Washington, D.C. 20549
AUTOMATIC DATA PROCESSING, INC.
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 $39,603,050,847.$73,532,680,590. On July 31, 20172020 there were 444,374,752429,965,405 shares of Common Stock outstanding.
Item 1. Business
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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
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
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The principal market for the Company’s common stock is the NASDAQ Global Select Market under the symbol ADP. The following table sets forth the reported high and low sales prices of the Company’s common stock reported on the NASDAQ Global Select Market and the cash dividends per share of common stock declared during each quarter for the two most recent fiscal years. As of June 30, 2017,2020, there were 41,59836,378 holders of record of the Company’s common stock. As of such date, 587,1031,017,256 additional holders held their common stock in “street name.”
There is no expiration date for the common stock repurchase plan.
Item 6. Selected Financial Data
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| | |
Adjusted Financial Measure | U.S. GAAP Measures | Adjustments/Explanation |
Adjusted EBIT | Net earnings from continuing operations | - Provision for income taxes
- Gains/losses on non-operational transactions such as sales of businesses and assets
- All other interest expense and income
- Certain restructuring charges
See footnotes (a) and (b)
|
Adjusted net earnings from continuing operations | Net earnings from continuing operations | Pre-tax and tax impacts of:
- Gains/losses on non-operational transactions such as sales of businesses and assets
- Certain restructuring charges
See footnotes (b), (c), and (d)
|
Adjusted provision for income taxes | Provision for income taxes | Tax impacts of:
- Gains/losses on non-operational transactions such as sales of businesses and assets
- Certain restructuring charges
See footnotes (c) and (d)
|
Adjusted diluted earnings per share from continuing operations | Diluted earnings per share | EPS impacts of:
- Gains/losses on non-operational transactions such as sales of businesses and assets
- Certain restructuring charges
See footnote (b)
|
Adjusted effective tax rate | Effective tax rate | See footnote (e) |
Constant Dollar Basis | U.S. GAAP P&L line items | See footnote (f) |
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 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 U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.
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| | | | | | | | | | | | | | | | | | | | |
| (Dollars and shares in millions, except per share amounts) | | | | | | | | | | |
| Years ended June 30, | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | | |
| Net earnings from continuing operations | | $ | 1,733.4 |
| | $ | 1,493.4 |
| | $ | 1,376.5 |
| | $ | 1,242.6 |
| | $ | 1,122.2 |
|
| Adjustments: | | | | | | | | | | |
| Provision for income taxes | | 797.7 |
| | 741.3 |
| | 694.2 |
| | 636.6 |
| | 587.9 |
|
| All other interest expense (a) | | 59.3 |
| | 47.9 |
| | 1.5 |
| | 1.6 |
| | 2.3 |
|
| All other interest income (a) | | (22.4 | ) | | (13.6 | ) | | (10.7 | ) | | (10.5 | ) | | (8.6 | ) |
| Gain on sale of businesses | | (205.4 | ) | | (29.1 | ) | | — |
| | — |
| | — |
|
| Gain on sale of building | | — |
| | (13.9 | ) | | — |
| | — |
| | — |
|
| Workforce Optimization Effort (b) | | (5.0 | ) | | 48.2 |
| | — |
| | — |
| | — |
|
| Service Alignment Initiative (b) | | 90.0 |
| | — |
| | — |
| | — |
| | — |
|
| Goodwill impairment charge | | — |
| | — |
| | — |
| | — |
| | 42.7 |
|
| Adjusted EBIT | | $ | 2,447.6 |
| | $ | 2,274.2 |
| | $ | 2,061.5 |
| | $ | 1,870.3 |
| | $ | 1,746.5 |
|
| | | | | | | | | | | |
| Net earnings from continuing operations | | $ | 1,733.4 |
| | $ | 1,493.4 |
| | $ | 1,376.5 |
| | $ | 1,242.6 |
| | $ | 1,122.2 |
|
| Adjustments: | | | | | | | | | | |
| Gain on sale of businesses | | (205.4 | ) | | (29.1 | ) | | — |
| | — |
| | — |
|
| Gain on sale of building | | — |
| | (13.9 | ) | | — |
| | — |
| | — |
|
| Workforce Optimization Effort (b) | | (5.0 | ) | | 48.2 |
| | — |
| | — |
| | — |
|
| Service Alignment Initiative (b) | | 90.0 |
| | — |
| | — |
| | — |
| | — |
|
| Goodwill impairment charge (g) | | — |
| | — |
| | — |
| | — |
| | 42.7 |
|
| Provision for income taxes on gain on sale of business (c) | | 84.0 |
| | 7.3 |
| | — |
| | — |
| | — |
|
| Provision for income taxes on gain on sale of building (d) | | — |
| | 5.3 |
| | — |
| | — |
| | — |
|
| Benefit/(Provision) for income taxes for Workforce Optimization Effort (d) | | 1.8 |
| | (16.4 | ) | | — |
| | — |
| | — |
|
| Income tax benefit for Service Alignment Initiative (d) | | (33.8 | ) | | — |
| | — |
| | — |
| | — |
|
| Adjusted net earnings from continuing operations | | $ | 1,665.0 |
| | $ | 1,494.8 |
| | $ | 1,376.5 |
| | $ | 1,242.6 |
| | $ | 1,164.9 |
|
| | | | | | | | | | | |
| Diluted earnings per share from continuing operations | | $ | 3.85 |
| | $ | 3.25 |
| | $ | 2.89 |
| | $ | 2.57 |
| | $ | 2.30 |
|
| Adjustments: | | | | | | | | | | |
| Gain on sale of businesses | | (0.27 | ) | | (0.05 | ) | | — |
| | — |
| | — |
|
| Gain on sale of building | | — |
| | (0.02 | ) | | — |
| | — |
| | — |
|
| Workforce Optimization Effort (b) | | (0.01 | ) | | 0.07 |
| | — |
| | — |
| | — |
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| Service Alignment Initiative (b) | | 0.12 |
| | — |
| | — |
| | — |
| | — |
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| Goodwill impairment charge | | — |
| | — |
| | — |
| | — |
| | 0.09 |
|
| Adjusted diluted earnings per share from continuing operations | | $ | 3.70 |
| | $ | 3.26 |
| | $ | 2.89 |
| | $ | 2.57 |
| | $ | 2.39 |
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(a) We continue to 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."
(b) The majority of charges relating to our Service Alignment Initiative and Workforce Optimization Effort represent severance charges. Severance charges have been taken in the past and not included as an adjustment to get to adjusted results. Unlike severance charges in prior periods, these specific charges relate to our broad-based, company-wide Service Alignment Initiative and Workforce Optimization Effort. The fiscal 2017 Workforce Optimization Effort adjustment totaling approximately $5 million represents a reversal of the fiscal 2016 estimate.
(c) 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.
(d) The tax benefit/provision on the Service Alignment Initiative, Workforce Optimization Effort, and the gain on the sale of the building was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.
(e) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings from continuing operations plus our Adjusted provision for income taxes.
(f) "Constant dollar basis" provides information that isolates the actual growth of our operations. "Constant dollar basis" is determined by calculating the current year result using foreign exchange rates consistent with the prior year.
(g) The goodwill impairment charge in fiscal 2013 was non tax-deductible.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular dollars are presented in millions, except per share amounts)
Prior period total revenues and total costs of revenues reflect the impact of the revision to PEO revenues for comparability. Refer to Note 1 to our Consolidated Financial Statements for more information on this revision.
The following section discusses our year ended June 30, 2020 (“fiscal 2020”), as compared to year ended June 30, 2019 (“fiscal 2019”). A detailed review of our fiscal 2019 performance compared to our fiscal 2018 performance is set forth in Part II, Item 7 of our Form 10-K for the fiscal year ended June 30, 2019.
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 privacycyber breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; and the impact of new acquisitions and divestitures.divestitures; and the adequacy, effectiveness and success of our business transformation initiatives; and the impact of and uncertainties related to major natural disasters or catastrophic events, including the coronavirus (“COVID-19”) pandemic. 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.
NON-GAAP FINANCIAL MEASURES
In addition to our U.S. GAAP results, we use adjusted results and other non-GAAP metrics to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods. Adjusted EBIT, adjusted EBIT margin, adjusted net earnings, adjusted diluted earnings per share, adjusted effective tax rate and organic constant currency are all non-GAAP financial measures. Please refer to the accompanying financial tables in the “Non-GAAP Financial Measures” section for a discussion of why ADP believes these measures are important and for a reconciliation of non-GAAP financial measures to their comparable GAAP financial measures.
EXECUTIVE OVERVIEW
We are one of the largest providers of cloud-based Human Capital Management ("HCM") solutions - including payroll, talent management, Human Resources and benefits administration, and time and attendance management - to employers around the world. As a leader in this industry, we are focused on driving product innovation, enhancing our distribution and service capabilities, and assisting our clients with their HCM needs in the face of ever increasing regulatory complexity.
Highlights from the year ended June 30, 2017 ("fiscal 2017")2020 include:
Worldwide newThe global COVID-19 pandemic has continued to evolve and our priority has been and continues to be the safety of our associates and the needs of our clients. In March 2020, we implemented our Business Continuity Plan and took steps to shift over 98% of our workforce to work from home or off-site locations to ensure uninterrupted service to our clients across our solutions. While we are well-prepared to continue operating this way, we are in the early stages of bringing back a small portion of our workforce to the office on a volunteer-only basis. Our sales force will continue to primarily engage with prospects and clients virtually; however, we are beginning to conduct face-to-face meetings in certain geographies to the extent our employees, clients, and prospects are ready to do so. We announced for our employees, excluding corporate officers, a one-time global associate assistance payment of $1,000 (or equivalent, based on the average wage parity in each country) in response to COVID-19, totaling $50.4 million. We are also deeply embedded in our local communities and continue to support COVID-19 relief efforts through financial donations and donations of medical supplies for hospital workers globally.
As a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions to employers around the world, we have continued to process payroll and tax obligations and provide other HCM services to our clients, despite the unexpected challenges that our clients and their employees around the world are facing. ADP's efforts have been focused on providing information and tools to help clients understand and navigate the governmental relief that has been adopted globally. For example, the federal government in the United States enacted the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. ADP has been working to provide support to all employers on the relief available under both laws. This includes an Employer Preparedness Toolkit that helps explain the federal and state government relief, as well as a website dedicated to providing critical information about the Small Business Administration Paycheck Protection Program (“PPP”). During the second half of fiscal 2020, we rolled out a range of tools and reports to help our clients through the crisis and prepare for the recovery. We implemented over 1,000 feature changes to our products in response to 2,000 legislative updates in 60 countries, and we also had approximately 400,000 clients run over 2 million PPP reports for total loan values up to $115 billion dollars. Many of those clients have also now run the necessary payroll reports to apply for their loans to be forgiven. As the global economy and landscape continues to evolve for our clients, whether due to legislative changes or other factors, ADP is committed to supporting our clients to help them navigate these challenges.
The significant impact the COVID-19 pandemic is having on our clients and the broader economy is in turn having an effect on our reported metrics. Despite the fact that we have seen improvement as countries and states are in various stages of reopening and businesses gradually begin to bring a portion of their workers back, we've seen the impact on our full year fiscal 2020 results. Employer Services New Business Bookings was down 21% for fiscal 2020 as we saw bookings decline significantly and rapidly in mid-March due to the global social distancing guidelines coupled with the delayed decision making of our clients and prospects which continued into the fourth quarter. We also adjusted gross bookings as a result of client delays on implementation and the expectation that fewer client employees would come on board compared to when the business bookings declined 5% fromwas originally signed. The PEO average number of Worksite Employees increased 4% for fiscal 2020. Our pays per control metric, which represents growth of the employee base for a large portion of our client base, showed a decline in the fourth quarter
resulting in annual growth of negative 1.0% for fiscal 2020. In addition, we saw deterioration in Employer Services retention in fiscal 2020 of 20 basis points to 90.5% due to an increase in out-of-business losses.
While the challenges presented by COVID-19 may affect the timing of our execution of parts of our strategy, we remain on a transformation journey, and our initiatives are yielding efficiencies and are focused on changing how we work. In fiscal 2020, we executed on our Workforce Optimization program and Procurement Transformation initiatives. For fiscal 2021, we are moving forward with a digital implementation and servicing initiative that leverages many of the capabilities we highlighted at our February 2020 Innovation Day. Despite a challenging end to fiscal 2020, we continued to deliver profit growth during the year ended June 30, 2016 ("2020. We will continue to monitor macro trends based on externally and internally available data and are using these indicators to drive real-time decisions as we remain committed to our long-term strategy.
We have a strong business model, a highly cash generative business with low capital intensity, and offer a suite of products that provide critical support to our clients’ HCM functions. We generate sufficient free cash flow to satisfy our cash dividend and our modest debt obligations, which enables us to absorb the impact of downturns and remain steadfast in our reinvestments, our longer term strategy, and our commitments to shareholder friendly actions. We are committed to building upon our past successes by investing in our business through enhancements in research and development and by driving meaningful transformation in the way we operate. Our financial condition remains solid at June 30, 2020 and we remain well positioned to support our associates and our clients.
RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS
Total Revenues
For the year ended June 30, respectively:
| | | | | | | | |
| Growth: | á | 3% |
| Organic constant currency: | á | 4% |
Revenues for fiscal 2016"2020 increased due to new business started from New Business Bookings, partially offset by business losses. Our revenue growth includes one percentage point of pressure from foreign currency. 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 2020 include interest on funds held for clients of $545.2 million, as compared to $1.65$561.9 million in fiscal 2019. The decrease in the consolidated interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 2.1% in fiscal 2020, as compared to 2.2% in fiscal 2019. The decrease is partially offset by an increase in our average client funds balances of 2.1% to $26.0 billion in fiscal 2020 as compared to fiscal 2019.
Total Expenses
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| | | | | | | | | Years Ended | | | | | | |
| | | | | | | | | June 30, | | | | | | |
| | | | | | | | | | 2020 | | 2019 | | %
Change | | |
| | | | | | | | | | | | | | | |
| Costs of revenues: | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | $ | 7,404.1 | | | $ | 7,080.9 | | | 5 | % | | |
| Systems development and programming costs | | | | | | | | | 674.1 | | | 636.3 | | | 6 | % | | |
| Depreciation and amortization | | | | | | | | | 366.9 | | | 304.4 | | | 21 | % | | |
| Total costs of revenues | | | | | | | | | 8,445.1 | | | 8,021.6 | | | 5 | % | | |
| Selling, general and administrative expenses | | | | | | | | | 3,003.0 | | | 3,064.2 | | | (2) | % | | |
| Interest expense | | | | | | | | | 107.1 | | | 129.9 | | | n/m | | |
| Total expenses | | | | | | | | | $ | 11,555.2 | | | $ | 11,215.7 | | | 3 | % | | |
n/m - not meaningful
Operating expenses increased as our PEO Services zero-margin benefits pass-through costs increased to $2,907.7 million from $2,647.5 million in fiscal 2020 and 2019, respectively. Additionally, operating expenses increased due to a change of $59.2 million in our estimated losses related to ADP Indemnity and a one-time global associate assistance payment in response to COVID-19 (“associate assistance payment”). The increase was partially offset by the impact of foreign currency, reduced incentive compensation costs and reduced costs due to certain cost actions as a result of our transformation initiatives including procurement transformation initiatives in fiscal 2020.
Systems development and programming costs increased for fiscal 2017.2020 due to increased investments and costs to develop, support, and maintain our products, partially offset by capitalization of costs related to our strategic projects, including our next gen platforms. Depreciation and amortization expense increased related to the amortization of our acquisitions of intangibles and internally developed software.
Revenue grew 6%
Selling, general and administrative expenses decreased for fiscal 2020 due to reduced incentive compensation costs, broad-based efficiencies as a result of our transformation initiatives including procurement transformation initiatives, a decrease in net charges related to our transformation initiatives, reduced facilities costs as a result of COVID-19, and impact of foreign currency. The decrease was partially offset by increased selling expenses, an increase in our allowance for doubtful accounts of $26.0 million as a result of an increase in estimated credit losses related to the impact of COVID-19 on our clients (“increase in our allowance for doubtful accounts”), severance cost as a result of COVID-19 of $25.4 million, a legal settlement accrual of $25.0 million, and an associate assistance payment.
Other Income, net
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | |
| Years ended June 30, | | 2020 | | 2019 | | $ Change |
| Interest income on corporate funds | | $ | (84.5) | | | $ | (97.6) | | | $ | (13.1) | |
| | | | | | |
| | | | | | |
| Realized (gains) / losses on available-for-sale securities, net | | (12.9) | | | 0.9 | | | 13.8 | |
| Impairment of assets | | 29.9 | | | 12.1 | | | (17.8) | |
| | | | | | |
| | | | | | |
| Gain on sale of assets | | (5.8) | | | (4.1) | | | 1.7 | |
| Gain on sale of investment | | (0.2) | | | (15.7) | | | (15.5) | |
| Non-service components of pension (income)/expense, net | | (74.5) | | | (6.7) | | | 67.8 | |
| Other income, net | | $ | (148.0) | | | $ | (111.1) | | | $ | 36.9 | |
Other income, net, increased $36.9 million in fiscal 2020, as compared to fiscal 2019 due to the change in non-service components of pension (income)/expense, net, and the items described below. See Note 10 of our Consolidated Financial Statements for further details on non-service components of pension (income)/expense, net.
In fiscal 2020, the Company recorded impairment charges of $29.9 million, which is comprised of $25.3 millionas a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale and vacating
certain leased locations early and recorded total impairment charges of $4.6 million to operating right-of-use assets and certain related fixed assets associated with the vacated locations. 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 a recent acquisition.
In fiscal 2019, the Company recognized a gain of $15.7 million in relation to the sale of an investment held at cost acquired in prior years and subsequently sold during fiscal 2019.
Earnings before Income Taxes ("EBIT")
For the year ended June 30:
Earnings before income taxes increased in fiscal 2020 due to the increases in revenues partially offset by the increases in expenses discussed above.
Overall margin increased in fiscal 2020 as a result of our continued successful execution of our broad-based transformation initiatives including our procurement transformation initiatives as well as operating efficiencies. In addition, our margin improvement was aided by reduced incentive compensation costs, lower transformation initiative related charges of $60.9 million, and reduced facilities costs as result of COVID-19. These were partially offset by incremental pressure from growth in our zero-margin benefits pass-throughs, an increase in selling expenses, an increase in amortization expense, a change in our estimated losses related to ADP Indemnity, an associate assistance payment, an increase in our allowance for doubtful accounts, severance costs as a result of COVID-19, and a legal settlement accrual.
Adjusted EBIT
For the year ended June 30:
Adjusted EBIT excludes certain interest amounts, net charges related to our transformation initiatives, the impact of the severance charges related to COVID-19, accrual for legal settlement, and the gain on sale of assets in the respective periods. For fiscal 2020, adjusted EBIT increased due to increases in revenues offset by the increases in expenses discussed above. Our adjusted EBIT margin reflects changes described above in our EBIT margin excluding the net charges noted above.
Provision for Income Taxes
The effective tax rate in fiscal 2020 and 2019 was 22.5% and 23.7%, respectively. The decrease in the effective tax rate is primarily due to the release of a valuation allowance related to foreign tax credit carryforwards, a reduction in the operating tax rate due to the mix between domestic and foreign earnings, the benefit of a foreign tax law change and lower reserves for uncertain tax positions during fiscal 2020 partially offset by favorable adjustments to prior year tax liabilities during fiscal 2019. Refer to Note 11, 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 2020 and 2019 was 22.6% and 23.8%, respectively. The drivers of the adjusted effective tax rate are the same as the drivers of the effective tax rate discussed above.
Net Earnings and Diluted Earnings per Share
For the year ended June 30:
For fiscal 2020, the net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.
For fiscal 2020, diluted EPS increased as a result of an increase in net earnings and the impact of fewer shares outstanding, resulting from the repurchase of approximately 6.2 million shares in fiscal 2020 and 6.5 million shares in fiscal 2019, partially offset by the issuances of shares under our employee benefit plans.
Adjusted Net Earnings and Adjusted Diluted Earnings per Share
For the year ended June 30:
For fiscal 2020, adjusted net earnings reflect the changes described above in our adjusted EBIT and our adjusted effective tax rate.
For fiscal 2020, our adjusted diluted EPS reflects the changes described above in our adjusted net earnings and shares outstanding.
ANALYSIS OF REPORTABLE SEGMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues | | | | | | | | | | | | | | | | |
| | Years Ended
June 30, | | | | | | | | | | % Change | | | | | | |
| | | 2020 | | 2019 | | | | | | | | As Reported | | | | Organic Constant Currency | | |
| Employer Services | | $ | 10,086.6 | | | $ | 9,942.8 | | | | | | | | | 1 | % | | | | 2 | % | | |
| PEO Services | | 4,511.5 | | | 4,177.7 | | | | | | | | | 8 | % | | | | 8 | % | | |
| Other | | (8.3) | | | (10.3) | | | | | | | | | n/m | | | | n/m | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 14,589.8 | | | $ | 14,110.2 | | | | | | | | | 3 | % | | | | 4 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Earnings before Income Taxes | | | | | | | | | | | | | | | | |
| | Years Ended
June 30, | | | | | | | | | | % Change | | | | | | |
| | | 2020 | | 2019 | | | | | | | | As Reported | | | | | | |
| Employer Services | | $ | 3,063.0 | | | $ | 2,960.9 | | | | | | | | | 3 | % | | | | | | |
| PEO Services | | 605.5 | | | 616.2 | | | | | | | | | (2) | % | | | | | | |
| Other | | (485.9) | | | (571.5) | | | | | | | | | n/m | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 3,182.6 | | | $ | 3,005.6 | | | | | | | | | 6 | % | | | | | | |
n/m - not meaningful
Employer Services
Revenues
Revenues increased in fiscal 2020 due to new business started from New Business Bookings, partially offset by business losses and a decrease in interest earned on funds held for clients. Our revenue growth includes one percentage point of combined pressure from the sale of our COBRA and CHSA businesses and foreign currency translation.
Pre-tax margin increased approximately 130 basis points to 20.4%; Adjusted EBIT margin increased 30 basis points to 19.8%.
Net earnings from continuing operations increased 16%; Adjusted net earnings from continuing operations grew 11%.
Diluted earnings per share from continuing operations increased 18% to $3.85. Adjusted diluted earnings per share from continuing operations increased 13% to $3.70.
| |
• | We continued our shareholder friendly actions by returning $1.3 billion via share repurchases, and approximately $1 billion via dividends, which increased on a per-share basis for the 42nd consecutive year. We have fully distributed the proceeds from our fiscal 2016 debt issuance.
|
During fiscal 2017, we continued to focus on our global HCM strategy by investing to strengthen our underlying business model and prospects for sustainable long-term growth. Our robust and diverse product offerings are the result of our continued investment in product innovation and service. Our results in fiscal 2017 reflect the stability of our underlying business model and our disciplined strategy for profitable growth while maintaining our focus on shareholder friendly actions.
Our new business bookings were down 5% during fiscal 2017, as compared to fiscal 2016, due to high demand in fiscal 2016 for our solutions that assist our clients in complying with the Affordable Care Act ("ACA"). We remain optimistic of our ability to deliver innovative and competitive products, as well as our sales force's ability to distribute our products heading into the year ending June 30, 2018 ("fiscal 2018").
The causes of our client losses and resulting impact on our revenue retention continue to be a point of internal focus. Our Employer Services revenue retention was down 50 basis points during fiscal 2017 as compared to fiscal 2016 primarily due to lower retention on our legacy client platforms coupled with the anticipated loss of a large client within our former CHSA business at the beginning of the fiscal year. We are seeing strong retention on our strategic platforms. We continue to upgrade our clients from legacy platforms to our new cloud-based solutions and focus on improving the client experience. We believe upgrading our clients from legacy platforms is an important aspect of our long-term strategy, giving our clients our most innovative and seamless products.
Our implementation team's ability to implement our services as well as our sales force's ability to sell to clients and prospects drove revenue growth during fiscal 2017.currency. Our revenue growth was also benefited frompartially offset by a decrease in the continued increase innumber of employees on our clients' payrolls as our pays per control decreased 1.0% in fiscal 2020, as compared to fiscal 2019. Our pays per control metric which we measure asmeasures 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.
During fiscal 2017, we incurred $90.0 million in charges for a previously announced multi-year Service Alignment Initiative intended to align our client service operations to our strategic platforms. In connection with this Service Alignment Initiative, we anticipate incurring total pre-tax charges of about $30 million in the year ended June 30, 2018.
In November 2016, we completed the sale of our Consumer Health Spending Account ("CHSA") and Consolidated Omnibus Reconciliation Act ("COBRA") businesses which resulted in a pre-tax gain of approximately $205 million. This disposition, and subsequent partnership with the acquiring company, allows us to further sharpen our focus on our core capabilities while continuing to deliver a full suite of HCM solutions to current and future clients in a seamless fashion. The historical results of operations of this business are included inaddition, the Employer Services segment.
In January 2017, we acquired The Marcus Buckingham Company ("TMBC"). TMBC is a provider of talent management technology, coaching, and consulting solutions. The acquisition reflects our commitment to innovation and enhances our core HCM capabilities, allowing us to deepen our offering in this critical area of talent management. The results of operations of this business will be included in the Employer Services segment.
We have a strong business model with a high percentage of recurring revenues, good margins, the ability to generate consistent healthy cash flows, strong client retention, and low capital expenditure requirements. Our financial condition and balance sheet remain solid at June 30, 2017, with cash and cash equivalents and marketable securities of approximately $2.8 billion.
We continue to make investments in our sales force and are pleased with the operational improvements of our organization, our ability to continuously innovate and offer new and exciting products to our clients, and the ability of our service organization to support these new services and strategic platforms. Our pipeline for future new business bookings remains strong, as we leverage our investments in our strategic platforms and our strong, tenured sales force. We believe that our focus on these areas will continue to drive our growth and success in the future.
RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS
Prior period amounts have been adjusted to exclude discontinued operations (refer to Note 3 of our Consolidated Financial Statements for additional information).
(In millions, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended | | % Change |
| | | June 30, | | As Reported | | Constant Dollar Basis |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | | | | |
| Total revenues from continuing operations | | $ | 12,379.8 |
| | $ | 11,667.8 |
| | $ | 10,938.5 |
| | 6 | % | | 7 | % | | 6 | % | | 8 | % |
| | | | | | | | | | | | | | | |
| Costs of revenues: | | |
| | |
| | | | |
| | |
| | | | |
| Operating expenses | | 6,416.1 |
| | 6,025.0 |
| | 5,625.3 |
| | 6 | % | | 7 | % | | 7 | % | | 9 | % |
| Systems development and programming costs | | 627.5 |
| | 603.7 |
| | 595.4 |
| | 4 | % | | 1 | % | | 4 | % | | 4 | % |
| Depreciation and amortization | | 226.2 |
| | 211.6 |
| | 206.9 |
| | 7 | % | | 2 | % | | 7 | % | | 5 | % |
| Total costs of revenues | | 7,269.8 |
| | 6,840.3 |
| | 6,427.6 |
| | 6 | % | | 6 | % | | 7 | % | | 8 | % |
| | | | | | | | | | | | | | | |
| Selling, general and administrative costs | | 2,783.2 |
| | 2,637.0 |
| | 2,496.9 |
| | 6 | % | | 6 | % | | 6 | % | | 7 | % |
| Interest expense | | 80.0 |
| | 56.2 |
| | 6.5 |
| | n/m |
| | n/m |
| | n/m |
| | n/m |
|
| Total expenses | | 10,133.0 |
| | 9,533.5 |
| | 8,931.0 |
| | 6 | % | | 7 | % | | 7 | % | | 8 | % |
| | | | | | | | | | | | | | | |
| Other income, net | | (284.3 | ) | | (100.4 | ) | | (63.2 | ) | | n/m |
| | n/m |
| | n/m |
| | n/m |
|
| | | | | | | | | | | | | | | |
| Earnings from continuing operations before income taxes | | $ | 2,531.1 |
| | $ | 2,234.7 |
| | $ | 2,070.7 |
| | 13 | % | | 8 | % | | 13 | % | | 9 | % |
| Margin | | 20.4 | % | | 19.2 | % | | 18.9 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Provision for income taxes | | $ | 797.7 |
| | $ | 741.3 |
| | $ | 694.2 |
| | 8 | % | | 7 | % | | 7 | % | | 8 | % |
| Effective tax rate | | 31.5 | % | | 33.2 | % | | 33.5 | % | | |
| | |
| | | | |
| | | | | | | | | | | | | | | |
| Net earnings from continuing operations | | $ | 1,733.4 |
| | $ | 1,493.4 |
| | $ | 1,376.5 |
| | 16 | % | | 8 | % | | 16 | % | | 10 | % |
| | | | | | | | | | | | | | | |
| Diluted earnings per share ("EPS") from continuing operations | | $ | 3.85 |
| | $ | 3.25 |
| | $ | 2.89 |
| | 18 | % | | 12 | % | | 18 | % | | 13 | % |
n/m - not meaningful
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 Measure | U.S. GAAP Measures | Adjustments/Explanation |
Adjusted EBIT | Net earnings from continuing operations | - Provision for income taxes
- Gains/losses on non-operational transactions such as sales of businesses and assets
- All other interest expense and income
- Certain restructuring charges
See footnotes (a) and (b) |
Adjusted net earnings from continuing operations | Net earnings from continuing operations | Pre-tax and tax impacts of:
- Gains/losses on non-operational transactions such as sales of businesses and assets
- Certain restructuring charges
See footnotes (b), (c), and (d) |
Adjusted provision for income taxes | Provision for income taxes | Tax impacts of:
- Gains/losses on non-operational transactions such as sales of businesses and assets
- Certain restructuring charges
See footnotes (c) and (d) |
Adjusted diluted earnings per share from continuing operations | Diluted earnings per share | EPS impacts of:
- Gains/losses on non-operational transactions such as sales of businesses and assets
- Certain restructuring charges
See footnote (b)
|
Adjusted effective tax rate | Effective tax rate | See footnote (e) |
Constant Dollar Basis | U.S. GAAP P&L line items | See footnote (f) |
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 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 U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended | | % Change |
| | | June 30, | | As Reported | | Constant Dollar Basis (f) |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| Net earnings from continuing operations | | $ | 1,733.4 |
| | $ | 1,493.4 |
| | $ | 1,376.5 |
| | 16 | % | | 8 | % | | 16 | % | | 10 | % |
| Adjustments: | | | | | | | | | | | | | | |
| Provision for income taxes | | 797.7 |
| | 741.3 |
| | 694.2 |
| | | | | | | | |
| All other interest expense (a) | | 59.3 |
| | 47.9 |
| | 1.5 |
| | | | | | | | |
| All other interest income (a) | | (22.4 | ) | | (13.6 | ) | | (10.7 | ) | | | | | | | | |
| Gain on sale of businesses | | (205.4 | ) | | (29.1 | ) | | — |
| | | | | | | | |
| Gain on sale of building | | — |
| | (13.9 | ) | | — |
| | | | | | | | |
| Workforce Optimization Effort (b) | | (5.0 | ) | | 48.2 |
| | — |
| | | | | | | | |
| Service Alignment Initiative (b) | | 90.0 |
| | — |
| | — |
| | | | | | | | |
| Adjusted EBIT | | $ | 2,447.6 |
| | $ | 2,274.2 |
| | $ | 2,061.5 |
| | 8 | % | | 10 | % | | 7 | % | | 11 | % |
| Adjusted EBIT Margin | | 19.8 | % | | 19.5 | % | | 18.8 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Provision for income taxes | | $ | 797.7 |
| | $ | 741.3 |
| | $ | 694.2 |
| | 8 | % | | 7 | % | | 7 | % | | 8 | % |
| Adjustments: | | | | | | | | | | | | | | |
| Gain on sale of businesses (c) | | (84.0 | ) | | (7.3 | ) | | — |
| | | | | | | | |
| Gain on sale of building (d) | | — |
| | (5.3 | ) | | — |
| | | | | | | | |
| Workforce Optimization Effort (d) | | (1.8 | ) | | 16.4 |
| | — |
| | | | | | | | |
| Service Alignment Initiative (d) | | 33.8 |
| | — |
| | — |
| | | | | | | | |
| Adjusted provision for income taxes | | $ | 745.7 |
| | $ | 745.1 |
| | $ | 694.2 |
| | — | % | | 7 | % | | — | % | | 8 | % |
| Adjusted effective tax rate (e) | | 30.9 | % | | 33.3 | % | | 33.5 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Net earnings from continuing operations | | $ | 1,733.4 |
| | $ | 1,493.4 |
| | $ | 1,376.5 |
| | 16 | % | | 8 | % | | 16 | % | | 10 | % |
| Adjustments: | | | | | | | | | | | | | | |
| Gain on sale of businesses | | (205.4 | ) | | (29.1 | ) | | — |
| | | | | | | | |
| Gain on sale of building | | — |
| | (13.9 | ) | | — |
| | | | | | | | |
| Workforce Optimization Effort (b) | | (5.0 | ) | | 48.2 |
| | — |
| | | | | | | | |
| Service Alignment Initiative (b) | | 90.0 |
| | — |
| | — |
| | | | | | | | |
| Provision for income taxes on gain on sale of business (c) | | 84.0 |
| | 7.3 |
| | — |
| | | | | | | | |
| Provision for income taxes on gain on sale of building (d) | | — |
| | 5.3 |
| | — |
| | | | | | | | |
| Benefit/(Provision) for income taxes for Workforce Optimization Effort (d) | | 1.8 |
| | (16.4 | ) | | — |
| | | | | | | | |
| Income tax benefit for Service Alignment Initiative (d) | | (33.8 | ) | | — |
| | — |
| | | | | | | | |
| Adjusted net earnings from continuing operations | | $ | 1,665.0 |
| | $ | 1,494.8 |
| | $ | 1,376.5 |
| | 11 | % | | 9 | % | | 11 | % | | 10 | % |
| | | | | | | | | | | | | | | |
| Diluted earnings per share from continuing operations | | $ | 3.85 |
| | $ | 3.25 |
| | $ | 2.89 |
| | 18 | % | | 12 | % | | 18 | % | | 13 | % |
| Adjustments: | | | | | | | | | | | | | | |
| Gain on sale of businesses | | (0.27 | ) | | (0.05 | ) | | — |
| | | | | | | | |
| Gain on sale of building | | — |
| | (0.02 | ) | | — |
| | | | | | | | |
| Workforce Optimization Effort (b) | | (0.01 | ) | | 0.07 |
| | — |
| | | | | | | | |
| Service Alignment Initiative (b) | | 0.12 |
| | — |
| | — |
| | | | | | | | |
| Adjusted diluted earnings per share from continuing operations | | $ | 3.70 |
| | $ | 3.26 |
| | $ | 2.89 |
| | 13 | % | | 13 | % | | 13 | % | | 14 | % |
(a) We continue to 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."
(b) The majority of charges relating to our Service Alignment Initiative and Workforce Optimization Effort represent severance charges. Severance charges have been taken in the past and not included as an adjustment to get to adjusted results. Unlike
severance charges in prior periods, these specific charges relate to our broad-based, company-wide Service Alignment Initiative and Workforce Optimization Effort. The fiscal 2017 Workforce Optimization Effort adjustment totaling approximately $5 million represents a reversal of the fiscal 2016 estimate.
(c) 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.
(d) The tax benefit/provision on the Service Alignment Initiative, Workforce Optimization Effort, and the gain on the sale of the building was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.
(e) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings from continuing operations plus our Adjusted provision for income taxes.
(f) "Constant dollar basis" provides information that isolates the actual growth of our operations. "Constant dollar basis" is determined by calculating the current year result using foreign exchange rates consistent with the prior year.
Fiscal 2017 Compared to Fiscal 2016
Total Revenues
Our revenues, as reported, increased 6% in fiscal 2017, which includes one percentage point of pressure from the net impact of acquisitions, the disposition of our CHSA and COBRA businesses and foreign currency translation. Revenue increased primarily due to new business started from 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 Professional Employer Organization ("PEO") Services.
Total revenues in fiscal 2017 include interest on funds held for clients of $397.4 million, as compared to $377.3 million in fiscal 2016. The increase in the consolidated interest earned on funds held for clients resulted from the increase in our average client funds balances of 2.7% to $23,023.5 million in fiscal 2017.
Total Expenses
Our total expenses, as reported, increased 6% in fiscal 2017, as compared to fiscal 2016. The increase is primarily due to an increase in PEO services pass-through costs, the restructuring and dual operations costs related to our Service Alignment Initiative, and increased costs to service our client base in support of our growing revenue. These increases were partially offset by the disposition of our CHSA and COBRA businesses during fiscal 2017.
Operating expenses, as reported, increased 6% in fiscal 2017, as compared to fiscal 2016. PEO Services pass-through costs were $2,628.4 million for fiscal 2017, which included costs for benefits coverage of $2,173.9 million and costs for workers’ compensation and payment of state unemployment taxes of $454.5 million. These pass-through costs were $2,336.3 million for fiscal 2016, which included costs for benefits coverage of $1,906.0 million and costs for workers’ compensation and payment of state unemployment taxes of $430.3 million. Additionally, operating expenses increased due to higher costs to service our client base in support of our growing revenue, including dual operation costs associated with our Service Alignment Initiative, partially offset by the disposition of our CHSA and COBRA businesses.
Systems development and programming costs, as reported, increased 4% in fiscal 2017, when compared to the same period in the prior year, due to increased investments and costs to develop, support, and maintain our products, partially offset by a higher proportion of capitalized costs of our strategic projects.
Selling, general and administrative expenses, as reported, increased 6% in fiscal 2017, as compared to fiscal 2016. The increase was primarily related to investments in our sales organization. Selling, general and administrative expenses also increased due to additional restructuring charges which primarily relate to our Service Alignment Initiative and Workforce Optimization Effort.
Other Income, net
|
| | | | | | | | | | | | |
| (In millions) | | | | | | |
| Years ended June 30, | | 2017 | | 2016 | | $ Change |
| Interest income on corporate funds | | $ | (76.7 | ) | | $ | (62.4 | ) | | $ | 14.3 |
|
| Realized gains on available-for-sale securities | | (5.3 | ) | | (5.1 | ) | | 0.2 |
|
| Realized losses on available-for-sale securities | | 3.1 |
| | 10.1 |
| | 7.0 |
|
| Gain on sale of businesses (see Note 3 of the Consolidated Financial Statements) | | (205.4 | ) | | (29.1 | ) | | 176.3 |
|
| Gain on sale of building | | — |
| | (13.9 | ) | | (13.9 | ) |
| Other income, net | | $ | (284.3 | ) | | $ | (100.4 | ) | | $ | 183.9 |
|
Other income, net, increased $183.9 million in fiscal 2017, as compared to fiscal 2016. The increase was primarily due to the gain on sale of the CHSA and COBRA businesses of $205.4 million in fiscal 2017, partially offset by the gain on sale of the AdvancedMD ("AMD") business of $29.1 million and the gain on the sale of a building of $13.9 million in fiscal 2016.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased 13% due to the gain on the sale of the CHSA and COBRA businesses as well as the increases in revenues and expenses discussed above, partially offset by the net impact of the Service Alignment Initiative and Workforce Optimization Effort charges in fiscal 2017 and 2016. Overall margin increased from 19.2% in fiscal 2016 to 20.4% in fiscal 2017 primarily due to the gain on the sale of the CHSA and COBRA businesses, and operating efficiencies, partially offset by the net charges related to the Service Alignment Initiative and Workforce Optimization Effort in fiscal 2017 and 2016, the gain on the sale of the building and the gain on the sale of AMD in fiscal 2016, and additional interest expense related to our September 2015 $2.0 billion senior note issuance in fiscal 2016.
Adjusted EBIT
Adjusted EBIT excludes certain interest amounts, the gain on the sale of the CHSA and COBRA businesses, the impact of the charges related to the Service Alignment Initiative and the Workforce Optimization Effort, and the gain on the sale of the building and the gain on the sale of the AMD business in fiscal 2016.
Adjusted EBIT increased 8% due to the increases in revenues and expenses discussed above. Overall Adjusted EBIT margin increased from 19.5% in fiscal 2016 to 19.8% in fiscal 2017 due to operating efficiencies partially offset by 20 basis points of pressure from dual operation costs related to our Service Alignment Initiative.
Provision for Income Taxes
The effective tax rate in fiscal 2017 and 2016 was 31.5% and 33.2%, respectively. The decrease in the effective tax rate is due to tax incentives associated with the domestic production activity deduction and research tax credit for prior tax years which decreased our effective tax rate by 210 basis points in fiscal 2017 and the adoption of ASU 2016-09 related to the new accounting guidance for excess tax benefits on stock-based compensation (as further explained in Note 1 of our Consolidated Financial Statements), which decreased our effective tax rate by 130 basis points in fiscal 2017. These decreases were partially offset by the impact of the sale of the CHSA and COBRA businesses and a lower benefit related to the usage of foreign tax credits in fiscal 2017.
Adjusted Provision for Income Taxes
The effective tax rate, adjusted for the gain on the sale of the CHSA and COBRA businesses, the impact of the charges related to the Service Alignment Initiative and Workforce Optimization Effort, the gain on the sale of the building and the gain on the sale of the AMD business in fiscal 2016, for fiscal 2017 and 2016 was 30.9% and 33.3%, respectively. The decrease in the adjusted effective tax rate is due to tax incentives associated with the domestic production activity deduction and research tax credit for prior tax years which decreased our effective tax rate by 220 basis points in fiscal 2017 and the adoption of ASU 2016-09 related to the new accounting guidance for excess tax benefits on stock-based compensation (as further explained in Note 1 of our Consolidated Financial Statements), which decreased our effective tax rate by 130 basis points in fiscal 2017. This decrease was offset by a lower benefit related to the usage of foreign tax credits in fiscal 2017.
Net Earnings from Continuing Operations and Diluted EPS from Continuing Operations
Net earnings from continuing operations, as reported, increased 16% in fiscal 2017 due to the increase in earnings from continuing operations before income taxes and the reduction in our effective tax rate described above, when compared to fiscal 2016.
Diluted earnings per share from continuing operations increased 18% to $3.85 in fiscal 2017, as compared to $3.25 in fiscal 2016. Diluted earnings per share from continuing operations reflects the increase in net earnings from continuing operations (inclusive of a $0.07 impact from the adoption of ASU 2016-09 in fiscal 2017) and the impact of fewer shares outstanding, resulting from the repurchase of approximately 13.5 million shares in fiscal 2017 and 13.8 million shares in fiscal 2016, partially offset by the issuances of shares under our employee benefit plans.
Adjusted Net Earnings from Continuing Operations and Adjusted Diluted EPS from Continuing Operations
Adjusted net earnings from continuing operations increased 11% in fiscal 2017 due to the increase in adjusted EBIT and reduction in our effective tax rate described above when compared to fiscal 2016.
For fiscal 2017, our Adjusted diluted EPS from continuing operations reflects the increase in Adjusted net earnings from continuing operations (inclusive of a $0.07 impact from the adoption of ASU 2016-09 in fiscal 2017) and the impact of fewer shares outstanding as a result of the repurchase of 13.5 million shares during fiscal 2017 and the repurchase of 13.8 million shares in fiscal 2016, partially offset by shares issued under our employee benefit plans.
Fiscal 2016 Compared to Fiscal 2015
Total Revenues
Our revenues, as reported, increased 7% in fiscal 2016, despite two percentage points of combined pressure from foreign currency translation and the disposition of the AMD business in September 2015, primarily due to new business started during the past twelve months from new business bookings growth. 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 2016 include interest on funds held for clients of $377.3 million, as compared to $377.7 million in fiscal 2015. The decrease in the consolidated interest earned on funds held for clients resulted from the decrease in the average interest rate earned in fiscal 2016, as compared to fiscal 2015, partially offset by the increase in our average client funds balances of 2.8% to $22,418.7 million in fiscal 2016.
Total Expenses
Our total expenses, as reported, increased 7% in fiscal 2016, as compared to the same period in the prior year. The increase is primarily due to an increase in PEO services pass-through costs as well as an increase in selling and implementation expenses to support our growth in new business bookings as we experienced continued demand for additional HCM solutions, including products that assist businesses in complying with the ACA. Total expenses also increased due to increased costs to service our client base in support of our growing revenue, and an increase in severance expenses, primarily related to our Workforce Optimization Effort. These increases were partially offset by the impact of foreign currency translation.
Operating expenses, as reported, increased 7% in fiscal 2016, as compared to fiscal 2015. PEO Services pass-through costs were $2,336.3 million for fiscal 2016, which included costs for benefits coverage of $1,906.0 million and costs for workers’ compensation and payment of state unemployment taxes of $430.3 million. These pass-through costs were $2,015.9 million for fiscal 2015, which included costs for benefits coverage of $1,627.1 million and costs for workers’ compensation and payment of state unemployment taxes of $388.8 million. Additionally, operating expenses increased due to higher costs to implement and service our client base in support of our growing revenue, including products that assist with ACA compliance which contributed to our strong new business bookings over the past several quarters. These increases were partially offset by the impact of foreign currency translation.
Systems development and programming costs, as reported, increased 1% in fiscal 2016, when compared to the same period in the prior year, due to increased investments and costs to develop, support, and maintain our products, partially offset by a higher proportion of capitalized costs of our strategic projects and the impact of foreign currency translation.
Selling, general and administrative expenses, as reported, increased 6% in fiscal 2016, as compared to fiscal 2015. The increase was primarily related to an increase in selling expenses to support our growth in new business bookings as we experienced continued demand for our HCM products, particularly those that are designed to assist businesses in complying with the ACA. Selling, general and administrative expenses also increased due to $57.6 million of additional severance charges, of which $48.2 million relate to our Workforce Optimization Effort, and a $10.7 million reversal of reserves in fiscal 2015 related to our former Dealer Services business financing arrangements which were sold to a third party. These increases were partially offset by the impact of foreign currency translation.
Other Income, net
|
| | | | | | | | | | | | |
| (In millions) | | | | | | |
| Years ended June 30, | | 2016 | | 2015 | | $ Change |
| Interest income on corporate funds | | $ | (62.4 | ) | | $ | (56.9 | ) | | $ | 5.5 |
|
| Realized gains on available-for-sale securities | | (5.1 | ) | | (6.8 | ) | | (1.7 | ) |
| Realized losses on available-for-sale securities | | 10.1 |
| | 1.9 |
| | (8.2 | ) |
| Gain on sale of notes receivable | | — |
| | (1.4 | ) | | (1.4 | ) |
| Gain on sale of AMD | | (29.1 | ) | | — |
| | 29.1 |
|
| Gain on sale of building | | (13.9 | ) | | — |
| | 13.9 |
|
| Other income, net | | $ | (100.4 | ) | | $ | (63.2 | ) | | $ | 37.2 |
|
Other income, net, increased $37.2 million in fiscal 2016, as compared to fiscal 2015. The increase was primarily due to the gain on the sale of the AMD business of $29.1 million and the gain on the sale of a building of $13.9 million.
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased 8% due to increases in revenues and expenses discussed above and includes an unfavorable impact from foreign currency translation of one percentage point. Overall margin increased from 18.9% in fiscal 2015 to 19.2% in fiscal 2016 due to the gain on the sale of the AMD business, the gain on the sale of the building and decreased selling expenses in the fourth quarter of fiscal 2016 as compared to fiscal 2015. These increases were offset by an increase in interest expense related to our September 2015 $2.0 billion senior note issuance, investments in implementation and operational resources to support our revenue growth, and the charges related to our Workforce Optimization Effort.
Adjusted EBIT
Adjusted EBIT, which excludes certain interest amounts, the impact of the AMD business sale, the gain on the sale of a building and the charges related to our Workforce Optimization Effort, increased 10% due to the increases in revenues and expenses discussed above. Overall Adjusted EBIT margin increased from 18.8% in fiscal 2015 to 19.5% in fiscal 2016 due to lower selling expenses in the fourth quarter of fiscal 2016 as compared to fiscal 2015, partially offset by investments in implementation and operational resources to support our revenue growth.
Provision for Income Taxes
The effective tax rate in fiscal 2016 and 2015 was 33.2% and 33.5%, respectively. The decrease in the effective tax rate was due to the usage of foreign tax credits in a repatriation of foreign earnings in fiscal 2016, partially offset by the resolution of certain tax matters in fiscal 2015.
Adjusted Provision for Income Taxes
The effective tax rate, adjusted for the impact of the Workforce Optimization Effort, sale of the AMD business, and a gain on the sale of a building, for fiscal 2016 and 2015 was 33.3% and 33.5%, respectively. The decrease in the Adjusted effective tax rate was due to the usage of foreign tax credits in a repatriation of foreign earnings in fiscal 2016, partially offset by the resolution of certain tax matters during fiscal 2015.
Net Earnings from Continuing Operations and Diluted EPS from Continuing Operations
Net earnings from continuing operations increased 8% on higher earnings from continuing operations before income taxes and a lower effective tax rate, as described above. Net earnings from continuing operations growth was unfavorably impacted one percentage point by foreign currency translation in fiscal 2016. Diluted EPS from continuing operations increased 12% to $3.25 in fiscal 2016, as compared to $2.89 in fiscal 2015. Diluted EPS growth was unfavorably impacted one percentage point due to foreign currency translation in fiscal 2016, as compared to fiscal 2015.
In fiscal 2016, our diluted EPS from continuing operations reflects the increase in net earnings from continuing operations and the impact of fewer shares outstanding, resulting from the repurchase of approximately 13.8 million shares in fiscal 2016 and 18.2 million shares in fiscal 2015, partially offset by the issuances of shares under our employee benefit plans.
Adjusted Net Earnings from Continuing Operations and Adjusted Diluted EPS from Continuing Operations
Adjusted net earnings from continuing operations increased 9% in fiscal 2016 due to the increase in revenues and expenses described above and the impact of the lower Adjusted effective tax rate when compared to fiscal 2015.
For fiscal 2016, our Adjusted diluted EPS from continuing operations reflects the increase in Adjusted net earnings from continuing operations and the impact of fewer shares outstanding as a result of the repurchase of 13.8 million shares during fiscal 2016 and the repurchase of 18.2 million shares in fiscal 2015, offset by shares issued under our employee benefit plans.
ANALYSIS OF REPORTABLE SEGMENTS
Revenues from Continuing Operations
(In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended | | % Change |
| | | June 30, | | As Reported | | Constant Dollar Basis |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| Employer Services | | $ | 9,535.2 |
| | $ | 9,211.9 |
| | $ | 8,815.1 |
| | 4 | % | | 5 | % | | 4 | % | | 6 | % |
| PEO Services | | 3,483.6 |
| | 3,073.1 |
| | 2,647.2 |
| | 13 | % | | 16 | % | | 13 | % | | 16 | % |
| Other | | (10.6 | ) | | 1.9 |
| | 69.8 |
| | n/m |
| | n/m |
| | n/m |
| | n/m |
|
| Reconciling item: | | |
| | |
| | | | | | | | | | |
| Client fund interest | | (628.4 | ) | | (619.1 | ) | | (593.6 | ) | | n/m |
| | n/m |
| | n/m |
| | n/m |
|
| | | $ | 12,379.8 |
| | $ | 11,667.8 |
| | $ | 10,938.5 |
| | 6 | % | | 7 | % | | 6 | % | | 8 | % |
Earnings from Continuing Operations before Income Taxes
(In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended | | % Change |
| | | June 30, | | As Reported | | Constant Dollar Basis |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| Employer Services | | $ | 2,921.3 |
| | $ | 2,800.4 |
| | $ | 2,595.4 |
| | 4 | % | | 8 | % | | 4 | % | | 9 | % |
| PEO Services | | 448.6 |
| | 371.2 |
| | 301.8 |
| | 21 | % | | 23 | % | | 21 | % | | 23 | % |
| Other | | (210.4 | ) | | (317.8 | ) | | (232.9 | ) | | n/m |
| | n/m |
| | n/m |
| | n/m |
|
| Reconciling item: | | |
| | |
| | | | | | | | | | |
| Client fund interest | | (628.4 | ) | | (619.1 | ) | | (593.6 | ) | | n/m |
| | n/m |
| | n/m |
| | n/m |
|
| | | $ | 2,531.1 |
| | $ | 2,234.7 |
| | $ | 2,070.7 |
| | 13 | % | | 8 | % | | 13 | % | | 9 | % |
Employer Services
Fiscal 2017 Compared to Fiscal 2016
Revenues
Employer Services' revenues, as reported, increased 4% in fiscal 2017, as compared to fiscal 2016, which includes one percentage point of pressure from the net impact of acquisitions, the disposition of our CHSA and COBRA businesses, and foreign currency translation. Revenues increased primarily due to new business started from new business bookings. 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 2.4% in fiscal 2017 as compared to fiscal 2016. The increases were partially offset by the impact of client losses and the sale of the CHSA and COBRA businesses during fiscal 2017. Our worldwide client revenue retention rate for fiscal 2017 decreased 50 basis points to 90.0% as compared to our rate for fiscal 2016, primarily driven by the lower retention on our legacy client platforms and the anticipated loss of a large client within our former CHSA business.
Earnings from Continuing Operations before Income Taxes
Employer Services’ earnings from continuing operations before income taxes, as reported, increased 4% in fiscal 2017, as compared to fiscal 2016. The increase was due to increased revenues discussed above, which was partially offset by an increase in expenses of $202.4 million. The increase in expenses is related to increased costs of servicing our clients on growing revenues as well as investments in our sales organization, partially offset by the disposition of the CHSA and COBRA businesses during fiscal 2017.
Employer Services' overall margin increased from 30.4% to 30.6% for fiscal 2017, as compared to fiscal 2016. Thisfiscal 2020 declined 20 basis point increase was driven by operational efficiencies partially offset by 30 basis points of pressure from dual operation costs related to our Service Alignment Initiative.
Fiscal 2016 Compared to Fiscal 2015
Revenues
Employer Services' revenues, as reported, increased 5% in fiscal 2016, as compared to fiscal 2015, despite a negative impact of one percentage point from foreign currency translation. Revenues increased due to new business started from new business bookings, the impact of price increases, and an increase in the number of employees on our clients’ payrolls as our U.S. pays per control increased 2.5% in fiscal 2016 as compared to fiscal 2015. These increases were partially offset by the impact of client losses and foreign currency translation. Our worldwide client revenue retention rate for fiscal 2016 decreased 100 basis points to 90.5% as compared to our rate for fiscal 2015 primarily due to elevated losses on our legacy platforms.2019, driven by an increase in out-of-business losses.
Earnings from Continuing Operations before Income Taxes
Employer Services’ earnings from continuing operations before income taxes as reported, increased 8%increased in fiscal 2016, as compared to fiscal 2015. The increase was2020 due to increased revenues discussed above whichand partially offset by increased expenses due to an increase in selling expenses, an increase in amortization expense, and an increase in our allowance for doubtful accounts. These increases in expenses were partially offset by reduced incentive compensation costs, impact from foreign currency and operating efficiencies as a result of our transformation initiatives including our procurement transformation initiatives.
For the year ended June 30, respectively:
Employer Services' overall margin increased for fiscal 2020 as a result of the continued successful execution of our broad-based transformation initiatives including our procurement transformation initiatives, as well as operating efficiencies and reduced incentive compensation costs. This increase was partially offset by an increase in expenses of $191.8 million. The increase in expenses is related to increased costs of servicing our clients, as well as increased selling and implementation expenses due to new business bookings and associated implementation costs, including an increase in costs related to assisting our clients with ACA compliance. These increases were partially offset by the impact of foreign currency translation.
Employer Services' overall margin increased from 29.4% to 30.4% for fiscal 2016, as compared to fiscal 2015. This increase is due to lower selling expenses, in the fourth quarter of fiscal 2016 as compared to fiscal 2015 as well as an increase of 30 basis points from foreign currency translation, partially offset by investments in implementationamortization expense and operational resources to support our revenue growth.allowance for doubtful accounts.
PEO Services
Fiscal 2017 Compared to Fiscal 2016
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | PEO Revenues | | | | | | |
| | | | | | | | | Years Ended | | | | Change | | |
| | | | | | | | | June 30, | | | | | | |
| | | | | | | | | | 2020 | | 2019 | | $ | | % |
| PEO Services' revenues | | | | | | | | | $ | 4,511.5 | | | $ | 4,177.7 | | | $ | 333.8 | | | 8 | % |
| Less: PEO zero-margin benefits pass-throughs | | | | | | | | | 2,907.7 | | | 2,647.5 | | | 260.2 | | | 10 | % |
| PEO Services' revenues excluding zero-margin benefits pass-throughs | | | | | | | | | $ | 1,603.8 | | | $ | 1,530.2 | | | $ | 73.6 | | | 5 | % |
PEO Services' revenues as reported increased 13%8% in fiscal 2017, as compared to fiscal 2016. Such revenues include pass-through costs of $2,628.4 million for fiscal year 2017 and $2,336.3 million for fiscal year 2016 associated with benefits coverage, workers' compensation coverage, and state unemployment taxes for worksite employees. The increase in revenues was2020 due to a 12%4% increase in the averageaverage number of worksite employees, drivenWorksite Employees in fiscal 2020 driven by an increase in the number of new PEO Services clients and growth in our existing clients. Additionally, PEO Services' revenues, excluding zero-margin benefits pass-through costs, increased 5% in fiscal 2020 and includes pressure from lower workers compensation and State Unemployment Insurance (“SUI”) costs and related pricing.
Earnings from Continuing Operations before Income Taxes
PEO Services’ earnings from continuing operations before income taxes increased 21%decreased 2% in fiscal 2017,2020 due to the increase in expenses partially offset by the increase in revenues discussed above. The increase in expenses was due to the increase in zero-margin benefits pass-through costs of $260.2 million described above and a change of $59.2 million in our estimated losses related to ADP Indemnity in fiscal 2020, as compared to fiscal 2016. The increase was2019.
For the year ended June 30, respectively:
PEO Services' overall margin decreased for fiscal 2020 due to increased revenues discussed above, which was partially offset by an increasea change of $59.2 million in expenses of $333.1 million. This increase in expenses is primarilyour estimated losses related to an increaseADP Indemnity in pass-through costs of $292.1 million. Overall margin increased from 12.1% to 12.9% for fiscal 2017,fiscal 2020 as compared to fiscal 2016, due to operating efficiencies, as our operating costs related to servicing our clients increased slower than our revenues.2019.
Fiscal 2016 Compared to Fiscal 2015
Revenues
PEO Services' revenues as reported increased 16% in fiscal 2016, as compared to fiscal 2015. Such revenues include pass-through costs of $2,336.3 million for fiscal 2016 and $2,015.9 million for fiscal 2015 associated with benefits coverage, workers' compensation coverage, and state unemployment taxes for worksite employees. The increase in revenues was due to a 13% increase in the average number of worksite employees, driven by an increase in the number of new PEO Services clients and growth in our existing clients, as well as higher client participation and higher benefit pass-through costs in our PEO benefit offerings.
Earnings from Continuing Operations before Income Taxes
PEO Services’ earnings from continuing operations before income taxes increased 23% in fiscal 2016, as compared to fiscal 2015. The increase was due to increased revenues discussed above, which was partially offset by an increase in expenses of $356.5 million. This increase in expenses is primarily related to an increase in pass-through costs of $320.4 million described above. Overall margin increased from 11.4% to 12.1% for fiscal 2016, as compared to fiscal 2015, due to operating efficiencies, as our operating costs related to servicing our clients increased slower than our revenues, and sales efficiencies.
Other
The primary components of “Other” are non-recurring gains and losses, miscellaneous processing services, the elimination of intercompany transactions, interest expense, the results of operations of ADP Indemnity, certain charges and expenses that have not been allocated to the reportable segments, and the historical results of the AMD business. Beginning in the first quarter of fiscal 2017, our chief operating decision maker began reviewing the Company's results with stock-based compensation included in the Company's operating segments. This change, as well as changes to the allocation methodology for certain corporate level allocations, has been adjusted in both the current period and the prior period in the table above, and did not materially affect reportable segment results.
ADP Indemnity provides workers'workers’ compensation and employer'semployer’s liability deductible reimbursement insurance protection for PEO Services'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. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability, for the PEO Services business. Premiums are charged by ADP Indemnity to PEO Services to cover the claims expected to be incurred by the PEO Services' worksite employees. The premiums charged from ADP Indemnity to PEO Services are eliminated in Other. Changesand changes in estimated ultimate incurred losses are recognized byincluded in the PEO segment. ADP Indemnity recorded a pre-tax loss of approximately $20 million in fiscal 2020 and includeda pre-tax benefit of approximately $39 million in Other. For the fiscal years2019, which were primarily a result of changes in our estimated actuarial losses. Beginning in fiscal year 2013, to 2017, 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.remote. During fiscal 2017,2020, ADP Indemnity paid a premium of $221.0$215 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 20172020 policy year up 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 $235.0$240 million in July 20172020 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the year ended June 30, 2018 ("fiscal 2018")2021 policy year on terms substantially similar to the fiscal 20172020 reinsurance policy.
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, an associate assistance payment, a legal settlement accrual, non-recurring gains and losses, the elimination of intercompany transactions, and other interest expense.
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 | 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 | |
| | |
| Organic constant currency | Revenues | |
| | |
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 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 corresponding U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended
June 30, | | | | | | % Change | | | | | | |
| | 2020 | | 2019 | | | | As Reported | | | | | | |
| Net earnings | | $ | 2,466.5 | | | $ | 2,292.8 | | | | | 8 | % | | | | | | |
| Adjustments: | | | | | | | | | | | | | | |
| Provision for income taxes | | 716.1 | | | 712.8 | | | | | | | | | | | |
| All other interest expense (a) | | 59.2 | | | 59.9 | | | | | | | | | | | |
| All other interest income (a) | | (20.5) | | | (32.4) | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Gain on sale of assets | | (0.2) | | | (15.7) | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Transformation initiatives (b) | | 77.4 | | | 138.3 | | | | | | | | | | | |
| COVID-19 related charges (c) | | 25.4 | | | — | | | | | | | | | | | |
| Legal settlement (d) | | 25.0 | | | — | | | | | | | | | | | |
| Adjusted EBIT | | $ | 3,348.9 | | | $ | 3,155.7 | | | | | 6 | % | | | | | | |
| Adjusted EBIT Margin | | 23.0 | % | | 22.4 | % | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Provision for income taxes | | $ | 716.1 | | | $ | 712.8 | | | | | — | % | | | | | | |
| Adjustments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Gain on sale of assets (e) | | (0.1) | | | (3.9) | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Transformation initiatives (e) | | 19.2 | | | 34.5 | | | | | | | | | | | |
| COVID-19 related charges (e) | | 6.3 | | | — | | | | | | | | | | | |
| Legal settlement (e) | | 6.2 | | | — | | | | | | | | | | | |
| Tax Cuts and Jobs Act (f) | | — | | | 0.5 | | | | | | | | | | | |
| Adjusted provision for income taxes | | $ | 747.7 | | | $ | 743.9 | | | | | 1 | % | | | | | | |
| Adjusted effective tax rate (g) | | 22.6 | % | | 23.8 | % | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net earnings | | $ | 2,466.5 | | | $ | 2,292.8 | | | | | 8 | % | | | | | | |
| Adjustments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Gain on sale of assets | | (0.2) | | | (15.7) | | | | | | | | | | | |
| Income tax provision on gain on sale of assets (e) | | 0.1 | | | 3.9 | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Transformation initiatives (b) | | 77.4 | | | 138.3 | | | | | | | | | | | |
| Income tax benefit for transformation initiatives (e) | | (19.2) | | | (34.5) | | | | | | | | | | | |
| COVID-19 related charges (c) | | 25.4 | | | — | | | | | | | | | | | |
| Income tax benefit for COVID-19 related charges (e) | | (6.3) | | | — | | | | | | | | | | | |
| Legal settlement (d) | | 25.0 | | | — | | | | | | | | | | | |
| Income tax benefit for legal settlement (e) | | (6.2) | | | — | | | | | | | | | | | |
| Tax Cuts and Jobs Act (f) | | — | | | (0.5) | | | | | | | | | | | |
| Adjusted net earnings | | $ | 2,562.5 | | | $ | 2,384.3 | | | | | 7 | % | | | | | | |
| | | | | | | | | | | | | | |
| Diluted EPS | | $ | 5.70 | | | $ | 5.24 | | | | | 9 | % | | | | | | |
| Adjustments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Gain on sale of assets (e) | | — | | | (0.03) | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Transformation initiatives (b) (e) | | 0.13 | | | 0.24 | | | | | | | | | | | |
| COVID-19 related charges (c) (e) | | 0.04 | | | — | | | | | | | | | | | |
| Legal settlement (d) (e) | | 0.04 | | | — | | | | | | | | | | | |
| Tax Cuts and Jobs Act (f) | | — | | | — | | | | | | | | | | | |
| Adjusted diluted EPS | | $ | 5.92 | | | $ | 5.45 | | | | | 9 | % | | | | | | |
| | | | | | | | | | | | | | |
(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 are not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”
(b) In fiscal 2020, transformation initiatives include: (i) charges of $29.9 million related to impairment charges as a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale and impairment charges of operating right-of-use assets and certain related fixed assets associated with the vacating of certain leased locations; (ii) charges of $29.1 million related to severance; (iii) charges of $28.5 million related to other transformation initiatives; all of which were partially offset by net reversals of charges related to Voluntary Early Retirement Program (“VERP”) and Service Alignment Initiative (“SAI”) of $10.1 million. Unlike certain other severance charges in prior periods that 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.
(c) Represents severance charges related to the impact of COVID-19 pandemic. Unlike other severance charges in prior periods that 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 initiatives to address excess capacity across our business and functions due to the COVID-19 pandemic.
(d) Represents a legal settlement accrual related to the Illinois Biometric Privacy Act matter. Refer to Note 12 of our Consolidated Financial Statements for additional detail.
(e) The income tax provision/(benefit) was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.
(f) There was no impact from the Tax Cuts and Jobs Act in fiscal 2020.
(g) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by the sum of our Adjusted net earnings plus our Adjusted provision for income taxes.
The following table reconciles our reported growth rates to the non-GAAP measure of organic constant currency, which excludes the impact of acquisitions, the impact of dispositions, and the impact of foreign currency. The impact of acquisitions and dispositions is calculated by excluding the current year revenues of acquisitions until the one-year anniversary of the transaction and by excluding the prior year revenues of divestitures for the one-year period preceding the transaction. The impact of foreign currency is determined by calculating the current year result using foreign exchange rates consistent with the prior year. The PEO segment is not impacted by acquisitions, dispositions or foreign currency.
| | | | | | | | | | | | |
| | | | | Year Ended | | | |
| | | | | June 30, | | | |
| | | | | 2020 | | | |
| Consolidated revenue growth as reported | | | | | 3 | % | | | |
| Adjustments: | | | | | | | | |
| Impact of acquisitions | | | | | — | % | | | |
| | | | | | | | |
| Impact of foreign currency | | | | | 1 | % | | | |
| Consolidated revenue growth, organic constant currency | | | | | 4 | % | | | |
| | | | | | | | |
| Employer Services revenue growth as reported | | | | | 1 | % | | | |
| Adjustments: | | | | | | | | |
| Impact of acquisitions | | | | | — | % | | | |
| | | | | | | | |
| Impact of foreign currency | | | | | 1 | % | | | |
| Employer Services revenue growth, organic constant currency | | | | | 2 | % | | | |
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2020, cash and cash equivalents were $1.9 billion, which were primarily invested in time deposits and money market funds.
For corporate liquidity, we expect existing cash, cash equivalents, short-term marketable securities, long-term marketable securities, and cash flow from operations together with our $9.5$9.7 billion of committedcommitted 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.expenditures for the foreseeable future. Our financial condition remains solid at June 30, 2020 and have sufficient liquidity as note above; however, given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 pandemic, we will continue to evaluate the nature and extent of the impact to our financial condition and liquidity.
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 CanadianUnited Kingdom short-term reverse repurchase agreements, together with our $9.5$9.7 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“Quantitative and Qualitative Disclosures about Market RiskRisk” for a further discussion of the risks, ofincluding with respect to the COVID-19 pandemic, related to our client funds extended investment strategy. See Note 98 of our Consolidated Financial Statements for a description of our short-term financing including commercial paper.
As of June 30, 2017, cash and short-term marketable securities were $2,783.6 million, which were primarily invested in time deposits and money market funds.
Operating, Investing and Financing Cash FlowsFlows
Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the years ended 2017, 2016,2020 and 2015,2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended June 30, | | | | | | | | |
| | 2020 | | 2019 | | | | $ Change | | |
| Cash provided by (used in): | | | | | | | | | | |
| Operating activities | | $ | 3,026.2 | | | $ | 2,688.3 | | | | | $ | 337.9 | | | |
| Investing activities | | 3,156.3 | | | (2,197.7) | | | | | 5,354.0 | | | |
| Financing activities | | (5,890.6) | | | (207.7) | | | | | (5,682.9) | | | |
| Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (34.5) | | | (28.8) | | | | | (5.7) | | | |
| Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 257.4 | | | $ | 254.1 | | | | | $ | 3.3 | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Years ended June 30, | | $ Change |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 |
| Cash provided by (used in): | | | | | | | | | | |
| Operating activities | | $ | 2,125.9 |
| | $ | 1,897.3 |
| | $ | 1,974.0 |
| | $ | 228.6 |
| | $ | (76.7 | ) |
| Investing activities | | 5,730.4 |
| | (9,087.2 | ) | | (3,760.3 | ) | | 14,817.6 |
| | (5,326.9 | ) |
| Financing activities | | (8,281.7 | ) | | 8,752.7 |
| | 1,548.3 |
| | (17,034.4 | ) | | 7,204.4 |
|
| Effect of exchange rate changes on cash and cash equivalents | | 14.7 |
| | (11.0 | ) | | (106.3 | ) | | 25.7 |
| | 95.3 |
|
| Net change in cash and cash equivalents | | $ | (410.7 | ) | | $ | 1,551.8 |
| | $ | (344.3 | ) | | $ | (1,962.5 | ) | | $ | 1,896.1 |
|
Fiscal 2017 Compared to Fiscal 2016
Net cash flows provided by operating activities increasedin fiscal 2020 and fiscal 2019 include cash payments for reinsurance agreements of $215.0 million and $218.0 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 supplemented by a growth in non-cash expenses within operating activities and net favorable changeschange in ourthe components of working capital which was dueas compared to the timing of payments from our clients and to our vendors in the ordinary course of business.fiscal 2019.
Net cash flows from investing activities changed due to the timing of receiptsproceeds and disbursements of restricted cash and cash equivalents held to satisfy client funds obligations of $15,061.8 million, as well as the timing of purchases of corporate and client funds marketable securities of $1,493.5 million. These increases were$5,256.9 million, proceeds from the sale of assets and lower payments related to acquisitions of business, partially offset by a decrease in the proceeds from the salespayments related to acquisitions of intangibles and maturities of corporate and client fund marketable securities of $1,621.8 million.payments related to capital expenditures in fiscal 2020.
Net cash flows from financing activities changed due to the a net decrease in the cash flow from client funds obligations of $14,923.9$4,909.2 million as a result of, which is due to the timing of cash receivedimpounds from our clients and payments made related to client funds,our clients' employees and proceeds from our $2.0 billion September 2015 debt issuance.other payees, more cash returned to shareholders via dividends and share repurchases and a net repayment of reverse repurchase agreements in fiscal 2020.
We purchased approximately 13.56.2 million shares of our common stock at an average price per share of $94.42$160.61 during fiscal 2017fiscal 2020, as compared to purchases of 13.86.5 million shares at an average price per share of $82.88$143.02 during fiscal 2016.2019. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.program. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
Fiscal 2016 Compared to Fiscal 2015
Net cash flows provided by operating activities decreased due to $226.7 million received from the sale of notes receivable related to Dealer Services financing arrangements during fiscal 2015.
Net cash flows used in investing activities increased due to the timing of receipts and disbursements of restricted cash and cash equivalents held to satisfy client funds obligations of $5,257.6 million and the receipt of the CDK Global, Inc. ("CDK") dividend during fiscal 2015, partially offset by the timing of purchases of and proceeds from corporate and client funds marketable securities of $545.7 million.
Net cash flows provided by financing activities increased due to the net increase in client funds obligations of $2,728.9 million, as a result of the timing of cash received and payments made related to client funds, proceeds from our $2.0 billion September 2015 debt issuance, a decrease in our repurchases of common stock, and the timing of borrowings and repayments of commercial paper. We purchased approximately 13.8 million shares of our common stock at an average price per share of $82.88 during fiscal 2016 as compared to purchases of 18.2 million shares at an average price per share of $85.28 during fiscal 2015. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
Capital Resources and Client Fund Obligations
InOn July 15, 2020, the Company gave notice to the current holders of our intention to redeem the $1.0 billion 2.25% Senior Notes due September 2015, we issued15, 2020 on the call date of August 15, 2020. It is the Company's intent to issue new long-term notes to fund this redemption and which also may be used for general corporate purposes. If necessary in the interim, the Company intends to issue commercial paper to fund the Notes’ redemption until such time as the new notes are issued.
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 acceptable to us, or at all. See Note 109 of our Consolidated Financial Statements for a description of our long-term financing, including this fiscal 2016 debt issuance.notes.
Our U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. Duringsecurities. In June 2020, the majority of fiscal 2017, thisCompany decreased its U.S. short-term commercial paper program providedto provide for the issuance of up to $9.25$9.7 billion from $10.3 billion in aggregate maturity value and in June 2017, we increased our commercial paper program to $9.5 billion.value. Our commercialcommercial paper program is rated A-1+ by Standard and Poor’s and Prime-1 (“P-1”) by Moody’s. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. In fiscal 2017 and 2016, our average daily borrowings were $3.1 billion and $2.7 billion, respectively, at a weighted average interest rate of 0.6% and 0.3%, respectively. The weighted average maturity of the Company’s commercial paper
during fiscal 2017 was approximately two days. At June 30, 20172020 and 2016,2019, we had no outstanding obligations under our short-term commercial paper program.borrowing outstanding. Details of the borrowings under the commercial paper program are as follows:
| | | | | | | | | | | | | | | | | |
| Years ended June 30, | | | | | 2020 | | 2019 |
| Average daily borrowings (in billions) | | | | | $ | 2.7 | | | $ | 2.8 | |
| Weighted average interest rates | | | | | 1.6 | % | | 2.2 | % |
| Weighted average maturity (approximately in days) | | | | | 2 days | | 2 days |
Our U.S., Canadian, and CanadianUnited Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. We have successfully borrowed through the use of reverse repurchase agreements on an as neededas-needed basis to meet short-term funding requirements related to client funds obligations. At June 30, 20172020 and 2016, there were no2019, the Company had $13.6 million and $262.0 million, respectively, of outstanding obligations related to the reverse repurchase agreements. For fiscal 2017 and 2016, we had average outstanding balances underDetails of the reverse repurchase agreements of $274.8 million and $341.0 million, respectively, at weighted average interest rates of 0.6% and 0.4%, respectively. See Note 9 of our Consolidated Financial Statements for client fund investments usedare as collateral for reverse repurchase agreements.follows:
| | | | | | | | | | | | | | | | | |
| Years ended June 30, | | | | | 2020 | | 2019 |
| Average outstanding balances | | | | | $ | 263.4 | | | $ | 316.7 | |
| Weighted average interest rates | | | | | 1.6 | % | | 1.9 | % |
We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a $3.5$3.2 billion, 364-day credit agreement with a group of lenders that matures in June 20182021 with a one year term-out option. In addition, we have a five-year $3.75$3.75 billion credit facility and a five-year $2.25$2.75 billion credit facility maturing in June 20212023 and June 2022,2024, respectively, each with an accordion feature under which the aggregate commitment can be increased by $500$500 million,, subject to the availability of additional commitments. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. We hadhad no borrowings throughthrough June 30, 20172020 under the credit agreements.facilities. We believe that we currently meet all conditions set forth in the revolving credit agreements to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the $9.5$9.7 billion available to us under the revolving credit agreements. See Note 68 of our Consolidated Financial Statements for a description of our short-term financing including credit facilities.
Our investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages, alternative-A mortgages, sub-prime auto loans or sub-prime home equity loans, collateralized debt obligations, collateralized loan obligations, credit default swaps, derivatives, auction rate securities, structured investment vehicles or non-investment grade fixed-income securities. We own AAA ratedAAA-rated senior tranches of primarily fixed rate auto loan, credit card, auto loan, equipment lease, and rate reduction receivables, secured predominatelypredominantly by prime collateral. All collateral on asset-backed securities is performing as expected. In addition, we own senior debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks. We do own mortgage-backed securities, which represent an undivided beneficial ownership interest in a group or pool of one or more residential mortgages. These securities are collateralized by the cash flows of 15-year and 30-year residential mortgages and are guaranteed primarily by Federal National Mortgage Association as to the timely payment of principal and interest. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations. See Note 64 of our Consolidated Financial Statements for a description of our corporate investments and funds held for clients.
Capital expenditures for continuing operations for fiscal 20172020 were $249.1$168.3 million, as compared to $165.7$162.7 million for fiscal 2016.2019. We expect capital expenditures in fiscal 20182021 to be aboutbetween $175 million and $200 million.
Contractual Obligations
The following table provides a summary of our contractual obligations at June 30, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Payments due by period | | | | | | | | | | |
| Contractual Obligations | | Less than
1 year | | 1-3
years | | 3-5
years | | More than
5 years | | Unknown | | Total |
| | | | | | | | | | | | |
| Debt Obligations (1) | | $ | 1,046.8 | | | $ | 69.4 | | | $ | 69.6 | | | $ | 1,019.8 | | | $ | — | | | $ | 2,205.6 | |
| Cash Flow Hedges (2) | | $ | 40.3 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 40.3 | |
| Operating Lease Obligations (3) | | $ | 105.5 | | | $ | 168.8 | | | $ | 100.5 | | | $ | 96.8 | | | $ | — | | | $ | 471.6 | |
| Purchase Obligations (4) | | $ | 415.6 | | | $ | 165.3 | | | $ | 32.1 | | | $ | 0.2 | | | $ | — | | | $ | 613.2 | |
Obligations Related to Unrecognized
Tax Benefits (5) | | $ | 3.7 | | | $ | — | | | $ | — | | | $ | — | | | $ | 58.6 | | | $ | 62.3 | |
Other Long-Term Liabilities Reflected
on our Consolidated Balance Sheets: | | | | | | | | | | | | |
| Compensation and Benefits (6) | | $ | 34.0 | | | $ | 63.3 | | | $ | 59.2 | | | $ | 308.4 | | | $ | 27.7 | | | $ | 492.6 | |
| | | | | | | | | | | | |
| Total | | $ | 1,645.9 | | | $ | 466.8 | | | $ | 261.4 | | | $ | 1,425.2 | | | $ | 86.3 | | | $ | 3,885.6 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Payments due by period |
| Contractual Obligations | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Unknown | | Total |
| | | | | | | | | | | | | |
| Debt Obligations (1) | | $ | 63.6 |
| | $ | 116.8 |
| | $ | 1,081.5 |
| | $ | 1,124.1 |
| | $ | — |
| | $ | 2,386.0 |
|
| Operating Lease Obligations (2) | | $ | 105.4 |
| | $ | 170.7 |
| | $ | 87.1 |
| | $ | 110.5 |
| | $ | — |
| | $ | 473.7 |
|
| Purchase Obligations (3) | | $ | 368.7 |
| | $ | 225.5 |
| | $ | 50.5 |
| | $ | 0.2 |
| | $ | — |
| | $ | 644.9 |
|
Obligations Related to Unrecognized Tax Benefits (4) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 74.6 |
| | $ | 74.6 |
|
Other Long-Term Liabilities Reflected on our Consolidated Balance Sheets: | | | | | | | | | | | | |
| Compensation and Benefits (5) | | $ | 3.8 |
| | $ | 250.1 |
| | $ | 123.1 |
| | $ | 273.0 |
| | $ | 93.7 |
| | $ | 743.7 |
|
| Acquisition-related obligations (6) | | $ | 2.6 |
| | $ | 8.1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10.7 |
|
| Total | | $ | 544.1 |
| | $ | 771.2 |
| | $ | 1,342.2 |
| | $ | 1,507.8 |
| | $ | 168.3 |
| | $ | 4,333.6 |
|
(1)These amounts represent the principal and interest payments of our debt.
| |
(1) | These amounts represent the principal and interest payments of our debt. |
| |
(2) | Included in these amounts are various facilities and equipment leases. We enter into operating leases in the normal course of business relating to facilities and equipment. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts or if we enter into additional operating lease agreements. |
| |
(3) | Purchase obligations are comprised of a $235.0 million reinsurance premium with Chubb for the fiscal 2018 policy year, as well as obligations related to software subscription licenses and purchase and maintenance agreements on our software, equipment, and other assets. |
| |
(4) | We are unable to make reasonably reliable estimates as to the period in which cash payments related to unrecognized tax benefits are expected to be paid. |
| |
(5) | Compensation and benefits primarily relates to amounts associated with our employee benefit plans and other compensation arrangements. These amounts exclude the estimated contributions to our defined benefit plans, which are expected to be $9.5 million in fiscal 2018. |
| |
(6) | Acquisition-related obligations relate to contingent consideration for a business acquisition for which the amount of contingent consideration was determinable at the date of acquisition and therefore included on the Consolidated Balance Sheet as a liability. |
(2)During fiscal 2020, we entered into a series of treasury rate lock transactions with an aggregate notional amount totaling $400.0 million, to hedge our exposure to changes in interest rates in anticipation of the refinancing of our fixed-rate notes due September 15, 2020. These amounts represent the aggregate fair value as of June 30, 2020, and is included in other current liabilities on our Consolidated Balance Sheet. Refer to Note 9 of our Consolidated Financial Statements for additional information.
(3)Included in these amounts are various facilities and equipment leases. We enter into operating leases in the normal course of business relating to facilities and equipment. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts or if we enter into additional operating lease agreements.
(4)Purchase obligations are comprised of a $240 million reinsurance premium with Chubb for the fiscal 2021 policy year, as well as obligations related to software subscription licenses and purchase and maintenance agreements on our software, equipment, and other assets.
(5)Based on current estimates, we expect to make cash payments up to $3.7 million in the next twelve months for obligations related to unrecognized tax benefits across various jurisdictions and tax periods. For $58.6 million of obligations related to unrecognized tax benefits we are unable to make reasonably reliable estimates as to the period in which cash payments are expected to be paid.
(6)Compensation and benefits primarily relates to amounts associated with our employee benefit plans and other compensation arrangements. These amounts exclude the estimated contributions to our defined benefit plans, which are expected to be $9.3 million in fiscal 2021.
In addition to the obligations quantified in the table above, we had obligations for the remittance of funds relating to our payroll and payroll tax filing services. As of June 30, 2017,2020, the obligations relating to these matters, which are expected to be paid in fiscal 2018,2021, total $27,189.4$25,831.6 million and were recorded in client funds obligations on our Consolidated Balance Sheets. We had $27,291.5$26,708.1 million of cash and cash equivalentsequivalents and marketable securities that were impounded from our clients to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as of June 30, 2017.2020.
Separately, ADP Indemnity paid a premiumpremium of $235.0$240 million in July 2017July 2020 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 20182021 policy year on terms substantially similar to the fiscal 2017 reinsurance policy.year. At June 30, 2017,2020, ADP Indemnity had total assets of $533.9$548.7 million to satisfy the actuarially estimated unpaid losses of $459.7$487.7 million for the policy years since July 1, 2003. ADP Indemnity paid claims of $10.7$4.4 million and $14.0$4.0 million, net of insurance recoveries, in fiscal 20172020 and 2016,2019, respectively. Refer to the "Analysis“Analysis of Reportable Segments - Other"PEO Services” above for additional information regarding ADP Indemnity.
In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the
performance of our services and products. We do not expect any material losses related to such representations and warranties.
Quantitative and Qualitative Disclosures about Market Risk
Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, short-term marketable securities, and long-term marketable securities) and client funds assets (funds that have been collected from clients but have not yet remitted to the applicable tax authorities or client employees).
Our corporate investments are invested in cash and cash equivalents and highly liquid, investment-grade marketable securities. These assets are available for our regular quarterly dividends, share repurchases, of common stock for treasurycapital expenditures and/or acquisitions, as well as other corporate operating purposes. All of our short-term and long-term fixed-income securities are classified as available-for-sale securities.
Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary objectives. Consistent with those objectives, we also seek to maximize interest income and to minimize the volatility of interest income. Client funds assets are invested in highly liquid, investment-grade marketable securities, with a maximum maturity of 10 years at the time of purchase, and money market securities and other cash equivalents.
We utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). As part of our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other unrelated client funds obligations, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. In circumstances where we experience a reduction in employment levels due to a slowdown in the economy, we may make tactical decisions to sell certain securities in order to reduce the size of the funds held for clients to correspond to client fund obligations. We minimize the risk of not having funds collected from a client available at the time such client’s obligation becomes due by impounding, in virtually all instances, the client’s funds in advance of the timing of payment of such client’s obligation. As a result of this practice, we have consistently maintained the required level of client funds assets to satisfy all of our obligations.
There are inherent risks and uncertainties involving our investment strategy relating to our client funds assets. Such risks include liquidity risk, including the risk associated with our ability to liquidate, if necessary, our available-for-sale securities in a timely manner in order to satisfy our client funds obligations. However, our investments are made with the safety of principal, liquidity, and diversification as the primary goals to minimize the risk of not having sufficient funds to satisfy all of our client funds obligations. We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our $9.5$9.7 billion commercial paper program (rated A-1+ by Standard and Poor’s and Prime-1 ("P-1")P-1 by Moody’s, the highest possible short-term credit ratings), and our ability to engage in reverse repurchase agreementsagreement transactions and available borrowings under our $9.5$9.7 billion committed credit facilities. The reduced availability of financing during periods of economic turmoil, including the COVID-19 pandemic, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business. In addition to liquidity risk, our investments are subject to interest rate risk and credit risk, as discussed below.
We have established credit quality, maturity, and exposure limits for our investments. The minimum allowed credit rating at time of purchase for corporate, Canadian government agency and Canadian provincial bonds is BBB, for asset-backed securities is AAA, and for municipal bonds is A. The maximum maturity at time of purchase for BBB ratedBBB-rated securities is 5 years, for single A rated securities is 7 years, and for AA ratedAA-rated and AAA ratedAAA-rated securities is 10 years. Time deposits and commercial paper must be rated A-1 and/or P-1. Money market funds must be rated AAA/Aaa-mf.
Details regarding our overall investment portfolio are as follows:
| | | (In millions) | | | | | | | |
| Years ended June 30, | | 2017 | | 2016 | | 2015 | Years ended June 30, | | 2020 | | 2019 | |
| Average investment balances at cost: | | | | | | | Average investment balances at cost: | | | | | |
| Corporate investments | | $ | 6,143.3 |
| | $ | 5,610.1 |
| | $ | 4,560.4 |
| Corporate investments | | $ | 4,560.3 | | | $ | 4,817.3 | | |
| Funds held for clients | | 23,023.5 |
| | 22,418.7 |
| | 21,798.4 |
| Funds held for clients | | 25,990.3 | | | 25,458.5 | | |
| Total | | $ | 29,166.8 |
| | $ | 28,028.8 |
| | $ | 26,358.8 |
| Total | | $ | 30,550.6 | | | $ | 30,275.8 | | |
| | | |
| | |
| | | | | | | |
Average interest rates earned exclusive of realized (gains)/losses on: | | |
| | |
| | | Average interest rates earned exclusive of realized
(gains)/losses on: | | | | | |
| Corporate investments | | 1.2 | % | | 1.1 | % | | 1.3 | % | Corporate investments | | 1.9 | % | | 2.0 | % | |
| Funds held for clients | | 1.7 | % | | 1.7 | % | | 1.7 | % | Funds held for clients | | 2.1 | % | | 2.2 | % | |
| Total | | 1.6 | % | | 1.6 | % | | 1.7 | % | Total | | 2.1 | % | | 2.2 | % | |
| | | | | | | | | |
| Realized gains on available-for-sale securities | | $ | (5.3 | ) | | $ | (5.1 | ) | | $ | (6.8 | ) | Realized gains on available-for-sale securities | | $ | (50.5) | | | $ | (1.8) | | |
| Realized losses on available-for-sale securities | | 3.1 |
| | 10.1 |
| | 1.9 |
| Realized losses on available-for-sale securities | | 37.6 | | | 2.7 | | |
| Net realized (gains)/losses on available-for-sale securities | | $ | (2.2 | ) | | $ | 5.0 |
| | $ | (4.9 | ) | Net realized (gains)/losses on available-for-sale securities | | $ | (12.9) | | | $ | 0.9 | | |
| | | | | | | | | | | | | | | | |
| As of June 30: | | | | | | |
| | | | | | |
| Net unrealized pre-tax gains on available-for-sale securities | | $ | 876.8 | | | $ | 287.5 | | | |
| | | | | | |
| Total available-for-sale securities at fair value | | $ | 21,576.6 | | | $ | 24,859.1 | | | |
|
| | | | | | | | | | | | |
| As of June 30: | | | | | | |
| | | |
| | |
| | |
| Net unrealized pre-tax gains on available-for-sale securities | | $ | 102.5 |
| | $ | 510.2 |
| | $ | 216.5 |
|
| | | | | | | |
| Total available-for-sale securities at fair value | | $ | 21,901.1 |
| | $ | 21,605.0 |
| | $ | 20,873.8 |
|
During the three months ended June 30, 2020, the Company made a decision to sell certain available-for-sale securities in the funds held for clients as the Company anticipated client fund obligations would decline due to reduction in employment levels from a slowdown in the economy as a result of the COVID-19 pandemic. To maintain the size of the funds held for clients in line with client fund obligations, the Company reduced its holdings of available-for-sale securities in the funds held for clients and sold approximately $1.6 billion of its available-for-sale securities.
We are exposed to interest rate risk in relation to securities that mature, as the proceeds from maturing securities are reinvested. Factors that influence the earnings impact of interest rate changes include, among others, the amount of invested funds and the overall portfolio mix between short-term and long-term investments. This mix varies during the fiscal year and is impacted by daily interest raterate changes. The annualized interest rate earned on our entire portfolio increased slightly to 1.6%decreased from 2.2% for fiscal 2017, as compared2019 to 2.1% for fiscal 2016.2020. A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-term interest rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $11$17 million impact to earnings from continuing operations before income taxes over the ensuing twelve-month period ending June 30, 2018.2021. A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated average short-term investment balances and any related short-term borrowings would result in approximately a $6an $8 million impact to earnings from continuing operations before income taxes over the ensuing twelve-month period ending June 30, 2018.2021.
We are exposed to credit risk in connection with our available-for-sale securities through the possible inability of the borrowers to meet the terms of the securities. We limit credit risk by investing in investment-grade securities, primarily AAAAAA-rated and AAAA- rated securities, as rated by Moody’s, Standard & Poor’s, andDBRS for Canadian dollar denominated securities, DBRS. Approximately and Fitch for asset-backed and commercial-mortgage-backed securities. Approximately 79% of our available-for-saleavailable-for-sale securities held a AAAAAA-rating or AA ratingAA-rating at June 30, 2017.2020. In addition, we limit amounts that can be invested in any security other than U.S. government and government agency, Canadian government, orand United Kingdom government agency securities.
We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign currency exchange rates that could impact our consolidated results of operations, financial position, or cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. We may use derivative financial instruments as risk management tools and not for trading purposes. We had no derivative financial instruments outstanding at June 30, 2017 or 2016.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1, NewRecently Issued Accounting Pronouncements, of Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and expenses.other comprehensive income. We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. In addition, as the duration and severity of COVID-19 pandemic are uncertain, certain of our estimates could require further judgment or modification and therefore carry a higher degree of variability and volatility. As events continue to evolve, our estimates may change materially in future periods. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below.
Revenue Recognition.Ourrevenues are primarily attributableRecognition (including Deferred Costs), Goodwill and Income Taxes. Refer to fees for providing services (e.g., Employer Services' payroll processing fees), investment income on payroll funds, payroll tax filing funds and other Employer Services' client-related funds, and fees charged to implement clients on the Company's solutions. We enter into agreements for a fixed fee per transaction (e.g., numberNote 1, Summary of payees or numberSignificant Accounting Policies, of payrolls processed). Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured.
PEO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions. 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 is not the primary obligor with respect to this aspect of the PEO arrangement. With respectNotes to the payrollConsolidated Financial Statements for discussion of our policies for Revenue Recognition (including Deferred Costs), Goodwill and payroll taxes,Income Taxes.
Goodwill. Goodwill represents the worksite employer isexcess of purchase price over the primary obligor, has latitude in establishing price, selects suppliers, and determines the service specifications.
The fees collected from the worksite employers for benefits, 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 respectvalue assigned to the fees for benefits, workers’ compensationnet tangible and state unemployment taxes, the Companyidentifiable intangible assets of businesses acquired. Goodwill is the primary obligor, has latitude in establishing price, selects suppliers, determines the service specifications and is liable for credit risk.
We recognize interest income 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.
Client implementation fees are charged to set clients up on our solutions and are deferred until the client has gone live and services have begun. These fees are amortized to revenue over the longer of the contractual term or expected client life, including estimated renewals of client contracts.
We assess the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history.
Goodwill. We account for goodwill in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other," which requires that goodwill be tested for impairment annually whenever events or changes in circumstances indicate the carrying value may not be recoverable. According to ASC 350, we can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or can directly perform the two-step impairment test. Based on a qualitative assessment, if it is determinedmore frequently when an event or circumstance indicates that the fair value of a reporting unit is more likely than not less than its carrying amount, the two-step impairment test prescribed by ASC 350 wouldgoodwill might be performed.impaired.
OurThe Company’s annual goodwill impairment assessment as of June 30, 20172020 was performed for all reporting units using a qualitative approach. The qualitative assessment considered industryquantitative approach by comparing the fair value of each reporting unit to its carrying value. We estimated the fair value of each reporting unit using, as appropriate, the income approach, which is derived using the present value of future cash flows discounted at a risk-adjusted weighted-average cost of capital, and market considerations for any deterioration in the environment in which we operate, the competitive environment, a decline (both absolute and relative to peers) in market-dependent multiples or metrics, any changes in the market for our services, and regulatory and political development. Additionally, we assessed financial
performance by reporting unit and considered cost factors, such as labor or other costs, that would have a negative effect on results. The annual goodwill impairment assessments performed for fiscal 2017 have indicated that itapproach, which is more likely than not thatbased upon using market multiples of companies in similar lines of business. Significant assumptions used in determining the fair value of our reporting units is substantially in excessinclude projected revenue growth rates, profitability projections, working capital assumptions, the weighted average cost of carrying valuecapital, the determination of appropriate market comparison companies, and not at riskterminal growth rates. Several of failing step one of the quantitative goodwill impairment test. Basedthese assumptions including projected revenue growth rates and profitability projections are dependent on our qualitativeability to upgrade, enhance, and expand our technology and services to meet client needs and preferences. As such, the determination of fair value requires management to make significant estimates and assumptions related to forecasts of future revenue and operating margins. Based upon the quantitative assessment, the Company has determinedconcluded that goodwill is not impaired.
Income Taxes. The objectives of accounting for income taxes are to recognize As the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service ("IRS") and other tax authorities. A changeassumptions used in the assessment of the outcomes of such matters could materiallyincome approach and market approach can have a material impact our Consolidated Financial Statements.
There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Specifically, the likelihood of an entity's tax benefits being sustained must be “more likely than not” assuming that those positions will be examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If a tax position drops below the “more likely than not” standard, the benefit can no longer be recognized. Assumptions, judgment and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard could materially impact our Consolidated Financial Statements. As of June 30, 2017 and 2016, the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $74.6 million and $27.4 million, respectively.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Based on current estimates, favorable settlements related to various jurisdictions and tax periods could increase earnings up to $35 million in the next twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
Stock-Based Compensation. We measure stock-based compensation expense based on the fair value of the award on the date of grant. We determine the fair value of stock options issued by usingdeterminations, we performed a binomial option-pricing model. The binomial option-pricing model considerssensitivity analysis and determined that a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilizedone percentage point increase in the binomial option-pricing model are based on a combinationweighted-average cost of implied market volatilities, historical volatilitycapital would not result in an impairment of our stock price,goodwill for all reporting units and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. Determining these assumptions is subjective and complex, and, therefore, a change in the assumptions utilized could impact the calculation of thetheir fair value of our stock options.values substantially exceeded their carrying values.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures About Market Risk” under “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Automatic Data Processing, Inc. and subsidiaries (the "Company") as of June 30, 20172020 and 2016,2019, and the related consolidated statements of income,earnings, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2017. Our audits also included2020, and the financial statementrelated notes and the schedule listed in the Index at Item 15(a) 2. 2 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 5, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective July 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (ASC 842), under the optional transition method.
Basis for Opinion
These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
InCritical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion such consolidated financial statements present fairly, in all material respects,on the financial position of Automatic Data Processing, Inc. and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, present fairly, in all material respects,and we are not, by communicating the information set forth therein.critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
We have also audited, in accordance with
Goodwill – Employer Services Reportable Segment— Refer to Notes 1 and 7 to the standardsfinancial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the Publicfair value of each reporting unit to its carrying value. The Company Accounting Oversight Board (United States),uses the Company's internal control over financial reportingdiscounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to forecasts of future revenue and operating margin. In addition, the discounted cash flow model requires the Company to select an appropriate weighted average cost of capital based on current market conditions as of June 30, 2017, based2020. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both.
Forecasts of future revenue and operating margin from the Company’s next-gen platform for which there is limited historical data, contribute significantly to the estimate of fair value of a reporting unit within the Employer Services reportable segment, with approximately $678 million of goodwill, as of June 30, 2020. Given the limited historical data associated with the Company’s next-gen platform, significant management judgment was required to forecast future revenue and operating margin to estimate the fair value of the reporting unit. In addition, there is inherent uncertainty related to the timing of economic recovery and this condition could impact the Company’s forecasts of future revenue and operating margin, and its selection of an appropriate weighted average cost of capital as of June 30, 2020, for the reporting unit. In turn, a high degree of auditor judgment and an increased extent of audit effort were required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions, related to the forecasts of revenue and operating margin and selection of the weighted average cost of capital, including the involvement of our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future revenue and operating margin and the selection of the weighted average cost of capital used by management to estimate the fair value contributed by the next-gen platform included the following, among others:
•We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting unit within the Employer Services reportable segment, such as controls related to management’s forecasts of future revenue and operating margin and the selection of the weighted average cost of capital.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation models, methodology, and significant assumptions used by the Company, specifically the weighted average cost of capital including:
◦Testing the mathematical accuracy of the Company’s calculation of the weighted average cost of capital.
◦Developing a range of independent estimates and compared to the weighted average cost of capital selected by management.
◦Evaluating management’s selection of the company-specific risk premium by comparing to the revenue growth and operating margins of peer companies.
•We evaluated management’s ability to accurately forecast future revenue and operating margin by comparing actual results to management’s historical forecasts. Due to the limited historical data for the next-gen platform, we evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts to (1) the historical operating results of the Company’s similar existing platforms, (2) the limited operating results to date of the next-gen platform, (3) internal communications to management and the board of directors, and (4) external communications made by management to analysts and investors.
•Given the inherent uncertainty related to the timing of economic recovery and the resulting adverse impacts associated with the COVID-19 outbreak on the criteria established in Internal Control - Integrated Framework (2013) issued byreporting unit, we evaluated the Committeereasonableness of Sponsoring Organizationsmanagement’s assumptions related to the severity of business disruption associated with the COVID-19 outbreak on the reporting unit and timing of economic recovery by:
◦Comparing management’s analysis of the Treadway Commission and our report dated August 4, 2017 expressed an unqualified opinionexpected business disruption from the COVID-19 outbreak on the reporting unit to the business impacts observed since the outbreak during the Company’s fiscal year 2020.
◦Comparing management’s analysis of the timing of economic recovery to external economic recovery and industry forecasts to evaluate contradictory evidence related to management’s assumptions regarding the expected impact of the COVID-19 business disruption and timing of recovery.
◦Evaluating the impact of various alternative scenarios on the discounted cash flow and fair value.
Client Fund Obligations - Refer to Note 4 to the financial statements
Critical Audit Matter Description
Client funds obligations represent the Company's internal control overcontractual obligations to remit funds to satisfy clients' payroll, tax and other payee payment obligations and are recorded as a liability at the time that the Company impounds funds from clients (i.e., money movement). The Company has reported client funds obligations as a current liability in the consolidated financial reporting.statements totaling $25,831.6 million as of June 30, 2020. This money movement activity involves significant amounts of client funds being impounded and remitted to third parties and results in a high volume of transactions.
To validate the accuracy and completeness of the client funds obligations reported as of period end, the Company performs complex data extracts in order to reconcile the transactional data to the client funds obligations and funds held for clients balances reported at period end. Given the significant volume of data used in the reconciliation, the complexity of the data extraction, and the reconciliation of the data extracts to the client funds obligations balance reported, auditing the client funds obligations is complex and requires the involvement of data specialists to independently reperform the reconciliation and assist with testing of the completeness and accuracy of client funds obligations reported as of period end, including identifying the manual adjustments identified in management’s reconciliation process.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company's client funds obligations included the following, among others:
•We tested the effectiveness of general information technology controls over the applications relevant to the money movement reconciliation process.
•We tested the effectiveness of (1) management’s controls over the client funds obligation data reconciliation and (2) management’s control to reconcile the consolidated client funds obligations to the corresponding consolidated funds held for clients balance.
•We involved data specialists to (1) independently reperform management’s client funds obligation reconciliation and (2) perform data analyses to identify and evaluate recurring and new adjustments to the data extracts in the current period.
•For a selection of client funds obligations transactions, we evaluated whether the funds were impounded prior to June 30, 2020, agreed the liability to the corresponding asset balance, and evaluated whether the funds were properly included or excluded from the client funds obligations.
•We made a selection of adjustments identified by management’s reconciliation of the transactional data to the client funds obligations balance reported at period end and evaluated whether the adjustments were supported and appropriate to reconcile and validate the client funds obligations balance reported at period end.
•We made a selection of disbursements to third parties subsequent to the balance sheet date to evaluate whether they were properly included or excluded from client funds obligations.
•We tested the Company’s reconciliation of the consolidated client funds obligations to funds held for clients.
|
| |
| /s/ Deloitte & Touche LLP |
Parsippany, New Jersey
August 4, 20175, 2020
We have served as the Company’s auditor since 1968.
Statements of Consolidated Earnings
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Years ended June 30, | | 2020 | | 2019 | | 2018 |
| | | | | | |
| REVENUES: | | | | | | |
Revenues, other than interest on funds held
for clients and PEO revenues | | $ | 9,538.1 | | | $ | 9,375.8 | | | $ | 8,983.4 | |
| Interest on funds held for clients | | 545.2 | | | 561.9 | | | 466.5 | |
| PEO revenues (A) | | 4,506.5 | | | 4,172.5 | | | 3,824.3 | |
| TOTAL REVENUES | | 14,589.8 | | | 14,110.2 | | | 13,274.2 | |
| | | | | | |
| EXPENSES: | | | | | | |
| Costs of revenues: | | | | | | |
| Operating expenses | | 7,404.1 | | | 7,080.9 | | | 6,847.5 | |
| Systems development and programming costs | | 674.1 | | | 636.3 | | | 635.4 | |
| Depreciation and amortization | | 366.9 | | | 304.4 | | | 274.5 | |
| TOTAL COSTS OF REVENUES | | 8,445.1 | | | 8,021.6 | | | 7,757.4 | |
| | | | | | |
| Selling, general, and administrative expenses | | 3,003.0 | | | 3,064.2 | | | 2,959.4 | |
| Interest expense | | 107.1 | | | 129.9 | | | 102.7 | |
| TOTAL EXPENSES | | 11,555.2 | | | 11,215.7 | | | 10,819.5 | |
| | | | | | |
| Other (income)/expense, net | | (148.0) | | | (111.1) | | | 172.1 | |
| | | | | | |
| EARNINGS BEFORE INCOME TAXES | | 3,182.6 | | | 3,005.6 | | | 2,282.6 | |
| | | | | | |
| Provision for income taxes | | 716.1 | | | 712.8 | | | 397.7 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| NET EARNINGS | | $ | 2,466.5 | | | $ | 2,292.8 | | | $ | 1,884.9 | |
| | | | | | |
| | | | | | |
| | | | | | |
| BASIC EARNINGS PER SHARE | | $ | 5.73 | | | $ | 5.27 | | | $ | 4.28 | |
| | | | | | |
| | | | | | |
| | | | | | |
| DILUTED EARNINGS PER SHARE | | $ | 5.70 | | | $ | 5.24 | | | $ | 4.25 | |
| | | | | | |
| Basic weighted average shares outstanding | | 430.8 | | | 435.0 | | | 440.6 | |
| Diluted weighted average shares outstanding | | 432.7 | | | 437.6 | | | 443.3 | |
| | | | | | |
| | | | | | |
.
|
| | | | | | | | | | | | |
| Years ended June 30, | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| REVENUES: | | | | | | |
Revenues, other than interest on funds held for clients and PEO revenues | | $ | 8,518.1 |
| | $ | 8,234.0 |
| | $ | 7,928.3 |
|
| Interest on funds held for clients | | 397.4 |
| | 377.3 |
| | 377.7 |
|
| PEO revenues (A) | | 3,464.3 |
| | 3,056.5 |
| | 2,632.5 |
|
| TOTAL REVENUES | | 12,379.8 |
| | 11,667.8 |
| | 10,938.5 |
|
| | | | | | | |
| EXPENSES: | | |
| | |
| | |
| Costs of revenues: | | |
| | |
| | |
| Operating expenses | | 6,416.1 |
| | 6,025.0 |
| | 5,625.3 |
|
| Systems development and programming costs | | 627.5 |
| | 603.7 |
| | 595.4 |
|
| Depreciation and amortization | | 226.2 |
| | 211.6 |
| | 206.9 |
|
| TOTAL COSTS OF REVENUES | | 7,269.8 |
| | 6,840.3 |
| | 6,427.6 |
|
| | | | | | | |
| Selling, general, and administrative expenses | | 2,783.2 |
| | 2,637.0 |
| | 2,496.9 |
|
| Interest expense | | 80.0 |
| | 56.2 |
| | 6.5 |
|
| TOTAL EXPENSES | | 10,133.0 |
| | 9,533.5 |
| | 8,931.0 |
|
| | | | | | | |
| Other income, net | | (284.3 | ) | | (100.4 | ) | | (63.2 | ) |
| | | | | | | |
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | | 2,531.1 |
| | 2,234.7 |
| | 2,070.7 |
|
| | | | | | | |
| Provision for income taxes | | 797.7 |
| | 741.3 |
| | 694.2 |
|
| NET EARNINGS FROM CONTINUING OPERATIONS | | $ | 1,733.4 |
| | $ | 1,493.4 |
| | $ | 1,376.5 |
|
| | | | | | | |
| (LOSSES)/EARNINGS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES | | — |
| | (1.4 | ) | | 171.5 |
|
| (Benefit)/provision for income taxes | | — |
| | (0.5 | ) | | 95.5 |
|
| NET (LOSS)/EARNINGS FROM DISCONTINUED OPERATIONS | | $ | — |
| | $ | (0.9 | ) | | $ | 76.0 |
|
| | | | | | | |
| NET EARNINGS | | $ | 1,733.4 |
| | $ | 1,492.5 |
| | $ | 1,452.5 |
|
| | | | | | | |
| Basic Earnings Per Share from Continuing Operations | | $ | 3.87 |
| | $ | 3.27 |
| | $ | 2.91 |
|
| Basic Earnings Per Share from Discontinued Operations | | — |
| | — |
| | 0.16 |
|
| BASIC EARNINGS PER SHARE | | $ | 3.87 |
| | $ | 3.27 |
| | $ | 3.07 |
|
| | | | | | | |
| Diluted Earnings Per Share from Continuing Operations | | $ | 3.85 |
| | $ | 3.25 |
| | $ | 2.89 |
|
| Diluted Earnings Per Share from Discontinued Operations | | — |
| | — |
| | 0.16 |
|
| DILUTED EARNINGS PER SHARE | | $ | 3.85 |
| | $ | 3.25 |
| | $ | 3.05 |
|
| | | | | | | |
| Basic weighted average shares outstanding | | 447.8 |
| | 457.0 |
| | 472.6 |
|
| Diluted weighted average shares outstanding | | 450.3 |
| | 459.1 |
| | 475.8 |
|
(A) For the years ended June 30, 2017 ("2020 (“fiscal 2017"2020”), June 30, 2016 ("2019 (“fiscal 2016"2019”), and June 30,2015 ("2018 (“fiscal 2015"2018”), Professional Employer Organization ("PEO"(“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $34,567.445,826.1 million, $30,928.6$42,688.8 million,, and $26,674.1$39,140.9 million,, respectively.
See notes to the Consolidated Financial Statements.
Statements of Consolidated Comprehensive Income
(In millions)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Years ended June 30, | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Net earnings | | $ | 2,466.5 | | | $ | 2,292.8 | | | $ | 1,884.9 | |
| | | | | | |
| Other comprehensive income/loss: | | | | | | |
| Currency translation adjustments | | (53.0) | | | (42.2) | | | 7.8 | |
| | | | | | |
| Unrealized net gains/(losses) on available-for-sale securities | | 602.2 | | | 642.4 | | | (460.7) | |
| Tax effect | | (136.4) | | | (144.4) | | | 123.4 | |
| Reclassification of net losses/(gains) on available-for-sale securities to net earnings | | (12.9) | | | 0.9 | | | 2.7 | |
| Tax effect | | 2.9 | | | (0.3) | | | (0.6) | |
| | | | | | |
| Unrealized loss on cash flow hedging activities | | (40.3) | | | — | | | — | |
| Tax effect | | 10.0 | | | — | | | — | |
| | | | | | |
| Pension net (losses)/gains arising during the year | | (160.8) | | | (84.7) | | | 87.0 | |
| Tax effect | | 39.5 | | | 20.0 | | | (18.7) | |
| Reclassification of pension liability adjustment to net earnings | | (11.8) | | | 40.3 | | | 9.3 | |
| Tax effect | | 3.1 | | | (9.5) | | | (4.5) | |
| | | | | | |
| Other comprehensive income/(loss), net of tax | | 242.5 | | | 422.5 | | | (254.3) | |
| Comprehensive income | | $ | 2,709.0 | | | $ | 2,715.3 | | | $ | 1,630.6 | |
|
| | | | | | | | | | | | |
| Years ended June 30, | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Net earnings | | $ | 1,733.4 |
| | $ | 1,492.5 |
| | $ | 1,452.5 |
|
| | | | | | | |
| Other comprehensive income: | | | | | | |
| Currency translation adjustments | | 23.0 |
| | (25.5 | ) | | (239.6 | ) |
| | | | | | | |
| Unrealized net (losses)/gains on available-for-sale securities | | (405.7 | ) | | 288.8 |
| | (103.0 | ) |
| Tax effect | | 141.6 |
| | (102.2 | ) | | 38.6 |
|
| Reclassification of net (gains)/losses on available-for-sale securities to net earnings | | (2.2 | ) | | 5.0 |
| | (4.9 | ) |
| Tax effect | | 0.8 |
| | (1.7 | ) | | 1.6 |
|
| | | | | | | |
| Pension net gains/(losses) arising during the period | | 109.6 |
| | (199.4 | ) | | (87.4 | ) |
| Tax effect | | (43.6 | ) | | 72.9 |
| | 32.7 |
|
| Reclassification of pension liability adjustment to net earnings | | 20.6 |
| | 12.0 |
| | 17.9 |
|
| Tax effect | | (8.2 | ) | | (4.4 | ) | | (6.5 | ) |
| | | | | | | |
| Other comprehensive (loss)/income, net of tax | | (164.1 | ) | | 45.5 |
| | (350.6 | ) |
| Comprehensive income | | $ | 1,569.3 |
| | $ | 1,538.0 |
| | $ | 1,101.9 |
|
See notes to the Consolidated Financial Statements.
Consolidated Balance Sheets
(In millions, except per share amounts)
| | | | | | | | | | | | | | |
| | | | |
| June 30, | | 2020 | | 2019 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 1,908.5 | | | $ | 1,949.2 | |
| Short-term marketable securities | | — | | | 10.5 | |
| Accounts receivable, net of allowance for doubtful accounts of $92.5 and $54.9, respectively | | 2,441.3 | | | 2,439.3 | |
| Other current assets | | 506.2 | | | 509.1 | |
| | | | |
| | | | |
| Total current assets before funds held for clients | | 4,856.0 | | | 4,908.1 | |
| Funds held for clients | | 26,708.1 | | | 29,434.2 | |
| Total current assets | | 31,564.1 | | | 34,342.3 | |
| | | | |
| Long-term receivables, net of allowance for doubtful accounts of $0.5 and $0.4, respectively | | 18.6 | | | 23.8 | |
| Property, plant and equipment, net | | 703.9 | | | 764.2 | |
| Operating lease right-of-use asset | | 493.7 | | | — | |
| Deferred contract costs | | 2,401.6 | | | 2,428.5 | |
| Other assets | | 458.4 | | | 934.4 | |
| Goodwill | | 2,309.4 | | | 2,323.0 | |
| Intangible assets, net | | 1,215.8 | | | 1,071.5 | |
| | | | |
| Total assets | | $ | 39,165.5 | | | $ | 41,887.7 | |
| | | | |
| Liabilities and Stockholders' Equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 102.0 | | | $ | 125.5 | |
| Accrued expenses and other current liabilities | | 1,980.7 | | | 1,759.0 | |
| Accrued payroll and payroll-related expenses | | 557.0 | | | 721.1 | |
| Dividends payable | | 387.3 | | | 340.1 | |
| Short-term deferred revenues | | 212.5 | | | 220.7 | |
| Obligations under reverse repurchase agreements (A) | | 13.6 | | | 262.0 | |
| | | | |
| Short-term debt | | 1,001.8 | | | — | |
| Income taxes payable | | 40.1 | | | 54.8 | |
| | | | |
| Total current liabilities before client funds obligations | | 4,295.0 | | | 3,483.2 | |
| Client funds obligations | | 25,831.6 | | | 29,144.5 | |
| Total current liabilities | | 30,126.6 | | | 32,627.7 | |
| Long-term debt | | 1,002.8 | | | 2,002.2 | |
| Operating lease liabilities | | 344.4 | | | — | |
| Other liabilities | | 837.0 | | | 798.7 | |
| Deferred income taxes | | 731.9 | | | 659.9 | |
| Long-term deferred revenues | | 370.6 | | | 399.3 | |
| Total liabilities | | 33,413.3 | | | 36,487.8 | |
| | | | |
| Commitments and Contingencies (Note 12) | | | | |
| | | | |
| Stockholders' equity: | | | | |
| Preferred stock, $1.00 par value: Authorized, 0.3 shares; issued, 0ne | | — | | | — | |
Common stock, $0.10 par value: authorized,1,000.0 shares; issued, 638.7 shares at June 30, 2020 and June 30, 2019; outstanding, 429.9 and 434.2 shares at June 30, 2020 and June 30, 2019, respectively | | 63.9 | | | 63.9 | |
| Capital in excess of par value | | 1,333.8 | | | 1,183.2 | |
| Retained earnings | | 18,436.3 | | | 17,500.6 | |
| Treasury stock - at cost: 208.9 and 204.5 shares at June 30, 2020 and June 30, 2019, respectively | | (14,067.0) | | | (13,090.5) | |
| Accumulated other comprehensive loss | | (14.8) | | | (257.3) | |
| Total stockholders’ equity | | 5,752.2 | | | 5,399.9 | |
| Total liabilities and stockholders’ equity | | $ | 39,165.5 | | | $ | 41,887.7 | |
|
| | | | | | | | |
| June 30, | | 2017 | | 2016 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 2,780.4 |
| | $ | 3,191.1 |
|
| Accounts receivable, net of allowance for doubtful accounts of $49.6 and $38.1, respectively | | 1,703.6 |
| | 1,742.8 |
|
| Other current assets | | 883.2 |
| | 725.3 |
|
| Total current assets before funds held for clients | | 5,367.2 |
| | 5,659.2 |
|
| Funds held for clients | | 27,291.5 |
| | 33,841.2 |
|
| Total current assets | | 32,658.7 |
| | 39,500.4 |
|
| Long-term receivables, net of allowance for doubtful accounts of $0.8 and $0.5, respectively | | 28.0 |
| | 27.1 |
|
| Property, plant and equipment, net | | 779.9 |
| | 685.0 |
|
| Other assets | | 1,352.2 |
| | 1,241.3 |
|
| Goodwill | | 1,741.0 |
| | 1,682.0 |
|
| Intangible assets, net | | 620.2 |
| | 534.2 |
|
| Total assets | | $ | 37,180.0 |
| | $ | 43,670.0 |
|
| | | | | |
| Liabilities and Stockholders' Equity | | |
| | |
|
| Current liabilities: | | |
| | |
|
| Accounts payable | | $ | 149.7 |
| | $ | 152.3 |
|
| Accrued expenses and other current liabilities | | 1,381.9 |
| | 1,246.8 |
|
| Accrued payroll and payroll-related expenses | | 562.5 |
| | 616.7 |
|
| Dividends payable | | 250.5 |
| | 238.4 |
|
| Short-term deferred revenues | | 232.9 |
| | 233.2 |
|
| Income taxes payable | | 49.0 |
| | 28.2 |
|
| Total current liabilities before client funds obligations | | 2,626.5 |
| | 2,515.6 |
|
| Client funds obligations | | 27,189.4 |
| | 33,331.8 |
|
| Total current liabilities | | 29,815.9 |
| | 35,847.4 |
|
| Long-term debt | | 2,002.4 |
| | 2,007.7 |
|
| Other liabilities | | 830.2 |
| | 701.1 |
|
| Deferred income taxes | | 163.1 |
| | 251.1 |
|
| Long-term deferred revenues | | 391.4 |
| | 381.1 |
|
| Total liabilities | | 33,203.0 |
| | 39,188.4 |
|
| | | | | |
| 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 June 30, 2017 and 2016, outstanding, 445.0 and 455.7 shares at June 30, 2017 and 2016, respectively | | 63.9 |
| | 63.9 |
|
| Capital in excess of par value | | 867.8 |
| | 768.1 |
|
| Retained earnings | | 14,728.2 |
| | 14,003.3 |
|
| Treasury stock - at cost: 193.7 and 183.0 shares at June 30, 2017 and June 30, 2016, respectively | | (11,303.7 | ) | | (10,138.6 | ) |
| Accumulated other comprehensive loss | | (379.2 | ) | | (215.1 | ) |
| Total stockholders’ equity | | 3,977.0 |
| | 4,481.6 |
|
| Total liabilities and stockholders’ equity | | $ | 37,180.0 |
| | $ | 43,670.0 |
|
(A) As of June 30, 2020, $13.6 million of long-term marketable securities 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 (see Note 8).
See notes to the Consolidated Financial Statements.
Statements of Consolidated Stockholders' Equity
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income/(Loss) |
| | Shares | | Amount | | | | | | | | |
| | | | | | | | | | | | |
| Balance at June 30, 2017 | | 638.7 | | | $ | 63.9 | | | $ | 867.8 | | | $ | 15,739.4 | | | $ | (11,303.7) | | | $ | (383.2) | |
| Net earnings | | — | | | — | | | — | | | 1,884.9 | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (254.3) | |
| Stock-based compensation expense | | — | | | — | | | 145.3 | | | — | | | — | | | — | |
| Issuances relating to stock compensation plans | | — | | | — | | | 1.7 | | | — | | | 144.5 | | | — | |
| | | | | | | | | | | | |
| Treasury stock acquired (8.5 shares repurchased) | | — | | | — | | | — | | | — | | | (1,050.4) | | | — | |
| Other (A) | | — | | | — | | | — | | | 42.3 | | | — | | | (42.3) | |
| | | | | | | | | | | | |
| Dividends ($2.52 per share) | | — | | | — | | | — | | | (1,120.0) | | | — | | | — | |
| | | | | | | | | | | | |
| Balance at June 30, 2018 | | 638.7 | | | $ | 63.9 | | | $ | 1,014.8 | | | $ | 16,546.6 | | | $ | (12,209.6) | | | $ | (679.8) | |
| Net earnings | | — | | | — | | | — | | | 2,292.8 | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 422.5 | |
| Stock-based compensation expense | | — | | | — | | | 144.2 | | | — | | | — | | | — | |
| Issuances relating to stock compensation plans | | — | | | — | | | 24.2 | | | — | | | 124.1 | | | — | |
| | | | | | | | | | | | |
| Treasury stock acquired (6.5 shares repurchased) | | — | | | — | | | — | | | — | | | (1,005.0) | | | — | |
| | | | | | | | | | | | |
| Dividends ($3.06 per share) | | — | | | — | | | — | | | (1,338.8) | | | — | | | — | |
| | | | | | | | | | | | |
| Balance at June 30, 2019 | | 638.7 | | | $ | 63.9 | | | $ | 1,183.2 | | | $ | 17,500.6 | | | $ | (13,090.5) | | | $ | (257.3) | |
| Net earnings | | — | | | — | | | — | | | 2,466.5 | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 242.5 | |
| Stock-based compensation expense | | — | | | — | | | 117.8 | | | — | | | — | | | — | |
| Issuances relating to stock compensation plans | | — | | | — | | | 32.8 | | | — | | | 112.9 | | | — | |
| | | | | | | | | | | | |
| Treasury stock acquired (6.2 shares repurchased) | | — | | | — | | | — | | | — | | | (1,089.4) | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Dividends ($3.52 per share) | | — | | | — | | | — | | | (1,523.9) | | | — | | | — | |
| Other | | — | | | — | | | — | | | (6.9) | | | — | | | — | |
| Balance at June 30, 2020 | | 638.7 | | | $ | 63.9 | | | $ | 1,333.8 | | | $ | 18,436.3 | | | $ | (14,067.0) | | | $ | (14.8) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income |
| | | Shares | | Amount | | | | |
| | | | | | | | | | | | | |
| Balance at June 30, 2014 | | 638.7 |
| | $ | 63.9 |
| | $ | 545.2 |
| | $ | 13,632.9 |
| | $ | (7,750.0 | ) | | $ | 178.2 |
|
| Net earnings | | — |
| | — |
| | — |
| | 1,452.5 |
| | — |
| | — |
|
| Other comprehensive (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | (350.6 | ) |
| Stock-based compensation expense | | — |
| | — |
| | 112.8 |
| | — |
| | — |
| | — |
|
| Issuances relating to stock compensation plans | | — |
| | — |
| | (67.8 | ) | | — |
| | 243.0 |
| | — |
|
| Tax benefits from stock compensation plans | | — |
| | — |
| | 73.1 |
| | — |
| | — |
| | — |
|
| Treasury stock acquired (18.2 shares) | | — |
| | — |
| | — |
| | — |
| | (1,611.4 | ) | | — |
|
| Spin-off of CDK Global, Inc. | | — |
| | — |
| | — |
| | (1,523.0 | ) | | — |
| | (88.2 | ) |
| Dividend from CDK Global, Inc. | | — |
| | — |
| | — |
| | 825.0 |
| | — |
| | — |
|
| Dividends ($1.95 per share) | | — |
| | — |
| | — |
| | (927.1 | ) | | — |
| | — |
|
| | | | | | | | | | | | | |
| Balance at June 30, 2015 | | 638.7 |
| | $ | 63.9 |
| | $ | 663.3 |
| | $ | 13,460.3 |
| | $ | (9,118.4 | ) | | $ | (260.6 | ) |
| Net earnings | | — |
| | — |
| | — |
| | 1,492.5 |
| | — |
| | — |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 45.5 |
|
| Stock-based compensation expense | | — |
| | — |
| | 117.2 |
| | — |
| | — |
| | — |
|
| Issuances relating to stock compensation plans | | — |
| | — |
| | (47.5 | ) | | — |
| | 182.5 |
| | — |
|
| Tax benefits from stock compensation plans | | — |
| | — |
| | 35.1 |
| | — |
| | — |
| | — |
|
| Treasury stock acquired (13.8 shares) | | — |
| | — |
| | — |
| | — |
| | (1,202.7 | ) | | — |
|
| Other | | — |
| | — |
| | — |
| | 6.2 |
| | — |
| | — |
|
| Dividends ($2.08 per share) | | — |
| | — |
| | — |
| | (955.7 | ) | | — |
| | — |
|
| | | | | | | | | | | | | |
| Balance at June 30, 2016 | | 638.7 |
| | $ | 63.9 |
| | $ | 768.1 |
| | $ | 14,003.3 |
| | $ | (10,138.6 | ) | | $ | (215.1 | ) |
| Net earnings | | — |
| | — |
| | — |
| | 1,733.4 |
| | — |
| | — |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (164.1 | ) |
| Stock-based compensation expense | | — |
| | — |
| | 115.5 |
| | — |
| | — |
| | — |
|
| Issuances relating to stock compensation plans | | — |
| | — |
| | (15.8 | ) | | — |
| | 169.2 |
| | — |
|
| Treasury stock acquired (13.5 shares) | | — |
| | — |
| | — |
| | — |
| | (1,334.3 | ) | | — |
|
| Dividends ($2.24 per share) | | — |
| | — |
| | — |
| | (1,008.5 | ) | | — |
| | — |
|
| Balance at June 30, 2017 | | 638.7 |
| | $ | 63.9 |
| | $ | 867.8 |
| | $ | 14,728.2 |
| | $ | (11,303.7 | ) | | $ | (379.2 | ) |
(A) During fiscal 2018, the Company adopted ASU 2018-02 and reclassified stranded tax effects attributable to the Tax Cuts and Jobs Act (the "Act") from AOCI to retained earnings. The fiscal 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive (loss)/income into retained earnings.
See notes to the Consolidated Financial Statements.
Statements of Consolidated Cash Flows
(In millions)
| | | | | | | | | | | | | | | | | | | | |
| Years ended June 30, | | 2020 | | 2019 | | 2018 |
| Cash Flows from Operating Activities: | | | | | | |
| Net earnings | | $ | 2,466.5 | | | $ | 2,292.8 | | | $ | 1,884.9 | |
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | | | | | | |
| Depreciation and amortization | | 480.0 | | | 409.0 | | | 377.6 | |
| Amortization of deferred contract costs | | 915.0 | | | 874.0 | | | 837.4 | |
| Deferred income taxes | | 26.0 | | | 9.3 | | | (152.0) | |
| Stock-based compensation expense | | 130.8 | | | 167.3 | | | 175.4 | |
| | | | | | |
| Net pension (income)/expense | | (11.6) | | | 55.4 | | | 330.4 | |
| | | | | | |
| Net amortization of premiums and accretion of discounts on available-for-sale securities | | 50.2 | | | 50.1 | | | 71.5 | |
| Impairment of assets | | 29.9 | | | 12.1 | | | — | |
| Gain on sale of assets | | (6.0) | | | (19.8) | | | (0.7) | |
| | | | | | |
| Other | | 65.4 | | | 43.9 | | | 32.2 | |
| Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses: | | | | | | |
| Increase in accounts receivable | | (113.8) | | | (473.9) | | | (291.8) | |
| Increase in other assets | | (910.4) | | | (987.2) | | | (858.3) | |
| Decrease in accounts payable | | (18.3) | | | (10.7) | | | (1.9) | |
| (Decrease)/Increase in accrued expenses and other liabilities | | (77.5) | | | 266.0 | | | 110.5 | |
| | | | | | |
| | | | | | |
| Net cash flows provided by operating activities | | 3,026.2 | | | 2,688.3 | | | 2,515.2 | |
| | | | | | |
| Cash Flows from Investing Activities: | | | | | | |
| Purchases of corporate and client funds marketable securities | | (3,905.1) | | | (4,422.6) | | | (4,876.8) | |
| Proceeds from the sales and maturities of corporate and client funds marketable securities | | 7,648.4 | | | 2,909.0 | | | 3,455.0 | |
| | | | | | |
| Capital expenditures | | (172.7) | | | (162.0) | | | (206.1) | |
| Additions to intangibles | | (443.7) | | | (404.5) | | | (264.7) | |
| Acquisitions of businesses, net of cash acquired | | — | | | (125.5) | | | (612.4) | |
| Proceeds from the sale of property, plant, and equipment and other assets | | 29.4 | | | 7.9 | | | 0.4 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash flows provided by/(used in) investing activities | | 3,156.3 | | | (2,197.7) | | | (2,504.6) | |
| | | | | | |
| Cash Flows from Financing Activities: | | | | | | |
| Net (decrease)/increase in client funds obligations | | (3,213.2) | | | 1,696.0 | | | 340.4 | |
| | | | | | |
| Payments of debt | | (2.2) | | | (2.1) | | | (7.3) | |
| Repurchases of common stock | | (1,006.3) | | | (937.7) | | | (989.3) | |
| Net proceeds from stock purchase plan and stock-based compensation plans | | 50.0 | | | 72.9 | | | 69.3 | |
| | | | | | |
| | | | | | |
| Dividends paid | | (1,470.5) | | | (1,293.0) | | | (1,063.7) | |
| | | | | | |
| Net (payments)/proceeds related to reverse repurchase agreements | | (248.4) | | | 262.0 | | | — | |
| | | | | | |
| Other | | — | | | (5.8) | | | (5.3) | |
| | | | | | |
| Net cash flows used in financing activities | | (5,890.6) | | | (207.7) | | | (1,655.9) | |
| | | | | | |
| Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | | (34.5) | | | (28.8) | | | 5.8 | |
| | | | | | |
| Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 257.4 | | | 254.1 | | | (1,639.5) | |
| | | | | | |
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of year | | 6,796.2 | | | 6,542.1 | | | 8,181.6 | |
| | | | | | |
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of year | | $ | 7,053.6 | | | $ | 6,796.2 | | | $ | 6,542.1 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets | | | | | | |
| Cash and cash equivalents | | $ | 1,908.5 | | | $ | 1,949.2 | | | $ | 2,170.0 | |
| Restricted cash and restricted cash equivalents included in funds held for clients (A) | | 5,145.1 | | | 4,847.0 | | | 4,372.1 | |
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 7,053.6 | | | $ | 6,796.2 | | | $ | 6,542.1 | |
| | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | |
| Cash paid for interest | | $ | 104.8 | | | $ | 127.5 | | | $ | 100.5 | |
| Cash paid for income taxes, net of income tax refunds | | $ | 677.1 | | | $ | 633.8 | | | $ | 529.7 | |
|
| | | | | | | | | | | | |
| Years ended June 30, | | 2017 | | 2016 | | 2015 |
| Cash Flows from Operating Activities: | | | | | | |
| Net earnings | | $ | 1,733.4 |
| | $ | 1,492.5 |
| | $ | 1,452.5 |
|
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | | |
| | |
| | |
| Depreciation and amortization | | 316.1 |
| | 288.6 |
| | 277.9 |
|
| Deferred income taxes | | 10.0 |
| | 0.7 |
| | (15.3 | ) |
| Stock-based compensation expense | | 138.9 |
| | 137.6 |
| | 143.2 |
|
| Net pension expense | | 24.2 |
| | 17.7 |
| | 17.6 |
|
| Net amortization of premiums and accretion of discounts on available-for-sale securities | | 85.9 |
| | 94.1 |
| | 100.3 |
|
| Gain on sale of building | | — |
| | (13.9 | ) | | — |
|
| Gain on sale of divested businesses, net of tax | | (121.4 | ) | | (21.8 | ) | | (78.4 | ) |
| Other | | 37.1 |
| | 30.7 |
| | 1.8 |
|
| Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses: | | |
| | |
| | |
| Decrease/(increase) in accounts receivable | | 23.4 |
| | (224.6 | ) | | (175.1 | ) |
| Increase in other assets | | (269.1 | ) | | (108.9 | ) | | (109.1 | ) |
| (Decrease)/Increase in accounts payable | | (11.6 | ) | | (15.9 | ) | | 13.1 |
|
| Increase in accrued expenses and other liabilities | | 159.0 |
| | 220.5 |
| | 122.1 |
|
| Proceeds from the sale of notes receivable | | — |
| | — |
| | 226.7 |
|
| Operating activities of discontinued operations | | — |
| | — |
| | (3.3 | ) |
| Net cash flows provided by operating activities | | 2,125.9 |
| | 1,897.3 |
| | 1,974.0 |
|
| | | | | | | |
| Cash Flows from Investing Activities: | | |
| | |
| | |
| Purchases of corporate and client funds marketable securities | | (4,382.8 | ) | | (5,876.3 | ) | | (5,047.6 | ) |
| Proceeds from the sales and maturities of corporate and client funds marketable securities | | 3,593.6 |
| | 5,215.4 |
| | 3,841.0 |
|
| Net decrease/(increase) in restricted cash and cash equivalents held to satisfy client funds obligations | | 6,843.6 |
| | (8,218.2 | ) | | (2,960.6 | ) |
| Capital expenditures | | (240.2 | ) | | (168.5 | ) | | (158.8 | ) |
| Additions to intangibles | | (230.4 | ) | | (217.5 | ) | | (176.7 | ) |
| Acquisitions of businesses, net of cash acquired | | (87.4 | ) | | — |
| | (8.1 | ) |
| Proceeds from the sale of property, plant, and equipment and other assets | | — |
| | 15.7 |
| | 23.6 |
|
| Dividend received from CDK Global, Inc. | | — |
| | — |
| | 825.0 |
|
| Cash retained by CDK Global, Inc. | | — |
| | — |
| | (180.0 | ) |
| Proceeds from the sale of divested businesses | | 234.0 |
| | 162.2 |
| | 98.6 |
|
| Investing activities of discontinued operations | | — |
| | — |
| | (16.7 | ) |
| Net cash flows provided by/(used in) investing activities | | 5,730.4 |
| | (9,087.2 | ) | | (3,760.3 | ) |
| | | | | | | |
| Cash Flows from Financing Activities: | | |
| | |
| | |
| Net (decrease)/increase in client funds obligations | | (6,120.6 | ) | | 8,803.3 |
| | 6,074.4 |
|
| Proceeds from debt issuance | | — |
| | 1,998.3 |
| | — |
|
| Payments of debt | | (2.0 | ) | | (1.5 | ) | | (2.3 | ) |
| Repurchases of common stock | | (1,259.6 | ) | | (1,155.7 | ) | | (1,557.2 | ) |
| Proceeds from stock purchase plan and exercises of stock options | | 95.7 |
| | 75.3 |
| | 109.1 |
|
| Dividends paid | | (995.2 | ) | | (943.6 | ) | | (927.6 | ) |
| Net repayments from issuance of commercial paper | | — |
| | — |
| | (2,173.0 | ) |
| Other | | — |
| | (23.4 | ) | | 23.4 |
|
| Financing activities of discontinued operations | | — |
| | — |
| | 1.5 |
|
| Net cash flows (used in)/provided by financing activities | | (8,281.7 | ) | | 8,752.7 |
| | 1,548.3 |
|
| | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | 14.7 |
| | (11.0 | ) | | (106.3 | ) |
| | | | | | | |
| Net change in cash and cash equivalents | | (410.7 | ) | | 1,551.8 |
| | (344.3 | ) |
| | | | | | | |
| Cash and cash equivalents, beginning of period | | 3,191.1 |
| | 1,639.3 |
| | 1,983.6 |
|
| Cash and cash equivalents, end of period | | $ | 2,780.4 |
| | $ | 3,191.1 |
| | $ | 1,639.3 |
|
| | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | |
| Cash paid for interest | | $ | 78.1 |
| | $ | 37.5 |
| | $ | 5.7 |
|
| Cash paid for income taxes, net of income tax refunds | | $ | 817.1 |
| | $ | 651.6 |
| | $ | 773.3 |
|
(A) See Note 4 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.
Notes to Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Preparation. The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc. and 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”). Intercompany balances and transactions have been eliminated in consolidation.
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 4, “Corporate Investments and Funds Held for Clients.”
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 fiscal 2020, 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 fiscal 2019 and fiscal 2018 have 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:
| | | | | | | | | | | | | | | | | |
| Year 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 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Year Ended | | | | |
| June 30, 2018 | | | | |
| As reported | | Revision | | As revised |
| PEO revenues | $ | 3,877.8 | | | (53.5) | | | $ | 3,824.3 | |
| TOTAL REVENUES | 13,327.7 | | | (53.5) | | | 13,274.2 | |
| Operating expenses | 6,901.0 | | | (53.5) | | | 6,847.5 | |
| Total Expenses | 10,873.0 | | | (53.5) | | | 10,819.5 | |
| EARNINGS BEFORE INCOME TAXES | 2,282.6 | | | — | | | 2,282.6 | |
| Provision for income taxes | 397.7 | | | — | | | 397.7 | |
| NET EARNINGS | $ | 1,884.9 | | | — | | | $ | 1,884.9 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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 Financial Data by Segment and Geographic Area disclosure.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenues, costs, expenses, and accumulated other comprehensive income (loss) that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. The Consolidated Financial Statements and all relevant footnotes
Certain amounts from the prior year's financial statements have been adjusted for all businesses that qualify as a discontinued operation (see Note 3).reclassified in order to conform to the current year's presentation.
B. Description of Business. The Company is a provider of cloud-based Human Capital Management ("HCM"(“HCM”) solutions. The Company classifies its operations into the following two reportable segments: Employer Services and Professional Employer Organization (“PEO”) Services. The primary components of the “Other” segment are non-recurring gains and losses, miscellaneous processing services, the elimination of intercompany transactions, interest expense, the results of operations of ADP Indemnity, 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 historical resultselimination of the AdvancedMD ("AMD") business. Beginning in the first quarter of fiscal 2017, the Company's chief operating decision maker began reviewing the Company's results with stock-based compensation included in the Company's operating segments. This change, as well as changes to the allocation methodology for certain corporate level allocationsintercompany transactions, and the movement of the historical results of AMD to Other, has been adjusted in both the current period and the prior period and did not materially affect reportable segment results. Prior to October 1, 2014, the Company had a third reportable segment, Dealer Services. See Note 3 for further information.interest expense.
C. Revenue Recognition. Revenues are primarily attributable to fees for providing services (e.g., Employer Services' payroll processing fees), investment income on payroll funds, payroll tax filing funds, other Employer Services' client-related funds, and fees charged to implement clients on the Company's solutions. The Company enters into agreements for a fixed fee per transaction (e.g., number of payees or number of payrolls processed). Fees associated
The Company enters into service agreements with clients that include anywhere from one service to a full suite of services. The Company’s agreements vary in duration having a legally enforceable term of 30 days to 5 years. The performance obligations in the agreements are generally combined into one performance obligation, as they are considered a series of distinct services, and are recognizedsatisfied over time because the client simultaneously receives and consumes the benefits provided as the Company performs the services. The Company uses the output method based on a fixed fee per employee serviced to recognize revenue, as the value to the client of the goods or services transferred to date (e.g. number of payees or number of payrolls processed) appropriately depicts our performance towards complete satisfaction of the performance obligation. The fees are typically billed in the period in which services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured.performed.
PEO, a component of the HR Outsourcing (“HRO”) strategic pillar, provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions. 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 isdoes not the primary obligorretain 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 primary obligor,service and has latitudediscretion in establishing price, selects suppliers, and determines the service specifications.wages.
The fees collected from the worksite employers for benefits (i.e. PEO zero-margin benefits pass-throughs), workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as the Company does retain risk and acts as a principal with respect to this aspect of the arrangement. With respect to thethese fees, for benefits, workers’ compensation and state unemployment taxes, the Company is primarily responsible for fulfilling the primary obligor,service and has latitudediscretion in establishing price, selects suppliers, determines the service specifications and is liable for credit risk.price.
InterestWe recognize client fund interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.
Client implementationSet up fees are chargedreceived from certain clients to set clients up on the Company's platform and are deferred until the client has gone live onimplement the Company's solutions are considered a material right. Therefore, the Company defers revenue associated with these set up fees and services have begun. These fees are amortized to revenuerecords them over the longerperiod in which such clients are expected to benefit from the material right, which is approximately five to seven years.
Collection of consideration the contractual term or the expected client life, including estimated renewalsCompany expects to receive typically occurs within 30 to 60 days of client contracts. Additionally, certain implementation costs are deferred until the client has gone live on the Company's solution and services have begun and are then amortized over the longer of the contractual term or the expected client life, including estimated renewals of client contracts.
The Company assessesbilling. We assess the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history.history and their intention to pay the consideration.
D. Deferred Costs.
Incremental Costs of Obtaining a Contract
Incremental costs of obtaining a contract (e.g., sales commissions) that are expected to be recovered are capitalized and amortized on a straight-line basis over a period of three to eight years, depending on the Company's business unit. Incremental costs of obtaining a contract include only those costs the Company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. These costs are included in selling, general and administrative expenses.
Costs to fulfill a Contract
The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract ii) are expected to generate resources that will be used to satisfy the Company's performance obligations under the contract and iii) are expected to be recovered through revenue generated under the contract. Costs incurred to implement clients on our solutions (e.g. direct labor) are capitalized and amortized on a straight-line basis over the expected client relationship period if the Company expects to recover those costs. The expected client relationship period ranges from three to eight years. These costs are included in operating expenses.
The Company has estimated the amortization periods for the deferred costs by using its historical retention by business units to estimate the pattern during which the service transfers.
E. Cash and Cash Equivalents. Highly liquid investment securities with a maturity of ninety days or less at the time of purchase are considered cash equivalents. The fair value of our cash and cash equivalents approximates carrying value.
E.F. Corporate Investments and Funds Held for Clients. All of the Company's marketable securities are considered to be “available-for-sale” and, accordingly, are carried on the Consolidated Balance Sheets at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) on the Consolidated Balance Sheets until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identificationan aggregate approach basis and are included in other income,(income)/expense, net on the Statements of Consolidated Earnings.
If the fair value of an available-for-sale debt security is below its amortized cost, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery. If either of those two conditions is met, the Company would recognize a charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value. If the Company does not intend to sell a security or it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income (loss).
Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned.
F.G. Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date and is based upon the Company’s principal, or most advantageous, market for a specific asset or liability.
U.S. GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:
Level 1 Fair value is determined based upon quoted prices for identical assets or liabilities that are traded in active markets.
Level 2 Fair value is determined based upon inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
· quoted prices for similar assets or liabilities in active markets;
· quoted prices for identical or similar assets or liabilities in markets that are not active;
· inputs other than quoted prices that are observable for the asset or liability; or
· inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Fair value is determined based upon inputs that are unobservable and reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based upon the best information
available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).
The Company's corporate investments and funds held for clients (see Note 6) and its long term debt4) are measured at fair value on a recurring basis as described below. Over 99% of the Company's available-for-sale securities included in Level 2 are valued based on prices obtained from an independent pricing service. To determine the fair value of the Company's Level 2 investments, the independent pricing service uses various pricing models for each asset class that are consistent with what other market participants would use, including the market approach. Inputs and assumptions to the pricing model of the independent pricing service are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and other market-related data. Since many fixed income securities do not
trade on a daily basis, the independent pricing service applies available information, as applicable, through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations. For the purposes of valuing the Company’s asset-backed securities as well as theand mortgage-backed securities that are included within Other securities in Note 6,4, the independent pricing service includes additional inputs to the model such as monthly payment information, new issue data, and collateral performance. For the purposes of valuing the Company’s Municipal bonds, the independent pricing service includes Municipal Market Data benchmark yield curves as additional inputs to the model. While the Company is not provided access to the proprietary models of the third party pricing service, each quarterly reporting period, the Company reviews the inputs utilized by the independent pricing service and compares the valuations received from the independent pricing service to valuations from at least one other observable source for reasonableness. The Company has not adjusted the prices obtained from the independent pricing service and the Company believes the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price). The Company has no available-for-sale securities included in Level 1 and Level 3.
In September 2015,fiscal 2016, the Company issued fixed-rate notes with 5-year and 10-year maturities for an aggregate principal amount of $2.0 billion (collectively the "Notes"). The fair value of the Notes are valuedestimated in Note 9 utilizing a variety of inputs obtained from an independent pricing service, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. The Company reviews the values generated by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations from at least one other observable source. The Company has not adjusted the prices obtained from the independent pricing service.
In fiscal 2020, the Company entered into a series of treasury rate lock transactions to hedge its exposure to changes in interest rates. The treasury rate lock derivatives are classified as Level 2 in the fair value hierarchy as their value is determined using observable inputs such as forward treasury rates. See Note 9 for additional details.
The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The significant input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
G.H. Property, Plant and Equipment. Property, plant and equipment is stated at cost less accumulated depreciation on the Consolidated Balance Sheets. Depreciation is recognized over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of assets are primarily as follows:
|
| | | | |
| Data processing equipment | 25 to 510 years |
| Buildings | 20 to 40 years |
| Furniture and fixtures | 4 to 7 years |
.
The Company has obligations under various facilitiesI. Leases. Operating lease ROU assets and equipment leases. The Company assesses whether these arrangements meetoperating lease liabilities are recognized at the criteria for capital leases by determining whetherlease commencement date based on the agreement transfers ownershippresent value of the asset, whetherlease payments over the lease includesterm. The lease liabilities are measured by discounting future lease payments at the Company’s collateralized incremental borrowing rate for financing instruments of a bargain purchase option, whethersimilar term, unless the implicit rate is readily determinable. ROU assets also include adjustments related to prepaid or deferred lease payments and lease incentives. Lease ROU assets are amortized over the life of the lease term isand tested for greater than 75% ofimpairment in the asset's useful life, or whether the minimum lease payments exceed 90% of the leased equipment's fair market value. All of the Company's leases are classifiedsame manner as operating leases. Total expense under these operating lease agreements was approximately $234.5 million, $201.7 million, and $201.8 million in fiscal 2017, 2016, and 2015, respectively.long-lived assets as described below.
H.
J. Goodwill. Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired.
The Company'sCompany’s annual goodwill impairment assessment as of June 30, 20172020 was performed for all reporting units using a qualitative approach. The qualitative assessment considered industryquantitative approach by comparing the fair value of each reporting unit to its carrying value. We estimated the fair value of each reporting unit using, as appropriate, the income approach, which is derived using the present value of future cash flows discounted at a risk-adjusted weighted-average cost of capital, and market considerations for any deterioration in the environment in which the Company operates, the competitive environment, a decline (both absolute and relative to peers) in market-dependent multiples or metrics, any changes in the market forapproach, which is based upon using market multiples of companies in similar lines of business. Significant assumptions used in determining the Company's productsfair value of our reporting units include projected revenue growth rates, profitability projections, working capital assumptions, the weighted average cost of capital, the determination of appropriate market comparison companies, and terminal growth rates. Several of these assumptions including projected revenue growth rates and profitability projections are dependent on our ability to upgrade, enhance, and expand our technology and services to meet client needs and regulatorypreferences. As such, the determination of fair value requires management to make significant estimates and political developments. Additionally,assumptions related to forecasts of future revenue and operating margins. Based upon the Company assessed financial performance by reporting unit and considered cost factors, such as labor or other costs, that would have a negative effect on results. Based on the qualitativequantitative assessment, the Company has determinedconcluded that goodwill is not impaired.
I.K. Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
J.L. Foreign Currency. The net assets of the Company's foreign subsidiaries are translated into U.S. dollars based on exchange rates in effect for each period, and revenues and expenses are translated at average exchange rates in the periods. Gains or losses from balance sheet translation are included in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. Currency transaction gains or losses, which are included in the results of operations, are not significant for all periods presented.
K.M. Foreign Currency Risk Management Programs and Derivative Financial Instruments. The Company transacts business in various foreign jurisdictions and is therefore exposed to market risk from changes in foreign currency exchange rates that could impact its consolidated results of operations, financial position, or cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use derivative financial instruments for trading purposes.
L.In fiscal 2020, the Company entered into a series of treasury rate lock transactions to hedge its exposure to changes in interest rates. See Note 9 for additional details.
N. Earnings per Share (“EPS”). The Company computes EPS in accordance with ASC 260.
The calculations of basic and diluted EPS are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended June 30, | | Basic | | Effect of Employee Stock Option Shares | | Effect of
Employee
Restricted
Stock
Shares | | Diluted |
| 2020 | | | | | | | | |
| Net earnings | | $ | 2,466.5 | | | | | | | $ | 2,466.5 | |
| Weighted average shares (in millions) | | 430.8 | | | 0.9 | | | 1.0 | | | 432.7 | |
| EPS | | $ | 5.73 | | | | | | | $ | 5.70 | |
| | | | | | | | |
| 2019 | | | | | | | | |
| Net earnings | | $ | 2,292.8 | | | | | | | $ | 2,292.8 | |
| Weighted average shares (in millions) | | 435.0 | | | 1.0 | | | 1.6 | | | 437.6 | |
| EPS | | $ | 5.27 | | | | | | | $ | 5.24 | |
| | | | | | | | |
| 2018 | | | | | | | | |
| Net earnings | | $ | 1,884.9 | | | | | | | $ | 1,884.9 | |
| Weighted average shares (in millions) | | 440.6 | | | 1.1 | | | 1.6 | | | 443.3 | |
| EPS | | $ | 4.28 | | | | | | | $ | 4.25 | |
|
| | | | | | | | | | | | | | |
| Years ended June 30, | | Basic | | Effect of Employee Stock Option Shares | | Effect of Employee Restricted Stock Shares | | Diluted |
| 2017 | | |
| | |
| | |
| | |
|
| Net earnings from continuing operations | | $ | 1,733.4 |
| | |
| | |
| | $ | 1,733.4 |
|
| Weighted average shares (in millions) | | 447.8 |
| | 0.9 |
| | 1.6 |
| | 450.3 |
|
| EPS from continuing operations | | $ | 3.87 |
| | |
| | |
| | $ | 3.85 |
|
| | | | | | | | | |
| 2016 | | |
| | |
| | |
| | |
|
| Net earnings from continuing operations | | $ | 1,493.4 |
| | |
| | |
| | $ | 1,493.4 |
|
| Weighted average shares (in millions) | | 457.0 |
| | 0.8 |
| | 1.3 |
| | 459.1 |
|
| EPS from continuing operations | | $ | 3.27 |
| | |
| | |
| | $ | 3.25 |
|
| | | | | | | | | |
| 2015 | | |
| | |
| | |
| | |
|
| Net earnings from continuing operations | | $ | 1,376.5 |
| | |
| | |
| | $ | 1,376.5 |
|
| Weighted average shares (in millions) | | 472.6 |
| | 1.6 |
| | 1.6 |
| | 475.8 |
|
| EPS from continuing operations | | $ | 2.91 |
| | |
| | |
| | $ | 2.89 |
|
Options to purchase 1.01.2 million, 1.80.7 million,, and 0.40.9 million shares of common stock for fiscal 2017, 2016,2020, 2019, and 2015,2018, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
M.O. Stock-Based Compensation. The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the date of the grant, and in the case of international units settled in cash, adjusts this fair value based on changes in the Company's stock price during the vesting period. The Company determines the fair value of stock options issued using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of the Company's stock price, and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of a stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.period. Restricted stock units and restricted stock awards are valued based on the closing price of the Company's common stock on the date of the grant and, in the case of performance based restricted stock
units and restricted stock, are adjusted for changes to probabilities of achieving performance targets. International restricted stock units are settled in cash and are marked-to-market based on changes in the Company's stock price. SeeSee Note 1110 for additional information on the Company's stock-based compensation programs.
N.P. Internal Use Software. Expenditures for major software purchases and software developed or obtained for internal use are capitalized and amortized generally over a three to five-year period on a straight-line basis. Software developed as part of the Company's next-generation platforms are depreciated over ten years. The Company begins to capitalize costs incurred for computer software developed for internal use when the preliminary development efforts are successfully completed, management has authorized and committed to funding the project, and it is probable that the project will be completed and the software will be used as intended. Capitalization ceases when a computer software project is substantially complete and ready for its intended use.
The Company's policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities.
O.Fees related to cloud-based subscriptions for which the Company has the right to take possession of the software at any time during the hosting period (without significant penalty) and can run the software on internal hardware, or through contract with a third party vendor to host the software, is recognized as an intangible asset and capitalized following the Internal Use Software guidance under ASC 350-40. Subscriptions where the Company accesses the software through the cloud but cannot take
possession of the software during the hosting period is treated as a service contract, and as such hosting fees are treated as expense.
Q. Acquisitions. Assets acquired and liabilities assumed in business combinations are recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company are included in the Statements of Consolidated Earnings since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed is allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions and subject to revision when the Company receives final information, including appraisals and other analysis. Accordingly, the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes available, but will not exceed twelve months.
P.R. Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). The Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our Consolidated Financial Statements.
There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Specifically, the likelihood of an entity's tax benefits being sustained must be “more likely than not,” assuming that these positions will be examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If a tax position drops below the “more likely than not” standard, the benefit can no longer be recognized. Assumptions, judgment, and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. As of June 30, 20172020 and 2016,2019, the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $74.6$62.3 million and $27.4$54.2 million,, respectively.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax years and jurisdictions. Based on current estimates, favorable settlements related to various jurisdictions and tax periods could increase earnings by up to $35 million in the next twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability, and deferred taxes in the period in which the facts that give rise to a revision become known.See Note 11 for additional details.
Q.S. Workers' Compensation Costs. The Company employs a third-party actuary to assist in determining the estimated claim liability related to workers' compensation and employer's liability coverage for PEO Services worksite employees. In estimating ultimate loss rates, we utilize historical loss experience, exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the worksite employee's job responsibilities, their location, the historical frequency and severity of workers' compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers' compensation claims cost estimates. 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. For the fiscal years 2013The Company has obtained approximately $242 million of irrevocable standby letters of credit in favor of licensed insurance companies of AIG to 2017, as well as in July 2017secure TotalSource workers’ compensation obligations if ADP were to fail to reimburse AIG for
the year ended workers’ compensation payments. The Company had 0 drawdowns during June 30, 2018 ("2020 and 2019 under the letters of credit. Beginning in fiscal 2018") policy year 2013, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited ("Chubb"), to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limit our overall exposure incurred up to a certain limit. The Company believes the likelihood of ultimate losses exceeding this limit is remote. ADP Indemnity paid a premium of $240 million in July 2020 to enter into a reinsurance arrangement to cover substantially all losses for the fiscal 2021 policy year on terms substantially similar to the fiscal 2020 policy.
R.T. Contingencies. In the normal course of business, the Company is subject to loss contingencies, such as claims and assessments arising from litigation and other legal proceedings, contractual indemnities, and tax matters. Accruals for loss contingencies are recorded when the Company determines that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. If the estimate of the amount of the loss is a range and some amount within the range appears to be a better estimate than any other amount within the range, that amount is accrued as a liability. If no amount within the range is a better estimate than any other amount, the minimum amount of the range is accrued as a liability. These accruals are adjusted periodically as assessments change or additional information becomes available. The loss contingencies are included in Selling, general and administrative expenses.
If no accrual is made for a loss contingency because the amount of loss cannot be reasonably estimated, the Company will disclose contingent liabilities when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.
Legal fees and other costs related to litigation and other legal proceedings or services are expensed as incurred and are included in Selling, general and administrative expenses.
Any claim for insurance recovery is recognized only when realization becomes probable.
U. Recently Issued Accounting Pronouncements.
Recently Adopted Accounting Pronouncements
InEffective July 2016,1, 2019, the Company adopted Accounting Standards Update ("ASU"accounting standard update (“ASU”) 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718)."2016-02, “Leases (ASC 842)” under the optional transition method. As a result, of this standard, the Company prospectively recorded income tax benefits and deficiencies with respect to stock-based compensation as income tax expense or benefit in the income statement for periods beginning after July 1, 2016. This resulted in a $32.1 million benefit in income tax expense for fiscal 2017. The Company retrospectively classified excess tax benefits as an operating activity on the Consolidated Balance Sheets total operating lease 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, which increased operating cash flows and decreased financing cash flows by $37.4 million and $68.4 millionFlows. Refer to Note 6 for fiscal 2016 and 2015, respectively. See Note 12 for the impact of the prospective adoption of the excess tax benefits in the income statement for fiscal 2017.
In July 2016, the Company prospectively adopted ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." The update provides guidance on whether a cloud computing arrangement includes a software license. For new and materially modified cloud computing arrangements that include a software license entered into after July 1, 2016, the Company accounts for the software license element consistent with the acquisition of other software licenses. If the new or materially modified cloud computing arrangement does not include a software license, the Company accounts for the arrangement as a service contract. The adoption of ASU 2015-05 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
In July 2016, the Company prospectively adopted ASU 2015-04, "Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets." The update allows an entity to remeasure their pension and other post-retirement benefit plan assets and liabilities at the month-end closest to a significant event such as a plan amendment, curtailment, or settlement. The adoption had no impact on the Company's consolidated results of operations, financial condition, or cash flows as presented, however, the future impact of ASU 2015-04 will be dependent upon the nature of future significant events impacting the Company's pension plans, if any.
further details.
Recently Issued Accounting Pronouncements
In May 2017,The following table summarizes recent ASU's issued by the Financial Accounting Standards Board ("FASB"(“FASB”) issued ASU 2017-09, "Compensation - Stock Compensation (Topic 708) Scope of Modification Accounting." ASU 2017-09 provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2017-09have been assessed:
| | | | | | | | | | | |
| Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
ASU 2020-04 Reference Rate Reform
(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | This update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate (LIBOR) reform on financial reporting. | March 12, 2020
(Fiscal 2020) through
December 31, 2022
(Fiscal 2023) | The Company is assessing the effects of the Reference Rate Reform. The Company has not yet determined the impact of this ASU on its consolidated results of operations, financial condition, or cash flows. |
| ASU 2018-14 Compensation-Retirement Benefits-Defined Benefit Plans | This update modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amendments in ASU 2018-14 would need to be applied on a retrospective basis. | 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.
|
| 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. In November 2019, the FASB issued Accounting Standard Update 2019-11 Codification Improvements to Topic 326, Financial-Credit Losses which provides clarification and eliminates inconsistencies to amendments included in Update 2016-13. | July 1, 2020
(Fiscal 2021) | Upon adoption of the CECL standard, in fiscal 2021, the Company intends to book an immaterial cumulative-effect adjustment to retained earnings. The most notable impact relates to the newly implemented processes around the assessment of the adequacy of our allowance for doubtful accounts on accounts receivable. The adoption of this guidance will not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows. |
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NOTE 2. REVENUE
Based upon similar operational and economic characteristics, the Company’s consolidated results of operations, financial condition, or cash flows, however, the future impact will be dependent on the nature of future modifications of any share-based payment awards.
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Feesrevenues are disaggregated by its three strategic pillars: Human Capital Management (“HCM”), HR Outsourcing (“HRO”), and Other Costs: Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 shortens the amortization periodGlobal (“Global”) Solutions, with separate disaggregation for certain callable debt securities held at a premiumPEO zero-margin benefits pass-through revenues and requires the premium to be amortized to the earliest call date. ASU 2017-08 will be effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. ASU 2017-08 is not expected to have a material impact on the Company’s consolidated results of operations, financial condition, or cash flows.
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost." ASU 2017-07 requires reporting the service cost component in the same line item or items as other compensation costs arising during the period in the Statements of Consolidated Earnings. The other components of net periodic pension cost are required to be presented in the Statements of Consolidated Earnings separately from the service cost component. Such changes are to be applied retrospectively from the date of adoption. ASU 2017-07 will be effective for fiscal years beginning after December 15, 2017. Early adoption is permitted.client fund interest revenues. The Company has not yet determined the impact of ASU 2017-07 on its consolidated results of operations, financial condition, or cash flows.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairments.” ASU 2017-04 establishes a one-step process for testing goodwill for a decrease in value, requiring
a goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. The guidance eliminates the second step of the current two-step process that requires the impairment to be measured as the difference between the implied value of a reporting unit’s goodwill with the goodwill’s carrying amount. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual impairment tests after January 1, 2017. ASU 2017-04 is not expected to have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business," to clarify the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU 2017-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The impact of ASU 2017-01 will be dependent upon the nature of future acquisitions or dispositions made by the Company, if any.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Accordingly, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statements of Consolidated Cash Flows. ASU 2016-18 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company expects to retrospectively adopt the new standard in its fiscal year beginning on July 1, 2017. ASU 2016-18 will not have a material impact on the Company's consolidated results of operations or financial condition.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This update amends the existing accounting standards for lease accounting, and requires lessees to recognize virtually all of their leases on the balance sheet by recording a right-of-use asset and lease liabilities (other than leases that meet the definition of a "short-term lease"). ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet determined the impact of ASU 2016-02 on its consolidated results of operations, financial condition, or cash flows.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting forbelieves these revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance, and has since issued additional amendments to ASU 2014-09. These new standards require an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standards will also result in enhanced revenue related disclosures. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statements of Consolidated Financial Position. The new standards are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early adoption is permitted.
The Company had been assessing the impact of the new revenue recognition standard on its relationships with its clients. In fiscal 2017, the Company determined it will not early adopt the standard, and instead will adopt the new standard in its fiscal year beginning on July 1, 2018. Further, the Company anticipates applying the guidance under the full retrospective approach. The Company is nearly complete with its comprehensive diagnostic of the measurement and recognition provisions of the new standard and is in the process of finalizing its conclusions and policies. The Company expects the provisions of the new standard to primarily impact the manner in which it treats certain costs to fulfill contracts (i.e., implementation costs) and costs to acquire new contracts (i.e., selling costs). The provisions of the new standard will require the Company to capitalize and amortize additional implementation costs than those capitalized and amortized under current U.S. GAAP. Further, under current U.S. GAAP, the Company immediately expenses all selling expenses. The provisions of the new standard will require that the Company capitalize incremental selling expenses such as commissions and bonuses paid to the salesforce for obtaining contracts with new clients and/or selling additional business to current clients. These capitalized expenses will be amortized over the expected client life. While the Company grows, the impact of deferring and amortizing additional costs creates higher overall pre-tax income, net earnings, and earnings per share, when compared to current U.S. GAAP. The Company does not expect the provisions of the new standard to materially impact the timing or amount of revenue it recognizes.
The Company has not yet determined the impacts of all the disclosure requirements and specifically is assessing the manner in which it will disaggregate its revenue to illustratecategories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors. Additionally, while
HCM provides a suite of product offerings that assist employers of all types and sizes in all stages of the employment cycle, from recruitment to retirement. Global is generally consistent with the types of services provided within HCM but represent geographies outside of the United States and includes our multinational offerings. HCM and Global revenues are primarily attributable to fees for providing solutions for payroll, benefits, talent, retirement services and HR processing and fees charged to implement the Company's solutions for clients.
HRO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions. This revenue is primarily driven by PEO. The Company is in the process of assessinghas further disaggregated HRO to separate out its accounting andPEO zero-margin benefits pass-through revenues.
forecasting processes to ensure its ability to record, report, forecast, and analyze results under the new standard, it is not expecting significant changes to its business processes or systems.
NOTE 2. ACQUISITIONS
The Company acquired two businesses during fiscal 2017recognizes client fund interest revenues on collected but not yet remitted funds held for total upfront cash considerationclients in revenues as earned, as the collection, holding and remittance of approximately $90.0 millionthese funds are critical components of providing these services.
The following tables provide details of revenue by our strategic pillars with disaggregation for PEO zero-margin benefits pass-throughs and contingent consideration of up to $35.0 million, which is payable over the next three years, subjectclient fund interest, and includes a reconciliation to the achievementCompany’s reportable segments:
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| | | | | | | | | |
| | | | | Years Ended | | | | |
| | | | | June 30, | | | | |
| Types of Revenues | | | | | 2020 | | 2019 | | 2018 |
| HCM | | | | | $ | 6,540.9 | | | $ | 6,441.8 | | | $ | 6,204.9 | |
| HRO, excluding PEO zero-margin benefits pass-throughs | | | | | 2,543.2 | | | 2,444.4 | | | 2,261.9 | |
| PEO zero-margin benefits pass-throughs | | | | | 2,907.7 | | | 2,647.5 | | | 2,409.6 | |
| Global | | | | | 2,052.8 | | | 2,014.6 | | | 1,931.3 | |
| Interest on funds held for clients | | | | | 545.2 | | | 561.9 | | | 466.5 | |
| Total Revenues | | | | | $ | 14,589.8 | | | $ | 14,110.2 | | | $ | 13,274.2 | |
Reconciliation of specified financial metrics and/or other conditions. The Company determineddisaggregated revenue to our reportable segments for the fair value of the contingent consideration on the acquisition date using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. The acquisitions were not material to the Company's results of operations, financial position, or cash flows and, therefore, the pro forma impact of these acquisitions is not presented. The results of the acquisitions are reported within the Company’s Employer Services segment. As of June 30, 2017, the Company had not yet finalized the purchase price allocation for these two acquisitions.
NOTE 3. DIVESTITURES
A. Dispositions
On November 28, 2016, the Company completed the sale of its Consumer Health Spending Account ("CHSA") and Consolidated Omnibus Reconciliation Act ("COBRA") businesses for a pre-tax gain of $205.4 million, and recorded such gain within Other income, net on the Statements of Consolidated Earnings. The historical results of operations of these businesses are included in the Employer Services segment.
On September 1, 2015, the Company completed the sale of its AMD business for a pre-tax gain of $29.1 million, less costs to sell, and recorded such gain within Other income, net on the Statements of Consolidated Earnings. The historical results of operations of this business are included in the Other segment.
The Company determined that the CHSA, COBRA and AMD divestitures did not meet the criteria for reporting discontinued operations under ASU 2014-08 as the disposition of these businesses does not represent a strategic shift that has a major effect on the Company's operations or financial results.
B. Discontinued Operations
On June 26, 2015, the Company completed the sale of its Procure-to-Pay business ("P2P") for a pre-tax gain of $100.9 million, less costs to sell, and recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings.
On September 30, 2014, the Company completed the tax free spin-off of its former Dealer Services business, which was a separate reportable segment, into an independent publicly traded company called CDK Global, Inc. ("CDK"). As a result of the spin-off, ADP stockholders of record on September 24, 2014 (the "record date") received one share of CDK common stock on September 30, 2014, par value $0.01 per share, for every three shares of ADP common stock held by them on the record date and cash for any fractional shares of CDK common stock. ADP distributed approximately 160.6 million shares of CDK common stock in the distribution. During the first quarter of fiscal 2016, the Company became aware that 1.0 million of the 160.6 million shares of CDK stock distributed at the distribution date were inadvertently issued and distributed with respect to certain unvested Company equity awards. The 1.0 million shares were canceled during the first quarter of fiscal 2016. Such shares distributed as part of the spin-off did not have any impact to previously reported results of operations, financial condition, or cash flows. The spin-off was made without the payment of any consideration or the exchange of any shares by ADP stockholders. The spin-off, transitional, and on-going relationships between ADP and CDK are governed by the Separation and Distribution Agreement entered into between ADP and CDK and certain other ancillary agreements.
Incremental costs associated with the spin-off of CDK and divestiture of P2P of $50.1 million for fiscal 2015 are included in discontinued operations on the Statements of Consolidated Earnings.
Results for discontinued operations were as follows. There were no results from discontinued operations in fiscal 2017.
|
| | | | | | | | |
| Years ended June 30, | | 2016 | | 2015 |
| Revenues | | $ | — |
| | $ | 538.8 |
|
| | | | | |
| Earnings from discontinued operations before income taxes | | — |
| | 69.2 |
|
| Provision for income taxes | | — |
| | 71.6 |
|
Net loss from discontinued operations before gain on disposal of discontinued operations | | — |
| | (2.4 | ) |
| | | | | |
| Gain on disposal of discontinued operations, less costs to sell | | (1.4 | ) | | 102.3 |
|
| (Benefit) / provision for income taxes | | (0.5 | ) | | 23.9 |
|
| Net gain on disposal of discontinued operations | | (0.9 | ) | | 78.4 |
|
| | | | | |
| Net (loss) / earnings from discontinued operations | | $ | (0.9 | ) | | $ | 76.0 |
|
NOTE 4. SERVICE ALIGNMENT INITIATIVE
On July 28, 2016, the Company announced a Service Alignment Initiative that is intended to simplify the Company's service organization by aligning the Company's service operations to its strategic platforms and locations. In fiscal 2016, the Company entered into leases in Norfolk, Virginia and Maitland, Florida, and in October 2016, the Company entered into a lease in Tempe, Arizona as part of this effort. The Company began incurring charges for this initiative during the first quarter of the fiscal year and expects to continue to incur charges through the year ended June 30, 2018 ("fiscal 2018") as the initiative is executed. The charges primarily relate2020:
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| Types of Revenues | Employer Services | | PEO | | Other | | Total |
| HCM | $ | 6,546.4 | | | $ | — | | | $ | (5.5) | | | $ | 6,540.9 | |
| HRO, excluding PEO zero-margin benefits pass-throughs | 947.2 | | | 1,598.8 | | | (2.8) | | | 2,543.2 | |
| PEO zero-margin benefits pass-throughs | — | | | 2,907.7 | | | — | | | 2,907.7 | |
| Global | 2,052.8 | | | — | | | — | | | 2,052.8 | |
| Interest on funds held for clients | 540.2 | | | 5.0 | | | — | | | 545.2 | |
| Total Segment Revenues | $ | 10,086.6 | | | $ | 4,511.5 | | | $ | (8.3) | | | $ | 14,589.8 | |
Reconciliation of disaggregated revenue to employee separation benefits recognized under ASC 712, and also include chargesour reportable segments for the relocationfiscal year ended June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Types of Revenues | Employer Services | | PEO | | Other | | Total |
| HCM | $ | 6,447.5 | | | $ | — | | | $ | (5.7) | | | $ | 6,441.8 | |
| HRO, excluding PEO zero-margin benefits pass-throughs | 924.0 | | | 1,525.0 | | | (4.6) | | | 2,444.4 | |
| PEO zero-margin benefits pass-throughs | — | | | 2,647.5 | | | — | | | 2,647.5 | |
| Global | 2,014.6 | | | — | | | — | | | 2,014.6 | |
| Interest on funds held for clients | 556.7 | | | 5.2 | | | — | | | 561.9 | |
| Total Segment Revenues | $ | 9,942.8 | | | $ | 4,177.7 | | | $ | (10.3) | | | $ | 14,110.2 | |
Reconciliation of certain current Company employees, lease termination costs, and accelerated depreciation of fixed assets. The Company expectsdisaggregated revenue to recognize pre-tax restructuring charges of about $30 million in fiscal 2018, consisting primarily of cash expenditures for employee separation benefits.
The table below summarizes the composition of the Company's Service Alignment Initiative charges: |
| | | | | | | | |
| | | Year Ended | | Cumulative amount from inception through |
| | | June 30, | | June 30, |
| | | 2017 | | 2017 |
| Employee separation benefits (a) | | $ | 84.1 |
| | $ | 84.1 |
|
| Other initiative costs (b) | | 5.9 |
| | 5.9 |
|
| Total (c) | | $ | 90.0 |
| | $ | 90.0 |
|
(a) Charges are recorded in selling, general and administrative expenses on the Statements of Consolidated Earnings.
(b) Other initiative costs include costs to relocate certain current Company employees to new locations, lease termination charges (both included within selling, general and administrative expenses on the Statements of Consolidated Earnings), and accelerated depreciation on fixed assets (included within depreciation and amortization on the Statements of Consolidated Earnings).
(c) All charges are included within the Other segment.
Activityour reportable segments for the Service Alignment Initiativefiscal year ended June 30, 2018:
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| Types of Revenues | Employer Services | | PEO | | Other | | Total |
| HCM | $ | 6,210.2 | | | $ | — | | | $ | (5.3) | | | $ | 6,204.9 | |
| HRO, excluding PEO zero-margin benefits pass-throughs | 851.3 | | | 1,414.7 | | | (4.1) | | | 2,261.9 | |
| PEO zero-margin benefits pass-throughs | — | | | 2,409.6 | | | — | | | 2,409.6 | |
| Global | 1,931.3 | | | — | | | — | | | 1,931.3 | |
| Interest on funds held for clients | 462.0 | | | 4.5 | | | — | | | 466.5 | |
| Total Segment Revenues | $ | 9,454.8 | | | $ | 3,828.8 | | | $ | (9.4) | | | $ | 13,274.2 | |
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 fiscal 2017 wasthe twelve months ended June 30, 2020 were as follows:
| | | | | |
| Contract Liability | |
| Contract liability, July 1, 2019 | $ | 563.4 | |
| Recognition of revenue included in beginning of year contract liability | (168.5) | |
| Contract liability, net of revenue recognized on contracts during the period | 134.2 | |
| Currency adjustments | (6.4) | |
| Contract liability, June 30, 2020 | $ | 522.7 | |
Deferred costs
Deferred costs are periodically reviewed for impairment. There were no impairment losses incurred during the period.
|
| | | | | | | | | | | |
| | Employee separation benefits | | Other initiative costs | | Total |
| Balance at June 30, 2016 | $ | — |
| | $ | — |
| | $ | — |
|
| Charged to expense | 85.6 |
| | 5.9 |
| | 91.5 |
|
| Reversals | (1.5 | ) | | — |
| | (1.5 | ) |
| Cash payments | (10.2 | ) | | (3.4 | ) | | (13.6 | ) |
| Non-cash utilization | — |
| | (2.0 | ) | | (2.0 | ) |
| Balance at June 30, 2017 | $ | 73.9 |
| | $ | 0.5 |
| | $ | 74.4 |
|
| | | | | | | | | | | | | | |
| | | | |
| June 30, | | 2020 | | 2019 |
| Deferred costs to obtain a contract | | $ | 977.8 | | | $ | 992.3 | |
| Deferred costs to fulfill a contract | | 1,423.8 | | | 1,436.2 | |
| Total deferred contract costs (1) | | $ | 2,401.6 | | | $ | 2,428.5 | |
(1) The amount of total deferred costs amortized during the twelve months ended June 30, 2020, June 30, 2019, and June 30, 2018 were $915.0 million, $874.0 million, and $837.4 million, respectively.
NOTE 5.3. OTHER INCOME,(INCOME)/EXPENSE, NET
Other income,(income)/expense, net consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| Years ended June 30, | | 2020 | | 2019 | | 2018 |
| Interest income on corporate funds | | $ | (84.5) | | | $ | (97.6) | | | $ | (83.5) | |
| | | | | | |
| | | | | | |
| Realized (gains) / losses on available-for-sale securities, net | | (12.9) | | | 0.9 | | | 2.5 | |
| | | | | | |
| | | | | | |
| Impairment of assets | | 29.9 | | | 12.1 | | | — | |
| Gain on sale of assets | | (5.8) | | | (4.1) | | | (0.7) | |
| Gain on sale of investment | | (0.2) | | | (15.7) | | | — | |
| | | | | | |
| Non-service components of pension (income)/expense, net (see Note 10) | | (74.5) | | | (6.7) | | | 253.8 | |
| Other (income)/expense, net | | $ | (148.0) | | | $ | (111.1) | | | $ | 172.1 | |
|
| | | | | | | | | | | | |
| Years ended June 30, | | 2017 | | 2016 | | 2015 |
| Interest income on corporate funds | | $ | (76.7 | ) | | $ | (62.4 | ) | | $ | (56.9 | ) |
| Realized gains on available-for-sale securities | | (5.3 | ) | | (5.1 | ) | | (6.8 | ) |
| Realized losses on available-for-sale securities | | 3.1 |
| | 10.1 |
| | 1.9 |
|
| Gain on sale of notes receivable | | — |
| | — |
| | (1.4 | ) |
| Gain on sale of businesses (see Note 3) | | (205.4 | ) | | (29.1 | ) | | — |
|
| Gain on sale of building | | — |
| | (13.9 | ) | | — |
|
| Other income, net | | $ | (284.3 | ) | | $ | (100.4 | ) | | $ | (63.2 | ) |
DuringIn fiscal 2016,2020, the Company sold a building and,recorded impairment charges of $25.3 million as a result,result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale. In addition, the Company vacated certain leased locations early and recorded total impairment charges of $4.6 million to operating right-of-use assets and certain related fixed assets associated with the vacated locations. 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 a recent acquisition.
In fiscal 2019, the Company recognized a gain of $13.9$15.7 million in Other income, net, on the Statements of Consolidated Earnings.
During fiscal 2015, the Company sold notes receivable relatedrelation to Dealer Services financing arrangements for $226.7 million. Although the sale of the notes receivable transfers the majority of the risk to the purchaser, the Company does retain a minimal level of credit risk on thean investment held at cost acquired in prior years and subsequently sold receivables. The cash received in exchange for the notes receivable sold was recorded within the operating activities on the Statements of Consolidated Cash Flows and the gain on sale of $1.4 million was recorded within Other income, net on the Statements of Consolidated Earnings.during fiscal 2019.
NOTE 6.4. CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS
Corporate investments and funds held for clients at June 30, 20172020 and 20162019 were as follows:
| | | | June 30, 2017 | | June 30, 2020 | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value (A) | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value (A) |
| Type of issue: | | | | | | | | Type of issue: | | | | | | | |
| Money market securities and other cash equivalents | $ | 8,181.6 |
| | $ | — |
| | $ | — |
| | $ | 8,181.6 |
| |
| Money market securities, cash and other cash equivalents | | Money market securities, cash and other cash equivalents | $ | 7,053.6 | | | $ | — | | | $ | — | | | $ | 7,053.6 | |
| Available-for-sale securities: | |
| | |
| | |
| | |
| Available-for-sale securities: | | | | | | | |
| Corporate bonds | 9,325.3 |
| | 98.8 |
| | (22.0 | ) | | 9,402.1 |
| Corporate bonds | 9,188.7 | | | 473.4 | | | — | | | 9,662.1 | |
| Asset-backed securities | | Asset-backed securities | 3,274.6 | | | 96.0 | | | (0.5) | | | 3,370.1 | |
| U.S. Treasury securities | | U.S. Treasury securities | 3,580.6 | | | 120.8 | | | — | | | 3,701.4 | |
| U.S. government agency securities | 3,557.7 |
| | 22.2 |
| | (13.4 | ) | | 3,566.5 |
| U.S. government agency securities | 1,128.2 | | | 35.6 | | | — | | | 1,163.8 | |
| Asset-backed securities | 4,453.1 |
| | 16.9 |
| | (8.6 | ) | | 4,461.4 |
| |
Canadian government securities and
Canadian government agency securities | 1,053.6 |
| | 2.9 |
| | (11.4 | ) | | 1,045.1 |
| |
Canadian government obligations and Canadian government agency obligations | | Canadian government obligations and Canadian government agency obligations | 1,018.7 | | | 23.1 | | | — | | | 1,041.8 | |
| Commercial Mortgage-Backed Securities | | Commercial Mortgage-Backed Securities | 814.3 | | | 53.9 | | | — | | | 868.2 | |
| Canadian provincial bonds | 746.9 |
| | 14.3 |
| | (1.4 | ) | | 759.8 |
| Canadian provincial bonds | 676.6 | | | 33.6 | | | — | | | 710.2 | |
| U.S. Treasury securities | 1,585.9 |
| | 2.6 |
| | (14.3 | ) | | 1,574.2 |
| |
| Municipal bonds | 582.5 |
| | 11.3 |
| | (1.3 | ) | | 592.5 |
| |
| Other securities | 493.6 |
| | 7.3 |
| | (1.4 | ) | | 499.5 |
| Other securities | 1,018.1 | | | 41.1 | | | (0.2) | | | 1,059.0 | |
| | | | | | | | | | | | | | | | |
| Total available-for-sale securities | 21,798.6 |
| | 176.3 |
| | (73.8 | ) | | 21,901.1 |
| Total available-for-sale securities | 20,699.8 | | | 877.5 | | | (0.7) | | | 21,576.6 | |
| | | | | | | | | | | | | | | | |
| Total corporate investments and funds held for clients | $ | 29,980.2 |
| | $ | 176.3 |
| | $ | (73.8 | ) | | $ | 30,082.7 |
| Total corporate investments and funds held for clients | $ | 27,753.4 | | | $ | 877.5 | | | $ | (0.7) | | | $ | 28,630.2 | |
(A) Included within available-for-sale securities are corporate investments with fair values of $10.8$13.6 million and funds held for clients with fair values of $21,890.3 million.$21,563.0 million. All available-for-sale securities wereare included in Level 2.2 of the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | | | | | |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair 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 | |
| U.S. 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 | |
|
| | | | | | | | | | | | | | | |
| | June 30, 2016 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value (B) |
| Type of issue: | |
| | |
| | |
| | |
|
| Money market securities and other cash equivalents | $ | 15,458.6 |
| | $ | — |
| | $ | — |
| | $ | 15,458.6 |
|
| Available-for-sale securities: | |
| | |
| | |
| | |
|
| Corporate bonds | 9,429.2 |
| | 261.8 |
| | (0.6 | ) | | 9,690.4 |
|
| U.S. government agency securities | 4,298.8 |
| | 91.3 |
| | — |
| | 4,390.1 |
|
| Asset-backed securities | 3,761.9 |
| | 59.0 |
| | (0.3 | ) | | 3,820.6 |
|
Canadian government securities and
Canadian government agency securities | 995.1 |
| | 12.8 |
| | — |
| | 1,007.9 |
|
| Canadian provincial bonds | 735.4 |
| | 30.8 |
| | (0.1 | ) | | 766.1 |
|
| U.S. Treasury securities | 746.9 |
| | 16.3 |
| | — |
| | 763.2 |
|
| Municipal bonds | 594.2 |
| | 23.9 |
| | (0.3 | ) | | 617.8 |
|
| Other securities | 533.3 |
| | 15.8 |
| | (0.2 | ) | | 548.9 |
|
| | | | | | | | |
| Total available-for-sale securities | 21,094.8 |
| | 511.7 |
| | (1.5 | ) | | 21,605.0 |
|
| | | | | | | | |
| Total corporate investments and funds held for clients | $ | 36,553.4 |
| | $ | 511.7 |
| | $ | (1.5 | ) | | $ | 37,063.6 |
|
(B) Included within available-for-sale securities are corporate investments with fair values of $31.3$271.9 million and funds held for clients with fair values of $21,573.7 million.$24,587.2 million. All available-for-sale securities were included in Level 2.2 of the fair value hierarchy.
For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 "Summary“Summary of Significant Accounting Policies."” The Company did not transfer any assets between Levels during fiscal 20172020 or 2016.2019. In addition, the Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 1 or Level 3 as of June 30, 2017.2020.
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2017,2020, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | | | |
| 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 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Asset-backed securities | (0.5) | | | 43.9 | | | — | | | — | | | (0.5) | | | 43.9 | |
| U.S. Treasury securities | — | | | 2.0 | | | — | | | — | | | — | | | 2.0 | |
| U.S. government agency securities | — | | | — | | | — | | | — | | | — | | | — | |
Canadian government obligations and Canadian government agency obligations | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial Mortgage-Backed Securities | — | | | — | | | — | | | 1.5 | | | — | | | 1.5 | |
| Canadian provincial bonds | — | | | — | | | — | | | — | | | — | | | — | |
| Other securities | (0.2) | | | 17.1 | | | — | | | — | | | (0.2) | | | 17.1 | |
| | $ | (0.7) | | | $ | 63.0 | | | $ | — | | | $ | 1.5 | | | $ | (0.7) | | | $ | 64.5 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2017 |
| | Securities in unrealized loss position less than 12 months | | Securities in unrealized loss position greater than 12 months | | Total |
| | Unrealized
losses | | Fair market
value | | Unrealized
losses | | Fair market
value | | Gross
unrealized
losses | | Fair
market value |
| Corporate bonds | $ | (22.0 | ) | | $ | 2,619.9 |
| | $ | — |
| | $ | 7.4 |
| | $ | (22.0 | ) | | $ | 2,627.3 |
|
| U.S. government agency securities | (13.4 | ) | | 1,935.3 |
| | — |
| | — |
| | (13.4 | ) | | 1,935.3 |
|
| Asset-backed securities | (8.5 | ) | | 1,916.1 |
| | (0.1 | ) | | 11.3 |
| | (8.6 | ) | | 1,927.4 |
|
Canadian government securities and
Canadian government agency securities | (11.4 | ) | | 699.6 |
| | — |
| | — |
| | (11.4 | ) | | 699.6 |
|
| Canadian provincial bonds | (1.4 | ) | | 179.8 |
| | — |
| | — |
| | (1.4 | ) | | 179.8 |
|
| U.S. Treasury securities | (14.3 | ) | | 1,317.8 |
| | — |
| | 1.0 |
| | (14.3 | ) | | 1,318.8 |
|
| Municipal bonds | (1.2 | ) | | 98.8 |
| | (0.1 | ) | | 1.2 |
| | (1.3 | ) | | 100.0 |
|
| Other securities | (1.3 | ) | | 148.0 |
| | (0.1 | ) | | 8.9 |
| | (1.4 | ) | | 156.9 |
|
| | $ | (73.5 | ) | | $ | 8,915.3 |
| | $ | (0.3 | ) | | $ | 29.8 |
| | $ | (73.8 | ) | | $ | 8,945.1 |
|
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, 20162019 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2016 |
| | Securities in unrealized loss position less than 12 months | | Securities in unrealized loss position greater than 12 months | | Total |
| | Unrealized
losses | | Fair market
value | | Unrealized
losses | | Fair market
value | | Gross
unrealized
losses | | Fair
market value |
| Corporate bonds | $ | (0.5 | ) | | $ | 138.0 |
| | $ | (0.1 | ) | | $ | 35.1 |
| | $ | (0.6 | ) | | $ | 173.1 |
|
| U.S. government agency securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Asset-backed securities | (0.1 | ) | | 58.8 |
| | (0.2 | ) | | 154.8 |
| | (0.3 | ) | | 213.6 |
|
Canadian government securities and
Canadian government agency securities | — |
| | 53.2 |
| | — |
| | — |
| | — |
| | 53.2 |
|
| Canadian provincial bonds | (0.1 | ) | | 19.1 |
| | — |
| | 7.8 |
| | (0.1 | ) | | 26.9 |
|
| U.S. Treasury securities | — |
| | 3.4 |
| | — |
| | 1.6 |
| | — |
| | 5.0 |
|
| Municipal bonds | — |
| | 12.9 |
| | (0.3 | ) | | 10.6 |
| | (0.3 | ) | | 23.5 |
|
| Other securities | (0.1 | ) | | 10.5 |
| | (0.1 | ) | | 8.0 |
| | (0.2 | ) | | 18.5 |
|
| | $ | (0.8 | ) | | $ | 295.9 |
| | $ | (0.7 | ) | | $ | 217.9 |
| | $ | (1.5 | ) | | $ | 513.8 |
|
At June 30, 2017,2020, Corporate bonds include investment-grade debt securities, which includewith a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from July 2017 to2020 through March 2026.2030.
At June 30, 2017, U.S. government agency2020, asset-backed securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $2,554.7 million and $803.2 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 September 2017 through February 2025.
At June 30, 2017, asset-backed securities include AAA ratedAAA-rated senior tranches of securities with predominately prime collateral of fixed-rate auto loan, credit card, auto loan, equipment lease and rate reduction receivables with fair values of $2,362.2 $1,666.6
million,, $1,428.3 $1,256.0 million,, $431.0 $344.4 million,, and $239.8$102.4 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 June 30, 2017.2020.
At June 30, 2017,2020, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $561.1 million and $432.0 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 July 2020 through December 2029.
At June 30, 2020, U.S. government agency commercial mortgage-backed securities of $868.2 million include those issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.
At June 30, 2020, other securities and their fair value primarily represent: AAAinclude municipal bonds, diversified with a variety of issuers, with credit ratings of A and AA ratedabove, with fair values of $592.7 million, AA-rated United Kingdom Gilt securities of $189.9 million, and AAA-rated and AA-rated supranational bonds of $129.3 million, AAA and AA rated sovereign bonds of $110.7 million, and AA rated mortgage-backed securities of $95.9 million that are guaranteed primarily by Federal National Mortgage Association ("Fannie Mae"). The Company's mortgage-backed securities represent an undivided beneficial ownership interest in a group or pool of one or more residential mortgages. These securities are collateralized by the cash flows of 15-year and 30-year residential mortgages and are guaranteed by Fannie Mae as to the timely payment of principal and interest.$91.4 million.
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
| | | June 30, | | 2017 | | 2016 | June 30, | | 2020 | | 2019 |
| Corporate investments: | | | | | Corporate investments: | | | | |
| Cash and cash equivalents | | $ | 2,780.4 |
| | $ | 3,191.1 |
| Cash and cash equivalents | | $ | 1,908.5 | | | $ | 1,949.2 | |
| Short-term marketable securities (a) | | 3.2 |
| | 23.5 |
| |
| Long-term marketable securities (b) | | 7.6 |
| | 7.8 |
| |
| Short-term marketable securities | | Short-term marketable securities | | — | | | 10.5 | |
| Long-term marketable securities (a) | | Long-term marketable securities (a) | | 13.6 | | | 261.4 | |
| Total corporate investments | | $ | 2,791.2 |
| | $ | 3,222.4 |
| Total corporate investments | | $ | 1,922.1 | | | $ | 2,221.1 | |
(a) - Short-term marketable securities are included within Other current assets on the Consolidated Balance Sheets.
(b) - Long-term marketable securities are included within Other assets on the Consolidated Balance Sheets.
Funds held for clients represent assets that, based upon the Company's intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets.
Funds held for clients have been invested in the following categories:
| | | | | | | | | | | | | | |
| June 30, | | 2020 | | 2019 |
| Funds held for clients: | | | | |
| Restricted cash and cash equivalents held to satisfy client funds obligations | | $ | 5,145.1 | | | $ | 4,847.0 | |
| Restricted short-term marketable securities held to satisfy client funds obligations | | 5,541.2 | | | 5,013.9 | |
| Restricted long-term marketable securities held to satisfy client funds obligations | | 16,021.8 | | | 19,573.3 | |
| Total funds held for clients | | $ | 26,708.1 | | | $ | 29,434.2 | |
|
| | | | | | | | |
| June 30, | | 2017 | | 2016 |
| Funds held for clients: | | | | |
| Restricted cash and cash equivalents held to satisfy client funds obligations | | $ | 5,401.2 |
| | $ | 12,267.5 |
|
| Restricted short-term marketable securities held to satisfy client funds obligations | | 2,918.5 |
| | 3,032.1 |
|
| Restricted long-term marketable securities held to satisfy client funds obligations | | 18,971.8 |
| | 18,541.6 |
|
| Total funds held for clients | | $ | 27,291.5 |
| | $ | 33,841.2 |
|
Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax and taxother 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 $27,189.4$25,831.6 million and $33,331.8$29,144.5 million as of June 30, 20172020 and 2016,2019, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purposes of satisfying the client funds obligations. Of the Company’s funds held for clients at June 30, 2020, $23,740.0 million are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and eliminate in consolidation.
The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash inflows and outflowscash equivalents related to client funds investments with original maturities of ninety days or less, on a net basis within net increase inthe beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents and other restricted assets heldequivalents. These amounts have been reconciled to satisfy client funds obligations in the investing section ofConsolidated 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 AAAAAA-rating or AA ratingAA-rating at June 30, 2017,2020, as rated by Moody's, Standard & Poor's, and,DBRS for Canadian dollar denominated securities, DBRS.and Fitch for asset-backed and commercial mortgage backed securities. All available-for-sale securities were rated as investment grade at June 30, 2017.2020.
Expected maturities of available-for-sale securities at June 30, 20172020 are as follows:
| | | | | |
| One year or less | $ | 5,541.2 | |
| One year to two years | 3,962.2 | |
| Two years to three years | 4,761.5 | |
| Three years to four years | 3,005.6 | |
| After four years | 4,306.1 | |
| |
| Total available-for-sale securities | $ | 21,576.6 | |
During the three months ended June 30, 2020, the Company made a decision to sell certain available-for-sale securities in the funds held for clients as the Company anticipated client fund obligations would decline due to reduction in employment levels from a slowdown in the economy as a result of the COVID-19 pandemic. To maintain the size of the funds held for clients in line with client fund obligations, the Company reduced its holdings of available-for-sale securities in the funds held for clients and sold approximately $1.6 billion of its available-for-sale securities.
Estimated future amortization expenses of the Company's existing intangible assets are as follows:
