filings.toolsItem 8. Financial Statements and Supplementary Data
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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, 2019 and 2018, and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2019, and the related notes and the schedule listed in the Index at Item 15(a) 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, 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, 2019, 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 9, 2019, 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, 2018, the Company adopted FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC 606), on a retrospective basis.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements 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 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, 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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical 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 on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Goodwill - Employer Services Reportable Segment - Refer to Notes 1 and 9 to the financial statements | ||||
| Critical Audit Matter Description | ||||
| The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company uses the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to forecasts of future revenue and operating margins. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The Company's new next-gen platform for which there is limited historical data and for which the forecasted future revenue and operating margin contribute significantly to the fair value of a reporting unit with approximately $678 million of goodwill within the Employer Services reportable segment as of June 30, 2019. Given the significant judgments made by management to estimate the fair value contributed by the next-gen platform for which there is limited historical data, including management’s judgments in selecting significant business assumptions to forecast future revenue and operating margin for the next-gen platform, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. |
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination of forecasts of future revenue and operating margin 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 units within the Employer Services reportable segment, such as controls related to management’s determination of forecasts of future revenue and operating margin. |
| • | With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology, including testing the mathematical accuracy of the calculation. |
| • | 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, (4) external communications made by management to analysts and investors, and (5) industry reports containing analyses of the Company’s and its competitor’s platforms. |
| Client Fund Obligations - Refer to Note 7 to the financial statements | ||||
| Critical Audit Matter Description | ||||
| The liability for client funds obligations represents the Company’s contractual obligations primarily to remit funds to satisfy clients' payroll and tax payment obligations and are recorded at the time the Company impounds funds from clients (i.e., money movement). 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 and a current liability of $29,144.5 million as of June 30, 2019. The Company performs complex data extracts in order to reconcile the client funds obligations to funds held for clients and records a high volume of material manual adjustments in order to properly reflect the client funds obligations’ as of period end. Given the significant volume of data extraction required, complexity of the reconciliation process, and the process used by management to extract the relevant data, auditing the client funds obligations is complex and requires the involvement of data specialists to independently reperform the reconciliation and test the completeness and accuracy of the manual adjustments recorded by management. |
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 in the current period as well as significant fluctuations from prior periods. |
| • | For a selection of client funds obligations transactions, we evaluated whether the funds were impounded prior to June 30, 2019, 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 manual adjustments recorded by management to properly reflect the client funds obligations balance and tested the accuracy of the selected adjustments. |
| • | 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 9, 2019
We have served as the Company’s auditor since 1968.
Statements of Consolidated Earnings
(In millions, except per share amounts)
| Years ended June 30, | 2018 | 2017 | ||||||||||
| 2019 | *As Restated | *As Restated | ||||||||||
| REVENUES: | ||||||||||||
| Revenues, other than interest on funds held for clients and PEO revenues | $ | 9,375.8 | $ | 8,983.4 | $ | 8,510.1 | ||||||
| Interest on funds held for clients | 561.9 | 466.5 | 397.4 | |||||||||
| PEO revenues (A) | 4,237.5 | 3,877.8 | 3,464.5 | |||||||||
| TOTAL REVENUES | 14,175.2 | 13,327.7 | 12,372.0 | |||||||||
| EXPENSES: | ||||||||||||
| Costs of revenues: | ||||||||||||
| Operating expenses | 7,145.9 | 6,901.0 | 6,386.2 | |||||||||
| Systems development and programming costs | 636.3 | 635.4 | 632.1 | |||||||||
| Depreciation and amortization | 304.4 | 274.5 | 226.2 | |||||||||
| TOTAL COSTS OF REVENUES | 8,086.6 | 7,810.9 | 7,244.5 | |||||||||
| Selling, general, and administrative expenses | 3,064.2 | 2,959.4 | 2,773.8 | |||||||||
| Interest expense | 129.9 | 102.7 | 80.0 | |||||||||
| TOTAL EXPENSES | 11,280.7 | 10,873.0 | 10,098.3 | |||||||||
| Other (income)/expense, net | (111.1 | ) | 172.1 | (343.2 | ) | |||||||
| EARNINGS BEFORE INCOME TAXES | 3,005.6 | 2,282.6 | 2,616.9 | |||||||||
| Provision for income taxes | 712.8 | 397.7 | 829.1 | |||||||||
| NET EARNINGS | $ | 2,292.8 | $ | 1,884.9 | $ | 1,787.8 | ||||||
| BASIC EARNINGS PER SHARE | $ | 5.27 | $ | 4.28 | $ | 3.99 | ||||||
| DILUTED EARNINGS PER SHARE | $ | 5.24 | $ | 4.25 | $ | 3.97 | ||||||
| Basic weighted average shares outstanding | 435.0 | 440.6 | 447.8 | |||||||||
| Diluted weighted average shares outstanding | 437.6 | 443.3 | 450.3 |
*See Note 1 for a summary of adjustments.
(A) For the years ended June 30, 2019 ("fiscal 2019"), June 30, 2018 ("fiscal 2018"), and June 30, 2017 ("fiscal 2017"), Professional Employer Organization ("PEO") revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $42,688.8 million, $39,140.9 million, and $34,567.4 million, respectively.
See notes to the Consolidated Financial Statements.
Statements of Consolidated Comprehensive Income
(In millions)
| Years ended June 30, | 2018 | 2017 | ||||||||||
| 2019 | *As Restated | *As Restated | ||||||||||
| Net earnings | $ | 2,292.8 | $ | 1,884.9 | $ | 1,787.8 | ||||||
| Other comprehensive income/loss: | ||||||||||||
| Currency translation adjustments | (42.2 | ) | 7.8 | 19.0 | ||||||||
| Unrealized net gains/(losses) on available-for-sale securities | 642.4 | (460.7 | ) | (405.7 | ) | |||||||
| Tax effect | (144.4 | ) | 123.4 | 141.6 | ||||||||
| Reclassification of net losses/(gains) on available-for-sale securities to net earnings | 0.9 | 2.7 | (2.2 | ) | ||||||||
| Tax effect | (0.3 | ) | (0.6 | ) | 0.8 | |||||||
| Pension net (losses)/gains arising during the year | (84.7 | ) | 87.0 | 109.6 | ||||||||
| Tax effect | 20.0 | (18.7 | ) | (43.6 | ) | |||||||
| Reclassification of pension liability adjustment to net earnings | 40.3 | 9.3 | 20.6 | |||||||||
| Tax effect | (9.5 | ) | (4.5 | ) | (8.2 | ) | ||||||
| Other comprehensive income/(loss), net of tax | 422.5 | (254.3 | ) | (168.1 | ) | |||||||
| Comprehensive income | $ | 2,715.3 | $ | 1,630.6 | $ | 1,619.7 |
*See Note 1 for a summary of adjustments.
See notes to the Consolidated Financial Statements.
Consolidated Balance Sheets
(In millions, except per share amounts)
| June 30, | 2018 | |||||||
| 2019 | *As Restated | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,949.2 | $ | 2,170.0 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $54.9 and $51.3, respectively | 2,439.3 | 1,984.2 | ||||||
| Other current assets | 519.6 | 531.3 | ||||||
| Total current assets before funds held for clients | 4,908.1 | 4,685.5 | ||||||
| Funds held for clients | 29,434.2 | 27,137.8 | ||||||
| Total current assets | 34,342.3 | 31,823.3 | ||||||
| Long-term receivables, net of allowance for doubtful accounts of $0.4 and $0.5, respectively | 23.8 | 25.5 | ||||||
| Property, plant and equipment, net | 764.2 | 793.7 | ||||||
| Deferred contract costs | 2,428.5 | 2,377.4 | ||||||
| Other assets | 934.4 | 699.3 | ||||||
| Goodwill | 2,323.0 | 2,243.5 | ||||||
| Intangible assets, net | 1,071.5 | 886.4 | ||||||
| Total assets | $ | 41,887.7 | $ | 38,849.1 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 125.5 | $ | 135.4 | ||||
| Accrued expenses and other current liabilities | 1,759.0 | 1,547.6 | ||||||
| Accrued payroll and payroll-related expenses | 721.1 | 667.7 | ||||||
| Dividends payable | 340.1 | 298.9 | ||||||
| Short-term deferred revenues | 220.7 | 225.7 | ||||||
| Obligations under reverse repurchase agreements (A) | 262.0 | — | ||||||
| Income taxes payable | 54.8 | 43.9 | ||||||
| Total current liabilities before client funds obligations | 3,483.2 | 2,919.2 | ||||||
| Client funds obligations | 29,144.5 | 27,493.5 | ||||||
| Total current liabilities | 32,627.7 | 30,412.7 | ||||||
| Long-term debt | 2,002.2 | 2,002.4 | ||||||
| Other liabilities | 798.7 | 728.0 | ||||||
| Deferred income taxes | 659.9 | 522.0 | ||||||
| Long-term deferred revenues | 399.3 | 448.1 | ||||||
| Total liabilities | 36,487.8 | 34,113.2 | ||||||
| Commitments and Contingencies (Note 14) | ||||||||
| 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, 2019 and June 30, 2018; outstanding, 434.2 and 438.8 shares at June 30, 2019 and June 30, 2018, respectively | 63.9 | 63.9 | ||||||
| Capital in excess of par value | 1,183.2 | 1,014.8 | ||||||
| Retained earnings | 17,500.6 | 16,546.6 | ||||||
| Treasury stock - at cost: 204.5 and 199.9 shares at June 30, 2019 and June 30, 2018, respectively | (13,090.5 | ) | (12,209.6 | ) | ||||
| Accumulated other comprehensive loss | (257.3 | ) | (679.8 | ) | ||||
| Total stockholders’ equity | 5,399.9 | 4,735.9 | ||||||
| Total liabilities and stockholders’ equity | $ | 41,887.7 | $ | 38,849.1 |
*See Note 1 for a summary of adjustments.
(A) 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 10).
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 *As Restated | Treasury Stock | Accumulated Other Comprehensive Income/(Loss) *As Restated | |||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||
| Balance at June 30, 2016 | 638.7 | $ | 63.9 | $ | 768.1 | $ | 14,960.1 | $ | (10,138.6 | ) | $ | (215.1 | ) | ||||||||||
| Net earnings | — | — | — | 1,787.8 | — | — | |||||||||||||||||
| Other comprehensive income | — | — | — | — | — | (168.1 | ) | ||||||||||||||||
| 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 | $ | 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) | — | — | — | — | (1,050.4 | ) | — | ||||||||||||||||
| Other (see Note 1) | — | — | — | 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) | — | — | — | — | (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 | ) |
*See Note 1 for a summary of adjustments.
See notes to the Consolidated Financial Statements.
Statements of Consolidated Cash Flows
(In millions)
| Years ended June 30, | 2019 | 2018 *As Restated | 2017 *As Restated | |||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net earnings | $ | 2,292.8 | $ | 1,884.9 | $ | 1,787.8 | ||||||
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | ||||||||||||
| Depreciation and amortization | 409.0 | 377.6 | 316.1 | |||||||||
| Amortization of deferred contract costs | 874.0 | 837.4 | 787.9 | |||||||||
| Deferred income taxes | 9.3 | (152.0 | ) | 41.3 | ||||||||
| Stock-based compensation expense | 167.3 | 175.4 | 138.9 | |||||||||
| Net pension expense | 55.4 | 330.4 | 24.2 | |||||||||
| Net amortization of premiums and accretion of discounts on available-for-sale securities | 50.1 | 71.5 | 85.9 | |||||||||
| Impairment of intangible assets | 12.1 | — | — | |||||||||
| Gain on sale of assets | (19.8 | ) | (0.7 | ) | — | |||||||
| Gain on sale of divested businesses, net of tax | — | — | (121.4 | ) | ||||||||
| Other | 43.9 | 32.2 | 37.1 | |||||||||
| Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses: | ||||||||||||
| (Increase)/decrease in accounts receivable | (473.9 | ) | (291.8 | ) | 23.4 | |||||||
| Increase in other assets | (987.2 | ) | (858.3 | ) | (1,139.4 | ) | ||||||
| Decrease in accounts payable | (10.7 | ) | (1.9 | ) | (11.6 | ) | ||||||
| Increase in accrued expenses and other liabilities | 266.0 | 110.5 | 155.7 | |||||||||
| Net cash flows provided by operating activities | 2,688.3 | 2,515.2 | 2,125.9 | |||||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Purchases of corporate and client funds marketable securities | (4,422.6 | ) | (4,876.8 | ) | (4,382.8 | ) | ||||||
| Proceeds from the sales and maturities of corporate and client funds marketable securities | 2,909.0 | 3,455.0 | 3,593.6 | |||||||||
| Capital expenditures | (162.0 | ) | (206.1 | ) | (240.2 | ) | ||||||
| Additions to intangibles | (404.5 | ) | (264.7 | ) | (230.4 | ) | ||||||
| Acquisitions of businesses, net of cash acquired | (125.5 | ) | (612.4 | ) | (87.4 | ) | ||||||
| Proceeds from the sale of property, plant, and equipment and other assets | 7.9 | 0.4 | — | |||||||||
| Proceeds from the sale of divested businesses | — | — | 234.0 | |||||||||
| Net cash flows used in investing activities | (2,197.7 | ) | (2,504.6 | ) | (1,113.2 | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Net increase/(decrease) in client funds obligations | 1,696.0 | 340.4 | (6,120.6 | ) | ||||||||
| Payments of debt | (2.1 | ) | (7.3 | ) | (2.0 | ) | ||||||
| Repurchases of common stock | (937.7 | ) | (989.3 | ) | (1,259.6 | ) | ||||||
| Net proceeds from stock purchase plan and stock-based compensation plans | 72.9 | 69.3 | 95.7 | |||||||||
| Dividends paid | (1,293.0 | ) | (1,063.7 | ) | (995.2 | ) | ||||||
| Net proceeds from reverse repurchase agreements | 262.0 | — | — | |||||||||
| Other | (5.8 | ) | (5.3 | ) | — | |||||||
| Net cash flows used in financing activities | (207.7 | ) | (1,655.9 | ) | (8,281.7 | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | (28.8 | ) | 5.8 | (8.0 | ) | |||||||
| Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | 254.1 | (1,639.5 | ) | (7,277.0 | ) | |||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of year | 6,542.1 | 8,181.6 | 15,458.6 | |||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of year | $ | 6,796.2 | $ | 6,542.1 | $ | 8,181.6 | ||||||
| Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets | ||||||||||||
| Cash and cash equivalents | $ | 1,949.2 | $ | 2,170.0 | $ | 2,780.4 | ||||||
| Restricted cash and restricted cash equivalents included in funds held for clients (A) | 4,847.0 | 4,372.1 | 5,401.2 | |||||||||
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 6,796.2 | $ | 6,542.1 | $ | 8,181.6 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 127.5 | $ | 100.5 | $ | 78.1 | ||||||
| Cash paid for income taxes, net of income tax refunds | $ | 633.8 | $ | 529.7 | $ | 817.1 |
*See Note 1 for a summary of adjustments.
(A) See Note 7 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.
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.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 7, “Corporate Investments and Funds Held for Clients.”
Restatements
Effective July 1, 2018, certain prior period amounts have been restated to conform to the current period presentation in connection with the adoption of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (ASC 606)” and ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Also, in the first quarter of the fiscal year ending June 30, 2019 (“fiscal 2019”), the Company's chief operating decision maker (“CODM”) began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity. Additionally, the CODM reviews results with changes to certain corporate allocations. These changes represent a change in the measure of segment performance. We reflected these new segment measures in fiscal 2019 and prior period segment results are restated for comparability.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenues, expenses, and other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates.
Certain amounts from the prior year's financial statements have been 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”) 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 certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and 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).
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 satisfied 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 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 does not retain risk and acts as an agent with respect to this aspect of the PEO arrangement. With respect to the payroll and payroll taxes, the worksite employer is the primarily responsible for providing the service and has discretion in establishing 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 these fees, the Company is primarily responsible for fulfilling the service and has discretion in establishing price.
We recognize client fund 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.
Set up fees received from certain clients to implement the Company's solutions are considered a material right. Therefore, the Company defers revenue associated with these set up fees and records them over the period in which such clients are expected to benefit from the material right, which is approximately five to seven years.
Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing. 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 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. Expected renewal periods are only included in the expected client relationship period if commission amounts paid upon renewal are not commensurate with amounts paid on the initial contract. 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.
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 an aggregate approach basis and are included in other (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.
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 7) 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 the mortgage-backed securities that are included within Other securities in Note 7, 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 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 estimated in Note 11 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.
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.
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 | 3 to 10 years |
| Buildings | 20 to 40 years |
| Furniture and fixtures | 4 to 7 years |
The Company has obligations under various facilities and equipment leases. The Company assesses whether these arrangements meet the criteria for capital leases by determining whether the agreement transfers ownership of the asset, whether the lease includes a bargain purchase option, whether the lease term is for greater than 75% of 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 classified as operating leases. Total expense under these operating lease agreements was approximately $270.1 million, $234.9 million, and $234.5 million in fiscal 2019, 2018, and 2017, respectively.
I. 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’s annual goodwill impairment assessment as of June 30, 2019 was performed for all reporting units using a quantitative 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 the market approach, which is based upon using market multiples of companies in similar lines of business. Significant assumptions used in determining the fair 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 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 concluded that goodwill is not impaired.
J. 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.
K. 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.
L. 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.
M. 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 | ||||||||||
| 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 | ||||||||||
| 2017 | ||||||||||||||
| Net earnings | $ | 1,787.8 | $ | 1,787.8 | ||||||||||
| Weighted average shares (in millions) | 447.8 | 0.9 | 1.6 | 450.3 | ||||||||||
| EPS | $ | 3.99 | $ | 3.97 |
Options to purchase 0.7 million, 0.9 million, and 1.0 million shares of common stock for fiscal 2019, 2018, and 2017, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
N. 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. 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. See Note 12 for additional information on the Company's stock-based compensation programs.
O. 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. 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.
P. 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.
Q. 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, 2019 and 2018, the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $54.2 million and $45.2 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 $3 million and expected cash payments could be up to $10 million in the next twelve months. The liability related to cash payments expected to be paid within the next 12 months has been reclassified from other liabilities to current liabilities on the Consolidated Balance Sheets. 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.
R. 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. The Company has obtained approximately $242 million of irrevocable standby letters of credit in favor of licensed insurance companies of AIG to secure TotalSource workers’ compensation obligations if ADP were to fail to reimburse AIG for workers’ compensation payments. The Company had no drawdowns during June 30, 2019 and 2018 under the letters of credit. For the fiscal years 2013 to 2018, as well as in July 2018 for the year ended June 30, 2019 (“fiscal 2019”), 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 $215 million in July 2019 to enter into a reinsurance arrangement to cover substantially all losses for the fiscal 2020 policy year on terms substantially similar to the fiscal 2019 policy.
S. Recently Issued Accounting Pronouncements.
Recently Adopted Accounting Pronouncements
Effective July 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)” on a retrospective basis. ASU 2014-09 requires 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. ASU 2014-09 resulted in enhanced revenue-related disclosures. The standard primarily impacted the manner in which we treat certain costs to fulfill contracts (i.e., implementation costs) and costs to acquire new contracts (i.e., selling costs). The new standard requires the Company to capitalize and amortize additional implementation costs than those capitalized and amortized under previous U.S. GAAP. Under previous U.S. GAAP, the Company immediately expensed all selling expenses. The adoption of the new standard did not materially impact the timing or amount of revenue the Company recognized and did not result in significant changes in its business processes or systems. Refer to Note 2 for further details. Refer to the table below for a summary of the restatements required, as a result of this change, on the Company's statements of consolidated earnings, consolidated balance sheets, and consolidated cash flows for fiscal 2018 and fiscal 2017.
Effective July 1, 2018, the Company adopted 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. The Company retrospectively adopted the new standard, and as a result reclassified 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)/expense, net. Refer to the table below for a summary of the reclassification required, as a result of this change, on the Company's consolidated results of operations for fiscal 2018 and fiscal 2017. The adoption of the new accounting rules only impacted the classification of expenses on the Statements of Consolidated Earnings and did not impact the Company’s consolidated earnings, balance sheets, or cash flows.
Adoption of ASC 606 and ASU 2017-07 impacted the Company's prior period Statements of Consolidated Earnings, Consolidated Balance Sheets, and Consolidated Cash Flows as follows:
Statement of Consolidated Earnings
| Year Ended | |||||||||||||||
| June 30, 2018 | |||||||||||||||
| As reported | Adjustments ASC 606 | Adjustments ASU 2017-07 | As adjusted | ||||||||||||
| Revenues, other than interest on funds held for clients and PEO revenues | $ | 8,985.2 | $ | (1.8 | ) | $ | — | $ | 8,983.4 | ||||||
| Interest on funds held for clients | 466.5 | — | — | 466.5 | |||||||||||
| PEO revenues | 3,874.1 | 3.7 | — | 3,877.8 | |||||||||||
| TOTAL REVENUES | 13,325.8 | 1.9 | — | 13,327.7 | |||||||||||
| Operating expenses | 6,937.9 | (74.0 | ) | 37.1 | 6,901.0 | ||||||||||
| Systems development and programming costs | 630.2 | — | 5.2 | 635.4 | |||||||||||
| Depreciation and amortization | 274.5 | — | — | 274.5 | |||||||||||
| Selling, general, and administrative expenses | 2,971.5 | (35.6 | ) | 23.5 | 2,959.4 | ||||||||||
| Interest expense | 102.7 | — | — | 102.7 | |||||||||||
| Total Expenses | 10,916.8 | (109.6 | ) | 65.8 | 10,873.0 | ||||||||||
| Other expense/(income), net | 237.9 | — | (65.8 | ) | 172.1 | ||||||||||
| EARNINGS BEFORE INCOME TAXES | 2,171.1 | 111.5 | — | 2,282.6 | |||||||||||
| Provision for income taxes | 550.3 | (152.6 | ) | — | 397.7 | ||||||||||
| NET EARNINGS | $ | 1,620.8 | $ | 264.1 | $ | — | $ | 1,884.9 |
| Year Ended | |||||||||||||||
| June 30, 2017 | |||||||||||||||
| As reported | Adjustments ASC 606 | Adjustments ASU 2017-07 | As adjusted | ||||||||||||
| Revenues, other than interest on funds held for clients and PEO revenues | $ | 8,518.1 | $ | (8.0 | ) | $ | — | $ | 8,510.1 | ||||||
| Interest on funds held for clients | 397.4 | — | — | 397.4 | |||||||||||
| PEO revenues | 3,464.3 | 0.2 | — | 3,464.5 | |||||||||||
| TOTAL REVENUES | 12,379.8 | (7.8 | ) | — | 12,372.0 | ||||||||||
| Operating expenses | 6,416.1 | (63.6 | ) | 33.7 | 6,386.2 | ||||||||||
| Systems development and programming costs | 627.5 | — | 4.6 | 632.1 | |||||||||||
| Depreciation and amortization | 226.2 | — | — | 226.2 | |||||||||||
| Selling, general, and administrative expenses | 2,783.2 | (30.0 | ) | 20.6 | 2,773.8 | ||||||||||
| Interest expense | 80.0 | — | — | 80.0 | |||||||||||
| Total Expenses | 10,133.0 | (93.6 | ) | 58.9 | 10,098.3 | ||||||||||
| Other (income), net | (284.3 | ) | — | (58.9 | ) | (343.2 | ) | ||||||||
| EARNINGS BEFORE INCOME TAXES | 2,531.1 | 85.8 | — | 2,616.9 | |||||||||||
| Provision for income taxes | 797.7 | 31.4 | — | 829.1 | |||||||||||
| NET EARNINGS | $ | 1,733.4 | $ | 54.4 | $ | — | $ | 1,787.8 |
Consolidated Balance Sheets
| June 30, | June 30, | |||||||||||
| 2018 | Adjustments ASC 606 | 2018 | ||||||||||
| As reported | As restated | |||||||||||
| Assets | ||||||||||||
| Current assets: | ||||||||||||
| Other current assets | $ | 758.0 | $ | (226.7 | ) | $ | 531.3 | |||||
| Total current assets | 32,050.0 | (226.7 | ) | 31,823.3 | ||||||||
| Deferred contract costs | — | 2,377.4 | 2,377.4 | |||||||||
| Other assets | 1,089.6 | (390.3 | ) | 699.3 | ||||||||
| Total assets | $ | 37,088.7 | $ | 1,760.4 | $ | 38,849.1 | ||||||
| Liabilities and Stockholders' Equity | ||||||||||||
| Current liabilities: | ||||||||||||
| Short-term deferred revenues | 226.5 | (0.8 | ) | 225.7 | ||||||||
| Total current liabilities | 30,413.6 | (0.8 | ) | 30,412.7 | ||||||||
| Deferred income taxes | 107.3 | 414.7 | 522.0 | |||||||||
| Long-term deferred revenues | 377.8 | 70.2 | 448.1 | |||||||||
| Total liabilities | 33,629.1 | 484.1 | 34,113.2 | |||||||||
| Stockholders' equity: | ||||||||||||
| Retained earnings | 15,271.3 | 1,275.3 | 16,546.6 | |||||||||
| Total stockholders’ equity | 3,459.6 | 1,276.3 | 4,735.9 | |||||||||
| Total liabilities and stockholders’ equity | $ | 37,088.7 | $ | 1,760.4 | $ | 38,849.1 |
Statements of Consolidated Cash Flows
| Year Ended | ||||||||||||
| June 30, | ||||||||||||
| 2018 | Adjustments ASC 606 | 2018 | ||||||||||
| As reported | As restated | |||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net earnings | $ | 1,620.8 | $ | 264.1 | $ | 1,884.9 | ||||||
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | ||||||||||||
| Amortization of deferred contract costs | — | 837.4 | 837.4 | |||||||||
| Deferred income taxes | 0.5 | (152.5 | ) | (152.0 | ) | |||||||
| Changes in operating assets and liabilities, net of effects from acquisitions: | ||||||||||||
| Decrease/(increase) in other assets | 93.5 | (951.8 | ) | (858.3 | ) | |||||||
| Increase in accrued expenses and other liabilities | 107.7 | 2.8 | 110.5 | |||||||||
| Net cash flows provided by operating activities | $ | 2,515.2 | $ | — | $ | 2,515.2 |
| Year Ended | ||||||||||||
| June 30, | ||||||||||||
| 2017 | Adjustments ASC 606 | 2017 | ||||||||||
| As reported | As restated | |||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net earnings | $ | 1,733.4 | $ | 54.4 | $ | 1,787.8 | ||||||
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | ||||||||||||
| Amortization of deferred contract costs | — | 787.9 | 787.9 | |||||||||
| Deferred income taxes | 10.0 | 31.3 | 41.3 | |||||||||
| Changes in operating assets and liabilities, net of effects from acquisitions: | ||||||||||||
| Increase in other assets | (269.1 | ) | (870.3 | ) | (1,139.4 | ) | ||||||
| Increase in accrued expenses and other liabilities | 159.0 | (3.3 | ) | 155.7 | ||||||||
| Net cash flows provided by operating activities | $ | 2,125.9 | $ | — | $ | 2,125.9 |
Effective October 1, 2018, the Company prospectively adopted ASU 2018-15, “Intangibles - Goodwill and Other-Internal-Use Software.” ASU 2018-15 clarifies and aligns the accounting and capitalization of implementation costs in cloud computing arrangements that are service arrangements with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40. The adoption of ASU 2018-15 did not have an impact on the Company’s consolidated results of operations, financial condition, or cash flows.
In March 2018, the Company adopted ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) from accumulated other comprehensive (loss)/income to retained earnings. The June 30, 2018 Consolidated Balance Sheets reflect the reclassification out of accumulated other comprehensive income and into retained earnings of $42.3 million. The Company's policy for releasing disproportionate income tax effects from AOCI utilizes the aggregate approach. Refer to Note 15 for additional detail regarding the components of the reclassification. The adoption of ASU 2018-02 did not have an impact on the Company's consolidated results of operations or cash flows.
Recently Issued Accounting Pronouncements
The following table summarizes recent ASU's issued by the Financial Accounting Standards Board ("FASB"):
| Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
| ASU 2018-14 Compensation-Retirement Benefits-Defined Benefit Plans | This update modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The amendments in ASU 2018-14 would need to be applied on a retrospective basis. | July 1, 2021 (“Fiscal 2022”) | The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows. |
| ASU 2018-13 Fair Value Measurement | This update modifies the disclosure requirements on fair value measurements. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. | July 1, 2020 (“Fiscal 2021”) | The adoption of this guidance will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, or cash flows. |
| ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | This update introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. In addition, this update modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. | July 1, 2020 (“Fiscal 2021”) | The adoption of this guidance will not have a material impact on its consolidated results of operations, financial condition, or cash flows. |
| Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
| 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. In July 2018, the FASB issued Accounting Standards Update 2018-10-Codification Improvements to Topic 842 (Leases), and Accounting Standards Update 2018-11-Leases (Topic 842)-Targeted Improvements, which (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) provide entities with an additional transition method to adopt the new standard, and (iii) provide lessors with a practical expedient for separating components of a contract. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) to be more general and/or to correct unintended application of guidance. | July 1, 2019 (“Fiscal 2020”) | The Company has finalized the assessment of the impacts of the new standard. The Company will use the optional transition method with a cumulative adjustment to retained earnings. There is no adjustment to retained earnings. The Company has reached a decision as to the systems it will use to manage the accounting for leases, determined the contracts that are considered leases under the new guidance and is currently in the process of implementing the systems and establishing the appropriate controls and procedures. The Company will utilize the transition package of practical expedients permitted within the new guidance which, among other things, will allow the Company to carry forward the historical lease classification. Upon adoption, the Company anticipates a material impact to its Consolidated Balance Sheets but expects no impact to the Statements of Consolidated Earnings or Statements of Consolidated Cash Flows. The most significant impact will be the recognition of the right-of-use (“ROU”) assets and lease liabilities for operating leases. We estimate the adoption of the guidance will result in the recognition and presentation of total operating lease ROU assets to be approximately $600 million to $700 million and total operating lease liabilities to be approximately $500 million to $600 million, upon the adoption date. |
NOTE 2. REVENUE
Based upon similar operational and economic characteristics, the Company’s revenues are disaggregated by its three strategic pillars: HCM (“HCM”), HR Outsourcing (“HRO”), and Global Solutions with separate disaggregation for PEO zero-margin benefits pass-through revenues and client fund interest revenues. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
HCM provides a suite of product offerings that assist employers of all types and sizes in all stages of the employment cycle, from recruitment to retirement. Global is generally consistent with the types of services provided within HCM but 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 the Professional Employer Organization Services (“PEO”). The Company has further disaggregated HRO to separate out its PEO zero-margin benefits pass-through revenues.
The Company recognizes client fund interest revenues on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.
The following tables provide details of revenue by our strategic pillars with disaggregation for PEO zero-margin benefits pass-throughs and client fund interest, and includes a reconciliation to the Company’s reportable segments (in millions):
| Years Ended | |||||||||||
| June 30, | |||||||||||
| Types of Revenues | 2019 | 2018 | 2017 | ||||||||
| HCM | $ | 6,441.8 | $ | 6,204.9 | $ | 6,020.5 | |||||
| HRO, excluding PEO zero-margin benefits pass-throughs | 2,444.4 | 2,261.9 | 2,068.8 | ||||||||
| PEO zero-margin benefits pass-throughs | 2,712.5 | 2,463.1 | 2,173.9 | ||||||||
| Global | 2,014.6 | 1,931.3 | 1,711.4 | ||||||||
| Interest on funds held for clients | 561.9 | 466.5 | 397.4 | ||||||||
| Total Revenues | $ | 14,175.2 | $ | 13,327.7 | $ | 12,372.0 |
Reconciliation of disaggregated revenue to our reportable segments for the fiscal 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 | — | 2,712.5 | — | 2,712.5 | |||||||||||
| 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 | $ | 4,242.7 | $ | (10.3 | ) | $ | 14,175.2 |
Reconciliation of disaggregated revenue to our reportable segments for the fiscal year ended June 30, 2018:
| 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 | — | 2,463.1 | — | 2,463.1 | |||||||||||
| 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 | $ | 3,882.3 | $ | (9.4 | ) | $ | 13,327.7 |
Reconciliation of disaggregated revenue to our reportable segments for the fiscal year ended June 30, 2017:
| Types of Revenues | Employer Services | PEO | Other | Total | |||||||||||
| HCM | $ | 6,026.7 | $ | — | $ | (6.2 | ) | $ | 6,020.5 | ||||||
| HRO, excluding PEO zero-margin benefits pass-throughs | 782.6 | 1,290.6 | (4.4 | ) | 2,068.8 | ||||||||||
| PEO zero-margin benefits pass-throughs | — | 2,173.9 | — | 2,173.9 | |||||||||||
| Global | 1,711.4 | — | — | 1,711.4 | |||||||||||
| Interest on funds held for clients | 393.5 | 3.9 | — | 397.4 | |||||||||||
| Total Segment Revenues | $ | 8,914.2 | $ | 3,468.4 | $ | (10.6 | ) | $ | 12,372.0 |
Contract Balances
The timing of revenue recognition for our HCM, HRO and Global Solutions is consistent with the invoicing of clients, as invoicing occurs in the period the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.
Changes in deferred revenue related to set up fees for the twelve months ended June 30, 2019 were as follows:
| Contract Liability | |||
| Contract liability, July 1, 2018 | $ | 607.5 | |
| Recognition of revenue included in beginning of year contract liability | (177.9 | ) | |
| Contract liability, net of revenue recognized on contracts during the period | 148.5 | ||
| Currency adjustments | (14.7 | ) | |
| Contract liability, June 30, 2019 | $ | 563.4 |
Deferred costs
Deferred costs are periodically reviewed for impairment. There were no impairment losses incurred during the period.
The balance is as follows:
| June 30, | |||
| 2019 | |||
| Deferred costs to obtain a contract | $ | 992.3 | |
| Deferred costs to fulfill a contract | 1,436.2 | ||
| Total deferred contract costs (1) | $ | 2,428.5 |
(1) The amount of total deferred costs amortized during the twelve months ended June 30, 2019, June 30, 2018, and June 30, 2017 were $874.0 million, $837.4 million, and $787.9 million, respectively.
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.
The final purchase price allocation for GCC is as follows:
| Goodwill | $ | 406.1 | |
| Identifiable intangible assets | 132.5 | ||
| Other assets | 0.8 | ||
| Total assets acquired | $ | 539.4 | |
| Total liabilities assumed | $ | 48.4 |
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 $132.5 million, included technology and software, and customer contracts and lists which are being amortized over a weighted average life of approximately 8 years.
In January 2018, the Company acquired 100% of the outstanding shares of Work Market, Inc. ("WorkMarket"), a leading provider of cloud-based freelance management solutions, for approximately $125 million in cash.
In July 2018, the Company acquired 100% of outstanding shares of Celergo Holdings, Inc. (“Celergo”), a leading provider of multi-country payroll management services.
These acquisitions, individually or in aggregate, 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 these acquisitions are reported within the Company’s Employer Services segment.
NOTE 4. DIVESTITURES
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)/expense, net on the Statements of Consolidated Earnings in fiscal 2017. 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 simplified 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 fiscal 2017, the Company entered into a lease in Tempe, Arizona as part of this effort. The Company began incurring charges during the first quarter of fiscal 2017. The charges primarily relate to employee separation benefits recognized under 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 does not expect to recognize any additional material pre-tax restructuring charges related to the Service Alignment Initiative.
The table below summarizes the composition of the Company's Service Alignment Initiative (reversals)/charges:
| Year Ended | Cumulative amount from inception through | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2017 | 2019 | |||||||||||||
| Employee separation benefits (a) | $ | (22.5 | ) | $ | 15.4 | $ | 84.1 | $ | 77.0 | |||||||
| Other initiative costs (b) | 2.7 | 5.1 | 5.9 | 13.7 | ||||||||||||
| Gain on sale of assets (c) | (4.1 | ) | — | — | (4.1 | ) | ||||||||||
| Total (d) | $ | (23.9 | ) | $ | 20.5 | $ | 90.0 | $ | 86.6 |
(a) - Net (reversals)/ 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) - In fiscal 2019, the Company sold assets related to the Service Alignment Initiative, and as a result recorded a gain of $4.1 million in Other (income)/expense, net, on the Statement of Consolidated Earnings. Refer to Note 6.
(d) - All charges are included within the Other segment.
Activity for the Service Alignment Initiative liability for fiscal 2019 and fiscal 2018 was as follows:
| Employee separation benefits | Other initiative costs | Total | ||||||||||
| Balance at June 30, 2017 | $ | 73.9 | $ | 0.5 | $ | 74.4 | ||||||
| Charged to expense | 38.8 | 5.1 | 43.9 | |||||||||
| Reversals | (23.4 | ) | — | (23.4 | ) | |||||||
| Cash payments | (35.3 | ) | (4.4 | ) | (39.7 | ) | ||||||
| Non-cash utilization | — | (0.7 | ) | (0.7 | ) | |||||||
| Balance at June 30, 2018 | $ | 54.0 | $ | 0.5 | $ | 54.5 | ||||||
| Charged to expense | 4.1 | 2.7 | 6.8 | |||||||||
| Reversals | (26.6 | ) | — | (26.6 | ) | |||||||
| Cash payments | (19.9 | ) | (2.8 | ) | (22.7 | ) | ||||||
| Balance at June 30, 2019 | $ | 11.6 | $ | 0.4 | $ | 12.0 |
NOTE 6. OTHER (INCOME)/EXPENSE, NET
Other (income)/expense, net consists of the following:
| Years ended June 30, | 2019 | 2018 | 2017 | |||||||||
| Interest income on corporate funds | $ | (97.6 | ) | $ | (83.5 | ) | $ | (76.7 | ) | |||
| Realized gains on available-for-sale securities | (1.8 | ) | (2.0 | ) | (5.3 | ) | ||||||
| Realized losses on available-for-sale securities | 2.7 | 4.5 | 3.1 | |||||||||
| Impairment of intangible assets | 12.1 | — | — | |||||||||
| Gain on sale of assets | (4.1 | ) | (0.7 | ) | — | |||||||
| Gain on sale of investment | (15.7 | ) | — | — | ||||||||
| Gain on sale of business | — | — | (205.4 | ) | ||||||||
| Non-service components of pension expense, net | (6.7 | ) | 253.8 | (58.9 | ) | |||||||
| Other (income)/expense, net | $ | (111.1 | ) | $ | 172.1 | $ | (343.2 | ) |
The charges within non-service components of pension expense, net include $48.2 million of non-cash settlement charges and of special termination benefits related to the Voluntary Early Retirement Program (“VERP”), for the twelve months ended June 30, 2019, offset by $54.9 million related to other components of net periodic pension cost for the twelve months ended June 30, 2019. Refer to Note 1 and Note 12 for further information.
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.
Additionally in fiscal 2019, the Company recognized a gain of $4.1 million for the sale of assets in relation to the Service Alignment Initiative, and a gain $15.7 million in relation to the sale of investment held at cost acquired in prior years and subsequently sold, in Other (income)/expense, net, on the Statement of Consolidated Earnings.
NOTE 7. CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS
Corporate investments and funds held for clients at June 30, 2019 and 2018 were as follows:
| June 30, 2019 | |||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value (A) | ||||||||||||
| 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 |
(A) Included within available-for-sale securities are corporate investments with fair values of $271.9 million and funds held for clients with fair values of $24,587.2 million. All available-for-sale securities are included in Level 2 of the fair value hierarchy.
| June 30, 2018 | |||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value (B) | ||||||||||||
| Type of issue: | |||||||||||||||
| Money market securities, cash and other cash equivalents | $ | 6,542.1 | $ | — | $ | — | $ | 6,542.1 | |||||||
| Available-for-sale securities: | |||||||||||||||
| Corporate bonds | 9,819.4 | 20.3 | (160.9 | ) | 9,678.8 | ||||||||||
| Asset-backed securities | 4,555.5 | 0.3 | (64.1 | ) | 4,491.7 | ||||||||||
| U.S. Treasury securities | 2,678.9 | 0.4 | (76.9 | ) | 2,602.4 | ||||||||||
| U.S. government agency securities | 2,787.0 | 4.0 | (47.7 | ) | 2,743.3 | ||||||||||
| Canadian government obligations and Canadian government agency obligations | 1,109.0 | 0.4 | (20.6 | ) | 1,088.8 | ||||||||||
| Canadian provincial bonds | 724.5 | 5.1 | (7.4 | ) | 722.2 | ||||||||||
| Municipal bonds | 584.6 | 3.2 | (4.3 | ) | 583.5 | ||||||||||
| Other securities | 873.0 | 3.0 | (10.5 | ) | 865.5 | ||||||||||
| Total available-for-sale securities | 23,131.9 | 36.7 | (392.4 | ) | 22,776.2 | ||||||||||
| Total corporate investments and funds held for clients | $ | 29,674.0 | $ | 36.7 | $ | (392.4 | ) | $ | 29,318.3 |
(B) Included within available-for-sale securities are corporate investments with fair values of $10.5 million and funds held for clients with fair values of $22,765.7 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.” The Company did not transfer any assets between Levels during fiscal 2019 or 2018. 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, 2019.
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2019, are as follows:
| June 30, 2019 | |||||||||||||||||||||||
| Securities in unrealized loss position less than 12 months | Securities in unrealized loss position greater than 12 months | Total | |||||||||||||||||||||
| Gross Unrealized Losses | Fair Market Value | Gross Unrealized Losses | Fair Market Value | Gross Unrealized Losses | Fair Market Value | ||||||||||||||||||
| Corporate bonds | $ | (0.6 | ) | $ | 151.9 | $ | (6.1 | ) | $ | 2,055.6 | $ | (6.7 | ) | $ | 2,207.5 | ||||||||
| Asset-backed securities | (0.2 | ) | 171.9 | (5.2 | ) | 2,083.5 | (5.4 | ) | 2,255.4 | ||||||||||||||
| U.S. Treasury securities | — | 1.8 | (8.0 | ) | 1,159.4 | (8.0 | ) | 1,161.2 | |||||||||||||||
| U.S. government agency securities | — | — | (5.8 | ) | 1,671.4 | (5.8 | ) | 1,671.4 | |||||||||||||||
| Canadian government obligations and Canadian government agency obligations | (6.0 | ) | 662.7 | — | 1.1 | (6.0 | ) | 663.8 | |||||||||||||||
| Canadian provincial bonds | (0.3 | ) | 81.5 | (0.2 | ) | 50.1 | (0.5 | ) | 131.6 | ||||||||||||||
| Municipal bonds | — | 1.5 | (0.1 | ) | 23.3 | (0.1 | ) | 24.8 | |||||||||||||||
| Other securities | (0.1 | ) | 36.4 | (0.5 | ) | 148.1 | (0.6 | ) | 184.5 | ||||||||||||||
| $ | (7.2 | ) | $ | 1,107.7 | $ | (25.9 | ) | $ | 7,192.5 | $ | (33.1 | ) | $ | 8,300.2 |
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, 2018 are as follows:
| June 30, 2018 | |||||||||||||||||||||||
| 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 | $ | (118.2 | ) | $ | 7,132.9 | $ | (42.7 | ) | $ | 994.2 | $ | (160.9 | ) | $ | 8,127.1 | ||||||||
| Asset-backed securities | (47.4 | ) | 3,515.9 | (16.7 | ) | 867.7 | (64.1 | ) | 4,383.6 | ||||||||||||||
| U.S. Treasury securities | (46.9 | ) | 1,676.8 | (30.0 | ) | 864.0 | (76.9 | ) | 2,540.8 | ||||||||||||||
| U.S. government agency securities | (31.2 | ) | 2,013.8 | (16.5 | ) | 431.1 | (47.7 | ) | 2,444.9 | ||||||||||||||
| Canadian government obligations and Canadian government agency obligations | (20.6 | ) | 1,020.3 | — | — | (20.6 | ) | 1,020.3 | |||||||||||||||
| Canadian provincial bonds | (6.3 | ) | 387.7 | (1.1 | ) | 50.4 | (7.4 | ) | 438.1 | ||||||||||||||
| Municipal bonds | (3.6 | ) | 285.8 | (0.7 | ) | 16.0 | (4.3 | ) | 301.8 | ||||||||||||||
| Other securities | (9.2 | ) | 573.3 | (1.3 | ) | 33.4 | (10.5 | ) | 606.7 | ||||||||||||||
| $ | (283.4 | ) | $ | 16,606.5 | $ | (109.0 | ) | $ | 3,256.8 | $ | (392.4 | ) | $ | 19,863.3 |
At June 30, 2019, Corporate bonds include investment-grade debt securities, with a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from July 2019 through July 2029.
At June 30, 2019, asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed-rate auto loan, credit card, equipment lease and rate reduction receivables with fair values of $2,073.2 million, $1,960.1 million, $495.1 million, and $162.3 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, 2019.
At June 30, 2019, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of $1,759.6 million and $655.0 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 August 2019 through January 2029.
At June 30, 2019, other securities and their fair value primarily include U.S. government agency commercial mortgage-backed securities of $615.6 million issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, Aa2 rated United Kingdom Gilt securities of $193.8 million, AAA and AA rated supranational bonds of $119.0 million, and AAA and AA rated sovereign bonds of $90.0 million.
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
| June 30, | 2019 | 2018 | ||||||
| Corporate investments: | ||||||||
| Cash and cash equivalents | $ | 1,949.2 | $ | 2,170.0 | ||||
| Short-term marketable securities (a) | 10.5 | 3.3 | ||||||
| Long-term marketable securities (b) | 261.4 | 7.2 | ||||||
| Total corporate investments | $ | 2,221.1 | $ | 2,180.5 |
(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, | 2019 | 2018 | ||||||
| Funds held for clients: | ||||||||
| Restricted cash and cash equivalents held to satisfy client funds obligations | $ | 4,847.0 | $ | 4,372.1 | ||||
| Restricted short-term marketable securities held to satisfy client funds obligations | 5,013.9 | 2,521.4 | ||||||
| Restricted long-term marketable securities held to satisfy client funds obligations | 19,573.3 | 20,244.3 | ||||||
| Total funds held for clients | $ | 29,434.2 | $ | 27,137.8 |
Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax and other payee payment obligations 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 $29,144.5 million and $27,493.5 million as of June 30, 2019 and 2018, 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, 2019, $26,648.0 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 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. The Company has reported the cash flows related to the cash
received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.
Approximately 79% of the available-for-sale securities held a AAA or AA rating at June 30, 2019, as rated by Moody's, Standard & Poor's, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial mortgage backed securities. All available-for-sale securities were rated as investment grade at June 30, 2019.
Expected maturities of available-for-sale securities at June 30, 2019 are as follows:
| One year or less | $ | 5,024.4 | |
| One year to two years | 5,726.8 | ||
| Two years to three years | 4,362.6 | ||
| Three years to four years | 4,518.4 | ||
| After four years | 5,226.9 | ||
| Total available-for-sale securities | $ | 24,859.1 |
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost and accumulated depreciation at June 30, 2019 and 2018 are as follows:
| June 30, | 2019 | 2018 | ||||||
| Property, plant and equipment: | ||||||||
| Land and buildings | $ | 781.2 | $ | 791.8 | ||||
| Data processing equipment | 749.0 | 707.4 | ||||||
| Furniture, leaseholds and other | 651.6 | 637.1 | ||||||
| 2,181.8 | 2,136.3 | |||||||
| Less: accumulated depreciation | (1,417.6 | ) | (1,342.6 | ) | ||||
| Property, plant and equipment, net | $ | 764.2 | $ | 793.7 |
Depreciation of property, plant and equipment was $180.6 million, $173.1 million, and $147.3 million for fiscal 2019, 2018 and 2017, respectively.
NOTE 9. GOODWILL AND INTANGIBLE ASSETS, NET
Changes in goodwill for the fiscal years ended June 30, 2019 and 2018 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 | 494.9 | — | 494.9 | ||||||||
| Currency translation adjustments | 7.6 | — | 7.6 | ||||||||
| Balance at June 30, 2018 | $ | 2,238.7 | $ | 4.8 | $ | 2,243.5 | |||||
| Additions and other adjustments | 94.3 | — | 94.3 | ||||||||
| Currency translation adjustments | (14.8 | ) | — | (14.8 | ) | ||||||
| Balance at June 30, 2019 | $ | 2,318.2 | $ | 4.8 | $ | 2,323.0 |
Components of intangible assets, net, are as follows:
| June 30, | 2019 | 2018 | ||||||
| Intangible assets: | ||||||||
| Software and software licenses | $ | 2,519.3 | $ | 2,292.9 | ||||
| Customer contracts and lists | 860.7 | 708.6 | ||||||
| Other intangibles | 237.9 | 236.5 | ||||||
| 3,617.9 | 3,238.0 | |||||||
| Less accumulated amortization: | ||||||||
| Software and software licenses | (1,762.3 | ) | (1,606.6 | ) | ||||
| Customer contracts and lists | (566.4 | ) | (533.4 | ) | ||||
| Other intangibles | (217.7 | ) | (211.6 | ) | ||||
| (2,546.4 | ) | (2,351.6 | ) | |||||
| Intangible assets, net | $ | 1,071.5 | $ | 886.4 |
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 6 years (5 years for software and software licenses, 6 years for customer contracts and lists, and 5 years for other intangibles). Amortization of intangible assets was $228.4 million, $204.5 million, and $168.8 million for fiscal 2019, 2018, and 2017, respectively.
Estimated future amortization expenses of the Company's existing intangible assets are as follows:
| Amount | |||
| Twelve months ending June 30, 2020 | $ | 275.9 | |
| Twelve months ending June 30, 2021 | $ | 220.1 | |
| Twelve months ending June 30, 2022 | $ | 173.5 | |
| Twelve months ending June 30, 2023 | $ | 139.4 | |
| Twelve months ending June 30, 2024 | $ | 110.2 |
NOTE 10. SHORT TERM FINANCING
The Company has a $3.8 billion, 364-day credit agreement that matures in June 2020 with a one year term-out option. The Company also has a $2.75 billion five-year credit facility that matures in June 2024 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 2023 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 June 30, 2019 and 2018 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. The Company increased its U.S. short-term commercial paper program to provide for the issuance of up to $10.3 billion from $9.8 billion in aggregate maturity value in June 2019. 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 June 30, 2019 and 2018, the Company had no commercial paper borrowing outstanding. In fiscal 2019 and 2018, the Company's average daily borrowings were $2.8 billion at a weighted average interest rate of 2.2% and 1.4%, respectively. The weighted average maturity of the Company’s commercial paper in fiscal 2019 and 2018 was approximately two days.
The Company’s U.S., Canadian and United 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. At June 30, 2019 , the Company had $262.0 million of outstanding obligations related to the reverse repurchase agreements. All outstanding reverse repurchase obligations matured and were fully paid in early July 2019. At June 30, 2018, there were no outstanding obligations related to the reverse repurchase agreements. In fiscal 2019 and 2018, the Company had average outstanding balances under reverse repurchase agreements of $316.7 million and $374.4 million, respectively, at weighted average interest rates of 1.9% and 1.3%, 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 June 30, 2019 and 2018 are as follows:
| Debt instrument | Effective Interest Rate | June 30, 2019 | June 30, 2018 | |||||||
| Fixed-rate 2.25% 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 | 10.9 | 13.0 | ||||||||
| 2,010.9 | 2,013.0 | |||||||||
| Less: current portion | (2.5 | ) | (2.5 | ) | ||||||
| Less: unamortized discount and debt issuance costs | (6.2 | ) | (8.1 | ) | ||||||
| Total long-term debt | $ | 2,002.2 | $ | 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 June 30, 2019, the fair value of the Notes, based on Level 2 inputs, was $2,059.4 million. 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.”
NOTE 12. EMPLOYEE BENEFIT PLANS
A. Stock-based Compensation Plans. Stock-based compensation consists of the following:
| • | Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant. Stock options generally vest ratably over 4 years and have a term of 10 years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized on a straight-line basis over the vesting period. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting. |
| • | Restricted Stock. |
| • | Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and time-based restricted stock units granted September 1, 2018 and after generally vest ratably over 3 years. Time-based restricted stock and time-based restricted stock units granted prior to September 1, 2018 are generally subject to a vesting period of 2 years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting. |
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Dividends are paid on shares awarded under the time-based restricted stock program.
Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date and is subsequently remeasured at each reporting date during the vesting period based on the change in the ADP stock price. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.
| • | Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 38 months. Under these programs, the Company communicates “target awards” at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 150% of the “target awards.” Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting. |
Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on shares awarded under the performance-based restricted stock program.
Performance-based restricted stock units cannot be transferred and are settled in either cash or stock, depending on the employee's home country. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the ADP stock price. Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards under the performance-based restricted stock unit program.
| • | Employee Stock Purchase Plan. The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded. |
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company repurchased 6.5 million shares in fiscal 2019 as compared to 8.5 million shares repurchased in fiscal 2018. 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. Cash payments related to the settlement of vested time-based restricted stock units and performance-based restricted stock units were approximately $26.6 million, $27.1 million, and $24.5 million during fiscal years 2019, 2018, and 2017, respectively.
The following table represents stock-based compensation expense and related income tax benefits in each of fiscal 2019, 2018, and 2017, respectively:
| Years ended June 30, | 2019 | 2018 | 2017 | |||||||||
| Operating expenses | $ | 16.9 | $ | 22.9 | $ | 21.5 | ||||||
| Selling, general and administrative expenses | 131.2 | 128.7 | 99.2 | |||||||||
| System development and programming costs | 19.2 | 23.8 | 18.2 | |||||||||
| Total pretax stock-based compensation expense | $ | 167.3 | $ | 175.4 | $ | 138.9 | ||||||
| Income tax benefit | $ | 41.6 | $ | 44.1 | $ | 49.9 |
As of June 30, 2019, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $15.3 million, $51.4 million, and $75.9 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.4 years, 1.6 years, and 1.9 years, respectively.
In fiscal 2019, the following activity occurred under the Company’s existing plans.
Stock Options:
| Number of Options (in thousands) | Weighted Average Price (in dollars) | ||||||
| Options outstanding at July 1, 2018 | 3,983 | $ | 87 | ||||
| Options granted | 836 | $ | 147 | ||||
| Options exercised | (1,126 | ) | $ | 78 | |||
| Options forfeited/cancelled | (85 | ) | $ | 103 | |||
| Options outstanding at June 30, 2019 | 3,608 | $ | 103 | ||||
| Options exercisable at June 30, 2019 | 1,207 | $ | 81 | ||||
| Shares available for future grants, end of year | 26,529 | ||||||
| Shares reserved for issuance under stock option plans, end of year | 30,137 |
Time-Based Restricted Stock and Time-Based Restricted Stock Units:
| Number of Shares (in thousands) | Number of Units (in thousands) | |||||
| Restricted shares/units outstanding at July 1, 2018 | 1,598 | 345 | ||||
| Restricted shares/units granted | 630 | 145 | ||||
| Restricted shares/units vested | (863 | ) | (169 | ) | ||
| Restricted shares/units forfeited | (93 | ) | (31 | ) | ||
| Restricted shares/units outstanding at June 30, 2019 | 1,272 | 290 |
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:
| Number of Shares (in thousands) | Number of Units (in thousands) | |||||
| Restricted shares/units outstanding at July 1, 2018 | 302 | 789 | ||||
| Restricted shares/units granted | 123 | 379 | ||||
| Restricted shares/units vested | (156 | ) | (283 | ) | ||
| Restricted shares/units forfeited | (19 | ) | (18 | ) | ||
| Restricted shares/units outstanding at June 30, 2019 | 250 | 867 |
The aggregate intrinsic value of outstanding stock options and exercisable stock options as of June 30, 2019 was $225.2 million and $101.7 million, respectively, which have a remaining life of 7 years and 6 years, respectively. The aggregate intrinsic value for stock options exercised in fiscal 2019, 2018, and 2017 was $78.2 million, $60.0 million, and $70.9 million, respectively.
The fair value for stock options granted was estimated at the date of grant using the following assumptions:
| 2019 | 2018 | 2017 | |||||||||
| Risk-free interest rate | 2.7 | % | 1.8 | % | 1.2 | % | |||||
| Dividend yield | 1.9 | % | 2.1 | % | 2.3 | % | |||||
| Weighted average volatility factor | 20.9 | % | 21.7 | % | 23.2 | % | |||||
| Weighted average expected life (in years) | 5.4 | 5.4 | 5.4 | ||||||||
| Weighted average fair value (in dollars) | $ | 26.60 | $ | 17.50 | $ | 14.36 |
The weighted average fair values of shares granted were as follows:
| Year ended June 30, | 2019 | 2018 | 2017 | |||||||||
| Performance-based restricted stock | $ | 146.93 | $ | 107.43 | $ | 90.63 | ||||||
| Time-based restricted stock | $ | 146.80 | $ | 108.10 | $ | 90.99 |
B. Pension Plans
The Company has a defined benefit cash balance pension plan under which employees are credited with a percentage of base pay plus interest. Effective January 1, 2015, associates hired on or after this date are not eligible to participate in this pension plan. In addition, associates rehired on or after January 1, 2015 will no longer be eligible to earn additional contributions but will continue to earn interest on any balance that remains in the pension plan. The plan interest credit rate varies from year-to-year based on the ten-year U.S. Treasury rate. Employees are fully vested upon completion of three years of service. The Company's policy is to make contributions within the range determined by generally accepted actuarial principles.
In fiscal 2018, the Company offered a voluntary early retirement program to certain eligible U.S.-based associates aged 55 or above with at least 10 years of service. The early retirement offer was extended to about 3,500 eligible associates, or approximately 6 percent of the Company’s workforce, with approximately 2,200 ADP associates opting to participate. The Company also extended to all employees participating in the VERP the opportunity to continue health care coverage at active employee contribution rates for up to 24 months following retirement. In fiscal 2019, the Company recorded $23.6 million of expenses within selling, general, and administrative expenses related to the continuing health coverage for VERP participants who have exited the Company as of June 30, 2019.
In addition, during fiscal 2019, the Company recorded $48.2 million of non-cash settlement charges and special termination benefits, and during fiscal 2018, the Company recorded $319.6 million of special termination benefits within Other (income)/expense, net on the Statement of Consolidated Earnings.
The Company also has various retirement plans for its non-U.S. employees and maintains a Supplemental Officers Retirement Plan (“SORP”). The SORP is a defined benefit plan pursuant to which the Company pays supplemental pension benefits to certain corporate officers upon retirement based upon the officers' years of service and compensation. The SORP, which is currently closed to new entrants, will be frozen effective July 1, 2019 with no future accruals due to pay and/or service.
A June 30 measurement date was used in determining the Company's benefit obligations and fair value of plan assets.
The Company is required to (a) recognize in its Consolidated Balance Sheets an asset for a plan's net overfunded status or a liability for a plan's net underfunded status, (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year, and (c) recognize changes in the funded status of a defined benefit plan in the year in which the changes occur in accumulated other comprehensive (loss)/income.
The Company's pension plans' funded status as of June 30, 2019 and 2018 is as follows:
| June 30, | 2019 | 2018 | ||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | $ | 2,178.1 | $ | 2,138.4 | ||||
| Actual return on plan assets | 142.0 | 148.5 | ||||||
| Employer contributions | 10.0 | 10.9 | ||||||
| Currency translation adjustments | (7.0 | ) | 5.0 | |||||
| Benefits paid | (412.6 | ) | (124.7 | ) | ||||
| Fair value of plan assets at end of year | $ | 1,910.5 | $ | 2,178.1 | ||||
| Change in benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 2,135.3 | $ | 1,866.7 | ||||
| Service cost | 59.8 | 74.6 | ||||||
| Interest cost | 78.6 | 65.4 | ||||||
| Actuarial loss/(gain) | 95.8 | (73.7 | ) | |||||
| Currency translation adjustments | (8.7 | ) | 7.5 | |||||
| Plan changes | 0.8 | — | ||||||
| Curtailments and special termination benefits | 2.2 | 319.5 | ||||||
| Benefits paid | (412.6 | ) | (124.7 | ) | ||||
| Projected benefit obligation at end of year | $ | 1,951.2 | $ | 2,135.3 | ||||
| Funded status - plan assets less benefit obligations | $ | (40.7 | ) | $ | 42.8 |
The amounts recognized on the Consolidated Balance Sheets as of June 30, 2019 and 2018 consisted of:
| June 30, | 2019 | 2018 | ||||||
| Noncurrent assets | $ | 108.0 | $ | 180.8 | ||||
| Current liabilities | (5.9 | ) | (5.3 | ) | ||||
| Noncurrent liabilities | (142.8 | ) | (132.7 | ) | ||||
| Net amount recognized | $ | (40.7 | ) | $ | 42.8 |
The accumulated benefit obligation for all defined benefit pension plans was $1,938.0 million and $2,121.1 million at June 30, 2019 and 2018, respectively.
The Company's pension plans with accumulated benefit obligations in excess of plan assets as of June 30, 2019 and 2018 had the following projected benefit obligation, accumulated benefit obligation, and fair value of plan assets:
| June 30, | 2019 | 2018 | ||||||
| Projected benefit obligation | $ | 162.4 | $ | 151.3 | ||||
| Accumulated benefit obligation | $ | 149.9 | $ | 138.1 | ||||
| Fair value of plan assets | $ | 13.8 | $ | 13.3 |
The components of net pension expense were as follows:
| 2019 | 2018 | 2017 | ||||||||||
| Service cost – benefits earned during the period | $ | 59.8 | $ | 74.6 | $ | 80.8 | ||||||
| Interest cost on projected benefits | 78.6 | 65.4 | 60.0 | |||||||||
| Expected return on plan assets | (131.8 | ) | (137.5 | ) | (135.8 | ) | ||||||
| Net amortization and deferral | 0.1 | 8.4 | 19.1 | |||||||||
| Special termination benefits and plan curtailments | 48.7 | 319.5 | 0.1 | |||||||||
| Net pension expense | $ | 55.4 | $ | 330.4 | $ | 24.2 |
The net actuarial loss and prior service credit for the defined benefit pension plans that are included in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit cost are $281.9 million and $16.1 million, respectively, at June 30, 2019. There is no remaining transition obligation for the defined benefit pension plans included in accumulated other comprehensive income. The estimated net actuarial loss and prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in fiscal 2020 are $8.0 million and $2.2 million, respectively.
Assumptions used to determine the actuarial present value of benefit obligations were:
| Years ended June 30, | 2019 | 2018 | ||||
| Discount rate | 3.40 | % | 4.10 | % | ||
| Increase in compensation levels | 4.00 | % | 4.00 | % |
Assumptions used to determine the net pension expense generally were:
| Years ended June 30, | 2019 | 2018 | 2017 | ||||||
| Discount rate | 4.10 | % | 3.70 | % | 3.40 | % | |||
| Expected long-term rate of return on assets | 6.75 | % | 6.75 | % | 7.00 | % | |||
| Increase in compensation levels | 4.00 | % | 4.00 | % | 4.00 | % |
The discount rate is based upon published rates for high-quality fixed-income investments that produce cash flows that approximate the timing and amount of expected future benefit payments.
The expected long-term rate of return on assets is determined based on historical and expected future rates of return on plan assets considering the target asset mix and the long-term investment strategy.
Plan Assets
The Company's pension plans' asset allocations at June 30, 2019 and 2018 by asset category were as follows:
| 2019 | 2018 | |||||
| Cash and cash equivalents | 1 | % | 1 | % | ||
| Fixed income securities | 44 | % | 52 | % | ||
| U.S. equity securities | 17 | % | 14 | % | ||
| International equity securities | 13 | % | 12 | % | ||
| Global equity securities | 25 | % | 22 | % | ||
| 100 | % | 100 | % |
The Company's pension plans' asset investment strategy is designed to ensure prudent management of assets, consistent with long-term return objectives and the prompt fulfillment of all pension plan obligations. The investment strategy and asset mix were developed in coordination with an asset liability study conducted by external consultants to maximize the funded ratio with the least amount of volatility.
The pension plans' assets are currently invested in various asset classes with differing expected rates of return, correlations, and volatilities, including large capitalization and small capitalization U.S. equities, international equities, U.S. fixed income securities, and cash.
The target asset allocation ranges for the U.S. plan are generally as follows:
| U.S. fixed income securities | 35% - 45% |
| U.S. equity securities | 14% - 24% |
| International equity securities | 11% - 21% |
| Global equity securities | 20% - 30% |
The U.S. pension plan's fixed income asset allocation for fiscal 2018 was outside of the target range due to the previously mentioned VERP in order to meet anticipated lump sum payments to participants. As of June 30, 2019, the U.S. pension plan asset allocation is within the target ranges.
The pension plans' fixed income portfolio is designed to match the duration and liquidity characteristics of the pension plans' liabilities. In addition, the pension plans invest only in investment-grade debt securities to ensure preservation of capital. The pension plans' equity portfolios are subject to diversification guidelines to reduce the impact of losses in single investments. Investment managers are prohibited from buying or selling commodities and from the short selling of securities.
None of the pension plans' assets are directly invested in the Company's stock, although the pension plans may hold a minimal amount of Company stock to the extent of the Company's participation in equity indices.
The pension plans' investments included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. The pension plans' investments included in Level 2 are valued utilizing inputs obtained from an independent pricing service, which are reviewed by the Company for reasonableness. To determine the fair value of our Level 2 plan assets, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The pension plans have no Level 3 investments at June 30, 2019.
The following table presents the investments of the pension plans measured at fair value at June 30, 2019:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Commingled trusts | $ | — | $ | 1,046.6 | $ | — | $ | 1,046.6 | ||||||||
| Government securities | — | 417.9 | — | 417.9 | ||||||||||||
| Mutual funds | 6.5 | — | — | 6.5 | ||||||||||||
| Corporate and municipal bonds | — | 394.3 | — | 394.3 | ||||||||||||
| Mortgage-backed security bonds | — | 30.2 | — | 30.2 | ||||||||||||
| Total pension asset investments | $ | 6.5 | $ | 1,889.0 | $ | — | $ | 1,895.5 |
In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $15.0 million as of June 30, 2019, which have been classified as Level 1 in the fair value hierarchy.
The following table presents the investments of the pension plans measured at fair value at June 30, 2018:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Commingled trusts | $ | — | $ | 1,036.7 | $ | — | $ | 1,036.7 | ||||||||
| U.S. government securities | — | 507.7 | — | 507.7 | ||||||||||||
| Mutual funds | 5.5 | — | — | 5.5 | ||||||||||||
| Corporate and municipal bonds | — | 586.8 | — | 586.8 | ||||||||||||
| Mortgage-backed security bonds | — | 28.2 | — | 28.2 | ||||||||||||
| Total pension asset investments | $ | 5.5 | $ | 2,159.4 | $ | — | $ | 2,164.9 |
In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $13.2 million as of June 30, 2018, which have been classified as Level 1 in the fair value hierarchy.
Contributions
During fiscal 2019, the Company contributed $10.0 million to the pension plans. The Company expects to contribute $9.3 million to the pension plans during fiscal 2020.
Estimated Future Benefit Payments
The benefits expected to be paid in each year from fiscal 2020 to the year ended June 30, 2024 are $134.9 million, $87.8 million, $95.9 million, $103.7 million, and $112.4 million, respectively. The aggregate benefits expected to be paid in the five fiscal years from the year ended June 30, 2025 to the year ended June 30, 2029 are $707.3 million. The expected benefits to be paid are based on the same assumptions used to measure the Company's pension plans' benefit obligations at June 30, 2019 and includes estimated future employee service.
C. Retirement and Savings Plan. The Company has a 401(k) retirement and savings plan, which allows eligible employees to contribute up to 50% of their compensation annually and allows highly compensated employees to contribute up to 12% of their compensation annually. The Company matches a portion of employee contributions, which amounted to approximately $110.9 million, $100.6 million, and $87.9 million for the calendar years ended December 31, 2018, 2017, and 2016, respectively.
NOTE 13. INCOME TAXES
Earnings before income taxes shown below are based on the geographic location to which such earnings are attributable.
| Years ended June 30, | 2019 | 2018 | 2017 | |||||||||
| Earnings before income taxes: | ||||||||||||
| United States | $ | 2,584.6 | $ | 1,937.2 | $ | 2,305.8 | ||||||
| Foreign | 421.0 | 345.4 | 311.1 | |||||||||
| $ | 3,005.6 | $ | 2,282.6 | $ | 2,616.9 |
The provision (benefit) for income taxes consists of the following components:
| Years ended June 30, | 2019 | 2018 | 2017 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 464.3 | $ | 366.6 | $ | 615.3 | ||||||
| Foreign | 129.1 | 105.5 | 91.6 | |||||||||
| State | 110.1 | 77.6 | 82.7 | |||||||||
| Total current | 703.5 | 549.7 | 789.6 | |||||||||
| Deferred: | ||||||||||||
| Federal | 7.9 | (193.0 | ) | 30.5 | ||||||||
| Foreign | 12.8 | 26.1 | 10.8 | |||||||||
| State | (11.4 | ) | 14.9 | (1.8 | ) | |||||||
| Total deferred | 9.3 | (152.0 | ) | 39.5 | ||||||||
| Total provision for income taxes | $ | 712.8 | $ | 397.7 | $ | 829.1 |
A reconciliation between the Company's effective tax rate and the U.S. federal statutory rate is as follows:
| Years ended June 30, | 2019 | % | 2018 | % | 2017 | % | |||||||||||||||
| Provision for taxes at U.S. statutory rate | $ | 631.2 | 21.0 | $ | 640.5 | 28.1 | $ | 915.9 | 35.0 | ||||||||||||
| Increase/(decrease) in provision from: | |||||||||||||||||||||
| State taxes, net of federal tax benefit | 80.7 | 2.7 | 58.1 | 2.5 | 54.4 | 2.1 | |||||||||||||||
| U.S. tax on foreign income | — | — | 12.0 | 0.5 | 66.1 | 2.5 | |||||||||||||||
| Utilization of foreign tax credits | — | — | (19.6 | ) | (0.9 | ) | (76.0 | ) | (2.9 | ) | |||||||||||
| Tax settlements | — | — | (31.9 | ) | (1.4 | ) | (33.2 | ) | (1.3 | ) | |||||||||||
| Re-measurement of deferred tax balances | — | — | (253.3 | ) | (11.1 | ) | — | — | |||||||||||||
| Section 199 - Qualified production activities and research tax credit refund claim - net of reserves | — | — | — | — | (51.8 | ) | (2.0 | ) | |||||||||||||
| Resolution of tax matters - Section 199 Qualified production activities and research tax credit refund claim | — | — | (33.3 | ) | (1.5 | ) | — | — | |||||||||||||
| Foreign rate differential | 46.9 | 1.6 | — | — | — | — | |||||||||||||||
| Excess tax benefit - Stock-based compensation | (29.8 | ) | (1.0 | ) | (26.7 | ) | (1.2 | ) | (32.1 | ) | (1.2 | ) | |||||||||
| Other | (16.2 | ) | (0.6 | ) | 51.9 | 2.4 | (14.2 | ) | (0.5 | ) | |||||||||||
| $ | 712.8 | 23.7 | $ | 397.7 | 17.4 | $ | 829.1 | 31.7 |
The effective tax rate for fiscal 2019 and 2018 was 23.7% and 17.4%, respectively. The increase in the effective tax rate is primarily due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the release of reserves for uncertain tax positions during fiscal 2018 and the loss of the qualified production activities tax deduction as a result of the Act during fiscal 2019. This is partially offset by the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act.
The Act reduced the U.S. federal corporate income tax rate from 35% to 21%. In accordance with ASC 740, companies re-measured deferred tax balances using the new enacted tax rates. The Act required the Company 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 created new taxes on the Company's foreign sourced earnings.
At December 31, 2018, the Company completed its accounting for all of the income tax effects of the Act. The adjustments were as follows:
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 $19.2 million could expire unutilized. During fiscal 2018, the Company recorded $28.3 million related to foreign withholding taxes on future distributions of earnings and profits ("E&P") that may not be utilizable as foreign tax credits.
During fiscal 2018, the Company recorded a benefit of $253.3 million (restated for ASC 606) to account for the effects of the rate change on deferred tax balances.
The one-time transition tax is based on the total post-1986 E&P that was previously deferred from US income taxes. During fiscal 2018, the Company recorded an amount for the one-time transition tax liability of $22.9 million for the Company's foreign subsidiaries.
Since June 30, 2018, the Company made no significant adjustments to the amounts recorded during the measurement period.
The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:
| Years ended June 30, | 2019 | 2018 | ||||||
| Deferred tax assets: | ||||||||
| Accrued expenses not currently deductible | $ | 228.9 | $ | 178.3 | ||||
| Stock-based compensation expense | 45.3 | 49.6 | ||||||
| Foreign tax credits | 25.1 | 40.0 | ||||||
| Net operating losses | 54.0 | 44.6 | ||||||
| Unrealized investment losses, net | — | 83.6 | ||||||
| Retirement Benefits | 5.6 | — | ||||||
| Other | 20.2 | 20.4 | ||||||
| 379.1 | 416.5 | |||||||
| Less: valuation allowances | (31.6 | ) | (46.0 | ) | ||||
| Deferred tax assets, net | $ | 347.5 | $ | 370.5 | ||||
| Deferred tax liabilities: | ||||||||
| Prepaid retirement benefits | $ | — | $ | 19.3 | ||||
| Deferred revenue | 475.9 | 452.4 | ||||||
| Fixed and intangible assets | 279.5 | 242.4 | ||||||
| Prepaid expenses | 86.2 | 71.8 | ||||||
| Unrealized investment gains, net | 63.0 | — | ||||||
| Tax on unrepatriated earnings | 31.6 | 28.3 | ||||||
| Other | 7.2 | 9.4 | ||||||
| Deferred tax liabilities | 943.4 | 823.6 | ||||||
| Net deferred tax liabilities | $ | 595.9 | $ | 453.1 |
There are $64.0 million and $68.9 million of long-term deferred tax assets included in other assets on the Consolidated Balance Sheets at June 30, 2019 and 2018, respectively.
Income taxes have not been provided on undistributed earnings of certain foreign subsidiaries in an aggregate amount of approximately $278.6 million as the Company considers such earnings to be permanently reinvested outside of the United States. As of June 30, 2019, it is not practicable to estimate the unrecognized tax liability that would occur upon distribution.
The Company has estimated foreign net operating loss carry-forwards of approximately $54.1 million as of June 30, 2019, of which $1.9 million expire through June 2027 and $52.2 million have an indefinite utilization period. As of June 30, 2019, the
Company has approximately $70.3 million of federal net operating loss carry-forwards from acquired companies. The net operating losses have an annual utilization limitation pursuant to section 382 of the Internal Revenue Code and expire through June 2036.
The Company has state net operating loss carry-forwards of approximately $372.0 million as of June 30, 2019, which expire through June 2038. The Company has recorded valuation allowances of $31.6 million and $46.0 million at June 30, 2019 and 2018, respectively, to reflect the estimated amount of domestic and foreign deferred tax assets that may not be realized.
Income tax payments were approximately $633.8 million, $529.7 million, and $817.1 million for fiscal 2019, 2018, and 2017, respectively.
As of June 30, 2019, 2018, and 2017 the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $54.2 million, $45.2 million, and $74.6 million respectively. The amount that, if recognized, would impact the effective tax rate is $43.3 million, $36.1 million, and $61.0 million, respectively. The remainder, if recognized, would principally impact deferred taxes.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| 2019 | 2018 | 2017 | ||||||||||
| Unrecognized tax benefits at beginning of the year | $ | 45.2 | $ | 74.6 | $ | 27.4 | ||||||
| Additions for tax positions | 9.5 | 4.0 | 7.5 | |||||||||
| Additions for tax positions of prior periods | 18.3 | 19.8 | 41.9 | |||||||||
| Reductions for tax positions of prior periods | (7.7 | ) | (40.5 | ) | (0.5 | ) | ||||||
| Settlement with tax authorities | (10.3 | ) | (11.7 | ) | (0.9 | ) | ||||||
| Expiration of the statute of limitations | (0.6 | ) | (1.0 | ) | (0.9 | ) | ||||||
| Impact of foreign exchange rate fluctuations | (0.2 | ) | — | 0.1 | ||||||||
| Unrecognized tax benefit at end of year | $ | 54.2 | $ | 45.2 | $ | 74.6 |
Interest expense and penalties associated with uncertain tax positions have been recorded in the provision for income taxes on the Statements of Consolidated Earnings. During the fiscal years 2019, 2018, and 2017, the Company recorded interest expense of $1.9 million, $3.2 million, and $3.0 million, respectively. Penalties incurred during fiscal years 2019, 2018, and 2017 were not significant.
At June 30, 2019, the Company had accrued interest of $9.3 million recorded on the Consolidated Balance Sheets, of which $4.3 million was recorded within income taxes payable, and the remainder was recorded within other liabilities. At June 30, 2018, the Company had accrued interest of $7.9 million recorded on the Consolidated Balance Sheets, of which $4.8 million was recorded within income taxes payable, and the remainder was recorded within other liabilities. At June 30, 2019, the Company had accrued penalties of $0.3 million recorded on the Consolidated Balance Sheets within other liabilities. At June 30, 2018, the Company had accrued penalties of $0.3 million recorded on the Consolidated Balance Sheets within other liabilities.
The Company is routinely examined by the IRS and tax authorities in foreign countries in which it conducts business, as well as tax authorities in states in which it has significant business operations. The tax years currently under examination vary by jurisdiction. Examinations in progress in which the Company has significant business operations are as follows:
| Taxing Jurisdiction | Fiscal Years under Examination | |
| U.S. (IRS) | 2018-2019 | |
| Wisconsin | 2011-2014 | |
| Michigan | 2012-2014 | |
| India | 2003-2007, 2008-2010, 2013-2015 |
The Company regularly considers the likelihood of assessments resulting from examinations in each of the jurisdictions. The resolution of tax matters is not expected to have a material effect on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company's Statements of Consolidated Earnings for a particular future period and on the Company's effective tax rate.
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, settlements related to various jurisdictions and tax periods could increase earnings up to $3 million and expected cash payments could be up to $10 million in the next twelve months. The liability related to cash payments expected to be paid within the next 12 months has been reclassified from other liabilities to current liabilities on the Consolidated Balance Sheets. 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.
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Company has obligations under various facilities and equipment leases. Minimum commitments under these obligations with a future life of greater than one year at June 30, 2019 are as follows:
| Years ending June 30, | |||
| 2020 | $ | 147.9 | |
| 2021 | 109.4 | ||
| 2022 | 87.4 | ||
| 2023 | 67.6 | ||
| 2024 | 50.1 | ||
| Thereafter | 134.0 | ||
| $ | 596.4 |
In addition to fixed rentals, certain leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices.
As of June 30, 2019, the Company has purchase commitments of approximately $483.6 million, including a reinsurance premium with Chubb for the fiscal 2020 policy year, as well as obligations related to software license agreements and purchase and maintenance agreements on our software, equipment, and other assets, of which $354.7 million relates to fiscal 2020, $102.1 million relates to the fiscal year ending June 30, 2021, and the remaining relates to fiscal years ending June 30, 2022 through fiscal 2024.
In June 2018, a potential class action complaint was filed against the Company in the Circuit Court of Cook County, Illinois. The complaint asserts that the Company violated the Illinois Biometric Privacy Act, was negligent and unjustly enriched itself in connection with its collection, use and storage of biometric data of employees of its clients who are residents of Illinois in connection with certain services provided by the Company to clients in Illinois. The complaint seeks statutory and other unspecified monetary damages, injunctive relief and attorney’s fees. In addition, similar potential class action complaints have been filed in Illinois state courts against the Company and/or certain of its clients with respect to the collection, use and storage of biometric data of the employees of these clients. All of these claims are still in their earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to these matters. The Company intends to vigorously defend against these lawsuits.
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. RECLASSIFICATION OUT OF ACCUMULATED OTHER COMPREHENSIVE (LOSS)/INCOME
Comprehensive income is a measure of income that includes both net earnings and other comprehensive income (loss). Other comprehensive income/(loss) results from items deferred on the Consolidated Balance Sheets in stockholders' equity. Other comprehensive income/(loss) was $422.5 million, ($254.3) million, and ($168.1) million in fiscal 2019, 2018, and 2017, respectively. Changes in Accumulated Other Comprehensive (Loss)/Income (“AOCI”) by component are as follows:
| Currency Translation Adjustment | Net Gains on Available-for-sale Securities | Pension Liability | Accumulated Other Comprehensive (Loss) / Income | |||||||||||||||
| Balance at June 30, 2016 | $ | (253.8 | ) | $ | 333.8 | $ | (295.1 | ) | $ | (215.1 | ) | |||||||
| Other comprehensive income/(loss) before reclassification adjustments | 19.0 | (405.7 | ) | 109.6 | (277.1 | ) | ||||||||||||
| Tax effect | — | 141.6 | (43.6 | ) | 98.0 | |||||||||||||
| Reclassification adjustments to net earnings | — | (2.2 | ) | (A) | 20.6 | (B) | 18.4 | |||||||||||
| Tax effect | — | 0.8 | (8.2 | ) | (7.4 | ) | ||||||||||||
| Balance at June 30, 2017 | $ | (234.8 | ) | $ | 68.3 | $ | (216.7 | ) | $ | (383.2 | ) | |||||||
| Other comprehensive income/(loss) before reclassification adjustments | 7.8 | (460.7 | ) | 87.0 | (365.9 | ) | ||||||||||||
| Tax effect | — | 123.4 | (18.7 | ) | 104.7 | |||||||||||||
| Reclassification adjustments to net earnings | — | 2.7 | (A) | 9.3 | (B) | 12.0 | ||||||||||||
| Tax effect | — | (0.6 | ) | (4.5 | ) | (5.1 | ) | |||||||||||
| Reclassification to retained earnings (C) | — | (7.1 | ) | (C) | (35.2 | ) | (C) | (42.3 | ) | |||||||||
| Balance at June 30, 2018 | $ | (227.0 | ) | $ | (274.0 | ) | $ | (178.8 | ) | $ | (679.8 | ) | ||||||
| Other comprehensive (loss)/income before reclassification adjustments | (42.2 | ) | 642.4 | (84.7 | ) | 515.5 | ||||||||||||
| Tax effect | — | (144.4 | ) | 20.0 | (124.4 | ) | ||||||||||||
| Reclassification adjustments to net earnings | — | 0.9 | (A) | 40.3 | (B) | 41.2 | ||||||||||||
| Tax effect | — | (0.3 | ) | (9.5 | ) | (9.8 | ) | |||||||||||
| Balance at June 30, 2019 | $ | (269.2 | ) | $ | 224.6 | $ | (212.7 | ) | $ | (257.3 | ) |
(A) Reclassification adjustments out of AOCI are included within Other (income)/expense, net, on the Statements of Consolidated Earnings.
(B) Reclassification adjustments out of AOCI are included in net pension expense (see Note 12).
(C) During fiscal 2018, the Company adopted ASU 2018-02 and reclassified stranded tax effects attributable to 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 Note 1).
NOTE 16. FINANCIAL DATA BY SEGMENT AND GEOGRAPHIC AREA
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 certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense. 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. In the first quarter of fiscal 2019, the Company's CODM began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity. Additionally, the CODM reviews results with changes to certain corporate allocations. These changes represent a change in the measure of segment performance. Effective July 1, 2018, the Company adopted ASC 606 (see Note 1). The segment results in the table below reflect the impacts of adoption of ASC 606, the inclusion of client funds interest in the segments at actual interest rates, the inclusion of ADP Indemnity in the PEO segment, and changes to certain corporate allocations. The Company reflects these new segment measures beginning in the first quarter of fiscal 2019 and prior period segment results are restated for comparability.
| Employer Services | PEO Services | Other | Total | |||||||||||||
| Year ended June 30, 2019 | ||||||||||||||||
| Revenues | $ | 9,942.8 | $ | 4,242.7 | $ | (10.3 | ) | $ | 14,175.2 | |||||||
| Earnings before income taxes | 2,957.0 | 620.1 | (571.5 | ) | 3,005.6 | |||||||||||
| Assets | 34,606.3 | 1,584.1 | 5,697.3 | 41,887.7 | ||||||||||||
| Capital expenditures | 98.2 | — | 64.5 | 162.7 | ||||||||||||
| Depreciation and amortization | 321.0 | 3.5 | 84.5 | 409.0 | ||||||||||||
| Year ended June 30, 2018 | ||||||||||||||||
| Revenues | $ | 9,454.8 | $ | 3,882.3 | $ | (9.4 | ) | $ | 13,327.7 | |||||||
| Earnings before income taxes | 2,598.1 | 544.6 | (860.1 | ) | 2,282.6 | |||||||||||
| Assets | 31,984.2 | 1,329.8 | 5,535.1 | 38,849.1 | ||||||||||||
| Capital expenditures | 113.9 | — | 78.0 | 191.9 | ||||||||||||
| Depreciation and amortization | 291.9 | 3.0 | 82.7 | 377.6 | ||||||||||||
| Year ended June 30, 2017 | ||||||||||||||||
| Revenues | $ | 8,914.2 | $ | 3,468.4 | $ | (10.6 | ) | $ | 12,372.0 | |||||||
| Earnings before income taxes | 2,396.8 | 463.4 | (243.3 | ) | 2,616.9 | |||||||||||
| Assets | 31,724.3 | 1,160.4 | 6,002.2 | 38,886.9 | ||||||||||||
| Capital expenditures | 83.0 | 0.2 | 165.8 | 249.0 | ||||||||||||
| Depreciation and amortization | 247.3 | 1.3 | 67.5 | 316.1 |
| United States | Europe | Canada | Other | Total | ||||||||||||||||
| Year ended June 30, 2019 | ||||||||||||||||||||
| Revenues | $ | 12,327.6 | $ | 1,236.8 | $ | 326.6 | $ | 284.2 | $ | 14,175.2 | ||||||||||
| Assets | $ | 36,508.3 | $ | 2,807.9 | $ | 1,950.5 | $ | 621.0 | $ | 41,887.7 | ||||||||||
| Year ended June 30, 2018 | ||||||||||||||||||||
| Revenues | $ | 11,493.3 | $ | 1,242.2 | $ | 321.6 | $ | 270.6 | $ | 13,327.7 | ||||||||||
| Assets | $ | 33,586.6 | $ | 2,608.6 | $ | 2,073.1 | $ | 580.8 | $ | 38,849.1 | ||||||||||
| Year ended June 30, 2017 | ||||||||||||||||||||
| Revenues | $ | 10,753.4 | $ | 1,086.4 | $ | 290.9 | $ | 241.3 | $ | 12,372.0 | ||||||||||
| Assets | $ | 33,752.7 | $ | 2,510.5 | $ | 2,068.6 | $ | 555.1 | $ | 38,886.9 |
NOTE 17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results of our operations for the fiscal years ended June 30, 2019 and June 30, 2018 are as follows:
| Year ended June 30, 2019 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Revenues | $ | 3,323.2 | $ | 3,505.9 | $ | 3,847.4 | $ | 3,498.7 | ||||||||
| Costs of revenues | $ | 1,940.5 | $ | 2,013.7 | $ | 2,111.8 | $ | 2,020.5 | ||||||||
| Gross profit | $ | 1,382.7 | $ | 1,492.2 | $ | 1,735.6 | $ | 1,478.2 | ||||||||
| Earnings before income taxes | $ | 646.8 | $ | 741.0 | $ | 984.5 | $ | 633.3 | ||||||||
| Net earnings | $ | 505.4 | $ | 558.2 | $ | 753.7 | $ | 475.5 | ||||||||
| Basic per common share amounts: | ||||||||||||||||
| Basic earnings per share | $ | 1.16 | $ | 1.28 | $ | 1.74 | $ | 1.10 | ||||||||
| Diluted per common share amounts: | ||||||||||||||||
| Diluted earnings per share | $ | 1.15 | $ | 1.27 | $ | 1.73 | $ | 1.09 |
| Year ended June 30, 2018 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Revenues | $ | 3,077.2 | $ | 3,238.3 | $ | 3,696.0 | $ | 3,316.2 | ||||||||
| Costs of revenues | $ | 1,851.5 | $ | 1,937.9 | $ | 2,079.3 | $ | 1,942.4 | ||||||||
| Gross profit | $ | 1,225.7 | $ | 1,300.4 | $ | 1,616.7 | $ | 1,373.8 | ||||||||
| Earnings before income taxes | $ | 564.9 | $ | 587.5 | $ | 875.2 | $ | 254.9 | ||||||||
| Net earnings | $ | 412.6 | $ | 670.4 | $ | 661.0 | $ | 140.9 | ||||||||
| Basic per common share amounts: | ||||||||||||||||
| Basic earnings per share | $ | 0.93 | $ | 1.52 | $ | 1.50 | $ | 0.32 | ||||||||
| Diluted per common share amounts: | ||||||||||||||||
| Diluted earnings per share | $ | 0.93 | $ | 1.51 | $ | 1.49 | $ | 0.32 |
Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure