Employee Benefit Plans

3 Months Ended

Sep. 30, 2018

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.

Compensation and Employee Benefit Plans

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.


•	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.

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

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