0000008670-18-000017.txt : 20181101 0000008670-18-000017.hdr.sgml : 20181101 20181101165324 ACCESSION NUMBER: 0000008670-18-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 86 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181101 DATE AS OF CHANGE: 20181101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOMATIC DATA PROCESSING INC CENTRAL INDEX KEY: 0000008670 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 221467904 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05397 FILM NUMBER: 181154540 BUSINESS ADDRESS: STREET 1: ONE ADP BOULVARD CITY: ROSELAND STATE: NJ ZIP: 07068 BUSINESS PHONE: 9739745000 MAIL ADDRESS: STREET 1: ONE ADP BOULEVARD CITY: ROSELAND STATE: NJ ZIP: 07068 10-Q 1 q1fy1910q.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 September 30, 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 [ ]
 
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 October 26, 2018 was 437,732,499.



Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
Statements of Consolidated Earnings
Three months ended September 30, 2018 and 2017
 
 
 
 
Statements of Consolidated Comprehensive Income
Three months ended September 30, 2018 and 2017
 
 
 
 
Consolidated Balance Sheets
At September 30, 2018 and June 30, 2018
 
 
 
 
Statements of Consolidated Cash Flows
Three Months Ended September 30, 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
 
September 30,
 
2018
 
2017
 
 
*As Adjusted
REVENUES:
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
$
2,218.6

 
$
2,078.9

Interest on funds held for clients
118.5

 
99.4

PEO revenues (A)
986.1

 
898.9

TOTAL REVENUES
3,323.2

 
3,077.2

 
 
 
 
EXPENSES:
 

 
 

Costs of revenues:
 

 
 

Operating expenses
1,709.9

 
1,630.7

Systems development and programming costs
158.0

 
158.2

Depreciation and amortization
72.6

 
62.6

TOTAL COSTS OF REVENUES
1,940.5

 
1,851.5

 
 
 
 
Selling, general, and administrative expenses
713.9

 
675.4

Interest expense
35.9

 
28.0

TOTAL EXPENSES
2,690.3

 
2,554.9

 
 
 
 
Other income, net
(13.9
)
 
(42.6
)
 
 
 
 
EARNINGS BEFORE INCOME TAXES
646.8

 
564.9

 
 
 
 
Provision for income taxes
141.4

 
152.3

 
 
 
 
NET EARNINGS
$
505.4

 
$
412.6

 
 
 
 
BASIC EARNINGS PER SHARE
$
1.16

 
$
0.93

 
 
 
 
DILUTED EARNINGS PER SHARE
$
1.15

 
$
0.93

 
 
 
 
Basic weighted average shares outstanding
436.8

 
442.2

Diluted weighted average shares outstanding
439.9

 
445.0

 
 
 
 
Dividends declared per common share
$
0.690

 
$
0.570


*See Note 2 for a summary of adjustments.

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $9,629.4 million and $8,738.5 million for the three months ended September 30, 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
 
September 30,
 
2018
 
2017
 
 
*As Adjusted
Net earnings
$
505.4

 
$
412.6

 
 
 
 
Other comprehensive income/loss:
 
 
 
Currency translation adjustments
(22.9
)
 
52.8

 
 
 
 
Unrealized net losses on available-for-sale securities
(50.4
)
 
(12.8
)
Tax effect
12.3

 
3.5

Reclassification of net losses on available-for-sale securities to net earnings
0.9

 

Tax effect
(0.2
)
 

 
 
 
 
Reclassification of pension liability adjustment to net earnings
0.2

 
2.3

Tax effect
(0.2
)
 
(0.9
)
 
 
 
 
Other comprehensive (loss)/income, net of tax
(60.3
)
 
44.9

Comprehensive income
$
445.1

 
$
457.5



*See Note 2 for a summary of adjustments.




























See notes to the Consolidated Financial Statements.

4


Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
 
September 30,
 
June 30,
 
 
 
2018
 
 
2018
 
*As Adjusted
 
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,490.3

 
$
2,170.0

Accounts receivable, net of allowance for doubtful accounts of $52.2 and $51.3, respectively
 
2,216.4

 
1,984.2

Other current assets
 
846.5

 
531.3

Total current assets before funds held for clients
 
4,553.2

 
4,685.5

Funds held for clients
 
25,402.7

 
27,137.8

Total current assets
 
29,955.9

 
31,823.3

Long-term receivables, net of allowance for doubtful accounts of $0.6 and $0.5, respectively
 
25.2

 
25.5

Property, plant and equipment, net
 
787.7

 
793.7

Deferred contract costs
 
2,352.3

 
2,377.4

Other assets
 
1,053.4

 
699.3

Goodwill
 
2,325.0

 
2,243.5

Intangible assets, net
 
917.2

 
886.4

Total assets
 
$
37,416.7

 
$
38,849.1

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
131.8

 
$
135.4

Accrued expenses and other current liabilities
 
1,603.5

 
1,547.6

Accrued payroll and payroll-related expenses
 
446.9

 
667.7

Dividends payable
 
298.8

 
298.9

Short-term deferred revenues
 
229.0

 
225.7

Obligations under reverse repurchase agreements (A)
 
453.0

 

Income taxes payable
 
75.4

 
43.9

Total current liabilities before client funds obligations
 
3,238.4

 
2,919.2

Client funds obligations
 
25,798.9

 
27,493.5

Total current liabilities
 
29,037.3

 
30,412.7

Long-term debt
 
2,002.4

 
2,002.4

Other liabilities
 
736.4

 
728.0

Deferred income taxes
 
533.2

 
522.0

Long-term deferred revenues
 
428.6

 
448.1

Total liabilities
 
32,737.9

 
34,113.2

 
 
 
 
 
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 September 30, 2018 and June 30, 2018;
outstanding, 438.2 and 438.8 shares at September 30, 2018 and June 30, 2018, respectively
 
63.9

 
63.9

Capital in excess of par value
 
1,035.1

 
1,014.8

Retained earnings
 
16,741.1

 
16,546.6

Treasury stock - at cost: 200.5 and 199.9 shares at September 30, 2018 and June 30, 2018, respectively
 
(12,421.2
)
 
(12,209.6
)
Accumulated other comprehensive loss
 
(740.1
)
 
(679.8
)
Total stockholders’ equity
 
4,678.8

 
4,735.9

Total liabilities and stockholders’ equity
 
$
37,416.7

 
$
38,849.1


*See Note 2 for a summary of adjustments.

(A) As of September 30, 2018$123.8 million of short-term marketable securities, $328.6 million of long-term marketable securities and $0.6 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements (see Note 10).


See notes to the Consolidated Financial Statements.

5

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



 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
 
*As Adjusted
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
505.4

 
$
412.6

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

 
 

Depreciation and amortization
 
99.0

 
87.2

Amortization of deferred contract costs
 
216.9

 
204.7

Deferred income taxes
 
26.4

 
55.4

Stock-based compensation expense
 
38.4

 
39.0

Net pension expense
 
17.1

 
2.7

Net amortization of premiums and accretion of discounts on available-for-sale securities
 
14.3

 
19.4

Impairment of intangible assets
 
12.1

 

Other
 
10.1

 
9.6

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

 
 

Increase in accounts receivable
 
(239.2
)
 
(81.7
)
Increase in other assets
 
(471.2
)
 
(460.7
)
Decrease in accounts payable
 
(2.3
)
 
(24.5
)
Decrease in accrued expenses and other liabilities
 
(77.8
)
 
(19.0
)
Net cash flows provided by operating activities
 
149.2

 
244.7

 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Purchases of corporate and client funds marketable securities
 
(755.8
)
 
(1,157.3
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
 
539.8

 
1,007.7

Capital expenditures
 
(43.2
)
 
(73.3
)
Additions to intangibles
 
(73.8
)
 
(69.7
)
Acquisitions of businesses, net of cash acquired
 
(119.7
)
 

Net cash flows used in investing activities
 
(452.7
)
 
(292.6
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Net decrease in client funds obligations
 
(1,711.5
)
 
(1,674.3
)
Payments of debt
 
(0.5
)
 
(0.9
)
Repurchases of common stock
 
(227.1
)
 
(250.1
)
Net proceeds from stock purchase plan and stock-based compensation plans
 
(24.4
)
 
(15.1
)
Dividends paid
 
(302.6
)
 
(253.7
)
Net proceeds from reverse repurchase agreements
 
448.4

 
129.4

Net cash flows used in financing activities
 
(1,817.7
)
 
(2,064.7
)
 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(12.6
)
 
14.2

 
 
 
 
 
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(2,133.8
)
 
(2,098.4
)
 
 
 
 
 
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period
 
6,542.1

 
8,181.6

Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
 
$
4,408.3

 
$
6,083.2

 
 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets
 
 
 
 
Cash and cash equivalents
 
$
1,490.3

 
$
2,363.6

Restricted cash and restricted cash equivalents included in funds held for clients (A)
 
2,918.0

 
3,719.6

Total cash, cash equivalents, restricted cash, and restricted cash equivalents
 
$
4,408.3

 
$
6,083.2

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
49.4

 
$
41.4

Cash paid for income taxes, net of income tax refunds
 
$
39.3

 
$
41.9


*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.

The Company has a grantor trust, which 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 Accounting Standards Codification ("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.” 

Restatements

Effective July 1, 2018, certain prior period amounts have been restated to conform to the current period presentation in connection with the adoption of Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers (ASC 606)” and ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Also, beginning in the first quarter of the fiscal year ended June 30, 2019 ("fiscal 2019"), the Company's chief operating decision maker ("CODM") reviews segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity, and with changes to certain corporate allocations. Refer to Note 2 and Note 16 for additional information.

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. 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, 2018 (“fiscal 2018”).

Note 2.  New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective July 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)” on a retrospective basis. ASU 2014-09 requires an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 resulted in enhanced revenue related disclosures. The standard primarily impacted 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 require the Company to capitalize and amortize additional implementation costs than those capitalized and amortized under previous U.S. GAAP. Under previous U.S. GAAP, the Company immediately expensed all selling expenses. The adoption of provisions of the new standard did not materially impact the timing or amount of revenue the Company recognized and did not result in significant changes in its business processes or systems. Refer to Note 3 for further details. Refer to the table below for a summary of the restatements required, as a result of this change, on the Company's consolidated results of operations, statements of financial condition, and cash flows for the three months ended September 30, 2017.
Effective July 1, 2018, the Company adopted 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

7


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. The Company retrospectively adopted the new standard, and as a result reclassified 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. Refer to the table below for a summary of the reclassification required, as a result of this change, on the Company's consolidated results of operations for the three months ended September 30, 2017. The adoption of the new accounting rules only impacted the classification of expenses on the Statements of Consolidated Earnings and did not impact the Company’s consolidated income, statements of financial condition, or cash flows.
Adoption of ASC 606 and ASU 2017-07 impacted the Company's prior period Statements of Consolidated Earnings, Consolidated Balance Sheets, and Consolidated Cash Flows as follows:

Statements of Consolidated Earnings

 
Three Months Ended
 
September 30, 2017
 
As reported
 
Adjustments
ASC 606
 
Adjustments
ASU 2017-07
 
As adjusted
Revenues, other than interest on funds held for clients and PEO revenues
$
2,080.9

 
$
(2.0
)
 
$

 
$
2,078.9

Interest on funds held for clients
99.4

 

 

 
99.4

PEO revenues
898.5

 
0.4

 

 
898.9

TOTAL REVENUES
3,078.8

 
(1.6
)
 

 
3,077.2

Operating expenses
1,646.9

 
(25.3
)
 
9.3

 
1,630.7

Systems development and programming costs
156.9

 

 
1.3

 
158.2

Depreciation and amortization
62.6

 

 

 
62.6

Selling, general, and administrative expenses
662.4

 
7.0

 
5.9

 
675.4

Interest expense
28.0

 

 

 
28.0

Total Expenses
2,556.8

 
(18.3
)
 
16.5

 
2,554.9

Other income, net
(26.2
)
 

 
(16.5
)
 
(42.6
)
EARNINGS BEFORE INCOME TAXES
548.2

 
16.7

 

 
564.9

Provision for income taxes
146.7

 
5.6

 

 
152.3

NET EARNINGS
$
401.5

 
$
11.1

 
$

 
$
412.6


Consolidated Balance Sheets
 
 
June 30,
 
 
 
June 30,
 
 
2018
 
Adjustments
ASC 606
 
2018
 
 
As reported
 
 
As adjusted
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Other current assets
 
$
758.0

 
$
(226.7
)
 
$
531.3

Total current assets
 
32,050.0

 
(226.7
)
 
31,823.3

Deferred contract costs
 

 
2,377.4

 
2,377.4

Other assets
 
1,089.6

 
(390.3
)
 
699.3

Total assets
 
$
37,088.7

 
$
1,760.4

 
$
38,849.1

 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Short-term deferred revenues
 
226.5

 
(0.8
)
 
225.7

Total current liabilities
 
30,413.6

 
(0.8
)
 
30,412.7

Deferred income taxes
 
107.3

 
414.7

 
522.0

Long-term deferred revenues
 
377.8

 
70.2

 
448.1

Total liabilities
 
33,629.1

 
484.1

 
34,113.2

 
 
 
 
 
 
 
Stockholders' equity:
 
 

 
 

 
 

Retained earnings
 
15,271.3

 
1,275.3

 
16,546.6

Total stockholders’ equity
 
3,459.6

 
1,276.3

 
4,735.9

Total liabilities and stockholders’ equity
 
$
37,088.7

 
$
1,760.4

 
$
38,849.1


8



Statements of Consolidated Cash Flows
 
 
Three Months Ended
 
 
September 30,
 
 
2017
 
Adjustments
ASC 606
 
2017
 
 
As reported
 
 
As adjusted
Cash Flows from Operating Activities:
 
 
 
 
 
 
Net earnings
 
$
401.5

 
$
11.1

 
$
412.6

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

 
 

 
 

Amortization of deferred contract costs
 

 
204.7

 
204.7

Deferred income taxes
 
46.4

 
9.0

 
55.4

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

 
 

 
 

Increase in other assets
 
(259.5
)
 
(201.2
)
 
(460.7
)
Decrease in accrued expenses and other liabilities
 
4.6

 
(23.6
)
 
(19.0
)
Net cash flows provided by operating activities
 
$
244.7

 
$

 
$
244.7

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 2018-15 Intangibles - Goodwill and Other-Internal-Use Software
This update clarifies the accounting and capitalization of implementation costs in cloud computing arrangements that are service arrangements. The amendments in ASU 2018-15 are required to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
For fiscal years beginning after December 15, 2019. Early adoption is permitted.
The Company has not yet determined the impact of this ASU on its consolidated results of operations, financial condition, or cash flows.
ASU 2018-14 Compensation-Retirement Benefits-Defined Benefit Plans
This update modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amendments in ASU 2018-14 would need to be applied on a retrospective basis. 
For fiscal years beginning after December 15, 2020. Early adoption is permitted.
The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.

9


Standard
Description
Effective Date
Effect on Financial Statements or Other Significant Matters
ASU 2018-13 Fair Value Measurement
This update modifies the disclosure requirements on fair value measurements. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis.
For fiscal years beginning after December 15, 2019. Early adoption is permitted.
The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.
ASU 2018-09 Codification Improvements
This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The transition guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective immediately. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018.
The transition and effective date guidance is based on the facts and circumstances of each amendment.
Clarifications which were effective immediately were not applicable and for other amendments the Company has not yet determined the impact of this ASU on its consolidated results of operations, financial condition, or cash flows.
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.

Note 3.  Revenue

Based upon similar operational and economic characteristics, the Company’s revenues are disaggregated by its three strategic pillars: U.S. Integrated HCM (“HCM”), HR Outsourcing ("HRO"), and Global with separate disaggregation for PEO benefits pass-through revenues and Client Fund Interest revenues.  The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.

HCM provides a suite of product offerings that assist employers of all types and sizes in all stages of the employment cycle, from recruitment to retirement. Global is generally consistent with the types of services provided within HCM but represent geographies outside of the United States and includes our multinational offerings. HCM and Global revenues are primarily attributable to fees for providing solutions for payroll, benefits, talent, retirement services and HR processing and fees charged to implement the Company's solutions for clients.

HRO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions. This revenue is primarily driven by the Professional Employer Organization Services (“PEO”). Amounts collected from PEO worksite employers include payroll, fees for benefits, and an administrative fee that also includes payroll taxes, fees for workers’ compensation and state unemployment taxes. The payroll and payroll taxes collected from the worksite employers are presented in revenue net, as the Company does not retain risk and acts as an agent with respect to this aspect of the PEO arrangement. With respect to the payroll and payroll taxes, the worksite employer is primarily responsible for providing the service and has discretion in establishing wages. The fees collected from the worksite employers for benefits (i.e., PEO benefits pass-throughs), workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as the Company does retain risk and acts as a principal with respect to this aspect of the arrangement. With respect to these fees, the Company is primarily

10


responsible for fulfilling the service and has discretion in establishing price. The Company has further disaggregated HRO to separate out its PEO benefits pass-through revenues.

The Company enters into service agreements with clients that include anywhere from one service to a full suite of services. The Company’s agreements vary in duration having a legally enforceable term of 30 days to 5 years. The performance obligations in the agreements are generally combined into one performance obligation, as they are considered a series of distinct services, and are satisfied over time because the client simultaneously receives and consumes the benefits provided as the Company performs the services. The Company uses the output method based on a fixed fee per employee serviced to recognize revenue, as the value to the client of the goods or services transferred to date (e.g., number of payees or number of payrolls processed) appropriately depicts our performance towards complete satisfaction of the performance obligation. The fees are typically billed in the period in which services are performed.

The Company recognizes client fund interest revenues on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.

Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing. We assess the collectability of revenues based primarily on the creditworthiness of the client as determined by credit checks and analysis, as well as the client's payment history.

The following tables provide details of revenue by our strategic pillars with disaggregation for PEO benefits pass-throughs and client fund interest, and includes a reconciliation to the Company’s reportable segments (in millions):

 
Three Months Ended
 
September 30,
Types of Revenues
2018
 
2017
HCM
$
1,520.3

 
$
1,424.1

HRO, excluding PEO benefits pass-throughs
557.5

 
509.1

PEO benefits pass-throughs
653.4

 
595.3

Global
473.5

 
449.3

Client Fund Interest
118.5

 
99.4

Total Revenues
$
3,323.2

 
$
3,077.2


Reconciliation of disaggregated revenue to our reportable segments for September 30, 2018:
Types of Revenues
Employer Services
 
PEO
 
Other
 
Total
HCM
$
1,521.8

 
$

 
$
(1.5
)
 
$
1,520.3

HRO, excluding PEO benefits pass-throughs
226.1

 
332.7

 
(1.3
)
 
557.5

PEO benefits pass-throughs

 
653.4

 

 
653.4

Global
473.5

 

 

 
473.5

Client Fund Interest
116.8

 
1.7

 

 
118.5

Total Segment Revenues
$
2,338.2

 
$
987.8

 
$
(2.8
)
 
$
3,323.2


Reconciliation of disaggregated revenue to our reportable segments for September 30, 2017:
Types of Revenues
Employer Services
 
PEO
 
Other
 
Total
HCM
$
1,425.0

 
$

 
$
(0.9
)
 
$
1,424.1

HRO, excluding PEO benefits pass-throughs
206.6

 
303.6

 
(1.1
)
 
509.1

PEO benefits pass-throughs

 
595.3

 

 
595.3

Global
449.3

 

 

 
449.3

Client Fund Interest
98.5

 
0.9

 

 
99.4

Total Segment Revenues
$
2,179.4

 
$
899.8

 
$
(2.0
)
 
$
3,077.2


11




Contract Balances

The timing of revenue recognition for our HCM, Global and HRO services is consistent with the invoicing of clients, as invoicing occurs in the period the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Set up fees received from certain clients to implement the Company's solutions are considered a material right. Therefore, the Company defers revenue associated with these set up fees and records them over the period in which such clients are expected to benefit from the material right, which is approximately five to seven years.

Changes in deferred revenue related to set up fees for the three months ended September 30, 2018 were as follows:
Contract Liability
 
Contract liability, July 1, 2018
$
607.5

Recognition of revenue included in beginning of year contract liability
(47.4
)
Contract liability, net of revenue recognized on contracts during the period
30.8

Currency adjustments
(5.8
)
Contract liability, September 30, 2018
$
585.1


Deferred costs
 
Incremental Costs of Obtaining a Contract

Incremental costs of obtaining a contract (e.g., sales commissions) that are expected to be recovered are capitalized and amortized on a straight-line basis over a period of three to eight years, depending on the Company's business unit. The Company has previously expensed these costs as incurred. Expected renewal periods are only included in the expected client relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include only those costs the Company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. These costs are included in selling, general and administrative expenses.

Costs to fulfill a Contract

The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract ii) are expected to generate resources that will be used to satisfy the Company’s performance obligations under the contract and iii) are expected to be recovered through revenue generated under the contract. Costs incurred to implement clients on our solutions (e.g. direct labor) are capitalized and amortized on a straight-line basis over the expected client relationship period if the Company expects to recover those costs. The expected client relationship period ranges from three to eight years. These costs are included in operating expenses.

The Company has estimated the amortization periods for the deferred costs by using its historical retention by business unit to estimate the pattern during which the service transfers.

Deferred costs are periodically reviewed for impairment. There were no impairment losses incurred during the period. 

The balance is as follows:
 
September 30,
 
2018
Deferred costs to obtain a contract
$
1,445.7

Deferred costs to fulfill a contract
906.6

Total deferred contract costs (1)
$
2,352.3


(1) The amount of total deferred costs amortized during the three months ended September 30, 2018 and for the three months ended September 30, 2017 were $216.9 million and $204.7 million, respectively.

12



Note 4. 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.

The final purchase price allocation for GCC is as follows:
Goodwill
$
406.1

Identifiable intangible assets
132.5

Other assets
0.8

Total assets acquired
$
539.4

 
 
Total liabilities assumed
$
48.4


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 Work Market, Inc. ("WorkMarket"), a leading provider of cloud-based freelance management solutions, for approximately $125 million in cash.

In July 2018, the Company acquired 100% of outstanding shares of Celergo Holdings, Inc. ("Celergo"), a leading provider of multi-country payroll management services.

These acquisitions, individually or in aggregate, 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 these acquisitions are reported within the Company’s Employer Services segment.

Note 5. Service Alignment Initiative

On July 28, 2016, the Company announced a Service Alignment Initiative that simplified 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 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 does not expect to recognize significant pre-tax restructuring charges related to the Service Alignment Initiative for the remainder of fiscal 2019.

The table below summarizes the composition of the Company's Service Alignment Initiative (reversals)/charges:
 
Three Months Ended
 
Cumulative amount from inception through
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
Employee separation benefits (a)
$
(5.2
)
 
$
(5.2
)
 
$
94.3

Other initiative costs (b)
0.8

 
1.9

 
11.8

Total (c)
$
(4.4
)
 
$
(3.3
)
 
$
106.1


(a) - (Reversals)/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.


13



Activity for the Service Alignment Initiative liability for the three months ended September 30, 2018 and September 30, 2017, respectively, was as follows:
 
Employee
separation benefits
 
Other initiative costs
 
Total
Balance at June 30, 2018
$
54.0

 
$
0.5

 
$
54.5

Charged to expense
4.1

 
0.8

 
4.9

Reversals
(9.3
)
 

 
(9.3
)
Cash payments
(11.1
)
 
(0.4
)
 
(11.5
)
Non-cash utilization

 
(0.3
)
 
(0.3
)
Balance at September 30, 2018
$
37.7

 
$
0.6

 
$
38.3

 
 
 
 
 
 
Balance at June 30, 2017
$
73.9

 
$
0.5

 
$
74.4

Charged to expense
0.8

 
1.9

 
2.7

Reversals
(6.0
)
 

 
(6.0
)
Cash payments
(9.4
)
 
(1.2
)
 
(10.6
)
Non-cash utilization

 
(0.6
)
 
(0.6
)
Balance at September 30, 2017
$
59.3

 
$
0.6

 
$
59.9


Note 6.  Earnings per Share (“EPS”)
 
 
Basic
 
Effect of Employee Stock Option Shares
 
Effect of
Employee
Restricted
Stock
Shares
 
Diluted
Three Months Ended September 30, 2018
 
 

 
 

 
 

 
 

Net earnings
 
$
505.4

 
 

 
 

 
$
505.4

Weighted average shares (in millions)
 
436.8

 
1.4

 
1.7

 
439.9

EPS
 
$
1.16

 
 

 
 

 
$
1.15

Three Months Ended September 30, 2017
 
 

 
 

 
 

 
 

Net earnings
 
$
412.6

 
 

 
 

 
$
412.6

Weighted average shares (in millions)
 
442.2

 
1.0

 
1.8

 
445.0

EPS
 
$
0.93

 
 

 
 

 
$
0.93


Options to purchase 0.3 million and 0.4 million shares of common stock for the three months ended September 30, 2018 and 2017, respectively, 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
 
September 30,
 
2018
 
2017
Interest income on corporate funds
$
(28.5
)
 
$
(25.8
)
Realized gains on available-for-sale securities
(0.4
)
 
(0.3
)
Realized losses on available-for-sale securities
1.3

 
0.3

Impairment of intangible assets
12.1

 

Gain on sale of assets

 
(0.4
)
Non-service components of pension expense, net (see Note 2)
1.6

 
(16.4
)
Other income, net
$
(13.9
)
 
$
(42.6
)


14



The charges within non-service components of pension expense, net includes $14.0 million of non-cash settlement charges and $1.3 million of special termination benefits related to the Voluntary Early Retirement Program ("VERP"), partially offset by $13.7 million related to other components of net periodic pension cost. Refer to Note 2 and Note 12 for further information.

The Company wrote down $12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition.

Note 8. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at September 30, 2018 and June 30, 2018 were as follows:
 
September 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Market Value (A)
Type of issue:
 
 
 
 
 
 
 
Money market securities, cash and other cash equivalents
$
4,408.3

 
$

 
$

 
$
4,408.3

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate bonds
9,999.1

 
15.2

 
(167.2
)
 
9,847.1

Asset-backed securities
4,540.6

 
0.1

 
(66.2
)
 
4,474.5

U.S. government agency securities
2,738.9

 
2.6

 
(53.2
)
 
2,688.3

U.S. Treasury securities
2,741.8

 
0.1

 
(90.4
)
 
2,651.5

Canadian government obligations and
Canadian government agency obligations
1,132.0

 
0.3

 
(24.7
)
 
1,107.6

Canadian provincial bonds
767.2

 
3.6

 
(9.4
)
 
761.4

Municipal bonds
579.2

 
1.7

 
(6.3
)
 
574.6

Other securities
854.0

 
1.8

 
(13.2
)
 
842.6

 
 
 
 
 
 
 
 
Total available-for-sale securities
23,352.8

 
25.4

 
(430.6
)
 
22,947.6

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
27,761.1

 
$
25.4

 
$
(430.6
)
 
$
27,355.9

                                                            
(A) Included within available-for-sale securities are corporate investments with fair values of $462.9 million and funds held for clients with fair values of $22,484.7 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

15



 
June 30, 2018
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Market Value (B)
Type of issue:
 

 
 

 
 

 
 

Money market securities, cash and other cash equivalents
$
6,542.1

 
$

 
$

 
$
6,542.1

Available-for-sale securities:
 

 
 

 
 

 
 

Corporate bonds
9,819.4

 
20.3

 
(160.9
)
 
9,678.8

Asset-backed securities
4,555.5

 
0.3

 
(64.1
)
 
4,491.7

U.S. government agency securities
2,787.0

 
4.0

 
(47.7
)
 
2,743.3

U.S. Treasury securities
2,678.9

 
0.4

 
(76.9
)
 
2,602.4

Canadian government obligations and
Canadian government agency obligations
1,109.0

 
0.4

 
(20.6
)
 
1,088.8

Canadian provincial bonds
724.5

 
5.1

 
(7.4
)
 
722.2

Municipal bonds
584.6

 
3.2

 
(4.3
)
 
583.5

Other securities
873.0

 
3.0

 
(10.5
)
 
865.5

 
 
 
 
 
 
 
 
Total available-for-sale securities
23,131.9

 
36.7

 
(392.4
)
 
22,776.2

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
29,674.0

 
$
36.7

 
$
(392.4
)
 
$
29,318.3


(B) Included within available-for-sale securities are corporate investments with fair values of $10.5 million and funds held for clients with fair values of $22,765.7 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 2018. The Company did not transfer any assets between Levels during the three months ended September 30, 2018 or fiscal 2018. In addition, the Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company had no available-for-sale securities included in Level 1 or Level 3 at September 30, 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 September 30, 2018, are as follows: 
 
September 30, 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
$
(105.1
)
 
$
6,919.2

 
$
(62.1
)
 
$
1,598.9

 
$
(167.2
)
 
$
8,518.1

Asset-backed securities
(39.2
)
 
2,907.1

 
(27.0
)
 
1,544.5

 
(66.2
)
 
4,451.6

U.S. government agency securities
(18.8
)
 
1,312.2

 
(34.4
)
 
1,148.9

 
(53.2
)
 
2,461.1

U.S. Treasury securities
(20.1
)
 
847.6

 
(70.3
)
 
1,787.6

 
(90.4
)
 
2,635.2

Canadian government obligations and
Canadian government agency obligations
(24.7
)
 
1,071.4

 

 
1.1

 
(24.7
)
 
1,072.5

Canadian provincial bonds
(8.3
)
 
459.7

 
(1.1
)
 
50.2

 
(9.4
)
 
509.9

Municipal bonds
(5.4
)
 
391.7

 
(0.9
)
 
19.7

 
(6.3
)
 
411.4

Other securities
(9.1
)
 
570.8

 
(4.1
)
 
120.6

 
(13.2
)
 
691.4

 
$
(230.7
)
 
$
14,479.7

 
$
(199.9
)
 
$
6,271.5

 
$
(430.6
)
 
$
20,751.2



16



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, 2018, are as follows:
 
June 30, 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
$
(118.2
)
 
$
7,132.9

 
$
(42.7
)
 
$
994.2

 
$
(160.9
)
 
$
8,127.1

Asset-backed securities
(47.4
)
 
3,515.9

 
(16.7
)
 
867.7

 
(64.1
)
 
4,383.6

U.S. government agency securities
(31.2
)
 
2,013.8

 
(16.5
)
 
431.1

 
(47.7
)
 
2,444.9

U.S. Treasury securities
(46.9
)
 
1,676.8

 
(30.0
)
 
864.0

 
(76.9
)
 
2,540.8

Canadian government obligations and
Canadian government agency obligations
(20.6
)
 
1,020.3

 

 

 
(20.6
)
 
1,020.3

Canadian provincial bonds
(6.3
)
 
387.7

 
(1.1
)
 
50.4

 
(7.4
)
 
438.1

Municipal bonds
(3.6
)
 
285.8

 
(0.7
)
 
16.0

 
(4.3
)
 
301.8

Other securities
(9.2
)
 
573.3

 
(1.3
)
 
33.4

 
(10.5
)
 
606.7

 
$
(283.4
)
 
$
16,606.5

 
$
(109.0
)
 
$
3,256.8

 
$
(392.4
)
 
$
19,863.3


At September 30, 2018, Corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from October 2018 through September 2028.

At September 30, 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 $2,018.3 million, $1,799.5 million, $467.6 million, and $189.1 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables.  The primary risk associated with these securities is the collection risk of the underlying receivables.  All collateral on such asset-backed securities has performed as expected through September 30, 2018.

At September 30, 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 $1,785.7 million and $678.5 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 October 2018 through August 2026.

At September 30, 2018, other securities and their fair value primarily represent: U.S. government agency commercial mortgage-backed securities of $307.8 million issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, Aa2 rated United Kingdom Gilt securities of $195.2 million, AAA and AA rated supranational bonds of $125.4 million, and AAA and AA rated sovereign bonds of $109.8 million.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 
 
September 30,
 
June 30,
 
 
2018
 
2018
Corporate investments:
 
 
 
 
Cash and cash equivalents
 
$
1,490.3

 
$
2,170.0

Short-term marketable securities (a)
 
127.1

 
3.3

Long-term marketable securities (b)
 
335.8

 
7.2

Total corporate investments
 
$
1,953.2

 
$
2,180.5

 
(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.


17



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

Funds held for clients have been invested in the following categories:
 
 
September 30,
 
June 30,
 
 
2018
 
2018
Funds held for clients:
 
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
 
$
2,918.0

 
$
4,372.1

Restricted short-term marketable securities held to satisfy client funds obligations
 
3,491.0

 
2,521.4

Restricted long-term marketable securities held to satisfy client funds obligations
 
18,993.7

 
20,244.3

Total funds held for clients
 
$
25,402.7

 
$
27,137.8


Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax, and other payee 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 $25,798.9 million and $27,493.5 million at September 30, 2018 and June 30, 2018, 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 September 30, 2018 and June 30, 2018, $22,994.7 million and $24,242.9 million, respectively, 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.  The Company has reported the cash and cash equivalents related to client funds investments with 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. 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 79% of the available-for-sale securities held a AAA or AA rating at September 30, 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 September 30, 2018.
 
Expected maturities of available-for-sale securities at September 30, 2018 are as follows:
One year or less
$
3,618.0

One year to two years
4,663.9

Two years to three years
5,684.7

Three years to four years
4,044.8

After four years
4,936.2

Total available-for-sale securities
$
22,947.6



18



Note 9. Goodwill and Intangibles Assets, net

Changes in goodwill for the three months ended September 30, 2018 are as follows:
 
Employer
Services
 
PEO
Services
 
Total
Balance at June 30, 2018
$
2,238.7

 
$
4.8

 
$
2,243.5

Additions and other adjustments
88.4

 

 
88.4

Currency translation adjustments
(6.9
)
 

 
(6.9
)
Balance at September 30, 2018
$
2,320.2

 
$
4.8

 
$
2,325.0


Components of intangible assets, net, are as follows:
 
 
September 30,
 
June 30,
 
 
2018
 
2018
Intangible assets:
 
 
 
 
Software and software licenses
 
$
2,358.8

 
$
2,292.9

Customer contracts and lists
 
716.7

 
708.6

Other intangibles
 
237.9

 
236.5

 
 
3,313.4

 
3,238.0

Less accumulated amortization:
 
 

 
 

Software and software licenses
 
(1,643.2
)
 
(1,606.6
)
Customer contracts and lists
 
(539.9
)
 
(533.4
)
Other intangibles
 
(213.1
)
 
(211.6
)
 
 
(2,396.2
)
 
(2,351.6
)
Intangible assets, net
 
$
917.2

 
$
886.4


Other intangibles consist primarily of purchased rights, 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 (5 years for software and software licenses, 8 years for customer contracts and lists, and 5 years for other intangibles).  Amortization of intangible assets was $53.4 million and $46.6 million for the three months ended September 30, 2018 and 2017, respectively.

Estimated future amortization expenses of the Company's existing intangible assets are as follows:
 
Amount
Nine months ending June 30, 2019
$
188.5

Twelve months ending June 30, 2020
$
213.2

Twelve months ending June 30, 2021
$
164.9

Twelve months ending June 30, 2022
$
120.0

Twelve months ending June 30, 2023
$
99.5

Twelve months ending June 30, 2024
$
47.1


Note 10. Short-term Financing

The Company has a $3.8 billion, 364-day credit agreement that matures in June 2019 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 2023 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 September 30, 2018 under the credit agreements.

19




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 $9.8 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 September 30, 2018 and June 30, 2018, the Company had no commercial paper outstanding. For the three months ended September 30, 2018 and 2017, the Company had average daily borrowings of $3.7 billion and $3.8 billion, respectively, at weighted average interest rates of 2.0% and 1.2%, respectively. The weighted average maturity of the Company’s commercial paper during the three months ended September 30, 2018 was approximately two days.
        
The Company’s U.S., Canadian and United Kingdom 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 September 30, 2018, the Company had $453.0 million of outstanding obligations related to the reverse repurchase agreements. All outstanding reverse repurchase obligations matured and were fully paid as of October 4, 2018. At June 30, 2018, there were no outstanding obligations related to the reverse repurchase agreements. For the three months ended September 30, 2018 and 2017, the Company had average outstanding balances under reverse repurchase agreements of $495.1 million and $526.2 million, respectively, at weighted average interest rates of 1.7% and 1.1%, 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 September 30, 2018 and June 30, 2018, are as follows:
Debt instrument
 
Effective Interest Rate
 
September 30, 2018
 
June 30,
 2018
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
 
 
 
12.5

 
13.0

 
 
 
 
2,012.5

 
2,013.0

Less: current portion
 
 
 
(2.5
)
 
(2.5
)
Less: unamortized discount and debt issuance costs
 
 
 
(7.6
)
 
(8.1
)
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 September 30, 2018, the fair value of the Notes, based on Level 2 inputs, was $1,979.4 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 2018.

Note 12. Employee Benefit Plans

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

Stock Options.  Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant.  Stock options generally vest ratably over 4 years and have a term of 10 years.  Compensation expense is measured based on the fair value of the stock option on the grant date and recognized on a straight-line basis over the vesting period. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.


20



Restricted Stock.
Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and time-based restricted stock units granted September 1, 2018 and after generally vest ratably over 3 years. Time-based restricted stock and time-based restricted stock units granted prior to September 1, 2018 are generally subject to a vesting period of two years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting. Compensation expense is measured based on the fair value of the grant at grant date and recognized on a straight-line basis over the vesting period.

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

Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date and is subsequently remeasured at each reporting date during the vesting period based on the change in the ADP stock price. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.
 
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 38 months. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 150% of the "target awards." Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting.

Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.
Performance-based restricted stock units cannot be transferred and are settled in either cash or stock, depending on the employee's home country. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the ADP stock price. Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards under the performance-based restricted stock unit program.
Employee Stock Purchase Plan.  The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period.  This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards.  From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.  The Company repurchased 1.6 million and 2.2 million shares in the three months ended September 30, 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.


21



The following table represents stock-based compensation expense for the three months ended September 30, 2018 and 2017, respectively:
 
Three Months Ended
 
September 30,
 
2018
 
2017
Operating expenses
$
5.4

 
$
5.2

Selling, general and administrative expenses
28.0

 
28.6

System development and programming costs
5.0

 
5.2

Total stock-based compensation expense
$
38.4

 
$
39.0


As of September 30, 2018, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $29.3 million, $83.6 million, and $126.7 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.5 years, 1.8 years, and 2.1 years, respectively.

During the three months ended September 30, 2018, 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, 2018
 
3,983

 
$
87

Options granted
 
836

 
$
147

Options exercised
 
(284
)
 
$
78

Options canceled/forfeited
 
(12
)
 
$
106

Options outstanding at September 30, 2018
 
4,523

 
$
98


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, 2018
 
1,598

 
345

Restricted shares/units granted
 
575

 
141

Restricted shares/units vested
 
(759
)
 
(169
)
Restricted shares/units forfeited
 
(24
)
 
(9
)
Restricted shares/units outstanding at September 30, 2018
 
1,390

 
308


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, 2018
 
302

 
789

Restricted shares/units granted
 
123

 
333

Restricted shares/units vested
 
(151
)
 
(283
)
Restricted shares/units forfeited
 
(6
)
 
(3
)
Restricted shares/units outstanding at September 30, 2018
 
268

 
836



22



The fair value for stock options granted was estimated at the date of grant using the following assumptions:
 
Three Months Ended
 
September 30,
 
2018
 
2017
Risk-free interest rate
2.7
%
 
1.8
%
Dividend yield
1.9
%
 
2.1
%
Weighted average volatility factor
20.9
%
 
21.7
%
Weighted average expected life (in years)
5.4

 
5.4

Weighted average fair value (in dollars)
$
26.60

 
$
17.50


B.  Pension Plans

The components of net pension expense were as follows:
 
Three Months Ended
 
September 30,
 
2018
 
2017
Service cost – benefits earned during the period
$
14.9

 
$
18.6

Interest cost on projected benefits
19.7

 
16.3

Expected return on plan assets
(32.9
)
 
(34.3
)
Net amortization and deferral
0.1

 
2.1

Settlement charges and special termination benefits
15.3

 

Net pension expense
$
17.1

 
$
2.7


In fiscal 2018, the Company offered a voluntary early retirement program to certain eligible U.S.-based associates aged 55 or above with at least 10 years of service. The early retirement offer was made to about 3,500 eligible associates, or approximately 6 percent of the Company’s workforce, with approximately 2,200 ADP associates opting to participate. 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. The Company recorded $9.3 million of expenses within selling, general, and administrative expenses related to the continuing health coverage for VERP participants who exited the Company during the three months ended September 30, 2018 and anticipates recording a charge for the remaining participants who will exit and continue health coverage during remainder of fiscal 2019, which may total up to $26 million, but is based on the number of associates electing this benefit and the health care option selected by each associate.

In addition, the Company recorded a $14.0 million non-cash settlement charge and $1.3 million of special termination benefits during the period. The Company anticipates recording additional non-cash settlement charges up to $15 million through the remainder of fiscal 2019, within Other income, net, on the Statements of Consolidated Earnings, 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.

Note 13. Income Taxes

The effective tax rate for the three months ended September 30, 2018 and 2017 was 21.9% and 27.0%, respectively. The decrease in the effective tax rate is primarily due to the impacts of the Tax Cuts and Jobs Act ("the Act") in the three months ended September 30, 2018 partially offset by the impact of benefits recognized from a foreign exchange loss realized on a distribution from a foreign subsidiary, the release of reserves for uncertain tax positions, and the usage of foreign tax credits in the three months ended September 30, 2017.
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 the Company 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 Company included the estimated impact of the Act in accordance with Staff Accounting Bulletin No. 118, which provides guidance on accounting for the impact of the Act, in the Company's financial results for the year ended June 30, 2018.

23



Income tax expense reported for the three months ended September 30, 2018 includes a benefit of $1.1 million related to the Act. The $1.1 million is comprised of adjustments to the one-time transition tax and 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 $19.2 million could expire unutilized. The Company also accrued $28.3 million in the period ended June 30, 2018 related to foreign withholding taxes on future distributions of earnings and profits ("E&P") that may not be utilizable as foreign tax credits.
The accounting for the effects of the rate change on deferred tax balances is not complete and a provisional benefit of $253.3 million (restated for ASC 606) was recognized in the year ended June 30, 2018. During the three months ended September 30, 2018, the Company did not record an adjustment to this provisional amount. 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 E&P that was previously deferred from US income taxes. The Company recorded a provisional amount for the one-time transition tax liability of $22.2 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.

During the three months ended September 30, 2018, the Company continued to evaluate and analyze its assessment of the Act which involves monitoring guidance from the U.S. tax authorities and refining tax return positions. The Company expects to complete its analysis and provisional estimates during the three months ended December 31, 2018 and record an adjustment to tax expense, if applicable.   

Note 14. Commitments and Contingencies

In June 2018, a potential class action complaint was filed against ADP in the Circuit Court of Cook County, Illinois.  The complaint asserts that ADP violated the Illinois Biometric Privacy Act, was negligent and unjustly enriched itself in connection with its collection, use and storage of biometric data of employees of its clients who are residents of Illinois in connection with certain services provided by ADP to clients in Illinois.  The complaint seeks statutory and other unspecified monetary damages, injunctive relief and attorney’s fees.  In addition, similar potential class action complaints have been filed in Illinois state courts against ADP and/or certain of its clients with respect to the collection, use and storage of biometric data of the employees of these clients.  All of these claims are still in their earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to these matters.  The Company intends to vigorously defend against these lawsuits.

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.


24


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

Changes in AOCI by component are as follows:
 
Three Months Ended
 
September 30, 2018
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at June 30, 2018
$
(227.0
)
 
$
(274.0
)
 
$
(178.8
)
 
$
(679.8
)
Other comprehensive loss
before reclassification adjustments
(22.9
)
 
(50.4
)
 

 
(73.3
)
Tax effect

 
12.3

 

 
12.3

Reclassification adjustments to
net earnings

 
0.9

(A)
0.2

(B)
1.1

Tax effect

 
(0.2
)
 
(0.2
)
 
(0.4
)
Balance at September 30, 2018
$
(249.9
)
 
$
(311.4
)
 
$
(178.8
)
 
$
(740.1
)

 
Three Months Ended
 
September 30, 2017
 
Currency Translation Adjustment
 
Net Gains/Losses on Available-for-sale Securities
 
Pension Liability
 
Accumulated Other Comprehensive Loss
Balance at June 30, 2017
$
(234.8
)
 
$
68.3

 
$
(216.7
)
 
$
(383.2
)
Other comprehensive income/(loss)
before reclassification adjustments
52.8

 
(12.8
)
 

 
40.0

Tax effect

 
3.5

 

 
3.5

Reclassification adjustments to
net earnings