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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
 
FORM 10-Q
______________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2019

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to    
 
Commission File Number 1-5397
__________________________
AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
22-1467904
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
One ADP Boulevard
 
Roseland,
NJ
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
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No o
 
Indicate by check mark whether the registrant has submitted electronically 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  ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The number of shares outstanding of the registrant’s common stock as of October 30, 2019 was 432,698,089.



Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 
September 30,
 
2019
 
2018
 
 
REVENUES:
 
 
 
Revenues, other than interest on funds held
for clients and PEO revenues
$
2,306.2

 
$
2,218.6

Interest on funds held for clients
133.9

 
118.5

PEO revenues (A)
1,055.6

 
973.2

TOTAL REVENUES
3,495.7

 
3,310.3

 
 
 
 
EXPENSES:
 

 
 

Costs of revenues:
 

 
 

Operating expenses
1,787.7

 
1,697.0

Systems development and programming costs
168.2

 
158.0

Depreciation and amortization
88.9

 
72.6

TOTAL COSTS OF REVENUES
2,044.8

 
1,927.6

 
 
 
 
Selling, general, and administrative expenses
726.5

 
713.9

Interest expense
39.9

 
35.9

TOTAL EXPENSES
2,811.2

 
2,677.4

 
 
 
 
Other income, net
(54.6
)
 
(13.9
)
 
 
 
 
EARNINGS BEFORE INCOME TAXES
739.1

 
646.8

 
 
 
 
Provision for income taxes
156.7

 
141.4

 
 
 
 
NET EARNINGS
$
582.4

 
$
505.4

 
 
 
 
BASIC EARNINGS PER SHARE
$
1.35

 
$
1.16

 
 
 
 
DILUTED EARNINGS PER SHARE
$
1.34

 
$
1.15

 
 
 
 
Basic weighted average shares outstanding
432.7

 
436.8

Diluted weighted average shares outstanding
435.4

 
439.9


(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $10,510.6 million and $9,629.4 million for the three months ended September 30, 2019 and 2018, respectively.












See notes to the Consolidated Financial Statements.

3



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

 
Three Months Ended
 
September 30,
 
2019
 
2018
 
 
Net earnings
$
582.4

 
$
505.4

 
 
 
 
Other comprehensive income/(loss):
 
 
 
Currency translation adjustments
(48.9
)
 
(22.9
)
 
 
 
 
Unrealized net gains/(losses) on available-for-sale securities
96.1

 
(50.4
)
Tax effect
(20.8
)
 
12.3

Reclassification of net (gain)/losses on available-for-sale securities to net earnings
(2.3
)
 
0.9

Tax effect
0.5

 
(0.2
)
 
 
 
 
Reclassification of pension liability adjustment to net earnings
(1.7
)
 
0.2

Tax effect
0.5

 
(0.2
)
 
 
 
 
Other comprehensive income/(loss), net of tax
23.4

 
(60.3
)
Comprehensive income
$
605.8

 
$
445.1
































See notes to the Consolidated Financial Statements.

4


Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
 
September 30,
 
June 30,
 
 
2019
 
2019
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,403.9

 
$
1,949.2

Short-term marketable securities (B)
 
3,545.1

 
10.5

Accounts receivable, net of allowance for doubtful accounts of $59.3 and $54.9, respectively
 
2,490.4

 
2,439.3

Other current assets
 
675.9

 
509.1

Total current assets before funds held for clients
 
8,115.3

 
4,908.1

Funds held for clients
 
21,393.2

 
29,434.2

Total current assets
 
29,508.5

 
34,342.3

Long-term receivables, net of allowance for doubtful accounts of $0.6 and $0.4, respectively
 
22.1

 
23.8

Property, plant and equipment, net
 
767.1

 
764.2

Operating lease right-of-use asset
 
504.0

 

Deferred contract costs
 
2,401.4

 
2,428.5

Other assets
 
1,129.4

 
934.4

Goodwill
 
2,303.3

 
2,323.0

Intangible assets, net
 
1,078.9

 
1,071.5

Total assets
 
$
37,714.7

 
$
41,887.7

Liabilities and Stockholders' Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
108.8

 
$
125.5

Accrued expenses and other current liabilities
 
1,994.6

 
1,759.0

Accrued payroll and payroll-related expenses
 
443.6

 
721.1

Dividends payable
 
339.1

 
340.1

Short-term deferred revenues
 
213.1

 
220.7

Obligations under reverse repurchase agreements (A)
 
428.6

 
262.0

Obligation under commercial paper borrowing (B)
 
3,536.7

 

Short-term debt
 
1,001.3

 

Income taxes payable
 
123.7

 
54.8

Total current liabilities before client funds obligations
 
8,189.5

 
3,483.2

Client funds obligations
 
21,011.4

 
29,144.5

Total current liabilities
 
29,200.9

 
32,627.7

Long-term debt
 
1,003.4

 
2,002.2

Operating lease liabilities
 
355.4

 

Other liabilities
 
707.9

 
798.7

Deferred income taxes
 
708.2

 
659.9

Long-term deferred revenues
 
378.2

 
399.3

Total liabilities
 
32,354.0

 
36,487.8

 
 
 
 
 
Commitments and contingencies (Note 13)
 


 


 
 
 
 
 
Stockholders' equity:
 
 

 
 

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

 

Common stock, $0.10 par value: authorized, 1,000.0 shares; issued, 638.7 shares at September 30, 2019 and June 30, 2019;
outstanding, 433.4 and 434.2 shares at September 30, 2019 and June 30, 2019, respectively
 
63.9

 
63.9

Capital in excess of par value
 
1,213.7

 
1,183.2

Retained earnings
 
17,729.6

 
17,500.6

Treasury stock - at cost: 205.3 and 204.5 shares at September 30, 2019 and June 30, 2019, respectively
 
(13,412.6
)
 
(13,090.5
)
Accumulated other comprehensive loss
 
(233.9
)
 
(257.3
)
Total stockholders’ equity
 
5,360.7

 
5,399.9

Total liabilities and stockholders’ equity
 
$
37,714.7

 
$
41,887.7



(A) As of September 30, 2019, $428.0 million of long-term marketable securities and $0.6 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements. As of June 30, 2019, $261.4 million of long-term marketable securities and $0.6 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements. Refer to Note 9.

(B) The Company reclassified $3,535.5 million of funds held for clients to short-term marketable securities as a result of proceeds from commercial paper borrowings as of September 30, 2019 which were utilized to pay our client obligations. Refer to Note 9.
See notes to the Consolidated Financial Statements.

5

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



 
 
Three Months Ended
 
 
September 30,
 
 
2019
 
2018
 
 
 
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
582.4

 
$
505.4

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

 
 

Depreciation and amortization
 
117.3

 
99.0

Amortization of deferred contract costs
 
227.3

 
216.9

Deferred income taxes
 
44.4

 
26.4

Stock-based compensation expense
 
37.1

 
38.4

Net pension expense
 
(2.7
)
 
17.1

Net amortization of premiums and accretion of discounts on available-for-sale securities
 
12.2

 
14.3

Impairment of intangible assets
 

 
12.1

Gain on sale of assets
 
(1.9
)
 

Other
 
11.9

 
10.1

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

 
 

Increase in accounts receivable
 
(96.8
)
 
(239.2
)
Increase in other assets
 
(391.7
)
 
(471.2
)
Decrease in accounts payable
 
(15.1
)
 
(2.3
)
Decrease in accrued expenses and other liabilities
 
(91.6
)
 
(77.8
)
Net cash flows provided by operating activities
 
432.8

 
149.2

 
 
 
 
 
Cash Flows from Investing Activities:
 
 

 
 

Purchases of corporate and client funds marketable securities
 
(1,409.9
)
 
(755.8
)
Proceeds from the sales and maturities of corporate and client funds marketable securities
 
1,653.7

 
539.8

Capital expenditures
 
(56.8
)
 
(43.2
)
Additions to intangibles
 
(88.2
)
 
(73.8
)
Acquisitions of businesses, net of cash acquired
 

 
(119.7
)
Proceeds from the sale of property, plant, and equipment and other assets
 
23.4

 

Net cash flows provided by / (used in) investing activities
 
122.2

 
(452.7
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 

 
 

Net decrease in client funds obligations
 
(8,063.3
)
 
(1,711.5
)
Payments of debt
 
(0.5
)
 
(0.5
)
Repurchases of common stock
 
(309.7
)
 
(227.1
)
Net proceeds from stock purchase plan and stock-based compensation plans
 
(32.1
)
 
(24.4
)
Dividends paid
 
(343.3
)
 
(302.6
)
Net proceeds from reverse repurchase agreements
 
166.3

 
448.4

Net proceeds from commercial paper borrowings
 
3,536.7

 

Net cash flows used in financing activities
 
(5,045.9
)
 
(1,817.7
)
 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(33.1
)
 
(12.6
)
 
 
 
 
 
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(4,524.0
)
 
(2,133.8
)
 
 
 
 
 
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period
 
6,796.2

 
6,542.1

Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
 
$
2,272.2

 
$
4,408.3

 
 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets
 
 
 
 
Cash and cash equivalents
 
$
1,403.9

 
$
1,490.3

Restricted cash and restricted cash equivalents included in funds held for clients (A)
 
868.3

 
2,918.0

Total cash, cash equivalents, restricted cash, and restricted cash equivalents
 
$
2,272.2

 
$
4,408.3

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
53.6

 
$
49.4

Cash paid for income taxes, net of income tax refunds
 
$
45.6

 
$
39.3


(A) See Note 6 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.


See notes to the Consolidated Financial Statements.

6


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

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

The Company has a grantor trust, which holds the majority of the funds provided by its clients pending remittance to employees of those clients, tax authorities, and other payees.  The Company is the sole beneficial owner of the trust.  The trust meets the criteria in Accounting Standards Codification (“ASC”) 810, “Consolidation” to be characterized as a variable interest entity (“VIE”).  The Company has determined that it has a controlling financial interest in the trust because it has both (1) the power to direct the activities that most significantly impact the economic performance of the trust (including the power to make all investment decisions for the trust) and (2) the right to receive benefits that could potentially be significant to the trust (in the form of investment returns) and, therefore, consolidates the trust.  Further information on these funds and the Company’s obligations to remit to its clients’ employees, tax authorities, and other payees is provided in Note 6, “Corporate Investments and Funds Held for Clients.” 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for a full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (“fiscal 2019”).

Revision of Previously Reported Financial Information

The Company has historically classified certain fees collected from worksite employers for certain benefits within PEO revenues, and the associated costs of these benefits have historically been classified within operating expenses as PEO zero-margin benefits pass-through costs in the Company's Statements of Consolidated Earnings. During the quarter ended September 30, 2019, management determined that the Company does not retain risk and is acting as the agent, rather than as the primary obligor, for a portion of the fees collected for worksite employee benefits and the worksite employer is primarily responsible for fulfilling certain aspects of the service and has discretion in establishing price. Accordingly, the accompanying Statements of Consolidated Earnings for the three months ended September 30, 2018 has been revised to correct the amounts previously reported on a gross basis to a net basis by reducing PEO revenues and operating expenses for associated costs of an equal amount, as follows:
 
Three Months Ended
 
September 30, 2018
 
As reported
 
Revision
 
As revised
PEO revenues
$
986.1

 
(12.9
)
 
$
973.2

TOTAL REVENUES
3,323.2

 
(12.9
)
 
3,310.3

Operating expenses
1,709.9

 
(12.9
)
 
1,697.0

Total Expenses
2,690.3

 
(12.9
)
 
2,677.4

EARNINGS BEFORE INCOME TAXES
646.8

 

 
646.8

Provision for income taxes
141.4

 

 
141.4

NET EARNINGS
$
505.4

 

 
$
505.4







7



In addition, the revised amounts for the fiscal year ended June 30, 2019 are as follows:
 
Twelve Months Ended
 
June 30, 2019
 
As reported
 
Revision
 
As revised
PEO revenues
$
4,237.5

 
(65.0
)
 
$
4,172.5

TOTAL REVENUES
14,175.2

 
(65.0
)
 
14,110.2

Operating expenses
7,145.9

 
(65.0
)
 
7,080.9

Total Expenses
11,280.7

 
(65.0
)
 
11,215.7

EARNINGS BEFORE INCOME TAXES
3,005.6

 

 
3,005.6

Provision for income taxes
712.8

 

 
712.8

NET EARNINGS
$
2,292.8

 

 
$
2,292.8



The correction of these previously reported amounts had no impact on the Company's earnings before income taxes, net earnings, consolidated financial condition or cash flows. In addition, corresponding revisions have been made elsewhere in the Company's consolidated footnote disclosures, where applicable, including its Interim Financial Data by Segment disclosure.

Note 2.  New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective July 1, 2019, the Company adopted accounting standard update (“ASU”) 2016-02, “Leases (ASC 842)” under the optional transition method. As a result, the Company recorded on the Consolidated Balance Sheets total operating lease right-of-use (“ROU”) assets of $573.3 million and total operating lease liabilities of $522.6 million, as of the adoption date. The adoption did not have an impact on our Statements of Consolidated Earnings or Statements of Consolidated Cash Flows. Refer to Note 7 for further details.
Recently Issued Accounting Pronouncements
The following table summarizes recent ASU's issued by the Financial Accounting Standards Board (“FASB”) which have been assessed:
Standard
Description
Effective Date
Effect on Financial Statements or Other Significant Matters
ASU 2018-14 Compensation-Retirement Benefits-Defined Benefit Plans
This update modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amendments in ASU 2018-14 would need to be applied on a retrospective basis. 
July 1, 2021 (Fiscal 2022)
The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.



8


Standard
Description
Effective Date
Effect on Financial Statements or Other Significant Matters
ASU 2018-13 Fair Value Measurement
This update modifies the disclosure requirements on fair value measurements. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis.
July 1, 2020 (Fiscal 2021)
The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.
ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This update introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. In addition, this update modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.
July 1, 2020 (Fiscal 2021)
The adoption of this guidance will not have a material impact on its consolidated results of operations, financial condition, or cash flows.


Note 3.  Revenue

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

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

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

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






9


The following tables provide details of revenue by our strategic pillars with disaggregation for PEO zero-margin benefits pass-throughs and client fund interest, and includes a reconciliation to the Company’s reportable segments:
 
Three Months Ended
 
September 30,
Types of Revenues
2019
 
2018
HCM
$
1,568.5

 
$
1,520.3

HRO, excluding PEO zero-margin benefits pass-throughs
591.1

 
557.5

PEO zero-margin benefits pass-throughs
699.1

 
640.5

Global
503.1

 
473.5

Interest on funds held for clients
133.9

 
118.5

Total Revenues
$
3,495.7

 
$
3,310.3



Reconciliation of disaggregated revenue to our reportable segments for the three months ended September 30, 2019:
Types of Revenues
Employer Services
 
PEO
 
Other
 
Total
HCM
$
1,570.0

 
$

 
$
(1.5
)
 
$
1,568.5

HRO, excluding PEO zero-margin benefits pass-throughs
235.7

 
356.5

 
(1.1
)
 
591.1

PEO zero-margin benefits pass-throughs

 
699.1

 

 
699.1

Global
503.1

 

 

 
503.1

Interest on funds held for clients
132.6

 
1.3

 

 
133.9

Total Segment Revenues
$
2,441.4

 
$
1,056.9

 
$
(2.6
)
 
$
3,495.7


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

 
$

 
$
(1.5
)
 
$
1,520.3

HRO, excluding PEO zero-margin benefits pass-throughs
226.1

 
332.7

 
(1.3
)
 
557.5

PEO zero-margin benefits pass-throughs

 
640.5

 


 
640.5

Global
473.5

 

 


 
473.5

Interest on funds held for clients
116.8

 
1.7

 


 
118.5

Total Segment Revenues
$
2,338.2

 
$
974.9

 
$
(2.8
)
 
$
3,310.3



Contract Balances

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

Changes in deferred revenue related to set up fees for the three months ended September 30, 2019 were as follows:
Contract Liability
 
Contract liability, July 1, 2019
$
563.4

Recognition of revenue included in beginning of year contract liability
(45.4
)
Contract liability, net of revenue recognized on contracts during the period
31.2

Currency adjustments
(4.5
)
Contract liability, September 30, 2019
$
544.7




10


Note 4.  Earnings per Share (“EPS”)
 
 
Basic
 
Effect of Employee Stock Option Shares
 
Effect of
Employee
Restricted
Stock
Shares
 
Diluted
Three Months Ended September 30, 2019
 
 

 
 

 
 

 
 

Net earnings
 
$
582.4

 
 

 
 

 
$
582.4

Weighted average shares (in millions)
 
432.7

 
1.3

 
1.4

 
435.4

EPS
 
$
1.35

 
 

 
 

 
$
1.34

Three Months Ended September 30, 2018
 
 

 
 

 
 

 
 

Net earnings
 
$
505.4

 
 

 
 

 
$
505.4

Weighted average shares (in millions)
 
436.8

 
1.4

 
1.7

 
439.9

EPS
 
$
1.16

 
 

 
 

 
$
1.15



Options to purchase 0.7 million and 0.3 million shares of common stock for the three months ended September 30, 2019 and 2018, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Note 5. Other Income, Net
 
Three Months Ended
 
September 30,
 
2019
 
2018
Interest income on corporate funds
$
(32.3
)
 
$
(28.5
)
Realized gains on available-for-sale securities
(2.6
)
 
(0.4
)
Realized losses on available-for-sale securities
0.3

 
1.3

Impairment of intangible assets

 
12.1

Gain on sale of assets
(1.9
)
 

Non-service components of pension expense, net (see Note 11)
(18.1
)
 
1.6

Other income, net
$
(54.6
)
 
$
(13.9
)


In fiscal 2019, the Company wrote down $12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of an acquisition.


11



Note 6. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at September 30, 2019 and June 30, 2019 were as follows:
 
September 30, 2019
 
Amortized
Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
 Fair Market Value (A)
Type of issue:
 
 
 
 
 
 
 
Money market securities, cash and other cash equivalents
$
2,272.2

 
$

 
$

 
$
2,272.2

Available-for-sale securities:
 
 
 
 
 
 
 
Corporate bonds
10,716.8

 
232.7

 
(2.2
)
 
10,947.3

Asset-backed securities
4,325.9

 
45.0

 
(2.8
)
 
4,368.1

U.S. Treasury securities
3,474.5

 
30.9

 
(5.9
)
 
3,499.5

U.S. government agency securities
2,106.7

 
25.1

 
(2.2
)
 
2,129.6

Canadian government obligations and Canadian government agency obligations
1,155.3

 
6.2

 
(5.7
)
 
1,155.8

Canadian provincial bonds
793.7

 
16.0

 
(0.3
)
 
809.4

Municipal bonds
561.3

 
17.5

 
(0.1
)
 
578.7

Other securities
1,130.5

 
27.6

 
(0.5
)
 
1,157.6

 
 
 
 
 
 
 
 
Total available-for-sale securities
24,264.7

 
401.0

 
(19.7
)
 
24,646.0

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
26,536.9

 
$
401.0

 
$
(19.7
)
 
$
26,918.2


(A) Included within available-for-sale securities are corporate investments with fair values of $4,121.1 million and funds held for clients with fair values of $20,524.9 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
 
June 30, 2019
 
Amortized 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Market Value (B)
Type of issue:
 

 
 

 
 

 
 

Money market securities, cash and other cash equivalents
$
6,796.2

 
$

 
$

 
$
6,796.2

Available-for-sale securities:
 
 
 
 
 
 
 

Corporate bonds
10,691.8

 
182.8

 
(6.7
)
 
10,867.9

Asset-backed securities
4,658.3

 
37.8

 
(5.4
)
 
4,690.7

U.S. Treasury securities
2,933.0

 
23.8

 
(8.0
)
 
2,948.8

US government agency securities
2,612.0

 
17.7

 
(5.8
)
 
2,623.9

Canadian government obligations and Canadian government agency obligations
1,164.1

 
7.0

 
(6.0
)
 
1,165.1

Canadian provincial bonds
800.2

 
14.5

 
(0.5
)
 
814.2

Municipal bonds
596.1

 
16.4

 
(0.1
)
 
612.4

Other securities
1,116.1

 
20.6

 
(0.6
)
 
1,136.1

 
 
 
 
 
 
 
 
Total available-for-sale securities
24,571.6

 
320.6

 
(33.1
)
 
24,859.1

 
 
 
 
 
 
 
 
Total corporate investments and funds held for clients
$
31,367.8

 
$
320.6

 
$
(33.1
)
 
$
31,655.3

(B) Included within available-for-sale securities are corporate investments with fair values of $271.9 million and funds held for clients with fair values of $24,587.2 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

12




For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for fiscal 2019. The Company did not transfer any assets between Levels during the three months ended September 30, 2019 or fiscal 2019. In addition, the Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company had no available-for-sale securities included in Level 1 or Level 3 at September 30, 2019.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of September 30, 2019, are as follows: 
 
September 30, 2019
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(1.0
)
 
$
438.5

 
$
(1.2
)
 
$
615.8

 
$
(2.2
)
 
$
1,054.3

Asset-backed securities
(0.9
)
 
327.2

 
(1.9
)
 
1,142.8

 
(2.8
)
 
1,470.0

U.S. Treasury securities
(0.2
)
 
90.8

 
(5.7
)
 
979.7

 
(5.9
)
 
1,070.5

U.S. government agency securities
(0.1
)
 
61.3

 
(2.1
)
 
945.3

 
(2.2
)
 
1,006.6

Canadian government obligations and Canadian government agency obligations
(5.7
)
 
794.4

 

 
1.1

 
(5.7
)
 
795.5

Canadian provincial bonds
(0.2
)
 
83.9

 
(0.1
)
 
29.8

 
(0.3
)
 
113.7

Municipal bonds
(0.1
)
 
20.0

 

 
5.0

 
(0.1
)
 
25.0

Other securities
(0.2
)
 
22.4

 
(0.3
)
 
67.6

 
(0.5
)
 
90.0

 
$
(8.4
)
 
$
1,838.5

 
$
(11.3
)
 
$
3,787.1

 
$
(19.7
)
 
$
5,625.6


The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2019, are as follows:

 
June 30, 2019
 
Securities in Unrealized Loss Position Less Than 12 Months
 
Securities in Unrealized Loss Position Greater Than 12 Months
 
Total
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Gross
Unrealized
Losses
 
Fair
Market Value
Corporate bonds
$
(0.6
)
 
$
151.9

 
$
(6.1
)
 
$
2,055.6

 
$
(6.7
)
 
$
2,207.5

Asset-backed securities
(0.2
)
 
171.9

 
(5.2
)
 
2,083.5

 
(5.4
)
 
2,255.4

U.S. Treasury securities

 
1.8

 
(8.0
)
 
1,159.4

 
(8.0
)
 
1,161.2

U.S. government agency securities

 

 
(5.8
)
 
1,671.4

 
(5.8
)
 
1,671.4

Canadian government obligations and Canadian government agency obligations
(6.0
)
 
662.7

 

 
1.1

 
(6.0
)
 
663.8

Canadian provincial bonds
(0.3
)
 
81.5

 
(0.2
)
 
50.1

 
(0.5
)
 
131.6

Municipal bonds

 
1.5

 
(0.1
)
 
23.3

 
(0.1
)
 
24.8

Other securities
(0.1
)
 
36.4

 
(0.5
)
 
148.1

 
(0.6
)
 
184.5

 
$
(7.2
)
 
$
1,107.7

 
$
(25.9
)
 
$
7,192.5

 
$
(33.1
)
 
$
8,300.2



At September 30, 2019, Corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from October 2019 through September 2029.



13



At September 30, 2019, asset-backed securities include AAA rated senior tranches of securities with predominantly prime collateral of fixed-rate auto loan, credit card, equipment lease, and rate reduction receivables with fair values of $2,157.9 million, $1,578.7 million, $481.8 million, and $149.7 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables. The primary risk associated with these securities is the collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through September 30, 2019.

At September 30, 2019, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $1,266.5 million and $661.2 million, respectively. U.S. government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's, and AA+ by Standard & Poor's, with maturities ranging from November 2019 through January 2029.

At September 30, 2019, other securities and their fair value primarily include U.S. government agency commercial mortgage-backed securities of $640.3 million issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, Aa2 rated United Kingdom Gilt securities of $188.1 million, AAA and AA rated supranational bonds of $108.5 million, and AAA and AA rated sovereign bonds of $89.5 million.

Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 
 
September 30,
 
June 30,
 
 
2019
 
2019
Corporate investments:
 
 
 
 
Cash and cash equivalents
 
$
1,403.9

 
$
1,949.2

Short-term marketable securities
 
3,545.1

 
10.5

Long-term marketable securities (a)
 
576.0

 
261.4

Total corporate investments
 
$
5,525.0

 
$
2,221.1


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

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

Funds held for clients have been invested in the following categories:
 
 
September 30,
 
June 30,
 
 
2019
 
2019
Funds held for clients:
 
 
 
 
Restricted cash and cash equivalents held to satisfy client funds obligations
 
$
868.3

 
$
4,847.0

Restricted short-term marketable securities held to satisfy client funds obligations
 
1,168.6

 
5,013.9

Restricted long-term marketable securities held to satisfy client funds obligations
 
19,356.3

 
19,573.3

Total funds held for clients
 
$
21,393.2

 
$
29,434.2



Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax, and other payee payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $21,011.4 million and $29,144.5 million at September 30, 2019 and June 30, 2019, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client funds obligations. Of the Company’s funds held for clients at September 30, 2019 and June 30, 2019, $18,898.2 million and $26,648.0 million, respectively, are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and are eliminated in consolidation.

The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash and cash equivalents related to client funds investments with original maturities of ninety days or less, within the beginning and ending balances of

14



cash, cash equivalents, restricted cash, and restricted cash equivalents. These amounts have been reconciled to the Consolidated Balance Sheets on the Statements of Consolidated Cash Flows. The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.

Approximately 79% of the available-for-sale securities held a AAA or AA rating at September 30, 2019, as rated by Moody's, Standard & Poor's, DBRS for Canadian dollar-denominated securities, and Fitch for asset-backed and commercial mortgage-backed securities.  All available-for-sale securities were rated as investment grade at September 30, 2019.
 
Expected maturities of available-for-sale securities at September 30, 2019 are as follows:
One year or less
$
4,713.6

One year to two years
6,040.5

Two years to three years
4,743.3

Three years to four years
3,726.7

After four years
5,421.9

Total available-for-sale securities
$
24,646.0



Note 7.  Leases

During the first quarter of the fiscal year ending June 30, 2020 ("fiscal 2020"), the Company adopted ASC 842 using the optional transition method under which financial results reported in periods prior were not adjusted and continue to be reported in accordance with historic accounting under ASC 840 - Leases.

The Company elected the following practical expedients permitted under the lease standard:
The Company did not reassess prior conclusions about lease identification, lease classification or initial direct costs, and did not use hindsight for leases existing at adoption date.
The Company did not record leases with an initial term of 12 months or less on the consolidated balance sheet but continues to expense them on a straight-line basis over the lease term.
The Company elected to combine lease and non-lease components for our facilities leases only. Non-lease components consist primarily of maintenance services.

The Company records leases on the consolidated balance sheets as operating lease ROU assets, records the current portion of operating lease liabilities within accrued expenses and other current liabilities and, separately, records long-term operating lease liabilities.

The Company has entered into operating lease agreements for facilities and equipment. The Company's leases have remaining lease terms of up to approximately ten years. Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. The lease liabilities are measured by discounting future lease payments at the Company’s collateralized incremental borrowing rate for financing instruments of a similar term, unless the implicit rate is readily determinable. ROU assets also include adjustments related to prepaid or deferred lease payments and lease incentives. As of September 30, 2019, total operating lease ROU assets were $504.0 million, current and long-term operating lease liabilities were approximately $103.3 million and $355.4 million, respectively. The difference between total ROU assets and total lease liabilities are primarily attributable to pre-payments of our obligations and the recognition of various lease incentives.

The components of operating lease expense were as follows for the three months ended September 30, 2019:
Operating lease cost
$
44.2

Short-term lease cost
2.7

Variable lease cost
1.3

Total operating lease cost
$
48.2



15



Information related to our operating lease ROU assets and operating lease liabilities was as follows:
 
September 30, 2019
Cash paid for operating lease liabilities
$
40.2

Operating lease ROU assets obtained in exchange for new operating lease liabilities
$
6.7

Weighted-average remaining lease term (in years)
6

Weighted-average discount rate
2.4
%


As of September 30, 2019, maturities of operating lease liabilities are as follows:
Nine months ending June 30, 2020
$
87.0

Twelve months ending June 30, 2021
97.1

Twelve months ending June 30, 2022