10-K 1 q4fy1910k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2019
OR
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
 
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5397
AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
Delaware
22-1467904
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
One ADP Boulevard, Roseland, New Jersey
07068 
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code: 973-974-5000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.10 Par Value
(voting)
ADP
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [x] No [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [x]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [x] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $56,967,135,372. On July 31, 2019 there were 433,942,837 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2019 Annual Meeting of Stockholders.
Part III



Table of Contents

 
 
 
 
 
Page
Part I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV.
 
 
Item 15.
Signatures
 
 
 
 
 
 
 

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Part I
Item 1. Business
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CORPORATE BACKGROUND
General
We were founded in 1949 on an innovative idea: to help business owners focus on core business activities by freeing them up from certain non-core tasks such as payroll. Today we are one of the world’s leading providers of cloud-based human capital management (HCM) solutions to employers, offering solutions to businesses of all sizes, whether they have simple or complex needs. We serve over 810,000 clients in 140 countries and territories. Our common stock is listed on the NASDAQ Global Select Market® under the symbol “ADP.”



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When we refer to “we,” “us,” “our,” “ADP,” or the “Company” in this Annual Report on Form 10-K, we mean Automatic Data Processing, Inc. and its consolidated subsidiaries.

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BUSINESS OVERVIEW
ADP’s Mission
As digital technology, globalization and new business models reshape the way people work, our mission is to power organizations with insightful solutions that meet the changing needs of our clients and their employees. Our technology, industry and compliance expertise and data insights deliver measurable results, peace-of-mind and an enabled, productive workforce. Our leading technology and commitment to service excellence is at the core of our relationship with each one of our clients, whether it's a small, mid-sized or large organization operating in one or multiple countries around the world. We are constantly designing better ways to work through cutting-edge products, premium services and exceptional experiences that enable people to reach their full potential.
ADP’s Strategy
Our Strategic Pillars. Our business strategy is based on three strategic pillars, which are designed to position us as the global market leader in HCM technology and services:
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• Grow a complete suite of cloud-based HCM solutions (HCM Solutions). We develop cloud-based software and offer comprehensive solutions that assist employers of all types and sizes in managing the entire worker spectrum and employment cycle - from full-time to freelancer and from hire to retire.
• Grow and scale our market-leading HR Outsourcing solutions by leveraging our platforms and processes (HRO Solutions). We offer comprehensive HRO solutions in which we provide complete management solutions for HR administration, payroll administration, talent management, employee benefits, benefits administration, employer liability management, and other HCM and employee benefits functions.
• Leverage our global presence to offer clients HCM solutions wherever they do business (Global Solutions). We are expanding our international HCM and HRO businesses, comprised of our established local, in-country software solutions and our market-leading, cloud-based multi-country solutions.
 
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With a large and growing addressable market, we are strongly positioned to continue delivering sustainable long-term value across our strategic pillars. We are doing this by successfully executing on product and technology innovation, providing industry-leading service and compliance expertise, and enhancing our world-class distribution.
We are focused on, and investing in, our world-class and next-gen platforms that are built for the future of work, and on providing market-leading product and technology solutions that solve the needs of our clients today, and anticipate the needs of our clients tomorrow. Our world-class platforms and multi-national solutions provide our clients with comprehensive HR and payroll capabilities that drive productivity and enable compliance globally. Our cloud-based next-gen platforms are built to be person-centric, serve all worker types and support flexible work and on-demand pay, and to deliver seamless global capabilities to dynamic, team-based organizations.
Digital technology is transforming today's workplace and workforce. We are accelerating our own digital transformation and leveraging digital technology to change how we engage with our clients and how their workers engage with us - and an important part of this includes delivering solutions wherever they are, whether at work or on the go.
We offer the broadest suite of complete HRO solutions coupled with dedicated and strategic HR services and deep local expertise. These offerings can be tailored to meet the increasingly complex and sophisticated needs of our clients and their workers.
Our global footprint in the HCM industry is unmatched and, together with world-class technology and deep in-country compliance expertise, we are strongly positioned to continue to drive growth by delivering solutions to clients of all sizes wherever they do business.

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Innovation at ADP
Innovation is in our DNA. For 70 years, we have reimagined the world of work by designing cutting-edge products, robust services and exceptional experiences that touch millions of people’s lives daily. We pioneered automation in HCM, HCM in the cloud, mobile HCM and the establishment of an HCM marketplace. As the business and digital technology landscape rapidly evolves, what ‘work’ means, ‘how’ and ‘where’ it gets done, and ‘how’ workers are paid is changing as well. We innovate by anticipating the future of work, the future of HCM and the future of pay in order to meet the evolving and unique needs of our clients and their workers.
Our next-gen platforms are built for the ever-changing world of work. Designed from the ground up to be cloud-native, global, scalable and secure, our next-generation platforms provide our clients with the flexibility they need to address today’s and tomorrow’s workplace challenges, regardless of their size and complexity. Our next-generation HCM platform enables our clients to personalize their experience based on their needs. Built for dynamic teams, our next-gen HCM platform provides our clients with visibility into where work actually happens rather than into rigid organizational hierarchies and worker types. With our “HR your way” approach, clients can easily tailor the solution to their needs by deploying low-code applications. Our next-generation payroll solution supports workers of all types and enables real-time, transparent, continuous payroll calculations. Our next-gen payroll solution also unlocks flexible pay choices for our clients so they can provide the best pay experience for their workers. Compliance capabilities are built-in, enabling our clients to focus on managing their business. Our next-gen platforms are designed to meet the needs of our clients in an ever-changing world of work.
Today, harnessing big data for use in artificial intelligence (AI) is a real competitive advantage. That is why we are accelerating the deployment of AI - driven by big data based on our unmatched HCM dataset - into our solutions and into the hands of our clients and their decision-makers. This is the same HCM dataset that drives our renowned ADP National Employment Report®. We are leading this innovation effort with ADP® DataCloud, a workforce intelligence engine which provides clients with in-depth workforce and business insights driven by unmatched big data that enables critical HR decisions. Powered by ADP Datacloud, ADP’s Executive and Manager Insights solution continually sifts through wage, time, location, industry and other client data, to spot meaningful trends and patterns, such as which departments have the highest overtime or the locations where turnover might be spiking, and compares those trends and patterns to those in the client's industry. ADP’s Pay Equity Explorer combines analytics and benchmarking to help employers better understand potential pay gaps and provide them with real, up-to-date, aggregated and anonymized market data to understand how their compensation for a particular job compares to other similar employers. These innovative
 
offerings combine HR expertise and data transparency in a way that connects HR to the bottom line.
Through our acquisition of WorkMarket, a cloud-based workforce management solution, we became the first HCM provider with robust freelancer management functionality and reporting insights, enabling clients to manage their extended workforce effectively.
Wisely by ADP® is our latest advancement in the future of pay. Our innovative payment offerings support an employer’s need for flexible payment solutions in order to meet the individual needs of its workers. The Wisely Pay by ADP™ payroll card is a network-branded payroll card and digital account that enables employers to pay their employees, and enables employees to access their payroll funds immediately, including via a network member bank or an ATM, make purchases or pay bills, load additional funds onto the card, such as tax refunds and military pensions, and transfer funds to a bank account in the United States. We also launched Wisely Direct by ADP®, a network-branded general purpose reloadable card and digital account, which provides similar features and functionality as Wisely Pay by ADP but is offered directly to consumers. Our digital card offerings are true banking alternatives that feature innovative services such as savings, budgeting, digital wallet and other personal financial management features. With Wisely by ADP, we received the “Awesome New Tech” award at the 2018 HR Technology Conference for a record-breaking fourth straight year.
In addition, our mobile apps simplify how work gets done by enabling clients to process their payroll, and giving millions of their employees convenient access to their payroll and HR information around the world and in 29 languages. We have also opened access for developers and system integrators to some of our platforms’ application programming interface libraries through ADP Marketplace. With ADP Marketplace, clients can integrate employee data from our core services across their other business systems or platforms. This access enables the exchange of client data housed in our databases, and creates a unified HCM ecosystem for clients informed by a single, comprehensive repository of their workforce data. Clients can choose from over 370 apps and integrations, allowing them to choose solutions that are tailored to their needs, industry requirements and preferences.
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Reportable Segments
Our two reportable business segments are Employer Services and Professional Employer Organization (“PEO”). For financial data by segment and by geographic area, see Note 16 to the “Consolidated Financial Statements” contained in this Annual Report on Form 10-K.
Employer Services. Our Employer Services segment serves clients ranging from single-employee small businesses to large enterprises with tens of thousands of employees around the world, offering a comprehensive range of technology-based HCM solutions, including our strategic, cloud-based platforms, and HRO (other than PEO) solutions. These solutions address critical client needs and include: Payroll Services, Benefits Administration, Talent Management, HR Management, Workforce Management, Compliance Services, Insurance Services and Retirement Services.
Professional Employer Organization. Our PEO business, called ADP TotalSource®, provides clients with comprehensive employment administration outsourcing solutions through a relationship in which employees who work for a client (referred to as “worksite employees”) are co-employed by us and the client.
Our reportable segments are based on the way that management reviews the performance of, and makes decisions about, our business. Our strategic pillars represent the strategic growth areas for our business. The results of our business related to products and solutions within the HCM Solutions pillar, the HRO Solutions pillar (other than PEO products and solutions) and the Global Solutions pillar are contained within our Employer Services segment. The results of our business within the HRO Solutions pillar related to our PEO products and solutions are contained within our PEO Segment.
PRODUCTS AND SOLUTIONS
In order to serve the unique needs of diverse types of businesses and workforce models, we provide a range of solutions which businesses of all types, sizes, and across geographies can use to recruit, pay, manage, and retain their workforce. We address these broad market needs with our cloud-based strategic platforms: RUN Powered by ADP®, serving over 640,000 small businesses; ADP Workforce Now®, serving over 70,000 mid-sized and large businesses across our strategic pillars; and ADP Vantage HCM®, serving over 500 large enterprise businesses. All of these solutions can be combined with ADP SmartCompliance® to address the increasingly broad and complex needs of employers. Outside the United States, we address the needs of approximately 65,000 clients with premier global solutions consisting of local in-country solutions and multinational offerings, including ADP GlobalView®, ADP Celergo® and ADP Streamline®.
Strategic Cloud-based Products and Solutions Across Client Size and Geography
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HCM Solutions
Integrated HCM Solutions. Our premier suite of HCM products offers complete solutions that assist employers of all types and sizes in all stages of the employment cycle, from recruitment to retirement.
Our suite of HCM solutions are powered by our strategic, cloud-based, award-winning platforms:
• RUN Powered by ADP combines a software platform for managing small business payroll, HR management and tax compliance administration, with 24/7 service and support from our team of small business experts. RUN Powered by ADP also integrates with other ADP solutions, such as workforce management, workers’ compensation insurance premium payment plans, and retirement plan administration systems.
• ADP Workforce Now is a flexible HCM solution used across mid-sized and large businesses in North America to manage their employees. More businesses use ADP Workforce Now in North America than any other HCM solution designed for both mid-sized and large businesses.
• ADP Vantage HCM is a solution for large enterprises in the United States. It offers a comprehensive set of HCM capabilities within a single solution that unifies the five major areas of HCM: HR management, benefits administration, payroll services, time and attendance management, and talent management.
Payroll Services. We pay approximately 26 million (approximately 1 out of every 6) workers in the United States. We provide flexible payroll services to employers of all sizes, including the preparation of employee paychecks, pay statements, supporting journals, summaries, and management reports. We provide employers with a wide range of payroll options, including using mobile technology, connecting their major enterprise resource planning (“ERP”) applications with ADP’s payroll services or outsourcing their entire payroll process to us. Employers can choose a variety of payroll payment options including ADP’s electronic wage payment and, in the United States, payroll card solutions and digital accounts. On behalf of our clients in the United States, we prepare and file federal, state and local payroll tax returns and quarterly and annual Social Security, Medicare, and federal, state and local income tax withholding reports.


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Benefits Administration. In the United States, we provide powerful and agile solutions for employee benefits administration. These options include health and welfare administration, leave administration services, insurance carrier enrollment services, employee communication services, and dependent verification services. In addition, ADP benefits administration solutions offer employers a simple and flexible cloud-based eligibility and enrollment system that provides their employees with tools, communications, and other resources they need to understand their benefits options and make informed choices.

Talent Management. ADP’s Talent Management solutions simplify and improve the talent acquisition, management, and activation process from recruitment to ongoing employee engagement and development. Employers can also outsource their internal recruitment function to ADP. Our solutions provide performance, learning, succession and compensation management tools that help employers align goals to outcomes, and enable managers to identify and mitigate potential retention risks. Our talent activation solutions include ADP’s StandOut® and Compass® solutions, which provide team leaders with data and insights to drive employee engagement and leadership development, which in turn help drive employee performance.

Workforce Management. ADP’s Workforce Management offers a range of solutions to over 75,000 employers of all sizes, including time and attendance, absence management and scheduling tools. Time and attendance solutions include time capture via online timesheets, timeclocks with badge readers, biometrics and touch-screens, telephone/interactive voice response, and mobile smartphones and tablets. These tools automate the calculation and reporting of hours worked, helping employers prepare payroll, control costs and overtime, and manage compliance with wage and hour regulations. Absence management tools include accrued time

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off, attendance policy and leave case modules. Our employee scheduling tools simplify visibility, offer shift-swapping capabilities and can assist managers with optimizing schedules to boost productivity and minimize under- and over-staffing. We also offer analytics and reporting tools that provide clients with insights, benchmarks and performance metrics so they can better manage their workforce. In addition, industry-specific modules are available for labor forecasting, budgeting, activity and task management, grant and project tracking, and tips management.
Compliance Solutions. ADP’s Compliance Solutions provides industry-leading expertise in payment compliance and employment-related tax matters that complement the payroll, HR and ERP systems of its clients.
ADP SmartCompliance. In the United States, ADP SmartCompliance integrates client data delivered from our integrated HCM platforms or third-party payroll, HR and financial systems into a single, cloud-based solution. Our specialized teams use the data to work with clients to help them manage changing and complex regulatory landscapes and improve business processes. ADP SmartCompliance includes HCM-related compliance solutions such as Employment Tax and Wage Payments, as well as Tax Credits, Health Compliance, Wage Garnishments, Employment Verifications, Unemployment Claims and W-2 Management.
ADP SmartCompliance Employment Tax. As part of our full service employment tax services in the United States, we prepare and file employment tax returns on our clients’ behalf and, in connection with these stand-alone services, collect employment taxes from clients and remit these taxes to more than 7,100 federal, state and local tax agencies. In our fiscal year ended June 30, 2019, in the United States, we processed and delivered approximately 67 million employee year-end tax statements, and moved more than $2.1 trillion in client funds to taxing and other agencies and to our clients’ employees and other payees.
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ADP SmartCompliance Wage Payments. In the United States, we offer compliant pay solutions for today's workforce, including electronic payroll disbursement options such as payroll cards, digital accounts and direct deposit, as well as traditional payroll checks, which can be integrated with clients’ ERP and payroll systems.
 
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Human Resources Management. Commonly referred to as Human Resource Information Systems, ADP’s Human Resources Management Solutions provide employers with a single system of record to support the entry, validation, maintenance, and reporting of data required for effective HR management, including employee names, addresses, job types, salary grades, employment history, and educational background.
Insurance Services. ADP’s Insurance Services business, in conjunction with our licensed insurance agency, Automatic Data Processing Insurance Agency, Inc., facilitates access in the United States to workers’ compensation and group health insurance for small and mid-sized clients through a variety of insurance carriers. Our automated Pay-by-Pay® premium payment program calculates and collects workers’ compensation premium payments each pay period, simplifying this task for employers.
Retirement Services. ADP Retirement Services helps employers in the United States administer various types of retirement plans, such as traditional and Roth 401(k)s, profit sharing (including new comparability), SIMPLE and SEP IRAs, and executive deferred compensation plans. ADP Retirement Services offers a full service 401(k) plan program which provides recordkeeping and administrative services, combined with an investment platform offered through ADP Broker-Dealer, Inc. that gives our clients’ employees access to a wide range of non-proprietary investment options and online tools to monitor the performance of their investments. In addition, ADP Retirement Services offers investment management services to retirement plans through ADP Strategic Plan Services, LLC, a registered investment adviser under the Investment Advisers Act of 1940. ADP Retirement Services also offers trustee services through a third party.

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HRO Solutions
As a leader in the growing HR Outsourcing market, we partner with our clients to offer a full range of seamless technology and service solutions for HR administration, workforce management, payroll services, benefits administration and talent management. From small businesses to enterprises with thousands of employees, with HRO our clients gain proven technology and processes and robust service and support. Whether a client chooses our PEO or other HR Outsourcing solutions, we offer solutions tailored to a client’s specific needs and preferences - designed to meet the client’s needs today, and as its business and needs evolve.
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Professional Employer Organization. ADP TotalSource, our PEO business, offers small and mid-sized businesses a comprehensive HR outsourcing solution through a co-employment model. With a PEO, both ADP and the client have a co-employment relationship with the client’s employees. We assume certain employer responsibilities such as payroll processing and tax filings, and the client maintains control of its business and all management responsibilities. ADP TotalSource clients are able to offer their employees services and benefits on par with those of much larger enterprises, without the need to staff an enterprise-size HR department. With our cloud-based HCM software at the core, we serve more than 12,500 clients and approximately 562,000 worksite employees in all 50 U.S. states. ADP TotalSource is the largest PEO certified by the Internal Revenue Service as meeting the requirements to operate as a Certified Professional Employer Organization under the Internal Revenue Code. As a full-service PEO, ADP TotalSource provides complete HR management and core administrative services while the client continues to direct the day-to-day job-related duties of the employees.
With constantly changing business regulations, global economies and technology, our clients benefit from partnering with ADP TotalSource to help them protect their business and drive growth and success. Some of the rich offerings available through ADP TotalSource to address today’s workplace challenges include:
• Better Benefits: Through our PEO, many of our clients discover that they can offer a richer overall benefits package than they could afford to offer on their own. We give clients
 
access to a new patent-pending approach to help them target the best benefit plan offerings for their employees. They can compare plan options and make more educated decisions about what plan offering is best for their company and budget. In addition, ADP TotalSource integrates with our award-winning ADP Marketplace to further tailor offerings, such as helping employees pay off student loans with payroll contributions and integrating a client’s U.S. PEO population with its global workforce’s HR system of record.
• Protection and Compliance: ADP TotalSource HR experts help clients manage the risks of being an employer by advising how to handle properly a range of issues - from HR and safety compliance to employee-relations. This includes access to workers' compensation coverage and expertise designed to help them handle both routine and unexpected incidents, including discrimination and harassment claims.
• Talent Engagement: Featuring a talent blueprint, ADP TotalSource HR experts work with clients to help them better engage and retain their workforce through solutions that support the core needs of an employee at work. In addition, our full-service recruitment team is dedicated to helping our clients find and hire new talent, while reducing the stress of uncovering top talent.
• Expertise: Each client is assigned a designated HR specialist for day-to-day and strategic guidance. Clients can also access data-driven benchmarks in areas such as turnover and overtime, staffing and understanding profit leaks, and have their ADP HR expert help tailor recommendations to continue to drive their business forward.

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ADP Comprehensive Services. Leveraging our market-leading ADP Workforce Now platform, ADP Comprehensive Services partners with clients of all types and sizes to tackle their HR, talent, benefits administration and pay challenges with help from our proven expertise, deep experience and best practices. ADP Comprehensive Services is flexible - enabling clients to partner with us for managed services for one, some or all areas across HR, talent, benefits administration and pay. We provide outsourced execution that combines processes, technology and a robust service and support team that acts as an extension of our client’s in-house resources - so their HCM and pay operations are executed with confidence.
ADP Comprehensive Outsourcing Services (ADP COS). Enabled by ADP Vantage HCM, ADP COS is designed for large business outsourcing for payroll, HR administration, workforce management, benefits administration and talent management. With COS, the day-to-day payroll process becomes our responsibility, freeing up clients to address critical issues like employee engagement and retention. The combination of technology, deep expertise and data-driven insights that COS offers is transformative, allowing clients to focus on strategy and results.
ADP Recruitment Process Outsourcing Services (ADP RPO). ADP RPO provides deep talent insights to help drive targeted recruitment strategies for attracting top talent. With global, customizable recruitment services, ADP RPO enables organizations to find and hire the best candidates for hourly, professional or executive positions. In addition, we also deliver market analytics, sourcing strategies, candidate screening, selection and on-boarding solutions to help organizations connect their talent strategy to their business's priorities.
Global Solutions
Our premier global solutions consist of multi-country and local in-country solutions for employers of any type or size. We partner with clients to help them navigate the most complex HR and payroll scenarios using tailored and scalable technology supported by our deep compliance expertise.
ADP Global Payroll is a solution for multinational organizations of all sizes. As a highly scalable and flexible suite of products supported by a team of experts, ADP Global Payroll allows small and mid-sized companies, as well as the largest multinationals, to standardize their HCM strategies globally (including payroll, HR, talent, time and labor, and benefits management) and adapt to changing local needs, while helping to drive overall organizational agility and engagement.
We also offer comprehensive HCM solutions on local, country-specific platforms. These suites of services offer various combinations of payroll services, HR management, time and attendance management, talent management and benefits management, depending on the country in which the solution is provided.
 
We pay approximately 15 million workers outside the United States with our local in-country solutions and with ADP GlobalView, ADP Celergo and ADP Streamline - our simplified and intuitive multi-country payroll solutions. As part of our global payroll services, we supply year-end regulatory and legislative tax statements and other forms to our clients’ employees. Our global talent management solutions elevate the employee experience, from recruitment to ongoing employee engagement and development. Our comprehensive HR solutions combined with our deep expertise make our clients’ global HR management strategies a reality. Our configurable, automated time and attendance tools help global clients understand the work being performed and the resources being used, and ensure the right people are in the right place at the right time.
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MARKETS AND SALES
Our HCM solutions are offered in 140 countries and territories across North America, Latin America, Europe, Asia and Africa. The most material markets for HCM Solutions, Global Solutions and HRO Solutions (other than PEO) are the United States, Canada and Europe. In each market, we have both country-specific solutions and multi-country solutions, for employers of all sizes and complexities. The major components of our offerings throughout these geographies are payroll, HR outsourcing and time and attendance management. In addition, we offer wage and tax collection and remittance services in the United States, Canada, the United Kingdom, the Netherlands, France, Australia, India, and China. Our PEO business offers services exclusively in the United States.
We market our solutions primarily through our direct sales force. We also market HCM Solutions, Global Solutions and HRO Solutions (other than PEO) through indirect sales channels, such as marketing relationships with certified public accountants and banks, among others. None of our major business units has a single homogeneous client base or market. While concentrations of clients exist in specific

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industries, no one client, industry or industry group is material to our overall revenues. We are a leader in each of our major service offerings and do not believe any of our major services or business units is subject to unique market risk.
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COMPETITION
The industries in which we operate are highly competitive. We know of no reliable statistics by which we can determine the number of our competitors, but we believe that we are one of the largest providers of HCM solutions in the world. HCM Solutions, Global Solutions and HRO Solutions (other than PEO) compete with other business outsourcing companies, companies providing ERP services, providers of cloud-based HCM solutions and financial institutions. Our PEO business competes with other PEOs providing similar services, as well as business outsourcing companies, companies providing ERP services and providers of cloud-based HCM solutions. Other competitive factors include a company’s in-house function, whereby a company installs and operates its own HCM system.
Competition for business outsourcing solutions is primarily based on product and service quality, reputation, ease of use and accessibility of technology, breadth of offerings, and price. We believe that we are competitive in each of these areas and that our leading-edge technology, together with our commitment to service excellence, distinguishes us from our competitors.
INDUSTRY REGULATION
Our business is subject to a wide range of complex U.S. and foreign laws and regulations. In addition, many of our solutions are designed to assist clients with their compliance with certain U.S. and foreign laws and regulations that apply to them. We have, and continue to enhance, compliance programs and policies to monitor and address the legal and regulatory requirements applicable to our operations and client solutions, including dedicated compliance personnel and training programs.
 
As one of the world’s largest providers of HCM solutions, our systems contain a significant amount of sensitive data related to clients, employees of our clients, vendors and our employees. We are, therefore, subject to compliance obligations under federal, state and foreign privacy, data protection and cybersecurity-related laws, including federal, state and foreign security breach notification laws with respect to both client employee data and our own employee data. The changing nature of these laws in the United States, Europe and elsewhere, including the European Union’s (the “EU”) General Data Protection Regulation (the "GDPR") and the California Consumer Privacy Act (the “CCPA”), will impact our processing of personal information of our employees and on behalf of our clients. The GDPR, which became effective in May 2018, imposes stricter and more comprehensive requirements on us as both a data controller and a data processor. As part of our overall data protection compliance program, including with respect to data protection laws in the EU, we have implemented Binding Corporate Rules (“BCRs”). Compliance with our BCRs permits us to process and transfer personal data across borders in accordance with the GDPR and other data protection laws in the EU. The CCPA will become effective on January 1, 2020 and will require companies to provide new data disclosure, access, deletion and opt-out rights to consumers in California. In addition, in the United States, the Health Insurance Portability and Accountability Act of 1996 applies to our insurance services businesses and ADP TotalSource.
As part of our payroll and payroll tax management services, we move client funds to taxing authorities, our clients’ employees, and other payees via electronic transfer, direct deposit, prepaid access and ADPCheck. Some elements of our U.S. money transmission activities, including our electronic payment and prepaid access (payroll pay card) offerings, are subject to certain licensing requirements. In addition, our U.S. prepaid access offering is subject to the anti-money laundering and reporting provisions of The Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2000 (the “BSA”). Elements of our money movement activities outside of the United States are subject to similar licensing and anti-money laundering and reporting laws and requirements in the countries in which we provide such services. Our employee screening and selection services business offers background checking services that are subject to the Fair Credit Reporting Act. ADP TotalSource is subject to various state licensing requirements and maintains certifications with the Internal Revenue Service. Because ADP TotalSource is a co-employer with respect to its clients’ worksite employees, we may be subject to limited obligations and responsibilities of an employer under federal and state tax, insurance and employment laws. Our registered investment adviser provides certain investment management and advisory services to retirement plan administrators under a heightened “fiduciary” standard and is regulated by the SEC and the U.S. Department of Labor.
In addition, many of our businesses offer solutions that assist our clients in complying with certain U.S. and foreign laws

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and regulations that apply to them. Although these laws and regulations apply to our clients and not to ADP, changes in such laws or regulations may affect our operations, products and services. For example, our payroll services are designed to facilitate compliance with state laws and regulations applicable to the payment of wages. In addition, our HCM solutions help clients manage their compliance with certain requirements of the Affordable Care Act in the United States. Similarly, our Tax Credit Services business, which helps clients in the United States take advantage of tax credit opportunities in connection with the hiring of new employees and certain other activities, is based on federal, state, or local tax laws and regulations allowing for tax credits, which are subject to renewal, amendment or rescission.
The foregoing description does not include an exhaustive list of the laws and regulations governing or impacting our business. See the discussion contained in the “Risk Factors” section in Part I, Item 1A of this Annual Report on Form 10-K for information regarding changes in laws and regulations that could have a materially adverse effect on our reputation, results of operations or financial condition or have other adverse consequences.
CLIENTS AND CLIENT CONTRACTS
We provide services to more than 810,000 clients. In fiscal 2019, no single client or group of affiliated clients accounted for revenues in excess of 2% of our annual consolidated revenues.
We are continuously in the process of performing implementation services for new clients. Depending on the service agreement and/or the size of the client, the installation or conversion period for new clients can vary from a short period of time for a small Employer Services client (as little as 24 hours) to a longer period for a large Employer Services client with multiple deliverables (generally six to nine months). In some cases, the period may exceed two years for a large, multi-country GlobalView client or other large, multi-phase implementation. Although we monitor sales that have not yet been installed, we do not view this metric as material to an understanding of our overall business in light of the recurring nature of our business. This metric is not a reported number, but it is used by management as a planning tool to allocate resources needed to install services, and as a means of assessing our performance against the expectations of our clients. In addition, some of our products and services are sold under longer term contracts with initial terms ranging from two to seven years. However, this anticipated future revenue under contract is not a significant portion of our expected future revenue, is not a meaningful indicator of our future performance and is not material to management's estimate of our future revenue.
Our business is typically characterized by long-term client relationships that result in recurring revenue. Our services are provided under written price quotations or service
 
agreements having varying terms and conditions. No one price quotation or service agreement is material to us. Our client retention is estimated at approximately 11 years in Employer Services, and approximately 6 years in PEO, and has not varied significantly from period to period.
PRODUCT DEVELOPMENT
We continually upgrade, enhance, and expand our solutions and services. In general, new solutions and services supplement rather than replace our existing solutions and services and, given our recurring revenue model, do not have a material and immediate effect on our revenues. We believe that our strategic solutions and services have significant remaining life cycles.
SYSTEMS DEVELOPMENT AND PROGRAMMING
During the fiscal years ended June 30, 2019, 2018 and 2017, we invested approximately $911 million, $1 billion and $859 million, respectively, in systems development and programming. These investments include expenses for activities such as client migrations to our new strategic cloud-based platforms, purchases of new software and software licenses, additions to software resulting from business combinations, as well as the development of new products and maintenance expenses associated with our existing technologies.
LICENSES
We are the licensee under a number of agreements for computer programs and databases. Our business is not dependent upon a single license or group of licenses. Third-party licenses, patents, trademarks, and franchises are not material to our business as a whole.
NUMBER OF EMPLOYEES
We employed approximately 58,000 persons as of June 30, 2019.
Available Information
Our corporate website, www.adp.com, provides materials for investors and information about our solutions and services. ADP’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and the Proxy Statements for our Annual Meetings of Stockholders are made available, free of charge, on our corporate website as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission (“SEC”), and are also available on the SEC’s website at www.sec.gov. The content on any website referenced in this filing is not incorporated by reference into this filing unless expressly noted otherwise.

12


Item 1A. Risk Factors
Our businesses routinely encounter and address risks, some of which may cause our future results to be different than we currently anticipate. The risk factors described below represent our current view of some of the most important risks facing our businesses and are important to understanding our business. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk and the consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion includes a number of forward-looking statements. You should refer to the description of the qualifications and limitations on forward-looking statements in the first paragraph under Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K. The level of importance of each of the following risks may vary from time to time, and any of these risks may have a materially adverse effect on our business, results of operations or financial condition.
Failure to comply with, or changes in, laws and regulations applicable to our businesses could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences
Our business is subject to a wide range of complex U.S. and foreign laws and regulations, including, but not limited to, the laws and regulations described in the “Industry Regulation” section in Part I, Item 1 of this Annual Report on Form 10-K. Failure to comply with laws and regulations applicable to our operations or client solutions and services could result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and the imposition of consent orders or civil and criminal penalties, including fines, that could damage our reputation and have a materially adverse effect on our results of operation or financial condition.
In addition, changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, may decrease our revenues and earnings and may require us to change the manner in which we conduct some aspects of our business. For example, a change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to government authorities would adversely impact average client balances and, thereby adversely impact interest income from investing client funds before such funds are remitted to the applicable taxing authorities. Changes in taxation regulations could adversely affect our effective tax rate and our net income. Changes in laws that govern the co-employment arrangement between a professional employer organization and its worksite employees may require us to change the manner in which we conduct some aspects of our PEO business. Health care reform under the Affordable Care Act, related state laws, and the regulations thereunder, as well as the uncertainty surrounding the Affordable Care Act, have the potential to
 
further impact the health insurance market for our PEO business and the demand for our health care compliance solutions. We are unable to determine the additional impact that any of this will have on our PEO business, our ability to attract and retain PEO clients or demand for our health care compliance solutions.
Amendments to money transmitter statutes have required us to obtain licenses in some jurisdictions. The adoption of new money transmitter statutes in other jurisdictions, changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, or disagreement by a regulatory authority with our interpretation of such statutes or regulations, could require additional registration or licensing, limit certain of our business activities until they are appropriately licensed, and expose us to financial penalties. These occurrences could also require changes to the manner in which we conduct some aspects of our money movement business or client funds investment strategy, which could adversely impact interest income from investing client funds before such funds are remitted.
Failure to comply with anti-corruption laws and regulations, economic and trade sanctions, anti-money laundering laws and regulations, and similar laws could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences
Regulators worldwide are exercising heightened scrutiny with respect to anti-corruption, economic and trade sanctions, and anti-money laundering laws and regulations. Such heightened scrutiny has resulted in more aggressive investigations and enforcement of such laws and more burdensome regulations, any of which could materially adversely impact our business. We operate our business around the world, including in numerous developing economies where companies and government officials are more likely to engage in business practices that are prohibited by domestic and foreign laws and regulations, including the United States Foreign Corrupt Practices Act and the U.K. Bribery Act. Such laws generally prohibit improper payments or offers of payments to foreign government officials and leaders of political parties, and in some cases, to other persons, for the purpose of obtaining or retaining business. We are also subject to economic and trade sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control, which prohibit or restrict transactions or dealings with specified countries, their governments and, in certain circumstances, their nationals, and with individuals and entities that are specially designated, including narcotics traffickers and terrorists or terrorist organizations, among others. In addition, some of our businesses in the U.S. and a number of countries in which we operate are subject to anti-money laundering laws and regulations, including, for example, The Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2000 (the “BSA”). Among other things, the BSA

13


requires certain financial institutions, including banks and money services businesses (such as money transmitters and providers of prepaid access), to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and maintain transaction records. We have registered our payroll card business with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) as a provider of prepaid access pursuant to a FinCEN regulation.
We have implemented policies and procedures to monitor and address compliance with applicable anti-corruption, economic and trade sanctions and anti-money laundering laws and regulations, and we are continuously in the process of reviewing, upgrading and enhancing certain of our policies and procedures. However, there can be no assurance that our employees, consultants or agents will not take actions in violation of our policies for which we may be ultimately responsible, or that our policies and procedures will be adequate or will be determined to be adequate by regulators. Any violations of applicable anti-corruption, economic and trade sanctions or anti-money laundering laws or regulations could limit certain of our business activities until they are satisfactorily remediated and could result in civil and criminal penalties, including fines, which could damage our reputation and have a materially adverse effect on our results of operation or financial condition. Further, bank regulators are imposing additional and stricter requirements on banks to ensure they are meeting their BSA obligations, and banks are increasingly viewing money services businesses, as a class, to be higher risk customers for money laundering. As a result, our banking partners may limit the scope of services they provide to us or may impose additional requirements on us. These regulatory restrictions on banks and changes to banks’ internal risk-based policies and procedures may result in a decrease in the number of banks that may do business with us, may require us to change the manner in which we conduct some aspects of our business, may decrease our revenues and earnings and could have a materially adverse effect on our results of operations or financial condition.
Failure to comply with privacy, data protection and cyber security laws and regulations could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences
The collection, storage, hosting, transfer, processing, disclosure, use, security and retention and destruction of personal information required to provide our services is subject to federal, state and foreign privacy, data protection and cyber security laws. These laws, which are not uniform, generally do one or more of the following: regulate the collection, storage, hosting, transfer (including in some cases, the transfer outside the country of collection), processing, disclosure, use, security and retention and destruction of personal information; require notice to individuals of privacy practices; give individuals certain access and correction rights with respect to their personal information; and regulate the use or disclosure of personal information for secondary
 
purposes such as marketing. Under certain circumstances, some of these laws require us to provide notification to affected individuals, clients, data protection authorities and/or other regulators in the event of a data breach. In many cases, these laws apply not only to third-party transactions, but also to transfers of information among the Company and its subsidiaries. The European Union (the “EU”) General Data Protection Regulation (the “GDPR”), which became effective in May 2018 and the California Consumer Protection Act (the “CCPA”), which will become effective on January 1, 2020, are among the most comprehensive of these laws. As part of our overall data protection compliance program in connection with the GDPR, we implemented Binding Corporate Rules (“BCRs”) as both a data processor and data controller, which permits us to process and transfer personal data across borders in compliance with EU data protection laws. Complying with these laws and requirements, including the enhanced obligations imposed by the GDPR, our BCRs and the CCPA, may result in significant costs to our business and require us to amend certain of our business practices. Further, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in significant regulatory penalties and legal liability and damage our reputation. In addition, data security events and concerns about privacy abuses by other companies are changing consumer and social expectations for enhanced privacy and data protection. As a result, even the perception of noncompliance, whether or not valid, may damage our reputation.
Our businesses collect, host, store, transfer, process, disclose, use, secure and dispose of personal and business information, and collect, hold and transmit client funds, and a security or privacy breach may damage or disrupt our businesses, result in the disclosure of confidential information, damage our reputation, increase our costs, cause losses and adversely affect our results of operations
In connection with our business, we collect, host, store, transfer, process, disclose, use, secure and dispose of large amounts of personal and business information about our clients, employees of our clients, our vendors and our employees, contractors and temporary staff, including payroll information, health care information, personal and business financial data, social security numbers and their foreign equivalents, bank account numbers, tax information and other sensitive personal and business information. We also collect and transmit significant amounts of funds from the accounts of our clients to their employees, taxing authorities and others.
We are focused on ensuring that we safeguard and protect personal and business information and client funds, and we devote significant resources to maintain and regularly update

14


our systems and processes. Nonetheless, the global environment grows increasingly hostile as attacks on information technology systems continue to grow in frequency, complexity and sophistication, and we are regularly targeted by unauthorized parties using malicious tactics, code and viruses. Certain of these malicious parties may be state-sponsored and supported by significant financial and technological resources. Although this is a global problem, it may affect our businesses more than other businesses because malevolent parties (including our personnel) may focus on the amount and type of personal and business information that our businesses collect, host, store, transfer, process, disclose, use, secure and dispose of, and the client funds that we collect and transmit.
We have programs and processes in place to prevent, detect and respond to data or cyber security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, are increasingly more complex and sophisticated and may be difficult to detect for long periods of time, we may be unable or fail to anticipate these techniques or implement adequate or timely preventive or responsive measures. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could compromise the confidentiality, integrity or availability of data or our systems. Unauthorized parties also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other methods of deceiving these third parties or our personnel, including phishing and other social engineering techniques whereby attackers use end-user behaviors to distribute computer viruses and malware into our systems. As these threats continue to evolve and increase, we may be required to invest significant additional resources to modify and enhance our information security and controls and to investigate and remediate any security vulnerabilities. In addition, while our operating environments are designed to safeguard and protect personal and business information, we do not have the ability to monitor the implementation or effectiveness of any safeguards by our clients, vendors or partners and, in any event, third parties may be able to circumvent those security measures. Information obtained by malevolent parties resulting from successful attacks against our clients, vendors, partners or other third parties may, in turn, be used to attack our information technology systems.
Any cyberattack, unauthorized intrusion, malicious software infiltration, network disruption, denial of service, corruption of data, theft of non-public or other sensitive information, or similar act by a malevolent party (including our personnel), or inadvertent acts or inactions by our vendors, partners or personnel, could result in the disclosure or misuse of confidential personal or business information or the theft of client funds, and could have a materially adverse effect on our business or results of operations or that of our clients, result in liability, litigation, regulatory investigations and sanctions or a loss of confidence in our ability to serve clients,
 
or cause current or potential clients to choose another service provider. As the global environment grows increasingly hostile, the security of our operating environment is ever more important to our clients and potential clients. As a result, the breach or perceived breach of our security systems could result in a loss of confidence by our clients or potential clients and cause them to choose another service provider, which could have a materially adverse effect on our business.
Although we believe that we maintain a robust program of information security and controls and none of the data or cyber security incidents that we have encountered to date have materially impacted us, a data or cyber security incident could have a materially adverse effect on our business, results of operations, financial condition and reputation. While ADP maintains insurance coverage that, subject to policy terms and conditions and a significant self-insured retention, is designed to address losses or claims that may arise in connection with certain aspects of data and cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the continually evolving area of data and cyber risk.
Our systems, applications, solutions and services may be subject to disruptions that could have a materially adverse effect on our business and reputation
Many of our businesses are highly dependent on our ability to process, on a daily basis, a large number of complicated transactions. We rely heavily on our payroll, financial, accounting, and other data processing systems. We need to properly manage our systems, applications and solutions, and any upgrades, enhancements and expansions we may undertake from time to time, in order to ensure they properly support our businesses. If any of these systems, applications or solutions fails to operate properly or becomes disabled even for a brief period of time, whether due to malevolent acts, errors, defects or any other factor(s), we could suffer financial loss, a disruption of our businesses, liability to clients, loss of clients, regulatory intervention or damage to our reputation, any of which could have a materially adverse effect on our results of operation or financial condition. We have disaster recovery, business continuity, and crisis management plans and procedures designed to protect our businesses against a multitude of events, including natural disasters, military or terrorist actions, power or communication failures, or similar events. Despite our preparations, our plans and procedures may not be successful in preventing or mitigating the loss of client data, service interruptions, disruptions to our operations, or damage to our important facilities.
A disruption of our data centers could have a materially adverse effect on our business
We host our applications and serve our clients from data centers that we operate and from data centers operated by third-party vendors. If any of our or our third-party vendors' data centers fails, becomes disabled or is disrupted, even for a limited period of time, our businesses could be disrupted

15


and we could suffer financial loss, liability to clients, loss of clients, regulatory intervention, or damage to our reputation, any of which could have a material adverse effect on our results of operation or financial condition. In addition, our third-party vendors may cease providing data center facilities or services, elect to not renew their agreements with us on commercially reasonable terms or at all, breach their agreements with us or fail to satisfy our expectations, which could disrupt our operations and require us to incur costs which could materially adversely affect our results of operation or financial condition.
If we fail to protect our intellectual property rights, it could materially adversely affect our business and our brand
Our ability to compete and our success depend, in part, upon our intellectual property. We rely on patent, copyright, trade secret and trademark laws, and confidentiality or license agreements with our employees, customers, vendors, partners and others to protect our intellectual property rights. We may need to devote significant resources, including cybersecurity resources, to monitoring our intellectual property rights. In addition, the steps we take to protect our intellectual property rights may be inadequate or ineffective, or may not provide us with a significant competitive advantage. Our intellectual property could be wrongfully acquired as a result of a cyber-attack or other wrongful conduct by third parties or our personnel. Litigation brought to protect and enforce our intellectual property rights could be costly and time-consuming. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights, which may be successful.
We may be sued by third parties for infringement of their proprietary rights, which could have a materially adverse effect on our business, financial condition or results of operations
There is considerable intellectual property development activity in our industry. Third parties, including our competitors, may own or claim to own intellectual property relating to our products or services and may claim that we are infringing their intellectual property rights. We may be found to be infringing upon such rights, even if we are unaware of their intellectual property rights. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us or if we decide to settle, could require that we pay substantial damages or ongoing royalty payments, obtain licenses, modify applications, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers, vendors or partners in connection with any such claim or litigation. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming.
 
If we fail to upgrade, enhance and expand our technology and services to meet client needs and preferences, the demand for our solutions and services may diminish
Our businesses operate in industries that are subject to rapid technological advances and changing client needs and preferences. In order to remain competitive and responsive to client demands, we continually upgrade, enhance, and expand our technology, solutions and services. If we fail to respond successfully to technology challenges and client needs and preferences, the demand for our solutions and services may diminish. In addition, investment in product development often involves a long return on investment cycle. We have made and expect to continue to make significant investments in product development. We must continue to dedicate a significant amount of resources to our development efforts before knowing to what extent our investments will result in products the market will accept. In addition, our business could be adversely affected in periods surrounding our new product introductions if customers delay purchasing decisions to evaluate the new product offerings. Furthermore, we may not execute successfully on our product development strategy, including because of challenges with regard to product planning and timing and technical hurdles that we fail to overcome in a timely fashion.
We may not realize or sustain the expected benefits from our business transformation initiatives, and these efforts could have a materially adverse effect on our business, operations, financial condition, results of operations and competitive position
We have been and will be undertaking certain transformation initiatives, which are designed to streamline our organization, extend our world-class distribution and strengthen our talent and culture, while supporting our revenue growth, margin improvement and productivity. If we do not successfully manage and execute these initiatives, or if they are inadequate or ineffective, we may fail to meet our financial goals and achieve anticipated benefits, improvements may be delayed, not sustained or not realized and our business, operations and competitive position could be adversely affected. These initiatives, or our failure to successfully manage them, could result in unintended consequences or unforeseen costs, including distraction of our management and employees, attrition, inability to attract or retain key personnel, and reduced employee productivity, which could adversely affect our business, financial condition, and results of operations.
Political and economic factors may adversely affect our business and financial results
Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and credit markets may experience periods of constriction and volatility. When there is a slowdown in the economy, employment levels and interest rates may decrease with a corresponding impact on our businesses. Clients may react to worsening conditions by reducing their spending on HCM services or

16


renegotiating their contracts with us, which may adversely affect our business and financial results.
We invest our client funds in liquid, investment-grade marketable securities, money market securities, and other cash equivalents. Nevertheless, our client fund assets are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated, individually or together, during periods of unusual financial market volatility. In addition, as part of our client funds investment strategy, we extend the maturities of our investment portfolio for client funds and utilize short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. In order to satisfy these short-term funding requirements, we maintain access to various sources of liquidity, including borrowings under our commercial paper program and our committed credit facilities, our ability to execute reverse repurchase transactions and corporate cash balances. A reduction in the availability of any such financing during periods of disruption in the financial markets or otherwise may require us to sell client fund assets to satisfy our short-term funding requirements, which may result in the recognition of losses and adversely impact our results of operations, financial condition and cash flow.
We are dependent upon various large banks to execute electronic payments and wire transfers as part of our client payroll, tax and other money movement services. While we have contingency plans in place for bank failures, a systemic shutdown of the banking industry would impede our ability to process funds on behalf of our payroll, tax and other money movement services clients and could have an adverse impact on our financial results and liquidity.
We derive a significant portion of our revenues and operating income outside of the United States and, as a result, we are exposed to market risk from changes in foreign currency exchange rates that could impact our results of operations, financial position and cash flows.
Our business could be negatively impacted as a result of actions by activist stockholders or others
We may be subject to actions or proposals from activist stockholders or others that may not align with our business strategies or the interests of our other stockholders. Responding to such actions could be costly and time-consuming, disrupt our business and operations, and divert the attention of our Board of Directors and senior management from the pursuit of our business strategies. Activist stockholders may create perceived uncertainties as to the future direction of our business or strategy, which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel, potential customers and business partners and may affect our relationships with current customers, vendors, investors and other third parties. In addition, actions of activist stockholders may cause periods of fluctuation in our stock price based on temporary or speculative market perceptions or other factors
 
that do not necessarily reflect the underlying fundamentals and prospects of our business.
Change in our credit ratings could adversely impact our operations and lower our profitability
The major credit rating agencies periodically evaluate our creditworthiness and have given us very strong, investment-grade long-term debt ratings and the highest commercial paper ratings. Failure to maintain high credit ratings on long-term and short-term debt could increase our cost of borrowing, reduce our ability to obtain intra-day borrowing required by our Employer Services business, and adversely impact our results of operations.
We may be unable to attract and retain qualified personnel
Our ability to grow and provide our clients with competitive services is partially dependent on our ability to attract and retain highly motivated people with the skills to serve our clients. Competition for skilled employees in the outsourcing and other markets in which we operate is intense and, if we are unable to attract and retain highly skilled and motivated personnel, results of our operations may suffer.


17


Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
ADP owns 7 of its processing/print centers, and 16 other operational offices, sales offices, and its corporate headquarters in Roseland, New Jersey, which aggregate approximately 3,361,473 square feet. None of ADP's owned facilities is subject to any material encumbrances. ADP leases space for some of its processing centers, other operational offices, and sales offices. All of these leases, which aggregate approximately 6,205,945 square feet worldwide, expire at various times up to the year 2029. ADP believes its facilities are currently adequate for their intended purposes and are adequately maintained.
Item 3. Legal Proceedings
In the normal course of business, ADP is subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, ADP believes that it has valid defenses with respect to the legal matters pending against it and that the ultimate resolution of these matters will not have a materially adverse impact on its financial condition, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.


18


Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant's Common Equity
The principal market for the Company’s common stock is the NASDAQ Global Select Market under the symbol ADP. As of June 30, 2019, there were 37,578 holders of record of the Company’s common stock. As of such date, 903,187 additional holders held their common stock in “street name.”

Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of the Publicly Announced Common Stock Repurchase Plan (2)
Maximum Number of Shares that may yet be Purchased under the Common Stock Repurchase Plan (2)
April 1, 2019 to
     April 30, 2019
85,061
$160.17
84,184
10,987,717
May 1, 2019 to
     May 31, 2019
606,392
$160.33
605,059
10,382,658
June 1, 2019 to
    June 30, 2019
431,403
$164.45
429,683
9,952,975
Total
1,122,856
 
1,118,926
 
(1)
     
Pursuant to the terms of the Company’s restricted stock program, the Company purchased 3,930 shares at the then market value of the shares in connection with the exercise by employees of their option under such program to satisfy certain tax withholding requirements through the delivery of shares to the Company instead of cash.
 
(2)
 
The Company received the Board of Directors' approval to repurchase shares of the Company's common stock as follows:
Date of Approval
 
Shares
August 2015
 
25 million
There is no expiration date for the common stock repurchase plan.

For equity compensation plan information, please refer to Item 12 in Part III of this Annual Report or Form 10-K.


19


Performance Graph
The following graph compares the cumulative return on the Company’s common stock(a) for the most recent five years with the cumulative return on the S&P 500 Index and the Peer Group Index,(b) assuming an initial investment of $100 on June 30, 2014, with all dividends reinvested. The stock price performance shown on this graph may not be indicative of future performance.

performancegrapha05.jpg

(a)
On September 30, 2014, the Company completed the spinoff of its former Dealer Services business into an independent publicly traded company called CDK Global, Inc. The cumulative returns of the Company’s common stock have been adjusted to reflect the spinoff.

(b)
We use the S&P 500 Information Technology Index as our Peer Group Index. The S&P 500 Information Technology Index is a broad index that includes the Company and several competitors.




20



Item 6. Selected Financial Data

The following selected financial data is derived from our Consolidated Financial Statements and should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Quantitative and Qualitative Disclosures About Market Risk included in this Annual Report on Form 10-K. The Company uses certain non-GAAP financial measures that we believe better reflect the underlying operations of our business model, allow investors to assess our performance in a manner similar to the method used by management, and improve our ability to understand and assess our operating performance against prior periods. Refer to note (A) below for additional information about our non-GAAP financial measures and our reconciliations to reported results. Additionally, prior period amounts have been adjusted to exclude discontinued operations and were restated for the adoption of Accounting Standards Update (“ASU”) 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Periodic Post-retirement Benefit Cost.”
 
(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
 
2016
 
2015
Years ended June 30,
 
2019
 
As Restated*
 
As Restated*
 
As Restated
 
As Restated
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
14,175.2

 
$
13,327.7

 
$
12,372.0

 
$
11,667.8

 
$
10,938.5

Total costs of revenues
 
$
8,086.6

 
$
7,810.9

 
$
7,244.5

 
$
6,876.1

 
$
6,459.6

Earnings from continuing operations before income taxes
 
$
3,005.6

 
$
2,282.6

 
$
2,616.9

 
$
2,234.7

 
$
2,070.7

Net earnings from continuing operations
 
$
2,292.8

 
$
1,884.9

 
$
1,787.8

 
$
1,493.4

 
$
1,376.5

Adjusted earnings from continuing operations before interest and income taxes (A)
 
$
3,155.7

 
$
2,754.6

 
$
2,533.4

 
$
2,274.2

 
$
2,061.5

Adjusted net earnings from continuing operations (A)
 
$
2,384.3

 
$
2,007.3

 
$
1,719.4

 
$
1,494.8

 
$
1,376.5

 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
 
$
5.27

 
$
4.28

 
$
3.99

 
$
3.27

 
$
2.91

Diluted earnings per share from continuing operations
 
$
5.24

 
$
4.25

 
$
3.97

 
$
3.25

 
$
2.89

Adjusted diluted earnings per share from continuing operations (A)
 
$
5.45

 
$
4.53

 
$
3.82

 
$
3.26

 
$
2.89

Basic weighted average shares outstanding
 
435.0

 
440.6

 
447.8

 
457.0

 
472.6

Diluted weighted average shares outstanding
 
437.6

 
443.3

 
450.3

 
459.1

 
475.8

Cash dividends declared per share
 
$
3.06

 
$
2.52

 
$
2.24

 
$
2.08

 
$
1.95

 
 
 
 
 
 
 
 
 
 
 
At year end:
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and marketable securities of continuing operations
 
$
2,221.1

 
$
2,180.5

 
$
2,791.2

 
$
3,222.4

 
$
1,694.8

Total assets
 
$
41,887.7

 
$
38,849.1

 
$
38,886.8

 
$
43,670.0

 
$
33,110.5

Obligations under reverse repurchase agreements
 
$
262.0

 
$

 
$

 
$

 
$

Long-term debt
 
$
2,002.2

 
$
2,002.4

 
$
2,002.4

 
$
2,007.7

 
$
9.2

Stockholders’ equity
 
$
5,399.9

 
$
4,735.9

 
$
4,984.1

 
$
4,481.6

 
$
4,808.5


*Note fiscal 2018 and 2017 were restated for the adoption of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.”

(A) Non-GAAP Financial Measures

In addition to our GAAP results, we use the adjusted results and other non-GAAP metrics set forth in the table below to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods:
Adjusted Financial Measures
U.S. GAAP Measures
Adjusted EBIT from continuing operations
Net earnings from continuing operations
Adjusted provision for income taxes
Provision for income taxes
Adjusted net earnings from continuing operations
Net earnings from continuing operations
Adjusted diluted earnings per share from continuing operations
Diluted earnings per share from continuing operations
Adjusted effective tax rate
Effective tax rate
Constant Currency Basis
U.S. GAAP P&L line items

21




We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations, against prior period, and to plan for future periods by focusing on our underlying operations.  We believe that the adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance.  The nature of these exclusions is for specific items that are not fundamental to our underlying business operations. Since these adjusted financial measures and other non-GAAP metrics are not measures of performance calculated in accordance with U.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to their U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.
(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Years ended June 30,
 
 
 
2018
 
2017
 
2016
 
2015
 
 
2019
 
As Restated*
 
As Restated*
 
As Restated
 
As Restated
 
 
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
2,292.8

 
$
1,884.9

 
$
1,787.8

 
$
1,493.4

 
$
1,376.5

Adjustments:
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
712.8

 
397.7

 
829.1

 
741.3

 
694.2

All other interest expense (a)
 
59.9

 
59.4

 
59.3

 
47.9

 
1.5

All other interest income (a)
 
(32.4
)
 
(25.5
)
 
(22.4
)
 
(13.6
)
 
(10.7
)
Gain on sale of businesses
 

 

 
(205.4
)
 
(29.1
)
 

Gain on sale of assets
 
(15.7
)
 

 

 
(13.9
)
 

Transformation initiatives (b)
 
138.3

 
404.8

 
85.0

 
48.2

 

Proxy contest matters (c)
 

 
33.3

 

 

 

Adjusted EBIT from continuing operations
 
$
3,155.7

 
$
2,754.6

 
$
2,533.4

 
$
2,274.2

 
$
2,061.5

 
 
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
 
$
2,292.8

 
$
1,884.9

 
$
1,787.8

 
$
1,493.4

 
$
1,376.5

Adjustments:
 
 
 
 
 
 
 
 
 
 
Gain on sale of businesses
 

 

 
(205.4
)
 
(29.1
)
 

Provision for income taxes on gain on sale of businesses (d)
 

 

 
84.0

 
7.3

 

Gain on sale of assets
 
(15.7
)
 

 

 
(13.9
)
 

Provision for income taxes on gain on sale of assets (e)
 
3.9

 

 

 
5.3

 

Transformation initiatives (b)
 
138.3

 
404.8

 
85.0

 
48.2

 

Income tax benefit for transformation initiatives (e)
 
(34.5
)
 
(122.1
)
 
(32.0
)
 
(16.4
)
 

Proxy contest matters (c)
 

 
33.3

 

 

 

Income tax benefit for proxy contest matters (e)
 

 
(10.4
)
 

 

 

Tax Cuts and Jobs Act (f)
 
(0.5
)
 
(183.2
)
 

 

 

Adjusted net earnings from continuing operations
 
$
2,384.3

 
$
2,007.3

 
$
1,719.4

 
$
1,494.8

 
$
1,376.5

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations

$
5.24


$
4.25


$
3.97


$
3.25


$
2.89

Adjustments:










Gain on sale of businesses (d)





(0.27
)

(0.05
)


Gain on sale of assets (e)

(0.03
)





(0.02
)


Transformation initiatives (b) (e)

0.24


0.64


0.12


0.07



Proxy contest matters (c) (e)
 

 
0.05

 

 

 

Tax Cuts and Jobs Act (f)
 

 
(0.41
)
 

 

 

Adjusted diluted earnings per share from continuing operations

$
5.45


$
4.53


$
3.82


$
3.26


$
2.89


*Note fiscal 2018 and 2017 were restated for the adoption of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.”

(a) We include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model. The adjustments in the table above represent the interest income and interest expense that is not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”

22




(b) The charges within transformation initiatives are comprised of charges related to our Voluntary Early Retirement Program (“VERP”), Service Alignment Initiative, Workforce Optimization and other transformation initiatives. Charges related to our VERP in fiscal 2019 include $48.2 million for non-cash pension settlement charges and special termination benefits, and $23.6 million of expenses related to the continuing health coverage. We also recorded severance charges in accordance with ASC 712 totaling $33.6 million primarily relating to our Workforce Optimization initiative to reduce management layers and increase spans of controls and $56.8 million related to our other transformation initiatives during fiscal 2019. These charges were partially offset by net reversals of charges and gain on sale of assets related to our Service Alignment Initiative totaling $23.9 million for fiscal 2019. Unlike certain other severance charges in prior periods which are not included as an adjustment to get to adjusted results, these specific charges relate to actions that are part of our broad-based, company-wide transformation initiatives. Refer to Note 5 and 12 of the Consolidated Financial Statements for a description of charges associated with Service Alignment Initiative and VERP.

(c) Represents non-operational costs relating to proxy contest matters.

(d) The taxes on the gains on the sale of the businesses were calculated based on the annualized marginal rate in effect during the quarter of the adjustment. The tax amount was adjusted for a book vs. tax basis difference for the year ended June 30, 2017 due to the derecognition of goodwill upon the sale of the business and for the year ended June 30, 2016 due to a previously recorded non tax-deductible goodwill impairment charge.

(e) The tax benefit/provision on the transformation initiatives, the gain on the sale of the assets, and non-operational charges related to proxy contest matters was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.

(f) The net benefit for fiscal 2018 is comprised of the re-measurement of deferred tax balances resulting in a one-time benefit, primarily as a result of ASC 606, using the lower tax rates enacted under the Tax Cuts and Jobs Act (“Act”), adjustments to the one-time transition tax on the earnings and profits of our foreign subsidiaries, foreign withholding taxes, and a valuation allowance against our foreign tax credits which may not be realized under the Act. Refer to Note 13 of our Consolidated Financial Statements for additional detail.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This document and other written or oral statements made from time to time by ADP may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” “is designed to” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and depend upon or refer to future events or conditions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements or that could contribute to such difference include: ADP's success in obtaining, and retaining clients, and selling additional services to clients; the pricing of products and services; the success of our new solutions; compliance with existing or new legislation or regulations; changes in, or interpretations of, existing legislation or regulations; overall market, political and economic conditions, including interest rate and foreign currency trends; competitive conditions; our ability to maintain our current credit ratings and the impact on our funding costs and profitability; security or cyber breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; the impact of new acquisitions and divestitures; and the adequacy, effectiveness and success of our business transformation initiatives. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. These risks and uncertainties, along with the risk factors discussed under “Item 1A. Risk Factors,” and in other written or oral statements made from time to time by ADP, should be considered in evaluating any forward-looking statements contained herein.

EXECUTIVE OVERVIEW

We are a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions - including payroll, talent management, Human Resources management, benefits administration, and workforce management - to employers around the world. As a leader in this industry, we deliver on our global HCM strategy and invest in highly strategic

23



areas and technology in order to strengthen our underlying business model and prospects for continued growth.

Highlights from the year ended June 30, 2019 (“fiscal 2019”) include:

Employer Services New Business Bookings increased 8%
Average number of Worksite Employees increased 8% to 547,000
Revenue increased 6%
EBIT Margin improved 410 basis points to 21.2% and Adjusted EBIT Margin improved 160 basis points to 22.3%
Diluted earnings per share (“EPS”) increased 23% to $5.24; adjusted diluted EPS increased 20% to $5.45
Our shareholder friendly actions continued as we returned approximately $1.3 billion via dividends and approximately $940 million via share repurchases

In fiscal 2019, we launched our new brand platform which represents an evolution in our journey to enhance the employee experience through innovation and insights designed with the worker as a central theme. At ADP, we are always designing for people and we continue to innovate by anticipating our clients' evolving needs as the world of work changes. We are reshaping the HCM industry with leading innovations like our next gen platforms and driving growth through our strategic cloud-based HCM solutions. We are further enabling these solutions through strategic acquisitions such as Global Cash Card, Work Market and Celergo, which we supplement with organic, differentiated investments such as the ADP Marketplace and ADP Datacloud, and through our compliance expertise.

With these investments, we are enhancing our position as a leading global HCM provider that can help businesses address the entire worker spectrum from full-time to freelancer through hire to retire. As the HCM market continues to evolve rapidly, we remain focused on rethinking a better, more personalized world at work and helping our clients and their workers achieve their full potential.

As we continue our transformation journey, our Voluntary Early Retirement Program (“VERP”) and Workforce Optimization initiatives are yielding operating efficiencies in conjunction with our Service Alignment Initiatve, which is focused on changing how we work. Through our transformation initiatives, we remain on track to continue to deliver balanced revenue growth, profit growth and margin expansion, and ultimately drive long-term shareholder value.

We are pleased with our progress and execution on these initiatives while also delivering improvements in our client satisfaction scores yielding an improvement in Employer Services revenue retention of 40 basis points to 90.8%. Also, our Employer Services New Business Bookings increased 8% in fiscal 2019, as compared to fiscal 2018, and our PEO Services' average number of Worksite Employees increased 8% to 547,000 in fiscal 2019, as compared to fiscal 2018.

We have a strong business model and operate in a growing global market. We continue to generate a high percentage of recurring revenues, healthy and improving margins, and consistent strong cash flows. Our financial condition and balance sheet remain solid at June 30, 2019. Through our investments in technology, service, and distribution, we are positioned to maintain our positive momentum into fiscal 2020.


24



RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS

Prior period amounts have been restated for the impact of certain accounting standards adopted (refer to Note 1 of our Consolidated Financial Statements for additional information).

(In millions, except per share amounts)

 
 
Years Ended
 
% Change
 
 
June 30,
 
 
 
Constant Currency Basis
 
 
 
 
2018
 
2017
 
 
 
2018
 
 
 
2018
 
 
2019
 
*As Restated
 
*As Restated
 
2019
 
*As Restated
 
2019
 
*As Restated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
14,175.2

 
$
13,327.7

 
$
12,372.0

 
6
%
 
8
 %
 
7
%
 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of revenues:
 
 

 
 

 
 
 
 

 
 

 
 
 
 
Operating expenses
 
7,145.9

 
6,901.0

 
6,386.2

 
4
%
 
8
 %
 
5
%
 
7
 %
Systems development and programming costs
 
636.3

 
635.4

 
632.1

 
%
 
1
 %
 
2
%
 
(1
)%
Depreciation and amortization
 
304.4

 
274.5

 
226.2

 
11
%
 
21
 %
 
12
%
 
20
 %
Total costs of revenues
 
8,086.6

 
7,810.9

 
7,244.5

 
4
%
 
8
 %
 
5
%
 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative costs
 
3,064.2

 
2,959.4

 
2,773.8

 
4
%
 
7
 %
 
4
%
 
6
 %
Interest expense
 
129.9

 
102.7

 
80.0

 
n/m

 
n/m

 
n/m

 
n/m

Total expenses
 
11,280.7

 
10,873.0

 
10,098.3

 
4
%
 
8
 %
 
5
%
 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other (income)/expense, net
 
(111.1
)
 
172.1

 
(343.2
)
 
n/m

 
n/m

 
n/m

 
n/m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings before income taxes
 
$
3,005.6

 
$
2,282.6

 
$
2,616.9

 
32
%
 
(13
)%
 
32
%
 
(14
)%
Margin
 
21.2
%
 
17.1
%
 
21.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
712.8

 
$
397.7

 
$
829.1

 
79
%
 
(52
)%
 
80
%
 
(53
)%
Effective tax rate
 
23.7
%
 
17.4
%
 
31.7
%
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
 
$
2,292.8

 
$
1,884.9

 
$
1,787.8

 
22
%
 
5
 %
 
22
%
 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
5.24

 
$
4.25

 
$
3.97

 
23
%
 
7
 %
 
24
%
 
6
 %

*See Note 1 of the Consolidated Financial Statements for a summary of adjustments.

n/m - not meaningful

25




Note 1. Non-GAAP measures

In addition to our GAAP results, we use the adjusted results and other non-GAAP metrics set forth in the table below to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods:
Adjusted Financial Measures
U.S. GAAP Measures
Adjusted EBIT
Net earnings
Adjusted provision for income taxes
Provision for income taxes
Adjusted net earnings
Net earnings
Adjusted diluted earnings per share
Diluted earnings per share
Adjusted effective tax rate
Effective tax rate
Constant Currency Basis
U.S. GAAP P&L line items

We believe that the exclusion of the identified items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations and against prior period, and to plan for future periods by focusing on our underlying operations.  We believe that the adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance.  The nature of these exclusions are for specific items that are not fundamental to our underlying business operations.  Since these adjusted financial measures and other non-GAAP metrics are not measures of performance calculated in accordance with U.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to their corresponding U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.










26



 
 
Years Ended
 
% Change
 
 
June 30,
 
 
 
Constant Currency Basis (h)
 
 
 
 
2018
 
2017
 
 
 
2018
 
 
 
2018
 
 
2019
 
*As Restated
 
*As Restated
 
2019
 
*As Restated
 
2019
 
*As Restated
Net earnings
 
$
2,292.8

 
$
1,884.9

 
$
1,787.8

 
22
%
 
5
 %
 
22
%
 
4
 %
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
712.8

 
397.7

 
829.1

 
 
 
 
 
 
 
 
All other interest expense (a)
 
59.9

 
59.4

 
59.3

 
 
 
 
 
 
 
 
All other interest income (a)
 
(32.4
)
 
(25.5
)
 
(22.4
)
 
 
 
 
 
 
 
 
Gain on sale of businesses
 

 

 
(205.4
)
 
 
 
 
 
 
 
 
Gain on sale of assets
 
(15.7
)
 

 

 
 
 
 
 
 
 
 
Transformation initiatives (b)
 
138.3

 
404.8

 
85.0

 
 
 
 
 
 
 
 
Proxy contest matters (c)
 

 
33.3

 

 
 
 
 
 
 
 
 
Adjusted EBIT
 
$
3,155.7

 
$
2,754.6

 
$
2,533.4

 
15
%
 
9
 %
 
15
%
 
7
 %
Adjusted EBIT Margin
 
22.3
%
 
20.7
%
 
20.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
$
712.8

 
$
397.7

 
$
829.1

 
79
%
 
(52
)%
 
80
%
 
(53
)%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of businesses (d)
 

 

 
(84.0
)
 
 
 
 
 
 
 
 
Gain on sale of assets (e)
 
(3.9
)
 

 

 
 
 
 
 
 
 
 
Transformation initiatives (e)
 
34.5

 
122.1

 
32.0

 
 
 
 
 
 
 
 
Proxy contest matters (e)
 

 
10.4

 

 
 
 
 
 
 
 
 
Tax Cuts and Jobs Act (f)
 
0.5

 
183.2

 

 
 
 
 
 
 
 
 
Adjusted provision for income taxes
 
$
743.9

 
$
713.4

 
$
777.1

 
4
%
 
(8
)%
 
4
%
 
(9
)%
Adjusted effective tax rate (g)
 
23.8
%
 
26.2
%
 
31.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
 
$
2,292.8

 
$
1,884.9

 
$
1,787.8

 
22
%
 
5
 %
 
22
%
 
4
 %
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of businesses
 

 

 
(205.4
)
 
 
 
 
 
 
 
 
Provision for income taxes on gain on sale of businesses (d)
 

 

 
84.0

 
 
 
 
 
 
 
 
Gain on sale of assets
 
(15.7
)
 

 

 
 
 
 
 
 
 
 
Provision for income taxes on gain on sale of assets (e)
 
3.9

 

 

 
 
 
 
 
 
 
 
Transformation initiatives (b)
 
138.3

 
404.8

 
85.0

 
 
 
 
 
 
 
 
Income tax benefit for transformation initiatives (e)
 
(34.5
)
 
(122.1
)
 
(32.0
)
 
 
 
 
 
 
 
 
Proxy contest matters (c)
 

 
33.3

 

 
 
 
 
 
 
 
 
Income tax benefit for proxy contest matters (e)
 

 
(10.4
)
 

 
 
 
 
 
 
 
 
Tax Cuts and Jobs Act (f)
 
(0.5
)
 
(183.2
)
 

 
 
 
 
 
 
 
 
Adjusted net earnings
 
$
2,384.3

 
$
2,007.3

 
$
1,719.4

 
19
%
 
17
 %
 
19
%
 
15
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
$
5.24

 
$
4.25

 
$
3.97

 
23
%
 
7
 %
 
24
%
 
6
 %
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of businesses (d)
 

 

 
(0.27
)
 
 
 
 
 
 
 
 
Gain on sale of assets (e)
 
(0.03
)
 

 

 
 
 
 
 
 
 
 
Transformation initiatives (b) (e)
 
0.24

 
0.64

 
0.12

 
 
 
 
 
 
 
 
Proxy contest matters (c) (e)
 

 
0.05

 

 
 
 
 
 
 
 
 
Tax Cuts and Jobs Act (f)
 

 
(0.41
)
 

 
 
 
 
 
 
 
 
Adjusted diluted EPS
 
$
5.45

 
$
4.53

 
$
3.82

 
20
%
 
19
 %
 
21
%
 
17
 %

*See Note 1 of the Consolidated Financial Statements for a summary of adjustments.

(a) We include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be

27



fundamental to the underlying operations of our business model. The adjustments in the table above represent the interest income and interest expense that are not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”

(b) The charges within transformation initiatives are comprised of charges related to our VERP, Service Alignment Initiative, Workforce Optimization and other transformation initiatives. Charges related to our VERP in fiscal 2019 include $48.2 million for non-cash pension settlement charges and special termination benefits, and $23.6 million of expenses related to the continuing health coverage, respectively. We also recorded severance charges in accordance with ASC 712 totaling $33.6 million primarily relating to our Workforce Optimization initiative to reduce management layers and increase spans of controls and $56.8 million related to our other transformation initiatives during fiscal 2019. These charges were partially offset by net reversals of charges and gain on sale of assets related to our Service Alignment Initiative totaling $23.9 million for fiscal 2019. Unlike certain other severance charges in prior periods which are not included as an adjustment to get to adjusted results, these specific charges relate to actions that are part of our broad-based, company-wide transformation initiatives. Refer to Note 5 and 12 of the Consolidated Financial Statements for a description of charges associated with Service Alignment Initiative and VERP.

(c) Represents non-operational costs relating to proxy contest matters.

(d) The taxes on the gains on the sale of the businesses were calculated based on the annualized marginal rate in effect during the quarter of the adjustment. The tax amount was adjusted for a book vs. tax basis difference for the year ended June 30, 2017 due to the derecognition of goodwill upon the sale of the business.

(e) The tax benefit/provision on the transformation initiatives, gain on sale of asset, and non-operational charges related to proxy contest matters was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.

(f) The net benefit for fiscal 2018 is comprised of the re-measurement of deferred tax balances resulting in a one-time benefit, primarily as a result of ASC 606, using the lower tax rates enacted under the Tax Cuts and Jobs Act (“Act”), adjustments to the one-time transition tax on the earnings and profits of our foreign subsidiaries, foreign withholding taxes, and a valuation allowance against our foreign tax credits which may not be realized under the Act. Refer to Note 13 of our Consolidated Financial Statements for additional detail.

(g) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings plus our Adjusted provision for income taxes.

(h) “Constant currency basis” provides information that isolates the actual growth of our operations. “Constant currency basis” is determined by calculating the current year result using foreign exchange rates consistent with the prior year.

Fiscal 2019 Compared to Fiscal 2018

Total Revenues

Our revenues increased 6% in fiscal 2019, as compared to fiscal 2018. Our revenue growth includes one percentage point of pressure from foreign currency partially offset by benefits from acquisitions. Revenues in fiscal 2019 increased primarily due to new business started from Employer Services New Business Bookings and continued strong retention. Refer to “Analysis of Reportable Segments” for additional discussion of the increases in revenue for both of our reportable segments, Employer Services and Professional Employer Organization (“PEO”) Services.

Total revenues in fiscal 2019 include interest on funds held for clients of $561.9 million, as compared to $466.5 million in fiscal 2018. The increase in the consolidated interest earned on funds held for clients resulted from the increase in our average interest rate earned to 2.2% in fiscal 2019, as compared to 1.9% in fiscal 2018, coupled with the increase in our average client funds balances of 4.6% to $25.5 billion in fiscal 2019 as compared to fiscal 2018.


28



Total Expenses

Our total expenses increased 4% in fiscal 2019, as compared to fiscal 2018. The increase is primarily due to an increase in PEO Services zero-margin benefits pass-through costs, costs related to our acquisitions, increased selling and marketing expenses related to our brand efforts and the impact of net charges related to our transformation initiatives. The increase was partially offset by the impact of foreign currency, operating efficiencies as a result of our continued successful execution on our broader transformation initiatives, and costs related to proxy contest matters in fiscal 2018.

Operating expenses increased 4% in fiscal 2019, as compared to fiscal 2018. PEO Services zero-margin benefits pass-through costs were $2,712.5 million for fiscal 2019 and $2,463.1 million for fiscal 2018. Additionally, operating expenses increased due to costs related to our acquisitions partially offset by the impact of foreign currency and operating efficiencies as a result of our continued successful execution on our broader transformation initiatives.

Systems development and programming costs were flat for fiscal 2019, as compared to fiscal 2018, due to the impact of foreign currency translation and reduced costs as a result of our transformation initiatives offset by increased investments in product innovation, primarily in our next gen platforms.

Selling, general and administrative expenses increased 4% in fiscal 2019, as compared to fiscal 2018.  The increase was primarily due to increased selling and marketing expenses related to our brand efforts and increased costs related to our transformation initiatives and acquisitions. These increases were partially offset by efficiencies as a result of our transformation initiatives, the impact of foreign currency translation in fiscal 2019 and costs related to proxy contest matters in fiscal 2018.

Other (Income)/Expense, net
(In millions)
 
 
 
 
 
 
Years ended June 30,
 
2019
 
2018
 
$ Change
Interest income on corporate funds
 
$
(97.6
)
 
$
(83.5
)
 
$
14.1

Realized gains on available-for-sale securities
 
(1.8
)
 
(2.0
)
 
(0.2
)
Realized losses on available-for-sale securities
 
2.7

 
4.5

 
1.8

Impairment of intangible assets
 
12.1

 

 
(12.1
)
Gain on sale of assets
 
(4.1
)
 
(0.7
)
 
3.4

Gain on sale of investment
 
(15.7
)
 

 
15.7

Non-service components of pension expense, net
 
(6.7
)
 
253.8

 
260.5

Other (income)/expense, net
 
$
(111.1
)
 
$
172.1

 
$
283.2


During fiscal 2019, we retrospectively adopted Accounting Standards Update (“ASU”) 2017-07 and as a result we reclassified the non-service cost components of the net periodic benefit cost from within the respective line items of our Statement of Consolidated Earnings to Other (income)/expense, net. During fiscal 2019, non-service components of pension expense included $48.2 million of non-cash settlement charges and special termination benefits, partially offset by $54.9 million related to other components of net periodic pension cost. See Note 1 and Note 12 of our Consolidated Financial Statements for additional details.

Other (income)/expense, net, increased $283.2 million in fiscal 2019, as compared to fiscal 2018. The increase was primarily due to the charges within non-service components of pension expense in fiscal 2018 noted in the table above and the gain on sale of assets of $4.1 million in relation to the Service Alignment Initiative and the gain on sale of investment of $15.7 million in relation to the sale of an investment held at cost acquired in prior years and subsequently sold in fiscal 2019. These are partially offset by the write down of $12.1 million related to internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition in fiscal 2019.

29




Earnings before Income Taxes

Earnings before income taxes increased 32% in fiscal 2019 primarily due to increases in revenues partially offset by increases in expenses discussed above.

Overall margin increased from 17.1% in fiscal 2018 to 21.2% in fiscal 2019 primarily due to operating efficiencies and aided by an increase in interest earned on funds held for clients, a decrease in charges of $266.5 million related to our transformation initiatives and the impact of costs related to proxy contest matters in fiscal 2018, partially offset by costs related to our acquisitions and incremental pressure from growth in our zero-margin benefits pass-throughs in fiscal 2019. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.


Adjusted EBIT

In fiscal 2019, adjusted EBIT increased 15% due to increases in revenues offset by the increases in expenses discussed above. Overall adjusted EBIT margin increased due to continued execution of transformation initiatives discussed above and aided by an increase in interest earned on funds held for clients, partially offset by incremental pressure from growth in our zero-margin benefits pass-throughs and costs related to our acquisitions.

Provision for Income Taxes

The effective tax rate in fiscal 2019 and 2018 was 23.7% and 17.4%, respectively. The increase in the effective tax rate is primarily due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the release of reserves for uncertain tax positions during fiscal 2018 and the loss of qualified production activities tax deductions as a result of the Act during fiscal 2019. This is partially offset by reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act. Refer to Note 13, Income Taxes, within the Notes to the Consolidated Financial Statements for further discussion.

Adjusted Provision for Income Taxes

The adjusted effective tax rate in fiscal 2019 and 2018 was 23.8% and 26.2%, respectively. The decrease in the adjusted effective tax rate is primarily due to the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1%, partially offset by the loss of qualified production activities tax deductions as a result of the Act in fiscal 2019, the release of reserves for uncertain tax positions and the benefit of a tax accounting method change filed with the IRS in fiscal 2018.

Net Earnings and Diluted Earnings per Share

Net earnings increased 22% in fiscal 2019 when compared to fiscal 2018 due to an increase in earnings before income taxes described above partially offset by an increase in our effective tax rate.

Diluted earnings per share increased 23% in fiscal 2019 as a result of an increase in net earnings and the impact of fewer shares outstanding, resulting from the repurchase of approximately 6.5 million shares in fiscal 2019 and 8.5 million shares in fiscal 2018, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted Earnings per Share

Adjusted net earnings increased 19% in fiscal 2019, when compared to fiscal 2018, due to the increase in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above.

For fiscal 2019, our adjusted diluted EPS increased 20% and reflects the changes described above in our net earnings and shares outstanding.


30



Fiscal 2018 Compared to Fiscal 2017

Total Revenues

Our revenues increased 8% in fiscal 2018, as compared to fiscal 2017. Our revenue growth includes two percentage points of combined benefit from foreign currency and acquisitions, partially offset by the impact of the disposition of our COBRA and CHSA businesses in fiscal 2017. Revenues in fiscal 2018 increased primarily due to new business started from Employer Services New Business Bookings. Refer to “Analysis of Reportable Segments” for additional discussion of the increases in revenue for both of our reportable segments, Employer Services and PEO Services.

Total revenues in fiscal 2018 include interest on funds held for clients of $466.5 million, as compared to $397.4 million in fiscal 2017.  The increase in the consolidated interest earned on funds held for clients resulted from the increase in our average interest rate earned to 1.9% in fiscal 2018, as compared to 1.7% in fiscal 2017, coupled with the increase in our average client funds balances of 5.7% to $24.3 billion in fiscal 2018 as compared to fiscal 2017.

Total Expenses

Our total expenses increased 8% in fiscal 2018, as compared to fiscal 2017. The increase is primarily due to an increase in PEO Services zero-margin benefits pass-through costs, increased costs to service our client base in support of our growing revenue, and increases in selling expense. Total expenses also increased due to costs related to acquisitions, the impact of foreign currency, and costs related to proxy contest matters in fiscal 2018.

Operating expenses increased 8% in fiscal 2018, as compared to fiscal 2017. PEO Services zero-margin benefits pass-through costs were $2,463.1 million for fiscal 2018 and $2,173.9 million for fiscal 2017. Additionally, operating expenses increased due to costs related to acquisitions, higher costs to service our client base in support of our growing revenue as well as the impact of foreign currency.

Systems development and programming costs increased 1% in fiscal 2018, as compared to fiscal 2017, due to increased investments in product innovation and costs to develop, support, and maintain our products, impact of foreign currency translation, partially offset by a higher proportion of capitalized costs of our strategic projects.

Selling, general and administrative expenses increased 7% in fiscal 2018, as compared to fiscal 2017.  The increase was primarily due to increases in selling expense to support our 8% new business bookings growth, charges related to our transformation initiatives, costs related to acquisitions, costs related to proxy contest matters, and the impact of foreign currency translation.

Other Expense/(Income), net
(In millions)
 
 
 
 
 
 
Years ended June 30,
 
2018*
 
2017*
 
$ Change
Interest income on corporate funds
 
$
(83.5
)
 
$
(76.7
)
 
$
6.8

Realized gains on available-for-sale securities
 
(2.0
)
 
(5.3
)
 
(3.3
)
Realized losses on available-for-sale securities
 
4.5

 
3.1

 
(1.4
)
Gain on sale of businesses (see Note 4 of the Consolidated Financial Statements)
 

 
(205.4
)
 
(205.4
)
Gain on sale of assets
 
(0.7
)
 

 
0.7

Non-service components of pension expense, net
 
253.8

 
(58.9
)
 
(312.7
)
Other expense/(income), net
 
$
172.1

 
$
(343.2
)
 
$
(515.3
)

*Restated for impact of ASU 2017-07.

During fiscal 2018, non-service components of pension expense included $319.6 million of special termination benefits related to our VERP, partially offset by $65.8 million related to other components of net periodic pension cost. See Note 1 and Note 12 of our Consolidated Financial Statements for additional details.


31



Other expense/(income), net, decreased $515.3 million in fiscal 2018, as compared to fiscal 2017. The decrease was primarily due to the charges within non-service components of pension expense discussed above in fiscal 2018 and the gain on sale of the CHSA and COBRA businesses of $205.4 million in fiscal 2017.

Earnings before Income Taxes

Earnings before income taxes decreased 13% primary due to $319.6 million related to the special termination benefit charges and $17.5 million of other charges related to our VERP in fiscal 2018 and the gain on the sale of the CHSA and COBRA businesses in fiscal 2017 offset by the increases in revenues and increases in expenses discussed above.

Overall margin decreased from 21.2% in fiscal 2017 to 17.1% in fiscal 2018 primarily due to $319.6 million related to the special termination benefit charges and $17.5 million of other charges related to our VERP in fiscal 2018, the gain on the sale of the CHSA and COBRA businesses in fiscal 2017, costs related to acquisitions and incremental pressure from growth in our zero-margin benefits pass-through revenues in fiscal 2018. These drivers were partially offset by operating and selling efficiencies in fiscal 2018.

Adjusted EBIT

In fiscal 2018, adjusted EBIT increased 9% due to the increases in revenues offset by the increases in expenses discussed above. Overall adjusted EBIT margin increased slightly due to operating and selling efficiencies offset by pressure from fiscal 2018 acquisitions and incremental pressure from growth in our zero-margin benefits pass-through revenues.

Provision for Income Taxes

The effective tax rate in fiscal 2018 and 2017 was 17.4% and 31.7%, respectively. The decrease in the effective tax rate is due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the reduction in the federal corporate statutory tax rate to 28.1% from 35% as a result of the Act and the release of reserves for uncertain tax positions, partially offset by the impact in the prior period of the sale of the CHSA and COBRA businesses and the impact of the benefit due to tax incentives associated with the domestic production activity deduction and research tax credit in fiscal 2017. Refer to Note 13, Income Taxes, within the Notes to the Consolidated Financial Statements for further discussion.

Adjusted Provision for Income Taxes

The adjusted effective tax rate in fiscal 2018 and 2017 was 26.2% and 31.1%, respectively. The decrease in the adjusted effective tax rate is due to the reduction in the blended federal corporate statutory tax rate to 28.1% from 35% as a result of the Act and the release of reserves for uncertain tax positions in fiscal 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 fiscal 2017.

Net Earnings and Diluted Earnings per Share

Net earnings increased 5% in fiscal 2018 due to the reduction in our effective tax rate described above, offset by $319.6 million related to the special termination benefit charges and $17.5 million of other charges related to our VERP in fiscal 2018 and the gain on the sale of the CHSA and COBRA businesses in fiscal 2017.

Diluted earnings per share increased 7% as a result of an increase in net earnings and the impact of fewer shares outstanding, resulting from the repurchase of approximately 8.5 million shares in fiscal 2018 and 13.5 million shares in fiscal 2017, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted Earnings per Share

Adjusted net earnings increased 17% in fiscal 2018 due to the increase in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above when compared to fiscal 2017.

For fiscal 2018, our adjusted diluted EPS increased 19% and reflects the changes described above in our adjusted net earnings and shares outstanding.


32



ANALYSIS OF REPORTABLE SEGMENTS

In the first quarter of fiscal 2019, our chief operating decision maker (“CODM”) began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity. Additionally, the CODM reviews results with the effects of changes to certain corporate allocations. These changes represent a change in the measure of segment performance. Effective July 1, 2018, we adopted ASC 606 (see Note 1 of the Consolidated Financial Statements). The segment results in the table below reflect the impacts of the adoption of ASC 606, the inclusion of client funds interest in our segments at actual interest rates, the inclusion of ADP Indemnity in the PEO segment, and changes to certain corporate allocations. We reflected these new segment measures beginning in fiscal 2019 and prior period segment results are restated for comparability.

Revenues

(In millions)
 
 
Years Ended
 
% Change
 
 
June 30,
 
As Reported
 
Constant Currency Basis
 
 
2019
 
2018
 
2017
 
2019
 
2018
 
2019
 
2018
Employer Services
 
$
9,942.8

 
$
9,454.8

 
$
8,914.2

 
5
%
 
6
%
 
6
%
 
5
%
PEO Services
 
4,242.7

 
3,882.3

 
3,468.4

 
9
%
 
12
%
 
9
%
 
12
%
Other
 
(10.3
)
 
(9.4
)
 
(10.6
)
 
n/m

 
n/m

 
n/m

 
n/m

 
 
$
14,175.2

 
$
13,327.7

 
$
12,372.0

 
6
%
 
8
%
 
7
%
 
7
%
 
Earnings before Income Taxes

(In millions)
 
 
Years Ended
 
% Change
 
 
June 30,
 
As Reported
 
Constant Currency Basis
 
 
2019
 
2018
 
2017
 
2019
 
2018
 
2019
 
2018
Employer Services
 
$
2,957.0

 
$
2,598.1

 
$
2,396.8

 
14
%
 
8
 %
 
14
%
 
7
 %
PEO Services
 
620.1

 
544.6

 
463.4

 
14
%
 
18
 %
 
14
%
 
18
 %
Other
 
(571.5
)
 
(860.1
)
 
(243.3
)
 
n/m

 
n/m

 
n/m

 
n/m

 
 
$
3,005.6

 
$
2,282.6

 
$
2,616.9

 
32
%
 
(13
)%
 
32
%
 
(14
)%

Employer Services

Fiscal 2019 Compared to Fiscal 2018

Revenues

Employer Services' revenues increased 5% in fiscal 2019, as compared to fiscal 2018. Revenues increased primarily due to new business started from New Business Bookings and continued strong retention. Our revenue growth includes one percentage point of pressure from foreign currency offset by benefits from acquisitions. Our revenues also increased due to the interest earned on funds held for clients, which benefited from improvement in the average yield earned on our client funds investments and growth in average client funds balances, and an increase in the number of employees on our clients' payrolls as our pays per control increased 2.7% in fiscal 2019, as compared to fiscal 2018. Our pays per control metric measures the number of employees on our clients' payrolls as measured on a same-store-sales basis utilizing a representative subset of payrolls ranging from small to large businesses that are reflective of a broad range of U.S. geographic regions. In addition, the Employer Services client revenue retention rate for fiscal 2019 improved 40 basis points to 90.8% as compared to our rate for fiscal 2018. This improvement was driven by higher retention across our cloud-based solutions and our focus on improving the client experience.


33



Earnings before Income Taxes

Employer Services’ earnings before income taxes increased 14% in fiscal 2019, as compared to fiscal 2018. The increase was due to increased revenues discussed above and partially offset by increases in expenses of $129.1 million, which were primarily due to increased selling and marketing expenses, costs related to acquisitions offset by operating efficiencies and impact from foreign currency.

Employer Services' overall margin increased from 27.5% to 29.7% for fiscal 2019, as compared to fiscal 2018. This increase is primarily due to operating efficiencies and aided by an increase in interest earned on funds held for clients, partially offset by increased costs related to our acquisitions. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.

Fiscal 2018 Compared to Fiscal 2017

Revenues

Employer Services' revenues increased 6% in fiscal 2018, as compared to fiscal 2017. Revenues increased primarily due to new business started from new business bookings. Our revenue growth includes two percentage points of combined benefit from foreign currency and acquisitions, partially offset by the impact of the disposition of our COBRA and CHSA businesses in fiscal 2017. Our revenues also benefited from the impact of an increase in the number of employees on our clients’ payrolls as our pays per control increased 2.7% in fiscal 2018 as compared to fiscal 2017. Employer Services client revenue retention rate for fiscal 2018 improved 50 basis points to 90.4% as compared to our rate for fiscal 2017. This improvement was driven by higher retention across our cloud-based solutions, our focus on improving the client experience, and the loss of a large client within our former CHSA business in fiscal 2017.

Earnings before Income Taxes

Employer Services’ earnings before income taxes increased 8% in fiscal 2018, as compared to fiscal 2017.  The increase was due to increased revenues discussed above, which was partially offset by an increase in expenses of $339.3 million, primarily due to investments in operational resources to support our revenue growth coupled with increased selling expenses in fiscal 2018.

Employer Services' overall margin increased from 26.9% to 27.5% for fiscal 2018, as compared to fiscal 2017. This 60 basis point increase was driven by operating efficiencies in fiscal 2018 partially offset by the impact of costs related to acquisitions.

PEO Services

Fiscal 2019 Compared to Fiscal 2018

Revenues

PEO Services' revenues increased 9% in fiscal 2019, as compared to fiscal 2018. PEO Services' revenues, excluding zero-margin benefits pass-through costs, increased from $1,419.2 million to $1,530.2 million for fiscal 2019. The increase was due to an 8% increase in the average number of Worksite Employees in fiscal 2019 driven by an increase in the number of new PEO Services clients and growth in our existing clients.

PEO Services' revenues includes zero-margin benefits pass-through costs associated with benefits coverage, which increased to $2,712.5 million in fiscal 2019 from $2,463.1 million in fiscal 2018.

Earnings before Income Taxes

PEO Services’ earnings before income taxes increased 14% in fiscal 2019, as compared to fiscal 2018. The increase was due to the increased revenues discussed above offset by an increase in expenses of $284.9 million. This increase in expenses was primarily related to an increase in zero-margin benefits pass-through costs of $249.4 million described above.


34



PEO Services' overall margin increased from 14.0% to 14.6% for fiscal 2019, as compared to fiscal 2018, due to operating efficiencies partially offset by increases in selling expenses and changes in our estimated incurred losses related to ADP Indemnity in fiscal 2019 as compared to fiscal 2018.

ADP Indemnity provides workers’ compensation and employer’s liability deductible reimbursement insurance protection for PEO Services’ worksite employees up to $1 million per occurrence. PEO Services has secured a workers’ compensation and employer’s liability insurance policy that has a $1 million per occurrence retention and, in fiscal years 2012 and prior, aggregate stop loss insurance that covers any aggregate losses within the $1 million retention that collectively exceed a certain level, from an admitted and licensed insurance company of AIG. The Company has obtained approximately $242 million of irrevocable standby letters of credit in favor of licensed insurance companies of AIG to secure TotalSource workers’ compensation obligations if ADP were to fail to reimburse AIG for workers’ compensation payments. The Company had no drawdowns during June 30, 2019 and 2018 under the letters of credit. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability, and changes in estimated ultimate incurred losses are included in the PEO segment.  ADP Indemnity recorded a pre-tax benefit of approximately $39 million in fiscal 2019, $40 million in fiscal 2018 and $20 million in fiscal 2017, which is primarily a result of changes in our estimated incurred losses. For the fiscal years 2013 to 2019, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited, to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limits our overall exposure incurred up to a certain limit. We believe the likelihood of ultimate losses exceeding this limit is remote. During fiscal 2019, ADP Indemnity paid a premium of $218.0 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2019 policy year to $1 million per occurrence related to the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' worksite employees. ADP Indemnity paid a premium of $215.0 million in July 2019 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for fiscal 2020 policy year on terms substantially similar to the fiscal 2019 reinsurance policy.

Fiscal 2018 Compared to Fiscal 2017

Revenues

PEO Services' revenues increased 12% in fiscal 2018, as compared to fiscal 2017. PEO Services' revenues excluding zero-margin benefits pass-through costs increased from $1,294.5 million to $1,419.2 million for fiscal 2018. The increase in revenues was due to a 9% increase in the average number of Worksite Employees, driven by an increase in the number of new PEO Services clients.

PEO Services' revenues includes zero-margin benefits pass-through costs associated with benefits coverage, which increased to $2,463.1 million in fiscal 2018 from $2,173.9 million in fiscal 2017.

Earnings before Income Taxes

PEO Services’ earnings before income taxes increased 18% in fiscal 2018, as compared to fiscal 2017. The increase was due to the increased revenues discussed above, which was partially offset by an increase in expenses of $332.7 million. This increase in expenses was primarily related to an increase in zero-margin benefits pass-through costs of $289.2 million.

PEO Services' overall margin increased from 13.4% to 14.0% for fiscal 2018, as compared to fiscal 2017, due to reductions in selling expenses and changes in our estimated incurred losses related to ADP Indemnity in fiscal 2018 as compared to fiscal 2017, partially offset by pressure from growth in our zero-margin benefits pass-through revenues.

For impact of ADP Indemnity to PEO services, refer to discussion above.

Other

The primary components of “Other” are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and other interest expense.


35



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

For corporate liquidity, we expect existing cash, cash equivalents, short-term marketable securities, long-term marketable securities, cash flow from operations together with our $10.3 billion of committed credit facilities and our ability to access both long-term and short-term debt financing from the capital markets will be adequate to meet our operating, investing, and financing activities such as regular quarterly dividends, share repurchases, and capital expenditures.

For client funds liquidity, we have the ability to borrow through our financing arrangements under our U.S. short-term commercial paper program and our U.S., Canadian and United Kingdom short-term reverse repurchase agreements, together with our $10.3 billion of committed credit facilities and our ability to use corporate liquidity when necessary to meet short-term funding requirements related to client funds obligations. Please see Quantitative and Qualitative Disclosures about Market Risk for a further discussion of the risks of our client funds investment strategy. See Note 10 of our Consolidated Financial Statements for a description of our short-term financing including commercial paper.

As of June 30, 2019, cash and cash equivalents were $1.9 billion, which were primarily invested in time deposits and money market funds.

Operating, Investing and Financing Cash Flows

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the years ended 2019, 2018, and 2017, are summarized as follows:
(In millions)
 
Years ended June 30,
 
$ Change
 
 
2019
 
2018
 
2017
 
2019
 
2018
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
2,688.3

 
$
2,515.2

 
$
2,125.9

 
$
173.1

 
$
389.3

Investing activities
 
(2,197.7
)
 
(2,504.6
)
 
(1,113.2
)
 
306.9

 
(1,391.4
)
Financing activities
 
(207.7
)
 
(1,655.9
)
 
(8,281.7
)
 
1,448.2

 
6,625.8

Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(28.8
)
 
5.8

 
(8.0
)
 
(34.6
)
 
13.8

Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
 
$
254.1

 
$
(1,639.5
)
 
$
(7,277.0
)
 
$
1,893.6

 
$
5,637.5


Fiscal 2019 Compared to Fiscal 2018     

Net cash flows provided by operating activities in fiscal 2019 and fiscal 2018 include cash payments for reinsurance agreements of $218.0 million and $235.0 million, respectively, which represent the policy premium for the entire fiscal year. The increase in operating cash provided is primarily due to growth in our business offset by a net decrease in the components of working capital as compared to fiscal 2018.

Net cash flows from investing activities changed due to lower payments made related to acquisitions, the timing of proceeds offset by purchases of corporate and client funds marketable securities of $91.8 million, and reduced capital expenditures, partially offset by the payments made related to acquisitions of intangible assets in fiscal 2019.

Net cash flows from financing activities changed primarily due to a net increase in the cash flow from client funds obligations of $1,355.6 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, more cash returned to shareholders via dividends in fiscal 2019, partially offset by an increase in net proceeds from reverse repurchase agreements and less cash paid for share repurchases.

We purchased approximately 6.5 million shares of our common stock at an average price per share of $143.02 during fiscal 2019, as compared to purchases of 8.5 million shares at an average price per share of $116.07 during fiscal 2018. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase program. The Company

36



considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions. 
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
Fiscal 2018 Compared to Fiscal 2017

Net cash flows provided by operating activities in fiscal 2018 increased primarily due to growth in our underlying business (net income adjusted for non-cash adjustments such as the VERP in fiscal 2018 and the gain on the sale of COBRA and CHSA in fiscal 2017).

Net cash flows from investing activities changed due to the timing of proceeds offset by purchases of corporate and client funds marketable securities of $632.6 million, payments made related to acquisitions in fiscal 2018 and proceeds from the sale of the CHSA and COBRA businesses of $234.0 million in fiscal 2017.

Net cash flows from financing activities changed due to net increase in the cash flow from client funds obligations of $6,461.0 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees and less cash paid for share repurchases.

We purchased approximately 8.5 million shares of our common stock at an average price per share of $116.07 during fiscal 2018 as compared to purchases of 13.5 million shares at an average price per share of $94.42 during fiscal 2017. The increased cash flow from client fund obligations and reduced share repurchases were partially offset by cash returned to shareholders via dividends, which increased by $68.5 million from fiscal 2017.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
Capital Resources and Client Fund Obligations

We have $2.0 billion of senior unsecured notes with maturity dates in 2020 and 2025. We may from time to time revisit the long-term debt market to refinance existing debt, finance investments including acquisitions for our growth, and maintain the appropriate capital structure. However, there can be no assurance that volatility in the global capital and credit markets would not impair our ability to access these markets on terms accep