Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 1-5397
______________
AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
______________
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| |
Delaware | 22-1467904 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
One ADP Boulevard, Roseland, New Jersey | 07068 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (973) 974-5000
______________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer [x] | | Accelerated filer [ ] |
Non-accelerated filer [ ] | (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
Emerging growth company [ ] | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares outstanding of the registrant’s common stock as of January 26, 2018 was 443,269,657.
Table of Contents
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| Statements of Consolidated Earnings Three and six months ended December 31, 2017 and 2016 | |
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| Statements of Consolidated Comprehensive Income Three and six months ended December 31, 2017 and 2016 | |
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| Consolidated Balance Sheets At December 31, 2017 and June 30, 2017 | |
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| Statements of Consolidated Cash Flows Six Months Ended December 31, 2017 and 2016 | |
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
REVENUES: | | | | | | | |
Revenues, other than interest on funds held for clients and PEO revenues | $ | 2,188.8 |
| | $ | 2,077.4 |
| | $ | 4,269.8 |
| | $ | 4,114.8 |
|
Interest on funds held for clients | 106.7 |
| | 91.8 |
| | 206.1 |
| | 181.0 |
|
PEO revenues (A) | 939.9 |
| | 818.1 |
| | 1,838.3 |
| | 1,608.4 |
|
TOTAL REVENUES | 3,235.4 |
| | 2,987.3 |
| | 6,314.2 |
| | 5,904.2 |
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| | | | | | | |
EXPENSES: | |
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| | |
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Costs of revenues: | |
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Operating expenses | 1,719.3 |
| | 1,560.4 |
| | 3,366.0 |
| | 3,091.9 |
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Systems development and programming costs | 158.1 |
| | 152.5 |
| | 315.1 |
| | 307.4 |
|
Depreciation and amortization | 69.3 |
| | 54.9 |
| | 131.9 |
| | 112.2 |
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TOTAL COSTS OF REVENUES | 1,946.7 |
| | 1,767.8 |
| | 3,813.0 |
| | 3,511.5 |
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| | | | | | | |
Selling, general, and administrative expenses | 717.2 |
| | 640.8 |
| | 1,379.6 |
| | 1,288.6 |
|
Interest expense | 27.5 |
| | 20.5 |
| | 55.5 |
| | 40.4 |
|
TOTAL EXPENSES | 2,691.4 |
| | 2,429.1 |
| | 5,248.1 |
| | 4,840.5 |
|
| | | | | | | |
Other income, net | (21.7 | ) | | (228.0 | ) | | (47.8 | ) | | (251.1 | ) |
| | | | | | | |
EARNINGS BEFORE INCOME TAXES | 565.7 |
| | 786.2 |
| | 1,113.9 |
| | 1,314.8 |
|
| | | | | | | |
Provision for income taxes | 98.2 |
| | 275.3 |
| | 244.9 |
| | 435.2 |
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NET EARNINGS | $ | 467.5 |
| | $ | 510.9 |
| | $ | 869.0 |
| | $ | 879.6 |
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BASIC EARNINGS PER SHARE | $ | 1.06 |
| | $ | 1.14 |
| | $ | 1.97 |
| | $ | 1.95 |
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DILUTED EARNINGS PER SHARE | $ | 1.05 |
| | $ | 1.13 |
| | $ | 1.96 |
| | $ | 1.94 |
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| | | | | | | |
Basic weighted average shares outstanding | 441.3 |
| | 447.9 |
| | 441.8 |
| | 450.1 |
|
Diluted weighted average shares outstanding | 443.7 |
| | 450.3 |
| | 444.4 |
| | 452.7 |
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| | | | | | | |
Dividends declared per common share | $ | 0.630 |
| | $ | 0.570 |
| | $ | 1.200 |
| | $ | 1.100 |
|
(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $10,632.3 million and $9,145.5 million for the three months ended December 31, 2017 and 2016, respectively, and $19,370.8 million and $16,833.1 million for the six months ended December 31, 2017 and 2016, respectively.
See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Comprehensive Income
(In millions)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net earnings | $ | 467.5 |
| | $ | 510.9 |
| | $ | 869.0 |
| | $ | 879.6 |
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| | | | | | | |
Other comprehensive income/loss: | | | | | | | |
Currency translation adjustments | 4.1 |
| | (55.0 | ) | | 46.6 |
| | (44.2 | ) |
| | | | | | | |
Unrealized net losses on available-for-sale securities | (147.3 | ) | | (413.3 | ) | | (160.2 | ) | | (484.7 | ) |
Tax effect | 53.1 |
| | 145.4 |
| | 56.6 |
| | 171.6 |
|
Reclassification of net losses/(gains) on available-for-sale securities to net earnings | 1.0 |
| | (1.3 | ) | | 1.1 |
| | (1.4 | ) |
Tax effect | (0.4 | ) | | 0.6 |
| | (0.4 | ) | | 0.6 |
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Reclassification of pension liability adjustment to net earnings | 2.3 |
| | 5.1 |
| | 4.6 |
| | 10.2 |
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Tax effect | (0.8 | ) | | (1.8 | ) | | (1.7 | ) | | (3.7 | ) |
| | | | | | | |
Other comprehensive loss, net of tax | (88.0 | ) | | (320.3 | ) | | (53.4 | ) | | (351.6 | ) |
Comprehensive income | $ | 379.5 |
| | $ | 190.6 |
| | $ | 815.6 |
| | $ | 528.0 |
|
See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
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| | | | | | | | |
| | December 31, | | June 30, |
| | 2017 | | 2017 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,773.4 |
| | $ | 2,780.4 |
|
Accounts receivable, net of allowance for doubtful accounts of $52.8 and $49.6, respectively | | 2,045.5 |
| | 1,703.6 |
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Other current assets | | 1,079.8 |
| | 883.2 |
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Total current assets before funds held for clients | | 4,898.7 |
| | 5,367.2 |
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Funds held for clients | | 34,451.3 |
| | 27,291.5 |
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Total current assets | | 39,350.0 |
| | 32,658.7 |
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Long-term receivables, net of allowance for doubtful accounts of $0.7 and $0.8, respectively | | 27.4 |
| | 28.0 |
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Property, plant and equipment, net | | 799.9 |
| | 779.9 |
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Other assets | | 1,371.2 |
| | 1,352.2 |
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Goodwill | | 2,164.3 |
| | 1,741.0 |
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Intangible assets, net | | 832.7 |
| | 620.2 |
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Total assets | | $ | 44,545.5 |
| | $ | 37,180.0 |
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Liabilities and Stockholders' Equity | | |
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Current liabilities: | | |
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Accounts payable | | $ | 136.8 |
| | $ | 149.7 |
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Accrued expenses and other current liabilities | | 1,583.9 |
| | 1,381.9 |
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Accrued payroll and payroll-related expenses | | 496.6 |
| | 562.5 |
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Dividends payable | | 275.2 |
| | 250.5 |
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Short-term deferred revenues | | 227.5 |
| | 232.9 |
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Income taxes payable | | 22.8 |
| | 49.0 |
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Total current liabilities before client funds obligations | | 2,742.8 |
| | 2,626.5 |
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Client funds obligations | | 34,508.1 |
| | 27,189.4 |
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Total current liabilities | | 37,250.9 |
| | 29,815.9 |
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Long-term debt | | 2,002.4 |
| | 2,002.4 |
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Other liabilities | | 824.8 |
| | 830.2 |
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Deferred income taxes | | 148.6 |
| | 163.1 |
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Long-term deferred revenues | | 387.6 |
| | 391.4 |
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Total liabilities | | 40,614.3 |
| | 33,203.0 |
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Commitments and contingencies (Note 14) | |
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Stockholders' equity: | | |
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Preferred stock, $1.00 par value: Authorized, 0.3 shares; issued, none | | — |
| | — |
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Common stock, $0.10 par value: authorized, 1,000.0 shares; issued, 638.7 shares at December 31, 2017 and June 30, 2017; outstanding, 442.7 and 445.0 shares at December 31, 2017 and June 30, 2017, respectively | | 63.9 |
| | 63.9 |
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Capital in excess of par value | | 903.5 |
| | 867.8 |
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Retained earnings | | 15,060.1 |
| | 14,728.2 |
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Treasury stock - at cost: 196.0 and 193.7 shares at December 31, 2017 and June 30, 2017, respectively | | (11,663.7 | ) | | (11,303.7 | ) |
Accumulated other comprehensive loss | | (432.6 | ) | | (379.2 | ) |
Total stockholders’ equity | | 3,931.2 |
| | 3,977.0 |
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Total liabilities and stockholders’ equity | | $ | 44,545.5 |
| | $ | 37,180.0 |
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See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In millions)
(Unaudited)
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| | | | | | | | |
| | Six Months Ended |
| | December 31, |
| | 2017 | | 2016 *As Adjusted |
Cash Flows from Operating Activities: | | | | |
Net earnings | | $ | 869.0 |
| | $ | 879.6 |
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Adjustments to reconcile net earnings to cash flows provided by operating activities: | | |
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Depreciation and amortization | | 182.0 |
| | 156.0 |
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Deferred income taxes | | 7.3 |
| | 27.7 |
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Stock-based compensation expense | | 77.7 |
| | 66.9 |
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Net pension expense | | 5.5 |
| | 12.1 |
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Net amortization of premiums and accretion of discounts on available-for-sale securities | | 37.9 |
| | 45.5 |
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Gain on sale of divested businesses, net of tax | | — |
| | (121.4 | ) |
Other | | 14.8 |
| | 13.6 |
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Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses: | | |
| | |
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Increase in accounts receivable | | (337.1 | ) | | (119.7 | ) |
Increase in other assets | | (244.7 | ) | | (144.1 | ) |
Decrease in accounts payable | | (2.7 | ) | | (16.1 | ) |
Increase in accrued expenses and other liabilities | | 65.4 |
| | 41.0 |
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Net cash flows provided by operating activities | | 675.1 |
| | 841.1 |
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Cash Flows from Investing Activities: | | |
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Purchases of corporate and client funds marketable securities | | (2,454.2 | ) | | (2,359.5 | ) |
Proceeds from the sales and maturities of corporate and client funds marketable securities | | 1,866.0 |
| | 1,878.0 |
|
Capital expenditures | | (118.3 | ) | | (119.7 | ) |
Additions to intangibles | | (132.4 | ) | | (106.6 | ) |
Acquisitions of businesses, net of cash acquired | | (487.4 | ) | | (20.0 | ) |
Proceeds from the sale of divested businesses | | — |
| | 234.0 |
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Net cash flows used in investing activities | | (1,326.3 | ) | | (493.8 | ) |
| | | | |
Cash Flows from Financing Activities: | | |
| | |
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Net increase / (decrease) in client funds obligations | | 7,207.1 |
| | (2,799.9 | ) |
Payments of debt | | (6.3 | ) | | (1.0 | ) |
Repurchases of common stock | | (408.3 | ) | | (765.3 | ) |
Net proceeds from stock purchase plan and stock-based compensation plans | | (5.5 | ) | | 19.2 |
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Dividends paid | | (506.7 | ) | | (482.3 | ) |
Net cash flows provided by / (used in) financing activities | | 6,280.3 |
| | (4,029.3 | ) |
| | | | |
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | | 49.1 |
| | (55.1 | ) |
| | | | |
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | | 5,678.2 |
| | (3,737.1 | ) |
| | | | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 8,181.6 |
| | 15,458.6 |
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Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 13,859.8 |
| | $ | 11,721.5 |
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Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets | | | | |
Cash and cash equivalents | | $ | 1,773.4 |
| | $ | 2,705.2 |
|
Restricted cash and restricted cash equivalents included in funds held for clients (A) | | 12,086.4 |
| | 9,016.3 |
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Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 13,859.8 |
| | $ | 11,721.5 |
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Supplemental disclosures of cash flow information: | | | | |
Cash paid for interest | | $ | 54.3 |
| | $ | 39.2 |
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Cash paid for income taxes, net of income tax refunds | | $ | 389.2 |
| | $ | 332.6 |
|
*See Note 2 for a summary of adjustments.
(A) See Note 8 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.
See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation
The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc. and its subsidiaries (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company’s interim financial results.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. The Interim Financial Data by Segment footnote reflects changes to the allocation methodology for certain allocations and has been adjusted in both the current period and the prior period and did not materially affect reportable segment results. Refer to Note 16 for further information.
Interim financial results are not necessarily indicative of financial results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (“fiscal 2017”).
Note 2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective July 1, 2017, the Company adopted Accounting Standards Update ("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. The Company retrospectively adopted the new standard, and as a result included restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the Statements of Consolidated Cash Flows. Accordingly, the statement of cash flows has been revised to include restricted cash and restricted cash equivalents associated with funds held to satisfy client obligations, as a component of cash, cash equivalents, restricted cash and restricted cash equivalents.
As a result of this adoption, the Company adjusted the Statements of Consolidated Cash Flows from previously reported amounts as follows:
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| Six Months Ended |
| December 31, 2016 (unaudited) |
| As previously reported | | Adjustments | | As adjusted |
Cash Flows from Investing Activities: | | | | | |
Net decrease / (increase) in restricted cash and cash equivalents held to satisfy client funds obligations | $ | 3,213.0 |
| | $ | (3,213.0 | ) | | $ | — |
|
Net cash flows provided by / (used in) investing activities | 2,719.2 |
| | (3,213.0 | ) | | (493.8 | ) |
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
| (16.9 | ) | | (38.2 | ) | | (55.1 | ) |
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | (485.9 | ) | | (3,251.2 | ) | | (3,737.1 | ) |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | $ | 2,705.2 |
| | $ | 9,016.3 |
| | $ | 11,721.5 |
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Effective July 1, 2017, the Company adopted 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. The adoption of ASU
2017-04 is not expected to have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.
In July 2017, the Company adopted ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business." ASU 2017-01 clarifies 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. The adoption of ASU 2017-01 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
Recently Issued Accounting Pronouncements
The following table summarizes recent ASU's issued by the Financial Accounting Standards Board ("FASB") that could have a material impact on the Company's consolidated results of operations, financial condition, or cash flows. |
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Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
ASU 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost | This standard 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. The ASU also allows only the service cost component to be eligible for capitalization, when applicable, prospectively from the date of adoption. | For fiscal years beginning after December 15, 2017. Early adoption is permitted. | The Company will adopt ASU 2017-07 beginning on July 1, 2018. This ASU will be applied retrospectively and will require the reclassification of the non-service cost components of the net periodic benefit cost from within the respective line items of our Statements of Consolidated Earnings to Other income, net. Also, the requirement set forth under this ASU only allows the service cost component of net periodic benefit cost to be capitalized. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s consolidated results of operations, financial condition, or cash flows. |
ASU 2016-02 Leases (Topic 842) | This update amends the existing accounting standards for lease accounting, and requires lessees to recognize most lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. This ASU requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. | For fiscal years beginning after December 15, 2018. Early adoption is permitted. | The Company will adopt ASU 2016-02 beginning on July 1, 2019. The Company has not yet determined the impact of this ASU on its consolidated results of operations, financial condition, or cash flows. |
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| | | |
Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
ASU 2014-09 Revenue from Contracts with Customers (Topic 606) | This standard outlines a single comprehensive model for entities to use in accounting for 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. | For fiscal 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 would not early adopt the standard, and instead would 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 sales force 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 illustrate how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Additionally, while the Company is in the process of assessing its accounting and 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.
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Note 3. Acquisitions
In October 2017, the Company acquired 100% of the outstanding shares of Global Cash Card, Inc. ("GCC"), a leader in digital payments, including paycards and other electronic accounts, for approximately $490 million in cash, net of cash acquired. The acquisition of GCC makes ADP the only human capital management provider with a proprietary digital payments processing platform. The results of GCC are reported within the Company’s Employer Services segment. Pro forma information has not been presented because the effect of the acquisition is not material to the Company's consolidated financial results.
The preliminary allocation of the purchase price is based upon estimates and assumptions that are subject to change within the purchase price allocation period, which is generally one year from the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to the measurement of certain assets and liabilities, including identifiable intangible assets, and the finalization of net working capital items included in the purchase price allocation. Accordingly, the
measurement period for such purchase price allocations will end when the information becomes available but will not exceed twelve months from the date of acquisition.
The preliminary purchase price allocation for GCC is as follows:
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| | | |
Goodwill | $ | 404.3 |
|
Identifiable intangible assets | 132.2 |
|
Other assets | 3.2 |
|
Total assets acquired | $ | 539.7 |
|
| |
Total liabilities acquired | $ | 48.7 |
|
The Company determined the purchase price allocations for this acquisition based on estimates of the fair value of tangible and intangible assets acquired and liabilities assumed, utilizing recognized valuation techniques, including the income and market approaches. The goodwill recorded as a result of the GCC transaction represents future economic benefits we expect to achieve as a result of the acquisition and expected cost synergies. None of the goodwill resulting from the acquisition is tax deductible.
Intangible assets for GCC, which totaled $132.2 million, included technology and software, and customer contracts and lists which are being amortized over a weighted average life of approximately 8 years.
Note 4. Divestitures
In November 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.
The Company determined that the CHSA and COBRA 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.
Note 5. 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 the fiscal year ended June 30, 2016 ("fiscal 2016"), the Company entered into leases in Norfolk, Virginia and Maitland, Florida, and in fiscal 2017, the Company entered into a lease in Tempe, Arizona as part of this effort. The Company began incurring charges for this initiative during the first quarter of fiscal 2017 and expects to continue to incur charges throughout the fiscal year ending June 30, 2018 ("fiscal 2018") as the initiative is executed. The charges primarily relate to employee separation benefits recognized under Accounting Standards Codification ("ASC") 712, and also include charges for the relocation of certain current Company employees, lease termination costs, and accelerated depreciation of fixed assets. The Company expects to recognize pre-tax restructuring charges of about $25 million for the remainder of 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/(reversals): |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | Cumulative amount from inception through |
| December 31, | | December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 |
Employee separation benefits (a) | $ | 2.3 |
| | $ | — |
| | $ | (2.9 | ) | | $ | 37.3 |
| | $ | 81.2 |
|
Other initiative costs (b) | 1.0 |
| | 1.2 |
| | 2.9 |
| | 3.8 |
| | 8.8 |
|
Total (c) | $ | 3.3 |
| | $ | 1.2 |
| | $ | — |
| | $ | 41.1 |
| | $ | 90.0 |
|
Activity for the Service Alignment Initiative liability for the six months ended December 31, 2017 was as follows:
|
| | | | | | | | | | | |
| Employee separation benefits | | Other initiative costs | | Total |
Balance at June 30, 2017 | $ | 73.9 |
| | $ | 0.5 |
| | $ | 74.4 |
|
Charged to expense | 7.9 |
| | 2.9 |
| | 10.8 |
|
Reversals | (10.8 | ) | | — |
| | (10.8 | ) |
Cash payments | (18.0 | ) | | (2.2 | ) | | (20.2 | ) |
Non-cash utilization | — |
| | (0.6 | ) | | (0.6 | ) |
Balance at December 31, 2017 | $ | 53.0 |
|
| $ | 0.6 |
|
| $ | 53.6 |
|
(a) - Charges/(reversals) 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.
Note 6. Earnings per Share (“EPS”)
|
| | | | | | | | | | | | | | |
| | Basic | | Effect of Employee Stock Option Shares | | Effect of Employee Restricted Stock Shares | | Diluted |
Three Months Ended December 31, 2017 | | |
| | |
| | |
| | |
|
Net earnings | | $ | 467.5 |
| | |
| | |
| | $ | 467.5 |
|
Weighted average shares (in millions) | | 441.3 |
| | 1.2 |
| | 1.2 |
| | 443.7 |
|
EPS | | $ | 1.06 |
| | |
| | |
| | $ | 1.05 |
|
Three Months Ended December 31, 2016 | | |
| | |
| | |
| | |
|
Net earnings | | $ | 510.9 |
| | |
| | |
| | $ | 510.9 |
|
Weighted average shares (in millions) | | 447.9 |
| | 1.1 |
| | 1.3 |
| | 450.3 |
|
EPS | | $ | 1.14 |
| | |
| | |
| | $ | 1.13 |
|
| | | | | | | | |
Six Months Ended December 31, 2017 | | | | | | | | |
Net earnings | | $ | 869.0 |
| | |
| | |
| | $ | 869.0 |
|
Weighted average shares (in millions) | | 441.8 |
| | 1.1 |
| | 1.5 |
| | 444.4 |
|
EPS | | $ | 1.97 |
| | |
| | |
| | $ | 1.96 |
|
Six Months Ended December 31, 2016 | | |
| | |
| | |
| | |
|
Net earnings | | $ | 879.6 |
| | |
| | |
| | $ | 879.6 |
|
Weighted average shares (in millions) | | 450.1 |
| | 1.1 |
| | 1.5 |
| | 452.7 |
|
EPS | | $ | 1.95 |
| | |
| | |
| | $ | 1.94 |
|
Options to purchase 1.1 million and 1.2 million shares of common stock for the three months ended December 31, 2017 and 2016, respectively, and 0.8 million shares of common stock for the six months ended December 31, 2017 and 2016, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Note 7. Other Income, Net
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest income on corporate funds | $ | (22.7 | ) | | $ | (21.3 | ) | | $ | (48.5 | ) | | $ | (44.3 | ) |
Realized gains on available-for-sale securities | (0.2 | ) | | (2.0 | ) | | (0.5 | ) | | (2.5 | ) |
Realized losses on available-for-sale securities | 1.2 |
| | 0.7 |
| | 1.6 |
| | 1.1 |
|
Gain on sale of assets | — |
| | — |
| | (0.4 | ) | | — |
|
Gain on sale of businesses (see Note 4) | — |
| | (205.4 | ) | | — |
| | (205.4 | ) |
Other income, net | $ | (21.7 | ) | | $ | (228.0 | ) | | $ | (47.8 | ) | | $ | (251.1 | ) |
Note 8. Corporate Investments and Funds Held for Clients
Corporate investments and funds held for clients at December 31, 2017 and June 30, 2017 were as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Market Value (A) |
Type of issue: | | | | | | | |
Money market securities, cash and other cash equivalents | $ | 13,859.8 |
| | $ | — |
| | $ | — |
| | $ | 13,859.8 |
|
Available-for-sale securities: | | | | | | | |
Corporate bonds | 9,435.9 |
| | 57.7 |
| | (39.7 | ) | | 9,453.9 |
|
Asset-backed securities | 4,445.0 |
| | 4.7 |
| | (22.0 | ) | | 4,427.7 |
|
U.S. government agency securities | 2,913.6 |
| | 10.6 |
| | (22.8 | ) | | 2,901.4 |
|
U.S. Treasury securities | 2,481.4 |
| | 1.0 |
| | (38.6 | ) | | 2,443.8 |
|
Canadian government obligations and Canadian government agency obligations | 1,148.3 |
| | 0.9 |
| | (20.1 | ) | | 1,129.1 |
|
Canadian provincial bonds | 760.8 |
| | 8.3 |
| | (3.3 | ) | | 765.8 |
|
Municipal bonds | 586.0 |
| | 6.3 |
| | (2.0 | ) | | 590.3 |
|
Other securities | 661.2 |
| | 5.0 |
| | (2.7 | ) | | 663.5 |
|
| | | | | | | |
Total available-for-sale securities | 22,432.2 |
| | 94.5 |
| | (151.2 | ) | | 22,375.5 |
|
| | | | | | | |
Total corporate investments and funds held for clients | $ | 36,292.0 |
| | $ | 94.5 |
| | $ | (151.2 | ) | | $ | 36,235.3 |
|
(A) Included within available-for-sale securities are corporate investments with fair values of $10.6 million and funds held for clients with fair values of $22,364.9 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
|
| | | | | | | | | | | | | | | |
| June 30, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Market Value (B) |
Type of issue: | |
| | |
| | |
| | |
|
Money market securities, cash and other cash equivalents | $ | 8,181.6 |
| | $ | — |
| | $ | — |
| | $ | 8,181.6 |
|
Available-for-sale securities: | |
| | |
| | |
| | |
|
Corporate bonds | 9,325.3 |
| | 98.8 |
| | (22.0 | ) | | 9,402.1 |
|
Asset-backed securities | 4,453.1 |
| | 16.9 |
| | (8.6 | ) | | 4,461.4 |
|
U.S. government agency securities | 3,557.7 |
| | 22.2 |
| | (13.4 | ) | | 3,566.5 |
|
U.S. Treasury securities | 1,585.9 |
| | 2.6 |
| | (14.3 | ) | | 1,574.2 |
|
Canadian government obligations and Canadian government agency obligations | 1,053.6 |
| | 2.9 |
| | (11.4 | ) | | 1,045.1 |
|
Canadian provincial bonds | 746.9 |
| | 14.3 |
| | (1.4 | ) | | 759.8 |
|
Municipal bonds | 582.5 |
| | 11.3 |
| | (1.3 | ) | | 592.5 |
|
Other securities | 493.6 |
| | 7.3 |
| | (1.4 | ) | | 499.5 |
|
| | | | | | | |
Total available-for-sale securities | 21,798.6 |
| | 176.3 |
| | (73.8 | ) | | 21,901.1 |
|
| | | | | | | |
Total corporate investments and funds held for clients | $ | 29,980.2 |
| | $ | 176.3 |
| | $ | (73.8 | ) | | $ | 30,082.7 |
|
(B) Included within available-for-sale securities are corporate investments with fair values of $10.8 million and funds held for clients with fair values of $21,890.3 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for fiscal 2017. The Company did not transfer any assets between Levels during the six months ended December 31, 2017 or fiscal 2017. 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 at December 31, 2017.
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 December 31, 2017, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| 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 | $ | (18.3 | ) | | $ | 3,437.6 |
| | $ | (21.4 | ) | | $ | 1,186.2 |
| | $ | (39.7 | ) | | $ | 4,623.8 |
|
Asset-backed securities | (10.8 | ) | | 2,463.5 |
| | (11.2 | ) | | 1,065.1 |
| | (22.0 | ) | | 3,528.6 |
|
U.S. government agency securities | (9.6 | ) | | 1,390.0 |
| | (13.2 | ) | | 656.1 |
| | (22.8 | ) | | 2,046.1 |
|
U.S. Treasury securities | (17.1 | ) | | 1,412.9 |
| | (21.5 | ) | | 982.1 |
| | (38.6 | ) | | 2,395.0 |
|
Canadian government obligations and Canadian government agency obligations | (20.1 | ) | | 895.3 |
| | — |
| | — |
| | (20.1 | ) | | 895.3 |
|
Canadian provincial bonds | (2.7 | ) | | 315.1 |
| | (0.6 | ) | | 55.4 |
| | (3.3 | ) | | 370.5 |
|
Municipal bonds | (1.4 | ) | | 189.2 |
| | (0.6 | ) | | 17.8 |
| | (2.0 | ) | | 207.0 |
|
Other securities | (1.9 | ) | | 269.2 |
| | (0.8 | ) | | 41.6 |
| | (2.7 | ) | | 310.8 |
|
| $ | (81.9 | ) | | $ | 10,372.8 |
| | $ | (69.3 | ) | | $ | 4,004.3 |
| | $ | (151.2 | ) | | $ | 14,377.1 |
|
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, 2017, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2017 |
| 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 | $ | (22.0 | ) | | $ | 2,619.9 |
| | $ | — |
| | $ | 7.4 |
| | $ | (22.0 | ) | | $ | 2,627.3 |
|
Asset-backed securities | (8.5 | ) | | 1,916.1 |
| | (0.1 | ) | | 11.3 |
| | (8.6 | ) | | 1,927.4 |
|
U.S. government agency securities | (13.4 | ) | | 1,935.3 |
| | — |
| | — |
| | (13.4 | ) | | 1,935.3 |
|
U.S. Treasury securities | (14.3 | ) | | 1,317.8 |
| | — |
| | 1.0 |
| | (14.3 | ) | | 1,318.8 |
|
Canadian government obligations and Canadian government agency obligations | (11.4 | ) | | 699.6 |
| | — |
| | — |
| | (11.4 | ) | | 699.6 |
|
Canadian provincial bonds | (1.4 | ) | | 179.8 |
| | — |
| | — |
| | (1.4 | ) | | 179.8 |
|
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 |
|
At December 31, 2017, corporate bonds include investment-grade debt securities, which include a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from January 2018 through March 2026.
At December 31, 2017, asset-backed securities include AAA rated senior tranches of securities with predominantly prime collateral of fixed-rate credit card, auto loan, equipment lease, and rate reduction receivables with fair values of $2,183.6 million, $1,581.6 million, $439.6 million, and $222.9 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 December 31, 2017.
At December 31, 2017, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $2,058.8 million and $603.0 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 June 2018 through November 2025.
At December 31, 2017, other securities and their fair value primarily represent: AAA and AA rated supranational bonds of $154.1 million, U.S. government agency commercial mortgage-backed securities of $147.0 million issued by Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation, Aa2 rated United Kingdom Gilt securities of $137.8 million, AAA and AA rated sovereign bonds of $110.8 million, and AA rated mortgage-backed securities of $87.2 million. 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 primarily guaranteed by Fannie Mae as to the timely payment of principal and interest.
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
|
| | | | | | | | |
| | December 31, | | June 30, |
| | 2017 | | 2017 |
Corporate investments: | | | | |
Cash and cash equivalents | | $ | 1,773.4 |
| | $ | 2,780.4 |
|
Short-term marketable securities (a) | | 3.2 |
| | 3.2 |
|
Long-term marketable securities (b) | | 7.4 |
| | 7.6 |
|
Total corporate investments | | $ | 1,784.0 |
| | $ | 2,791.2 |
|
(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:
|
| | | | | | | | |
| | December 31, | | June 30, |
| | 2017 | | 2017 |
Funds held for clients: | | | | |
Restricted cash and cash equivalents held to satisfy client funds obligations | | $ | 12,086.4 |
| | $ | 5,401.2 |
|
Restricted short-term marketable securities held to satisfy client funds obligations | | 2,285.3 |
| | 2,918.5 |
|
Restricted long-term marketable securities held to satisfy client funds obligations | | 20,079.6 |
| | 18,971.8 |
|
Total funds held for clients | | $ | 34,451.3 |
| | $ | 27,291.5 |
|
Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll and tax 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 $34,508.1 million and $27,189.4 million at December 31, 2017 and June 30, 2017, 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. 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. Beginning September 30, 2017, as a result of the adoption of ASU 2016-18 (see Note 2), the Company has reported the cash and cash equivalents related to client funds investments with original maturities of ninety days or less, within the beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents. These amounts have been reconciled to the Consolidated Balance Sheets on the Statements of Consolidated Cash Flows. Refer to Note 2 for a summary of the change in presentation as a result of the adoption of ASU 2016-18. 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 80% of the available-for-sale securities held a AAA or AA rating at December 31, 2017, as rated by Moody's, Standard & Poor's, DBRS for Canadian denominated securities, and Fitch for asset-backed and commercial mortgage backed securities. All available-for-sale securities were rated as investment grade at December 31, 2017.
Expected maturities of available-for-sale securities at December 31, 2017 are as follows:
|
| | | |
One year or less | $ | 2,288.5 |
|
One year to two years | 4,112.2 |
|
Two years to three years | 5,290.8 |
|
Three years to four years | 4,556.3 |
|
After four years | 6,127.7 |
|
Total available-for-sale securities | $ | 22,375.5 |
|
Note 9. Goodwill and Intangibles Assets, net
Changes in goodwill for the six months ended December 31, 2017 are as follows:
|
| | | | | | | | | | | |
| Employer Services | | PEO Services | | Total |
Balance at June 30, 2017 | $ | 1,736.2 |
| | $ | 4.8 |
| | $ | 1,741.0 |
|
Additions and other adjustments, net | 403.8 |
| | — |
| | 403.8 |
|
Currency translation adjustments | 19.5 |
| | — |
| | 19.5 |
|
Balance at December 31, 2017 | $ | 2,159.5 |
| | $ | 4.8 |
| | $ | 2,164.3 |
|
Components of intangible assets, net, are as follows:
|
| | | | | | | | |
| | December 31, | | June 30, |
| | 2017 | | 2017 |
Intangible assets: | | | | |
Software and software licenses | | $ | 2,187.6 |
| | $ | 1,975.2 |
|
Customer contracts and lists | | 703.2 |
| | 614.1 |
|
Other intangibles | | 234.1 |
| | 228.2 |
|
| | 3,124.9 |
| | 2,817.5 |
|
Less accumulated amortization: | | |
| | |
|
Software and software licenses | | (1,559.9 | ) | | (1,483.7 | ) |
Customer contracts and lists | | (522.1 | ) | | (506.0 | ) |
Other intangibles | | (210.2 | ) | | (207.6 | ) |
| | (2,292.2 | ) | | (2,197.3 | ) |
Intangible assets, net | | $ | 832.7 |
| | $ | 620.2 |
|
Other intangibles consist primarily of purchased rights, purchased content, trademarks and trade names (acquired directly or through acquisitions). All intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is 5 years (4 years for software and software licenses, 9 years for customer contracts and lists, and 6 years for other intangibles). Amortization of intangible assets was $51.8 million and $42.8 million for the three months ended December 31, 2017 and 2016, respectively, and $98.4 million and $85.4 million for the six months ended December 31, 2017 and 2016, respectively.
Estimated future amortization expenses of the Company's existing intangible assets are as follows:
|
| | | |
| Amount |
Six months ending June 30, 2018 | $ | 98.9 |
|
Twelve months ending June 30, 2019 | $ | 206.9 |
|
Twelve months ending June 30, 2020 | $ | 178.3 |
|
Twelve months ending June 30, 2021 | $ | 130.0 |
|
Twelve months ending June 30, 2022 | $ | 96.9 |
|
Twelve months ending June 30, 2023 | $ | 58.5 |
|
Note 10. Short-term Financing
The Company has a $3.5 billion, 364-day credit agreement that matures in June 2018 with a one year term-out option. The Company also has a $2.25 billion five-year credit facility that matures in June 2022 that also contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. In addition, the Company has a five-year $3.75 billion credit facility maturing in June 2021 that contains an accordion feature under which the aggregate commitment can be increased by $500 million, subject to the availability of additional commitments. The interest rate applicable to committed borrowings is tied to LIBOR, the effective federal funds rate, or the prime rate, depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing. The Company is also required to pay facility fees on the credit agreements. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. The Company had no borrowings through December 31, 2017 under the credit agreements.
The Company's U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to $9.5 billion in aggregate maturity value. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 by Moody’s. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At December 31, 2017 and June 30, 2017, the Company had no commercial paper outstanding. For the three months ended December 31, 2017 and 2016, the Company had average daily borrowings of $3.5 billion and $4.2 billion, respectively, at weighted average interest rates of 1.2% and 0.5%, respectively. For the six months ended December 31, 2017 and 2016, the Company had average daily borrowings of $3.7 billion and $4.2 billion, respectively, at weighted average interest rates of 1.2% and 0.5%, respectively. The weighted average maturity of the Company’s commercial paper during the three and six months ended December 31, 2017 was approximately two days.
The Company’s U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. At December 31, 2017 and June 30, 2017, there were no outstanding obligations related to the reverse repurchase agreements. For the three months ended December 31, 2017 and 2016, the Company had average outstanding balances under reverse repurchase agreements of $537.0 million and $267.6 million, respectively, at weighted average interest rates of 1.2% and 0.5%, respectively. For the six months ended December 31, 2017 and 2016, the Company had average outstanding balances under reverse repurchase agreements of $531.6 million and $313.4 million, respectively, at weighted average interest rates of 1.1% and 0.5%, respectively.
Note 11. Long-term Debt
The Company has fixed-rate notes with 5-year and 10-year maturities for an aggregate principal amount of $2.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
The principal amounts and associated effective interest rates of the Notes and other debt as of December 31, 2017 and June 30, 2017, are as follows: |
| | | | | | | | | | |
Debt instrument | | Effective Interest Rate | | December 31, 2017 | | June 30, 2017 |
Fixed-rate 2.250% notes due September 15, 2020 | | 2.37% | | $ | 1,000.0 |
| | $ | 1,000.0 |
|
Fixed-rate 3.375% notes due September 15, 2025 | | 3.47% | | 1,000.0 |
| | 1,000.0 |
|
Other | | | | 14.0 |
| | 20.3 |
|
| | | | 2,014.0 |
| | 2,020.3 |
|
Less: current portion | | | | (2.5 | ) | | (7.8 | ) |
Less: unamortized discount and debt issuance costs | | | | (9.1 | ) | | (10.1 | ) |
Total long-term debt | | | | $ | 2,002.4 |
| | $ | 2,002.4 |
|
The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.
As of December 31, 2017, the fair value of the Notes, based on Level 2 inputs, was $2,034.7 million. For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party service, see Note 1 "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for fiscal 2017.
Note 12. Employee Benefit Plans
A. Stock-based Compensation Plans
The Company's share-based compensation consists of stock options, time-based restricted stock, time-based restricted stock units, performance-based restricted stock, and performance-based restricted stock units. The Company also offers an employee stock purchase plan for eligible employees.
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company repurchased 1.4 million and 4.6 million shares in the three months ended December 31, 2017 and 2016, respectively and repurchased 3.6 million and 8.6 million shares in the six months ended December 31, 2017 and 2016, respectively. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
The following table represents stock-based compensation expense for the three and six months ended December 31, 2017 and 2016, respectively:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Operating expenses | $ | 5.4 |
| | $ | 6.3 |
| | $ | 10.6 |
| | $ | 11.8 |
|
Selling, general and administrative expenses | 27.5 |
| | 24.3 |
| | 56.1 |
| | 45.9 |
|
System development and programming costs | 5.8 |
| | 5.2 |
| | 11.0 |
| | 9.2 |
|
Total stock-based compensation expense | $ | 38.7 |
| | $ | 35.8 |
| | $ | 77.7 |
| | $ | 66.9 |
|
The methods and assumptions used in the determination of the fair value of stock-based awards are consistent with those described in the Company's fiscal 2017 Form 10-K. See the Company's Annual Report on Form 10-K for fiscal 2017 for a detailed description of the Company's stock-based compensation awards and employee stock purchase plan, including information related to vesting terms, service and performance conditions, payout percentages, and process for estimating the fair value of stock options granted.
B. Pension Plans
The components of net pension expense were as follows:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | Six Months Ended |
| December 31, | | | December 31, |
| 2017 | | 2016 | | | 2017 | | 2016 |
Service cost – benefits earned during the period | $ | 18.6 |
| | $ | 20.2 |
| | | $ | 37.3 |
| | $ | 40.4 |
|
Interest cost on projected benefits | 16.3 |
| | 14.9 |
| | | 32.6 |
| | 30.0 |
|
Expected return on plan assets | (34.3 | ) | | (33.9 | ) | | | (68.6 | ) | | (67.9 | ) |
Net amortization and deferral | 2.1 |
| | 4.8 |
| | | 4.2 |
| | 9.6 |
|
Net pension expense | $ | 2.7 |
| | $ | 6.0 |
| | | $ | 5.5 |
| | $ | 12.1 |
|
Note 13. Income Taxes
The effective tax rate for the three months ended December 31, 2017 and 2016 was 17.4% and 35.0%, respectively, and for the six months ended December 31, 2017 and 2016 was 22.0% and 33.1%, respectively. The decreases in the effective tax rates are primarily due to the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017 and the impact of sale of the CHSA and COBRA businesses in the three months ended December 31, 2016.
The Act reduces the U.S. federal corporate income tax rate from 35% to 21%. In accordance with ASC 740 companies are required to re-measure deferred tax balances using the new enacted tax rates. The Act requires companies to pay a one-time transition tax on earnings of the Company's foreign subsidiaries that were previously tax deferred for U.S. income taxes and creates new taxes on the Company's foreign sourced earnings. The rate change is administratively effective at the beginning of the Company's fiscal year resulting in a blended rate for fiscal 2018 of 28.1%.
Income tax expense reported for the three and six months ended December 31, 2017 was adjusted to reflect the effects of the Act and resulted in a decrease in income tax expense of approximately $98.0 million which includes a one-time net benefit of $45.7 million. The $45.7 million is comprised of the application of the newly enacted rates to the Company's U.S. deferred tax balances partially offset by the one-time transition tax and the recording of a valuation allowance against the Company's foreign tax credits which may not be realized. The Act’s foreign tax credit provisions may limit the Company’s ability to utilize existing foreign tax credits in future periods, accordingly we have estimated that approximately $23.1 million will expire unutilized.
The accounting for the effects of the rate change on deferred tax balances is not complete and provisional amounts were recorded for these items. The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The benefit recorded relating to the re-measurement of the Company's deferred tax balances was $84.7 million. The Company is still analyzing certain aspects of the Act and refining calculations, which could potentially affect the re-measurement of these balances or potentially give rise to new deferred tax amounts.
The one-time transition tax is based on the total post-1986 earnings and profits ("E&P") that was previously deferred from US income taxes. The Company recorded a provisional amount for the one-time transition tax liability of $15.9 million for the Company's foreign subsidiaries. The Company has not yet completed the calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from US federal taxation and finalizes the amounts held in cash or other specified assets.
Note 14. Commitments and Contingencies
In July 2016, Uniloc USA, Inc. and Uniloc Luxembourg, S.A. (“Uniloc”) filed a lawsuit against the Company in the United States District Court for the Eastern District of Texas (the "Court") alleging that Company products and services infringe four patents. Uniloc alleged infringement of its patents concerning centralized management of application programs on a network, distribution of application programs to a target station on a network, management of configurable application programs on a network, and license use management on a network. The complaint sought unspecified monetary damages, costs, and injunctive relief. On September 28, 2017, the Court granted ADP’s motion to dismiss the complaint on the grounds that all asserted claims of the four patents are invalid and dismissed the case with prejudice.
The Company has acquired a license to the four patents and a release for any potential past infringement liability. Despite the Company being licensed and released, Uniloc appealed the Court's invalidity determination to the U.S. Court of Appeals for the Federal Circuit. The Company has moved to dismiss Uniloc's appeal on the ground that the license and release have removed any justiciable dispute between the parties concerning the patents; the Company's motion is pending. Even though the Company's motion is pending, as a result of the license and release the Company does not believe the result of Uniloc’s appeal will have a material adverse impact on the Company.
The Company is subject to various claims, litigation and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims, litigation and regulatory compliance matters against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.
It is not the Company’s business practice to enter into off-balance sheet arrangements. In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
Note 15. Reclassifications out of Accumulated Other Comprehensive Income ("AOCI")
Changes in AOCI by component are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2017 |
| Currency Translation Adjustment | | Net Gains/Losses on Available-for-sale Securities | | Pension Liability | | Accumulated Other Comprehensive Loss |
Balance at September 30, 2017 | $ | (188.3 | ) | | $ | 59.0 |
| | $ | (215.3 | ) | | $ | (344.6 | ) |
Other comprehensive income/(loss) before reclassification adjustments | 4.1 |
| | (147.3 | ) | | — |
| | (143.2 | ) |
Tax effect | — |
| | 53.1 |
| | — |
| | 53.1 |
|
Reclassification adjustments to net earnings | — |
| | 1.0 |
| (A) | 2.3 |
| (B) | 3.3 |
|
Tax effect | — |
| | (0.4 | ) | | (0.8 | ) | | (1.2 | ) |
Balance at December 31, 2017 | $ | (184.2 | ) | | $ | (34.6 | ) | | $ | (213.8 | ) | | $ | (432.6 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2016 |
| Currency Translation Adjustment | | Net Gains/Losses on Available-for-sale Securities | | Pension Liability | | Accumulated Other Comprehensive Loss |
Balance at September 30, 2016 | $ | (243.0 | ) | | $ | 288.5 |
| | $ | (291.9 | ) | | $ | (246.4 | ) |
Other comprehensive loss before reclassification adjustments | (55.0 | ) | | (413.3 | ) | | — |
| | (468.3 | ) |
Tax effect | — |
| | 145.4 |
| | — |
| | 145.4 |
|
Reclassification adjustments to net earnings | — |
| | (1.3 | ) | (A) | 5.1 |
| (B) | 3.8 |
|
Tax effect | — |
| | 0.6 |
| | (1.8 | ) | | (1.2 | ) |
Balance at December 31, 2016 | $ | (298.0 | ) | | $ | 19.9 |
| | $ | (288.6 | ) | | $ | (566.7 | ) |
|
| | | | | | | | | | | | | | | |
| Six Months Ended |
| December 31, 2017 |
| Currency Translation Adjustment |
| Net Gains/Losses on Available-for-sale Securities |
| Pension Liability |
| Accumulated Other Comprehensive Loss |
Balance at June 30, 2017 | $ | (230.8 | ) | | $ | 68.3 |
| | $ | (216.7 | ) | | $ | (379.2 | ) |
Other comprehensive income/(loss) before reclassification adjustments | 46.6 |
| | (160.2 | ) | | — |
| | (113.6 | ) |
Tax effect | — |
| | 56.6 |
| | — |
| | 56.6 |
|
Reclassification adjustments to net earnings | — |
| | 1.1 |
| (A) | 4.6 |
| (B) | 5.7 |
|
Tax effect | — |
| | (0.4 | ) | | (1.7 | ) | | (2.1 | ) |
Balance at December 31, 2017 | $ | (184.2 | ) | | $ | (34.6 | ) | | $ | (213.8 | ) | | $ | (432.6 | ) |
|
| | | | | | | | | | | | | | | |
| Six Months Ended |
| December 31, 2016 |
| Currency Translation Adjustment | | Net Gains/Losses on Available-for-sale Securities | | Pension Liability | | Accumulated Other Comprehensive Loss |
Balance at June 30, 2016 | $ | (253.8 | ) | | $ | 333.8 |
| | $ | (295.1 | ) | | $ | (215.1 | ) |
Other comprehensive loss before reclassification adjustments | (44.2 | ) | | (484.7 | ) | | — |
| | (528.9 | ) |
Tax effect | — |
| | 171.6 |
| | — |
| | 171.6 |
|
Reclassification adjustments to net earnings | — |
| | (1.4 | ) | (A) | 10.2 |
| (B) | 8.8 |
|
Tax effect | — |
| | 0.6 |
| | (3.7 | ) | | (3.1 | ) |
Balance at December 31, 2016 | $ | (298.0 | ) | | $ | 19.9 |
| | $ | (288.6 | ) | | $ | (566.7 | ) |
(A) Reclassification adjustments out of AOCI are included within Other income, net, on the Statements of Consolidated Earnings.
(B) Reclassification adjustments out of AOCI are included in net pension expense (see Note 12).
Note 16. Interim Financial Data by Segment
Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two reportable segments: Employer Services and 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 (a wholly-owned captive insurance company that provides workers’ compensation and employee’s liability deductible reimbursement insurance protection for PEO Services’ worksite employees), and certain charges and expenses that have not been allocated to the reportable segments. Changes to the allocation methodology for certain allocations have been adjusted in both the current period and the prior period in the table below and did not materially affect reportable segment results.
Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. There is a reconciling item for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services and PEO Services at a standard rate of 4.5%. This allocation is made for management reasons so that the reportable segments' results are presented on a consistent basis without the impact of fluctuations in interest rates. This reconciling adjustment to the reportable segments' revenues and earnings before income taxes is eliminated in consolidation.
Segment Results:
|
| | | | | | | | | | | | | | | |
| Revenues |
| Three Months Ended | | Six Months Ended |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Employer Services | $ | 2,437.6 |
| | $ | 2,309.3 |
| | $ | 4,754.0 |
| | $ | 4,570.6 |
|
PEO Services | 945.3 |
| | 822.9 |
| | 1,848.8 |
| | 1,617.6 |
|
Other | (1.9 | ) | | (2.3 | ) | | (3.9 | ) | | (6.0 | ) |
Reconciling item: | | | | | | | |
Client fund interest | (145.6 | ) | | (142.6 | ) | | (284.7 | ) | | (278.0 | ) |
| $ | 3,235.4 |
| | $ | 2,987.3 |
| | $ | 6,314.2 |
| | $ | 5,904.2 |
|
|
| | | | | | | | | | | | | | | |
| Earnings before Income Taxes |
| Three Months Ended | | Six Months Ended |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Employer Services | $ | 706.4 |
| | $ | 681.1 |
| | $ | 1,353.0 |
| | $ | 1,337.1 |
|
PEO Services | 128.2 |
| | 114.5 |
| | 245.0 |
| | 221.6 |
|
Other | (123.3 | ) | | 133.2 |
| | (199.4 | ) | | 34.1 |
|
Reconciling item: | | | | | | | |
|
Client fund interest | (145.6 | ) | | (142.6 | ) | | (284.7 | ) | | (278.0 | ) |
| $ | 565.7 |
| | $ | 786.2 |
| | $ | 1,113.9 |
| | $ | 1,314.8 |
|
Note 17. Subsequent Events
In January 2018, the Company acquired 100% of the outstanding shares of Work Market, Inc., a leading provider of cloud-based freelance management solutions, for approximately $125 million in cash. The results of Work Market, Inc. will be reported within the Company’s Employer Services segment. The acquisition will be accounted for using the acquisition method of business combination under ASC 805, Business Combinations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Tabular dollars are presented in millions, except per share amounts)
FORWARD-LOOKING STATEMENTS
This document and other written or oral statements made from time to time by Automatic Data Processing, Inc. and its subsidiaries ("ADP" or "the Company") 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” 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; 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 privacy breaches, fraudulent acts, system interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; and the impact of new acquisitions and divestitures. 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” in our Annual Report on Form 10‑K for the fiscal year ended June 30, 2017 ("fiscal 2017"), 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.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 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. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for fiscal 2017 in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Executive Overview
We are one of the largest providers of global 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 deliver on our global HCM strategy and make investments in highly strategic areas in order to strengthen our underlying business model and prospects for continued growth.
Highlights from the six months ended December 31, 2017 include:
| |
• | Revenue grew 7% for the six months ended December 31, 2017 |
| |
• | Diluted earnings per share ("EPS") increased from $1.94 to $1.96; adjusted diluted earnings per share increased from $1.73 to $1.90 |
| |
• | Continued our shareholder friendly actions by returning over $400 million via share repurchases and approximately $500 million via dividends |
During the six months ended December 31, 2017, we continued to migrate clients to our strategic platforms while making investments in R&D to provide best-in-class cloud-based HCM solutions to our clients. Simultaneously, we continued to streamline our service organization. These actions are improving client satisfaction and retention. We remain focused on
delivering results and executing on our strategy to transform our business for continued success within the competitive global HCM environment.
Our new business bookings increased 2% in the six months ended December 31, 2017, compared to the six months ended December 31, 2016. We see growth in the business as we continue to build momentum going into the second half of fiscal year ending June 30, 2018 ("fiscal 2018") and we are confident that the investments in our sales force and products will drive results in line with our expectations.
Overall revenue retention improved 70 basis points across our businesses during the six months ended December 31, 2017. This improvement was driven by the upgrades of our clients from legacy platforms to our new cloud-based solutions, our focus on improving the client experience, and the loss of a large client within our former Consumer Health Spending Account ("CHSA") business during the six months ended December 31, 2016. This focus is translating well as we are seeing strong retention on our strategic platforms.
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 the six months ended December 31, 2017. Our revenue growth also benefited from the continued increase in our pays per control metric, which we measure as the number of employees on our clients' payrolls as measured on a same-store-sales basis utilizing a representative subset of payrolls ranging from small to large businesses that are reflective of a broad range of U.S. geographic regions.
In October 2017, we acquired Global Cash Card, Inc. ("GCC"), a leader in digital payments, allowing us to differentiate ADP’s leadership position in employee payments and makes ADP the only human capital management provider with a proprietary digital payments processing platform. The acquisition of this established company helps us innovate around the essential service of delivering pay, enabling us to provide new tools to consumers that help them manage their finances.
Also, in January 2018, we acquired Work Market, Inc. ("Work Market"), a leading provider of cloud-based freelance management solutions, for approximately $125 million in cash. As the composition of work is increasingly moving toward the contingent, or "gig" worker, this acquisition will allow us to expand our market opportunities while building on our current portfolio of industry-leading payroll and human capital management solutions.
We have a strong business model and operate in a large, growing market. We continue to maintain a high percentage of recurring revenues, healthy margins, and retain our ability to generate consistent healthy cash flows. Our financial condition and balance sheet remain solid at December 31, 2017, with cash and cash equivalents and marketable securities of approximately $1.8 billion. We will benefit from the Tax Cuts and Jobs Act (the "Act") signed into law in late December 2017 which offers us additional flexibility and greater access to cash world-wide. Our estimated fiscal 2018 adjusted effective tax rate is 26.9% and we anticipate a future adjusted effective tax rate, excluding one time items, of 25% to 26% beyond fiscal 2018. With this increased operating cash flow and greater access to our cash worldwide, we will continue our disciplined approach to capital allocation decisions, including assessing reinvestments into the business, potential acquisitions, and/or returning cash to shareholders through dividends and sharebacks, among other potential uses.
Analysis of Consolidated Operations
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Six Months Ended | | | | |
| December 31, | | % Change | | December 31, | | % Change |
| 2017 | | 2016 | | As Reported | | Constant Dollar Basis (Note 1) | | 2017 | | 2016 | | As Reported | | Constant Dollar Basis (Note 1) |
Total revenues | $ | |