8 million for the nine months ended March 31, 2018 and 2017, respectively.


16



Estimated future amortization expenses of the Company's existing intangible assets are as follows:
 
Amount
Three months ending June 30, 2018
$
52.1

Twelve months ending June 30, 2019
$
227.2

Twelve months ending June 30, 2020
$
197.9

Twelve months ending June 30, 2021
$
147.7

Twelve months ending June 30, 2022
$
110.0

Twelve months ending June 30, 2023
$
71.4


Note 10. Short-term Financing

The Company has a $3.5 billion, 364-day credit agreement that matures in June 2018 with a one year term-out option.  The Company also has a $2.25 billion five-year credit facility that matures in June 2022 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, 2018 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 $9.5 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, 2018 and June 30, 2017, the Company had no commercial paper outstanding. For the three months ended March 31, 2018 and 2017, the Company had average daily borrowings of $1.0 billion and $1.1 billion, respectively, at weighted average interest rates of 1.5% and 0.7%, respectively. For the nine months ended March 31, 2018 and 2017, the Company had average daily borrowings of $2.8 billion and $3.2 billion, respectively, at weighted average interest rates of 1.2% and 0.5%, respectively. The weighted average maturity of the Company’s commercial paper during the three and nine months ended March 31, 2018 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, 2018 and June 30, 2017, there were no outstanding obligations related to the reverse repurchase agreements. For the three months ended March 31, 2018 and 2017, the Company had average outstanding balances under reverse repurchase agreements of $99.0 million and $145.0 million, respectively, at weighted average interest rates of 1.2% and 0.5%, respectively. For the nine months ended March 31, 2018 and 2017, the Company had average outstanding balances under reverse repurchase agreements of $389.5 million and $258.1 million, respectively, at weighted average interest rates of 1.1% and 0.5%, 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.

17



The principal amounts and associated effective interest rates of the Notes and other debt as of March 31, 2018 and June 30, 2017, are as follows:
Debt instrument
 
Effective Interest Rate
 
March 31, 2018
 
June 30,
 2017
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
 
 
 
13.6

 
20.3

 
 
 
 
2,013.6

 
2,020.3

Less: current portion
 
 
 
(2.5
)
 
(7.8
)
Less: unamortized discount and debt issuance costs
 
 
 
(8.7
)
 
(10.1
)
Total long-term debt
 
 
 
$
2,002.4

 
$
2,002.4

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

As of March 31, 2018, the fair value of the Notes, based on Level 2 inputs, was $1,993.2 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 2017.

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.

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 1.7 million and 1.9 million shares in the three months ended March 31, 2018 and 2017, respectively and repurchased 5.3 million and 10.4 million shares in the nine months ended March 31, 2018 and 2017, 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 for the three and nine months ended March 31, 2018 and 2017, respectively:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
Operating expenses
$
4.8

 
$
4.6

 
$
15.4

 
$
16.4

Selling, general and administrative expenses
31.8

 
25.1

 
87.9

 
71.0

System development and programming costs
5.1

 
4.6

 
16.1

 
13.8

Total stock-based compensation expense
$
41.7

 
$
34.3

 
$
119.4

 
$
101.2


The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the Company's fiscal 2017 Form 10-K. See the Company's Annual Report on Form 10-K for fiscal 2017 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, payout percentages, and process for estimating the fair value of stock options granted.


18



B.  Pension Plans

The components of net pension expense were as follows:
 
Three Months Ended
 
 
Nine Months Ended
 
March 31,
 
 
March 31,
 
2018
 
2017
 
 
2018
 
2017
Service cost – benefits earned during the period
$
18.7

 
$
20.2

 
 
$
55.9

 
$
60.6

Interest cost on projected benefits
16.4

 
14.9

 
 
49.0

 
45.0

Expected return on plan assets
(34.4
)
 
(33.9
)
 
 
(103.0
)
 
(101.9
)
Net amortization and deferral
2.1

 
4.8

 
 
6.3

 
14.4

Net pension expense
$
2.8

 
$
6.0

 
 
$
8.2

 
$
18.1


On March 1, 2018, the Company announced that it is offering a voluntary early retirement program ("VERP") to certain eligible U.S.-based associates aged 55 or above with at least 10 years of service. The early retirement offer has been made to about 3,500 eligible associates, or approximately 6 percent of the Company’s workforce, who will meet the specific age and years of service criteria as of June 30, 2018. The Company also extended to all employees participating in the VERP the opportunity to continue health care coverage at active employee contribution rates for up to 24 months following retirement. ADP intends to fund a significant majority of the program costs from the existing surplus in ADP’s U.S. defined benefit plan, with the remaining portion of expenses expected to be funded from ADP’s U.S. corporate cash balances.

Associates were required to finalize their election by May 1, 2018. The Company will recognize estimated certain special termination benefit pre-tax charges of approximately $300 million in the fourth quarter of fiscal 2018. In addition, during the fourth quarter of fiscal 2018 the Company anticipates recording a non-cash settlement charge which is contingent on the number of participants electing the lump sum payment option and other actuarial assumptions, including the discount rate and long-term rate of return on assets. Lastly, the Company anticipates recording a cash charge for continued health care coverage, which is dependent upon the number of associates electing this benefit and the health care option selected by each associate.

Note 13. Income Taxes

The effective tax rate for the three months ended March 31, 2018 and 2017 was 24.6% and 29.0%, respectively. The decrease in the effective tax rate is primarily due to the impacts of the Act, the release of reserves for uncertain tax positions, and the benefit of a tax accounting method change filed with the IRS in the three months ended March 31, 2018, partially offset by the impact of a benefit due to tax incentives associated with the domestic production activity deduction and research tax credit in the three months ended March 31, 2017.
The effective tax rate for the nine months ended March 31, 2018 and 2017 was 23.1% and 31.5%, respectively. The decrease in the effective tax rate is primarily due to the impacts of the Act and the release of reserves for uncertain tax positions, partially offset by prior period impacts of the sale of the CHSA and COBRA businesses and the impact of a benefit due to tax incentives associated with the domestic production activity deduction and research tax credit.
The Act reduces the U.S. federal corporate income tax rate from 35% to 21%. In accordance with ASC 740 companies are required to re-measure deferred tax balances using the new enacted tax rates. The Act requires companies to pay a one-time transition tax on earnings of the Company's foreign subsidiaries that were previously tax deferred for U.S. income taxes and creates new taxes on the Company's foreign sourced earnings. The rate change is administratively effective at the beginning of the Company's fiscal year resulting in a blended corporate statutory tax rate for fiscal 2018 of 28.1%.
Income tax expense reported for the nine months ended March 31, 2018 reflect the effects of the Act and resulted in a decrease in income tax expense of approximately $140 million which includes a one-time net benefit of $42.9 million. The $42.9 million is comprised of the application of the newly enacted rates to the Company's U.S. deferred tax balances partially offset by the one-time transition tax and the recording of a valuation allowance against the Company's foreign tax credits which may not be realized. The Act’s foreign tax credit provisions may limit the Company’s ability to utilize existing foreign tax credits in future periods, accordingly we have estimated that approximately $20.6 million could expire unutilized.
The accounting for the effects of the rate change on deferred tax balances is not complete and provisional amounts were recorded for these items. The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The benefit recorded relating to the re-measurement of the Company's deferred tax

19



balances was $82.0 million. The Company is still analyzing certain aspects of the Act and refining calculations, which could potentially affect the re-measurement of these balances or potentially give rise to new deferred tax amounts.
The one-time transition tax is based on the total post-1986 earnings and profits ("E&P") that was previously deferred from US income taxes. The Company recorded a provisional amount for the one-time transition tax liability of $18.6 million for the Company's foreign subsidiaries. The Company has not yet completed the calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalizes the amounts held in cash or other specified assets.

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 (the "Court") alleging that Company products and services infringe four patents.  Uniloc alleged 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 sought unspecified monetary damages, costs, and injunctive relief. On September 28, 2017, the Court granted ADP’s motion to dismiss the complaint on the grounds that all asserted claims of the four patents are invalid and dismissed the case with prejudice.

The Company has acquired a license to the four patents and a release for any potential past infringement liability.  Despite the Company being licensed and released, Uniloc appealed the Court's invalidity determination to the U.S. Court of Appeals for the Federal Circuit.  The Company has moved to dismiss Uniloc's appeal on the ground that the license and release have removed any justiciable dispute between the parties concerning the patents; the Company's motion is pending.  Even though the Company's motion is pending, as a result of the license and release the Company does not believe the result of Uniloc’s appeal will have a material adverse impact on the Company.

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.


20


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

Changes in AOCI by component are as follows:
 
Three Months Ended
 
March 31, 2018
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at December 31, 2017
$
(184.2
)
 
$
(34.6
)
 
$
(213.8
)
 
$
(432.6
)
Other comprehensive income/(loss)
before reclassification adjustments
21.1

 
(240.4
)
 

 
(219.3
)
Tax effect

 
53.4

 

 
53.4

Reclassification adjustments to
net earnings

 
0.2

(A)
2.3

(B)
2.5

Tax effect

 
0.1

 
(0.6
)
 
(0.5
)
Reclassification to retained earnings (C)

 
(7.1
)
 
(35.2
)
 
(42.3
)
Balance at March 31, 2018
$
(163.1
)
 
$
(228.4
)
 
$
(247.3
)
 
$
(638.8
)

 
Three Months Ended
 
March 31, 2017
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
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
)


Nine Months Ended

March 31, 2018

Currency Translation Adjustment

Net Gains/Losses on Available-for-sale Securities

Pension Liability

Accumulated Other Comprehensive Loss
Balance at June 30, 2017
$
(230.8
)
 
$
68.3

 
$
(216.7
)
 
$
(379.2
)
Other comprehensive income/(loss)
before reclassification adjustments
67.7

 
(400.6
)
 

 
(332.9
)
Tax effect

 
109.9

 

 
109.9

Reclassification adjustments to
net earnings

 
1.3

(A)
6.9

(B)
8.2

Tax effect

 
(0.2
)
 
(2.3
)
 
(2.5
)
Reclassification to retained earnings (C)

 
(7.1
)
 
(35.2
)
 
(42.3
)
Balance at March 31, 2018
$
(163.1
)
 
$
(228.4
)
 
$
(247.3
)
 
$
(638.8
)

21



 
Nine Months Ended
 
March 31, 2017
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
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
)

(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).

(C) During the quarter ended March 31, 2018, the Company adopted ASU 2018-02 and reclassified stranded tax effects attributable to the Act from AOCI to retained earnings. The March 31, 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive income into retained earnings (see Note 2).

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), and certain charges and expenses that have not been allocated to the reportable segments. Changes to the allocation methodology for certain allocations have 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 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 before income taxes is eliminated in consolidation.


22



Segment Results:
 
Revenues
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
Employer Services
$
2,804.1

 
$
2,627.2

 
$
7,558.1

 
$
7,197.8

PEO Services
1,071.1

 
974.4

 
2,919.9

 
2,592.0

Other
0.2

 
(2.1
)
 
(3.7
)
 
(8.2
)
Reconciling item:
 
 
 
 
 
 
 
Client fund interest
(182.4
)
 
(188.7
)
 
(467.1
)
 
(466.7
)
 
$
3,693.0

 
$
3,410.8

 
$
10,007.2

 
$
9,314.9

  
 
Earnings before Income Taxes
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
Employer Services
$
1,022.5

 
$
963.0

 
$
2,375.5

 
$
2,300.1

PEO Services
136.3

 
120.0

 
381.3

 
341.5

Other
(123.8
)
 
(66.4
)
 
(323.2
)
 
(32.2
)
Reconciling item:
 
 
 
 
 
 
 

Client fund interest
(182.4
)
 
(188.7
)
 
(467.1
)
 
(466.7
)
 
$
852.6

 
$
827.9

 
$
1,966.5

 
$
2,142.7



23



Note 17. Subsequent Events

On May 1, 2018 the election window for VERP eligible associates closed as discussed in Note 12. There are no further subsequent events for disclosure.


24


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

FORWARD-LOOKING STATEMENTS

This document and other written or oral statements made from time to time by Automatic Data Processing, Inc. and its subsidiaries ("ADP" or "the Company") may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and 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