Notes to Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
NOTE
1
. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Preparation.
The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc. and its subsidiaries (“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 preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. The Consolidated Financial Statements and all relevant footnotes have been adjusted for all businesses that qualify as a discontinued operation (see Note
2
). The Financial Data by Segment and Geographic Area (Note 13) has also been adjusted to reflect the historical results of AdvancedMD ("AMD") within the Other segment.
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 the results of operations of ADP Indemnity, non-recurring gains and losses, miscellaneous processing services, the elimination of intercompany transactions, interest expense, certain charges and expenses that have not been allocated to the reportable segments, such as stock-based compensation expense, and beginning in the first quarter of fiscal 2016, the historical results of the AMD business, which was previously reported in the Employer Services segment. This change did not significantly affect reportable segment results and is consistent with the way the chief operating decision maker assesses the performance of the reportable segments. Prior to October 1, 2014, the Company had a third reportable segment, Dealer Services. Refer to Note 2 for further information.
C. Revenue Recognition.
Revenues are primarily attributable to fees for providing services (
e.g.,
Employer Services' payroll processing fees), investment income on payroll funds, payroll tax filing funds, other Employer Services' client-related funds, and fees charged to implement clients on the Company's solutions. The Company enters into agreements for a fixed fee per transaction (
e.g.,
number of payees or number of payrolls processed). Fees associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured.
PEO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and administering state unemployment insurance, among other human resources functions. Amounts collected from PEO worksite employers include payroll, fees for benefits, and an administrative fee that also includes payroll taxes, fees for workers’ compensation and state unemployment taxes.
The payroll and payroll taxes collected from the worksite employers is presented in revenue net, as the Company is not the primary obligor with respect to this aspect of the PEO arrangement. With respect to the payroll and payroll taxes, the worksite employer is the primary obligor, has latitude in establishing price, selects suppliers, and determines the service specifications.
The fees collected from the worksite employers for benefits, workers’ compensation and state unemployment taxes are presented in revenues and the associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as the Company acts as a principal with respect to this aspect of the arrangement. With respect to the fees for benefits, workers’ compensation and state unemployment taxes, the Company is the primary obligor, has latitude in establishing price, selects suppliers, determines the service specifications and is liable for credit risk.
Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned, as the collection, holding and remittance of these funds are critical components of providing these services.
Client implementation fees are charged to set clients up on the Company's platform and are deferred until the client has gone live on the Company's solutions and services have begun. These fees are amortized to revenue over the longer of the contractual term or the expected client life, including estimated renewals of client contracts. Additionally, certain
implementation costs are deferred until the client has gone live on the Company's solution and services have begun and are then amortized over the longer of the contractual term or the expected client life, including estimated renewals of client contracts.
The Company assesses 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.
D. Cash and Cash Equivalents.
Investment securities with a maturity of ninety days or less at the time of purchase are considered cash equivalents. The fair value of our cash and cash equivalents approximates carrying value.
E. 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 on the Consolidated Balance Sheets until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis and are included in other income, 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.
Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned.
F. 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 4) and its long term debt 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 4, the independent pricing service includes additional inputs to the model such as monthly payment
information, new issue data, and collateral performance. For the purposes of valuing the Company’s Municipal bonds, the independent pricing service includes Municipal Market Data benchmark yield curves as additional inputs to the model. While the Company is not provided access to the proprietary models of the third party pricing service, each quarterly reporting period, the Company reviews the inputs utilized by the independent pricing service and compares the valuations received from the independent pricing service to valuations from at least one other observable source for reasonableness. The Company has not adjusted the prices obtained from the independent pricing service and the Company believes the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price). The Company has no available-for-sale securities included in Level 1 and Level 3.
In
September 2015
, 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 Notes are valued 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.
G. Long-term Receivables.
Long-term receivables primarily relate to implementation and transition costs charged to clients acquiring ADP’s products and services. Unearned income from finance receivables represents the excess of gross receivables over the amount financed. Unearned income is amortized using the effective-interest method to maintain a constant rate of return over the term of each contract.
Notes receivable aged over
30
days past due are considered delinquent and notes receivable aged over
60
days past due with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are applied towards the principal. When notes receivable on non-accrual status are again less than
60
days past due, recognition of interest revenue for notes receivable is resumed.
The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the Company's existing note receivables.
H. Property, Plant and Equipment.
Property, plant and equipment is stated at cost and depreciated 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:
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Data processing equipment
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2 to 5 years
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Buildings
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20 to 40 years
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Furniture and fixtures
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4 to 7 years
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The Company has obligations under various facilities, equipment leases, and software license agreements. 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
$271.3 million
,
$237.9 million
, and
$227.4 million
in fiscal
2016
,
2015
, and
2014
, respectively.
I. Goodwill.
The Company accounts for goodwill in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other," which requires that goodwill be tested for impairment annually whenever events or changes in circumstances indicate the carrying value may not be recoverable. According to ASC 350, the Company can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or can directly perform the two-step impairment test. Based on a qualitative assessment, if it is determined that the fair value of a reporting unit is more likely than not less than its carrying amount, the two-step impairment test prescribed by ASC 350 would be performed.
The Company's annual goodwill impairment assessment as of
June 30, 2016
was performed using a qualitative approach. The qualitative assessment considered industry and market considerations for any deterioration in the environment in which the Company operates, the competitive environment, a decline (both absolute and relative to peers) in market-dependent multiples or metrics, any changes in the market for the Company's products and services, and regulatory and political developments. Additionally, the Company assessed financial performance by reporting unit and considered cost factors, such as labor or other costs, that would have a negative effect on results. Based on the qualitative assessment, the Company has determined 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 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:
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Years ended June 30,
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Basic
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Effect of Employee Stock Option Shares
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Effect of
Employee
Restricted
Stock
Shares
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Diluted
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2016
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Net earnings from continuing operations
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$
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1,493.4
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$
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1,493.4
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Weighted average shares (in millions)
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457.0
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0.8
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1.3
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459.1
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EPS from continuing operations
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$
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3.27
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$
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3.25
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2015
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Net earnings from continuing operations
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$
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1,376.5
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$
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1,376.5
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Weighted average shares (in millions)
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472.6
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1.6
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1.6
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475.8
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EPS from continuing operations
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$
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2.91
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$
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2.89
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2014
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Net earnings from continuing operations
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$
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1,242.6
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$
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1,242.6
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Weighted average shares (in millions)
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478.9
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2.7
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1.5
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483.1
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EPS from continuing operations
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$
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2.59
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$
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2.57
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Options to purchase
1.8 million
,
0.4 million
, and
1.5 million
shares of common stock for fiscal
2016
, fiscal
2015
, and fiscal
2014
, 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. Refer to Note
9
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 over a
three
to
five
-year period on a straight-line basis. 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. The Company did not acquire any businesses during fiscal
2016
or fiscal
2014
. The Company acquired
one
business during fiscal
2015
for approximately
$10.1 million
, net of cash acquired. The acquisition was not material to the Company's operations, financial position, or cash flows. Purchase accounting has been finalized for all acquisitions completed to date.
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. The Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities.
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, 2016
and
2015
, the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were
$27.4 million
and
$27.1 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
$2 million
. 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. For the fiscal years 2013 to 2016, as well as in July 2016 for the year ended June 30, 2017 ("fiscal 2017") policy year, 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.
S. Recently Issued Accounting Pronouncements.
Recently Adopted Accounting Pronouncements
In fiscal 2016, the Company prospectively adopted Accounting Standards Update ("ASU") 2015-17, "Balance Sheet Classification of Deferred Taxes." The update simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets, including valuation allowances, be classified as noncurrent in the consolidated balance sheets. ASU 2015-17 did not have a material impact on the Company’s consolidated statement of financial condition and had no impact on the Company's consolidated results of operations or cash flows. Prior periods were not retrospectively adjusted.
In fiscal 2016, the Company prospectively adopted ASU 2015-16, "Simplifying the Accounting for Measurement Period Adjustments." The update eliminates the need to retrospectively adjust prior period information in the financial statements for acquisition adjustments to goodwill during the measurement period. The adoption had no impact on the Company's consolidated results of operations, financial condition, or cash flows as presented, however, the future impact of ASU 2015-16 will be dependent on future acquisitions, if any.
In fiscal 2016, the Company retrospectively adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." Debt issuance costs have been presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. ASU 2015-03 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
In fiscal 2016, the Company prospectively adopted ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as a discontinued operation. Per the criteria of ASU 2014-08, the Company did not classify the sale of AMD as a discontinued operation. The businesses classified as a discontinued operation prior to June 30, 2015 continue to be classified as a discontinued operation (see Note
3
).
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for annual periods beginning after December 15, 2018. The adoption of ASU 2016-13 is not expected to have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
In March 2016, FASB issued ASU 2016-09 "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718)." Under this standard, among other changes, income tax benefits and deficiencies with respect to stock-based compensation will be recognized as income tax expense or benefit in the income statement, excess tax benefits will be classified as an operating activity on the statement of cash flows and stock-based compensation awards can qualify as equity awards even if the entity permits tax withholdings greater than the statutory minimum. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within that
reporting period. Early adoption is permitted. The adoption of ASU 2016-09 is expected to impact the Company's provision for income taxes on its Statements of Consolidated Earnings and its operating and financing cash flows on its Statements of Consolidated Cash Flows. The magnitude of such impacts are dependent upon the Company's future grants of stock-based compensation, the Company's stock price in relation to the fair value of awards on grant date, and the exercise behavior of the Company's equity compensation holders.
In February 2016, FASB issued 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. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet determined the impact of ASU 2016-02 on its consolidated results of operations, financial condition, or cash flows.
In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." The update provides guidance on whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company intends to prospectively adopt ASU 2015-05 on July 1, 2016. ASU 2015-05 is expected to change the geography of certain software licenses on the Statements of Consolidated Earnings (from operating expenses to depreciation and amortization) and the Consolidated Statements of Cash Flow (from operating cash flows to investing cash flows), as well as result in additional intangible assets on the Consolidate Balance Sheet. The magnitude of these changes is dependent upon new or materially modified software licenses entered into after July 1, 2016.
In April 2015, the FASB issued ASU 2015-04, "Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets." The update allows an entity to remeasure their pension and other post-retirement benefit plan assets and liabilities at the month-end closest to a significant event such as a plan amendment, curtailment, or settlement. ASU 2015-04 is to be applied prospectively and is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted. The impact of ASU 2015-04 is dependent upon the nature of future significant events impacting the Company's pension plans, if any.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance, and has since issued additional amendments to ASU 2014-09. These new standards require an entity to recognize revenue depicting the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standards will also result in enhanced revenue related disclosures. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statements of Consolidated Financial Position. The new standards are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company has not yet determined the impact of these new revenue recognition standards on its consolidated results of operations, financial condition, or cash flows.
NOTE
2
. DIVESTITURES
A. Disposition
On
September 1, 2015
, the Company completed the sale of its AMD business for a pre-tax gain of
$29.1 million
, less costs to sell, and recorded such gain within Other income, net on the Statements of Consolidated Earnings. The Company determined that the disposition did not meet the criteria for reporting discontinued operations under ASU 2014-08, which was adopted prospectively on July 1, 2015, as the disposition of this business does not represent a strategic shift that has a major effect on the Company's operations or financial results. The historical results of AMD are being reported in the Other segment (see Note
13
).
B. Discontinued Operations
On
June 26, 2015
, the Company completed the sale of its Procure-to-Pay business ("P2P") for a pre-tax gain of
$100.9 million
, less costs to sell, and recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings.
On
September 30, 2014
, the Company completed the tax free spin-off of its former Dealer Services business, which was a separate reportable segment, into an independent publicly traded company called CDK Global, Inc. ("CDK"). As a result of the spin-off, ADP stockholders of record on
September 24, 2014
(the "record date") received
one
share of CDK common stock on September 30, 2014, par value
$0.01
per share, for every
three
shares of ADP common stock held by them on the record date and cash for any fractional shares of CDK common stock. ADP distributed approximately
160.6 million
shares of CDK common stock in the distribution. During the first quarter of fiscal
2016
, the Company became aware that
1.0 million
of the
160.6 million
shares of CDK stock distributed at the distribution date were inadvertently issued and distributed with respect to certain unvested Company equity awards. The
1.0 million
shares were canceled during the first quarter of fiscal
2016
. Such shares distributed as part of the spin-off did not have any impact to previously reported results of operations, financial condition, or cash flows. The spin-off was made without the payment of any consideration or the exchange of any shares by ADP stockholders. The spin-off, transitional, and on-going relationships between ADP and CDK are governed by the Separation and Distribution Agreement entered into between ADP and CDK and certain other ancillary agreements.
Incremental costs associated with the spin-off of CDK and divestiture of P2P of
$50.1 million
for fiscal
2015
are included in discontinued operations on the Statements of Consolidated Earnings.
On
February 28, 2014
, the Company completed the sale of its Occupational Health and Safety services business ("OHS") for a pre-tax gain of
$15.6 million
, less costs to sell, and recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings. In connection with the disposal of OHS, the Company classified the results of this business as discontinued operations for all periods presented. OHS was previously reported in the Employer Services segment.
Results for discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
Revenues
|
|
$
|
—
|
|
|
$
|
538.8
|
|
|
$
|
1,993.1
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations before income taxes
|
|
—
|
|
|
69.2
|
|
|
399.3
|
|
Provision for income taxes
|
|
—
|
|
|
71.6
|
|
|
136.5
|
|
Net (loss) / earnings from discontinued operations before gain on disposal of
discontinued operations
|
|
—
|
|
|
(2.4
|
)
|
|
262.8
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations, less costs to sell
|
|
(1.4
|
)
|
|
102.3
|
|
|
15.6
|
|
(Benefit) / provision for income taxes
|
|
(0.5
|
)
|
|
23.9
|
|
|
5.1
|
|
Net gain on disposal of discontinued operations
|
|
(0.9
|
)
|
|
78.4
|
|
|
10.5
|
|
|
|
|
|
|
|
|
Net (loss) / earnings from discontinued operations
|
|
$
|
(0.9
|
)
|
|
$
|
76.0
|
|
|
$
|
273.3
|
|
NOTE
3
. OTHER INCOME, NET
Other income, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
Interest income on corporate funds
|
|
$
|
(62.4
|
)
|
|
$
|
(56.9
|
)
|
|
$
|
(53.7
|
)
|
Realized gains on available-for-sale securities
|
|
(5.1
|
)
|
|
(6.8
|
)
|
|
(20.4
|
)
|
Realized losses on available-for-sale securities
|
|
10.1
|
|
|
1.9
|
|
|
3.9
|
|
Gain on sale of notes receivable
|
|
—
|
|
|
(1.4
|
)
|
|
—
|
|
Gain on sale of AMD (see Note 2)
|
|
(29.1
|
)
|
|
—
|
|
|
—
|
|
Gain on sale of building
|
|
(13.9
|
)
|
|
—
|
|
|
—
|
|
Other income, net
|
|
$
|
(100.4
|
)
|
|
$
|
(63.2
|
)
|
|
$
|
(70.2
|
)
|
During fiscal
2016
, the Company sold a building and, as a result, recorded a gain of
$13.9 million
in Other income, net, on the Statements of Consolidated Earnings.
During fiscal
2015
, the Company sold notes receivable related to Dealer Services financing arrangements for
$226.7 million
. Although the sale of the notes receivable transfers the majority of the risk to the purchaser, the Company does retain a minimal level of credit risk on the sold receivables. The cash received in exchange for the notes receivable sold was recorded within the operating activities on the Statements of Consolidated Cash Flows and the gain on sale of
$1.4 million
was recorded within Other income, net on the Statements of Consolidated Earnings.
NOTE
4
. CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS
Corporate investments and funds held for clients at
June 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value (A)
|
Type of issue:
|
|
|
|
|
|
|
|
Money market securities and other cash equivalents
|
$
|
15,458.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,458.6
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
9,429.2
|
|
|
261.8
|
|
|
(0.6
|
)
|
|
9,690.4
|
|
U.S. government agency securities
|
4,298.8
|
|
|
91.3
|
|
|
—
|
|
|
4,390.1
|
|
Asset-backed securities
|
3,761.9
|
|
|
59.0
|
|
|
(0.3
|
)
|
|
3,820.6
|
|
Canadian government securities and
Canadian government agency securities
|
995.1
|
|
|
12.8
|
|
|
—
|
|
|
1,007.9
|
|
Canadian provincial bonds
|
735.4
|
|
|
30.8
|
|
|
(0.1
|
)
|
|
766.1
|
|
U.S. Treasury securities
|
746.9
|
|
|
16.3
|
|
|
—
|
|
|
763.2
|
|
Municipal bonds
|
594.2
|
|
|
23.9
|
|
|
(0.3
|
)
|
|
617.8
|
|
Other securities
|
533.3
|
|
|
15.8
|
|
|
(0.2
|
)
|
|
548.9
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
21,094.8
|
|
|
511.7
|
|
|
(1.5
|
)
|
|
21,605.0
|
|
|
|
|
|
|
|
|
|
Total corporate investments and funds held for clients
|
$
|
36,553.4
|
|
|
$
|
511.7
|
|
|
$
|
(1.5
|
)
|
|
$
|
37,063.6
|
|
(A) Included within available-for-sale securities are corporate investments with fair values of
$31.3 million
and funds held for clients with fair values of
$21,573.7 million
. All available-for-sale securities were included in Level 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value (B)
|
Type of issue:
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and other cash equivalents
|
$
|
5,686.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,686.3
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
9,497.5
|
|
|
115.7
|
|
|
(29.6
|
)
|
|
9,583.6
|
|
U.S. government agency securities
|
5,624.1
|
|
|
61.4
|
|
|
(9.5
|
)
|
|
5,676.0
|
|
Asset-backed securities
|
2,442.4
|
|
|
11.1
|
|
|
(6.1
|
)
|
|
2,447.4
|
|
Canadian government securities and
Canadian government agency securities
|
923.2
|
|
|
15.4
|
|
|
(0.2
|
)
|
|
938.4
|
|
Canadian provincial bonds
|
723.9
|
|
|
27.9
|
|
|
(0.8
|
)
|
|
751.0
|
|
U.S. Treasury securities
|
140.2
|
|
|
3.2
|
|
|
(0.3
|
)
|
|
143.1
|
|
Municipal bonds
|
586.6
|
|
|
14.3
|
|
|
(1.4
|
)
|
|
599.5
|
|
Other securities
|
719.4
|
|
|
16.1
|
|
|
(0.7
|
)
|
|
734.8
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
20,657.3
|
|
|
265.1
|
|
|
(48.6
|
)
|
|
20,873.8
|
|
|
|
|
|
|
|
|
|
Total corporate investments and funds held for clients
|
$
|
26,343.6
|
|
|
$
|
265.1
|
|
|
$
|
(48.6
|
)
|
|
$
|
26,560.1
|
|
(B) Included within available-for-sale securities are corporate investments with fair values of
$55.5 million
and funds held for clients with fair values of
$20,818.3 million
. All available-for-sale securities were included in Level 2.
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
2016
or
2015
. In addition, the Company 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, 2016
.
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, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Securities in unrealized loss position less than
12 months
|
|
Securities in unrealized loss position greater than 12 months
|
|
Total
|
|
Unrealized
losses
|
|
Fair market
value
|
|
Unrealized
losses
|
|
Fair market
value
|
|
Gross
unrealized
losses
|
|
Fair
market value
|
Corporate bonds
|
$
|
(0.5
|
)
|
|
$
|
138.0
|
|
|
$
|
(0.1
|
)
|
|
$
|
35.1
|
|
|
$
|
(0.6
|
)
|
|
$
|
173.1
|
|
U.S. government agency securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Asset-backed securities
|
(0.1
|
)
|
|
58.8
|
|
|
(0.2
|
)
|
|
154.8
|
|
|
(0.3
|
)
|
|
213.6
|
|
Canadian government securities and
Canadian government agency securities
|
—
|
|
|
53.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53.2
|
|
Canadian provincial bonds
|
(0.1
|
)
|
|
19.1
|
|
|
—
|
|
|
7.8
|
|
|
(0.1
|
)
|
|
26.9
|
|
U.S. Treasury securities
|
—
|
|
|
3.4
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
5.0
|
|
Municipal bonds
|
—
|
|
|
12.9
|
|
|
(0.3
|
)
|
|
10.6
|
|
|
(0.3
|
)
|
|
23.5
|
|
Other securities
|
(0.1
|
)
|
|
10.5
|
|
|
(0.1
|
)
|
|
8.0
|
|
|
(0.2
|
)
|
|
18.5
|
|
|
$
|
(0.8
|
)
|
|
$
|
295.9
|
|
|
$
|
(0.7
|
)
|
|
$
|
217.9
|
|
|
$
|
(1.5
|
)
|
|
$
|
513.8
|
|
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, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
Securities in unrealized loss position less than
12 months
|
|
Securities in unrealized loss position greater than 12 months
|
|
Total
|
|
Unrealized
losses
|
|
Fair market
value
|
|
Unrealized
losses
|
|
Fair market
value
|
|
Gross
unrealized
losses
|
|
Fair
market value
|
Corporate bonds
|
$
|
(27.3
|
)
|
|
$
|
2,403.5
|
|
|
$
|
(2.3
|
)
|
|
$
|
228.1
|
|
|
$
|
(29.6
|
)
|
|
$
|
2,631.6
|
|
U.S. government agency securities
|
(6.9
|
)
|
|
836.5
|
|
|
(2.6
|
)
|
|
374.0
|
|
|
(9.5
|
)
|
|
1,210.5
|
|
Asset-backed securities
|
(3.2
|
)
|
|
606.8
|
|
|
(2.9
|
)
|
|
443.6
|
|
|
(6.1
|
)
|
|
1,050.4
|
|
Canadian government securities and
Canadian government agency securities
|
(0.2
|
)
|
|
85.8
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
85.8
|
|
Canadian provincial bonds
|
(0.8
|
)
|
|
101.5
|
|
|
—
|
|
|
10.0
|
|
|
(0.8
|
)
|
|
111.5
|
|
U.S. Treasury securities
|
(0.3
|
)
|
|
28.6
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
28.6
|
|
Municipal bonds
|
(1.2
|
)
|
|
143.6
|
|
|
(0.2
|
)
|
|
6.0
|
|
|
(1.4
|
)
|
|
149.6
|
|
Other securities
|
(0.4
|
)
|
|
36.6
|
|
|
(0.3
|
)
|
|
13.7
|
|
|
(0.7
|
)
|
|
50.3
|
|
|
$
|
(40.3
|
)
|
|
$
|
4,242.9
|
|
|
$
|
(8.3
|
)
|
|
$
|
1,075.4
|
|
|
$
|
(48.6
|
)
|
|
$
|
5,318.3
|
|
At
June 30, 2016
, Corporate bonds include investment-grade debt securities, which include a wide variety of issuers, industries, and sectors, primarily carry credit ratings of A and above, and have maturities ranging from
July 2016
to
April 2024
.
At
June 30, 2016
, U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of
$3,220.0 million
and
$976.2 million
, respectively. U.S. government agency securities represent senior, unsecured, non-callable debt that primarily carry ratings of Aaa by Moody's and AA+ by Standard & Poor's with maturities ranging from
July 2016
through
May 2024
.
At
June 30, 2016
, asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed-rate credit card, auto loan, equipment lease and rate reduction receivables with fair values of
$2,172.3 million
,
$1,054.8 million
,
$338.2 million
, and
$255.2 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, 2016
.
At
June 30, 2016
, other securities and their fair value primarily represent: AAA and AA rated supranational bonds of
$189.8 million
, AAA and AA rated sovereign bonds of
$188.9 million
, and AA rated mortgage-backed securities of
$99.0 million
that are guaranteed primarily by Federal National Mortgage Association ("Fannie Mae"). The Company's mortgage-backed securities represent an undivided beneficial ownership interest in a group or pool of one or more residential mortgages. These securities are collateralized by the cash flows of
15
-year and
30
-year residential mortgages and are guaranteed by Fannie Mae as to the timely payment of principal and interest.
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2016
|
|
2015
|
Corporate investments:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,191.1
|
|
|
$
|
1,639.3
|
|
Short-term marketable securities
|
|
23.5
|
|
|
26.6
|
|
Long-term marketable securities
|
|
7.8
|
|
|
28.9
|
|
Total corporate investments
|
|
$
|
3,222.4
|
|
|
$
|
1,694.8
|
|
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,
|
|
2016
|
|
2015
|
Funds held for clients:
|
|
|
|
|
Restricted cash and cash equivalents held to satisfy client funds obligations
|
|
$
|
12,267.5
|
|
|
$
|
4,047.0
|
|
Restricted short-term marketable securities held to satisfy client funds obligations
|
|
3,032.1
|
|
|
4,497.7
|
|
Restricted long-term marketable securities held to satisfy client funds obligations
|
|
18,541.6
|
|
|
16,320.6
|
|
Total funds held for clients
|
|
$
|
33,841.2
|
|
|
$
|
24,865.3
|
|
Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll and tax payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds obligations represent liabilities that will be repaid within
one year
of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling
$33,331.8 million
and
$24,650.5 million
as of
June 30, 2016
and
2015
, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purposes of satisfying the client funds obligations. The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash inflows and outflows related to client funds investments with original maturities of
ninety days or less
on a net basis within net increase in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations in the investing section of 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 section of the Statements of Consolidated Cash Flows.
Approximately
80%
of the available-for-sale securities held a AAA or AA rating at
June 30, 2016
, as rated by Moody's, Standard & Poor's and, for Canadian securities, DBRS. All available-for-sale securities were rated as investment grade at
June 30, 2016
.
Expected maturities of available-for-sale securities at
June 30, 2016
are as follows:
|
|
|
|
|
Due in one year or less
|
$
|
3,055.6
|
|
Due after one year to two years
|
2,994.7
|
|
Due after two years to three years
|
2,860.0
|
|
Due after three years to four years
|
4,737.2
|
|
Due after four years
|
7,957.5
|
|
|
|
|
Total available-for-sale securities
|
$
|
21,605.0
|
|
NOTE
5
. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost and accumulated depreciation at June 30,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2016
|
|
2015
|
Property, plant, and equipment:
|
|
|
|
|
Land and buildings
|
|
$
|
745.7
|
|
|
$
|
730.6
|
|
Data processing equipment
|
|
605.0
|
|
|
588.5
|
|
Furniture, leaseholds, and other
|
|
490.1
|
|
|
457.3
|
|
|
|
1,840.8
|
|
|
1,776.4
|
|
Less: accumulated depreciation
|
|
(1,155.8
|
)
|
|
(1,103.7
|
)
|
Property, plant, and equipment, net
|
|
$
|
685.0
|
|
|
$
|
672.7
|
|
Depreciation of property, plant and equipment was
$135.6 million
,
$127.2 million
, and
$124.1 million
for fiscal
2016
,
2015
, and
2014
, respectively.
NOTE
6
. GOODWILL AND INTANGIBLE ASSETS, NET
Changes in goodwill for the fiscal years ended
June 30, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Services
|
|
PEO
Services
|
|
Other
|
|
Total
|
Balance at June 30, 2014 (A)
|
$
|
1,878.7
|
|
|
$
|
4.8
|
|
|
$
|
—
|
|
|
$
|
1,883.5
|
|
Additions and other adjustments, net
|
6.8
|
|
|
—
|
|
|
—
|
|
|
6.8
|
|
Currency translation adjustments
|
(96.8
|
)
|
|
—
|
|
|
—
|
|
|
(96.8
|
)
|
Balance at June 30, 2015 (A)
|
$
|
1,788.7
|
|
|
$
|
4.8
|
|
|
$
|
—
|
|
|
$
|
1,793.5
|
|
Transfer of AMD goodwill (see Note 15)
|
(100.4
|
)
|
|
—
|
|
|
100.4
|
|
|
—
|
|
Currency translation adjustments
|
(11.1
|
)
|
|
—
|
|
|
—
|
|
|
(11.1
|
)
|
Disposition of AMD
|
—
|
|
|
—
|
|
|
(100.4
|
)
|
|
(100.4
|
)
|
Balance at June 30, 2016
|
$
|
1,677.2
|
|
|
$
|
4.8
|
|
|
$
|
—
|
|
|
$
|
1,682.0
|
|
(A) The goodwill balance at
June 30, 2015
and
2014
is net of accumulated impairment losses of
$42.7 million
related to the Employer Services segment.
Components of intangible assets, net, are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2016
|
|
2015
|
Intangible assets:
|
|
|
|
|
Software and software licenses
|
|
$
|
1,811.6
|
|
|
$
|
1,648.7
|
|
Customer contracts and lists
|
|
603.7
|
|
|
625.4
|
|
Other intangibles
|
|
207.8
|
|
|
209.0
|
|
|
|
2,623.1
|
|
|
2,483.1
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
Software and software licenses
|
|
(1,403.8
|
)
|
|
(1,308.7
|
)
|
Customer contracts and lists
|
|
(486.4
|
)
|
|
(478.6
|
)
|
Other intangibles
|
|
(198.7
|
)
|
|
(192.6
|
)
|
|
|
(2,088.9
|
)
|
|
(1,979.9
|
)
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
534.2
|
|
|
$
|
503.2
|
|
Other intangibles consist primarily of purchased rights, covenants, patents, and trademarks (acquired directly or through acquisitions). All of the intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is
5 years
(
4 years
for software and software licenses,
9 years
for customer contracts and lists, and
2 years
for other intangibles). Amortization of intangible assets was
$153.0 million
,
$150.7 million
, and
$142.5 million
for fiscal
2016
,
2015
, and
2014
, respectively.
Estimated future amortization expenses of the Company's existing intangible assets are as follows:
|
|
|
|
|
|
Amount
|
Twelve months ending June 30, 2017
|
$
|
153.5
|
|
Twelve months ending June 30, 2018
|
$
|
118.3
|
|
Twelve months ending June 30, 2019
|
$
|
85.5
|
|
Twelve months ending June 30, 2020
|
$
|
62.4
|
|
Twelve months ending June 30, 2021
|
$
|
47.9
|
|
NOTE
7
. SHORT TERM FINANCING
The Company has a
$3.25 billion
,
364
-day credit agreement with a group of lenders that matures
June 2017
. The Company also has a
$2.25 billion
five
-year credit facility that matures in
June 2020
that also contains an accordion feature under which the aggregate commitment can be increased by
$500 million
, subject to the availability of additional commitments. In addition, the Company has a
five
-year
$3.75 billion
credit facility maturing in
June 2021
that contains an accordion feature under which the aggregate commitment can be increased by
$500 million
, subject to the availability of additional commitments. The interest rate applicable to committed borrowings is tied to LIBOR, the effective federal funds rate, or the prime rate depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing. The Company is also required to pay facility fees on the credit agreements. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. The Company had
no
borrowings through
June 30, 2016
under the credit agreements.
Our U.S. short-term funding requirements related to client funds are sometimes obtained through a short-term commercial paper program, which provides for the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. During the majority of fiscal
2016
, this commercial paper program provided for the issuance of up to
$8.25 billion
in aggregate maturity value; in June
2016
, we increased our U.S. short-term commercial paper program to provide for the issuance of up to
$9.25 billion
in aggregate maturity value. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 by Moody’s. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from
overnight to up to 364 days
. At
June 30, 2016
and 2015, the Company had
no
commercial paper outstanding. In fiscal
2016
and
2015
, the Company's average daily borrowings were
$2.7 billion
and
$2.3 billion
, respectively, at a weighted average interest rate of
0.3%
and
0.1%
, respectively. The weighted average maturity of the Company’s commercial paper in fiscal
2016
and
2015
was approximately
two days
.
The Company’s U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from
overnight to up to five business days
. At
June 30, 2016
and
2015
, there were
no
outstanding obligations related to the reverse repurchase agreements. In fiscal
2016
and
2015
, the Company had average outstanding balances under reverse repurchase agreements of
$341.0 million
and
$421.2 million
, respectively, at weighted average interest rates of
0.4%
.
NOTE
8
. LONG TERM DEBT
In
September 2015
, the Company issued fixed-rate notes with
5
-year and
10
-year maturities for an aggregate principal amount of
$2.0 billion
. 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, 2016
, are as follows. Debt outstanding at the comparative period of June 30, 2015 was not significant.
|
|
|
|
|
|
|
|
|
Debt instrument
|
|
June 30, 2016
|
|
Effective Interest Rate
|
Fixed-rate 2.250% notes due September 15, 2020
|
|
$
|
1,000.0
|
|
|
2.39
|
%
|
Fixed-rate 3.375% notes due September 15, 2025
|
|
1,000.0
|
|
|
3.48
|
%
|
Other
|
|
22.3
|
|
|
|
|
|
2,022.3
|
|
|
|
Less: current portion
|
|
(2.5
|
)
|
|
|
Less: unamortized discount and debt issuance costs
|
|
(12.1
|
)
|
|
|
Total long-term debt
|
|
$
|
2,007.7
|
|
|
|
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, 2016
, the fair value of the Notes, based on level 2 inputs, was
$2,126.4 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
9
. 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 are issued under a graded vesting schedule and have a term of
10 years
. Options granted after July 1, 2008 generally vest ratably over
four years
. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting.
|
|
|
•
|
Time-Based Restricted Stock and Time-Based Restricted Stock Units.
Time-based restricted stock and time-based restricted stock units granted prior to fiscal 2013 are subject to vesting periods of up to
five years
and awards granted in fiscal 2013 and later are generally subject to a vesting period of
two 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 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
26 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 are settled in either cash or stock, depending on the employee's home country, and cannot be transferred during the vesting period. 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 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 settled in stock 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
13.8 million
shares in fiscal
2016
as compared to
18.2 million
shares repurchased in fiscal
2015
. 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
$25.2 million
,
$25.2 million
, and
$1.2 million
during fiscal years
2016
,
2015
, and
2014
, respectively.
The following table represents stock-based compensation expense and related income tax benefits in each of fiscal
2016
,
2015
, and
2014
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
Operating expenses
|
|
$
|
23.1
|
|
|
$
|
27.0
|
|
|
$
|
21.7
|
|
Selling, general and administrative expenses
|
|
97.4
|
|
|
95.8
|
|
|
79.5
|
|
System development and programming costs
|
|
17.1
|
|
|
20.4
|
|
|
15.9
|
|
Total pretax stock-based compensation expense
|
|
$
|
137.6
|
|
|
$
|
143.2
|
|
|
$
|
117.1
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
49.6
|
|
|
$
|
51.1
|
|
|
$
|
42.2
|
|
Stock-based compensation expense attributable to employees of the discontinued operations are included in discontinued operations on the Statements of Consolidated Earnings and therefore not presented in the table above. For fiscal
2015
and
2014
, such stock-based compensation expense was
$5.5 million
and
$21.2 million
, respectively.
As a result of the spin-off of CDK, the number of vested and unvested ADP stock options, their strike price, and the number of unvested performance-based and time-based restricted shares and units were adjusted to preserve the intrinsic value of the awards immediately prior to the spin-off using an adjustment ratio based on the market close price of ADP stock prior to the spin-off and the market open price of ADP stock subsequent to the spin-off. Since these adjustments were considered to be a modification of the awards in accordance to ASC 718, "Stock Compensation," the Company compared the fair value of the awards immediately prior to the spin-off to the fair value immediately after the spin-off to measure potential incremental stock-based compensation expense, if any. The adjustments did not result in an increase in the fair value of the awards and, accordingly, the Company did not record incremental stock-based compensation expense. Unvested ADP stock options, unvested restricted stock, and unvested restricted stock units held by CDK employees were replaced by CDK awards immediately following the spin-off. The stock-based compensation expense associated with the original grant of ADP awards to remaining ADP employees will continue to be recognized within earnings from continuing operations in the Company's Statements of Consolidated Earnings.
As of
June 30, 2016
, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to
$12.2 million
,
$28.0 million
, and
$67.7 million
, respectively, which will be amortized over the weighted-average remaining requisite service periods of
1.7 years
,
1.2 years
, and
1.3 years
, respectively.
In fiscal
2016
, 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, 2015
|
|
5,888
|
|
|
$
|
55
|
|
Options granted
|
|
1,138
|
|
|
$
|
75
|
|
Options exercised
|
|
(1,982
|
)
|
|
$
|
41
|
|
Options canceled
|
|
(175
|
)
|
|
$
|
70
|
|
Options outstanding at June 30, 2016
|
|
4,869
|
|
|
$
|
65
|
|
Options exercisable at June 30, 2016
|
|
2,197
|
|
|
$
|
54
|
|
Shares available for future grants, end of year
|
|
20,469
|
|
|
|
Shares reserved for issuance under stock option plans, end of year
|
|
25,338
|
|
|
|
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, 2015
|
|
2,137
|
|
|
486
|
|
Restricted shares/units granted
|
|
1,018
|
|
|
244
|
|
Restricted shares/units vested
|
|
(1,134
|
)
|
|
(245
|
)
|
Restricted shares/units forfeited
|
|
(132
|
)
|
|
(51
|
)
|
Restricted shares/units outstanding at June 30, 2016
|
|
1,889
|
|
|
434
|
|
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, 2015
|
|
903
|
|
|
534
|
|
Restricted shares/units granted
|
|
286
|
|
|
358
|
|
Restricted shares/units vested
|
|
(540
|
)
|
|
(37
|
)
|
Restricted shares/units forfeited
|
|
(75
|
)
|
|
(44
|
)
|
Restricted shares/units outstanding at June 30, 2016
|
|
574
|
|
|
811
|
|
The aggregate intrinsic value of outstanding stock options and exercisable stock options as of
June 30, 2016
was
$130.1 million
and
$83.8 million
, respectively, which have a remaining life of
7 years
and
6 years
, respectively. The aggregate intrinsic value for stock options exercised in fiscal
2016
,
2015
, and
2014
was
$85.4 million
,
$125.3 million
, and
$156.3 million
, respectively.
The fair value for stock options granted was estimated at the date of grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
1.6
|
%
|
|
1.5
|
%
|
|
1.7
|
%
|
Dividend yield
|
2.6
|
%
|
|
2.3
|
%
|
|
2.4
|
%
|
Weighted average volatility factor
|
25.6
|
%
|
|
23.4
|
%
|
|
23.8
|
%
|
Weighted average expected life (in years)
|
5.4
|
|
|
5.4
|
|
|
5.4
|
|
Weighted average fair value (in dollars) (A)
|
$
|
13.16
|
|
|
$
|
14.29
|
|
|
$
|
11.89
|
|
The weighted average fair values of shares granted were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Performance-based restricted stock (A)
|
|
$
|
75.95
|
|
|
$
|
64.91
|
|
|
$
|
53.08
|
|
Time-based restricted stock (A)
|
|
$
|
76.09
|
|
|
$
|
73.83
|
|
|
$
|
62.85
|
|
(A) The weighted average fair values of grants before September 30, 2014 were adjusted to reflect the impact of the spin-off of CDK.
B. Pension Plans
The Company has a defined benefit cash balance pension plan covering substantially all U.S. employees, under which employees are credited with a percentage of base pay plus interest. 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. Effective January 1, 2015, associates hired on or after this date are not eligible to participate in the Company's U.S. 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 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. As of January 23, 2014, newly appointed corporate officers are no longer eligible to participate in the SORP.
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 income (loss).
The Company's pension plans' funded status as of
June 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2016
|
|
2015
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
2,009.8
|
|
|
$
|
2,024.1
|
|
Actual return on plan assets
|
|
61.2
|
|
|
60.6
|
|
Employer contributions
|
|
11.0
|
|
|
9.9
|
|
Currency translation adjustments
|
|
(8.7
|
)
|
|
(8.8
|
)
|
Benefits paid
|
|
(67.0
|
)
|
|
(76.0
|
)
|
Fair value of plan assets at end of year
|
|
$
|
2,006.3
|
|
|
$
|
2,009.8
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
1,661.0
|
|
|
$
|
1,598.7
|
|
Service cost
|
|
70.4
|
|
|
68.4
|
|
Interest cost
|
|
67.4
|
|
|
62.8
|
|
Actuarial losses
|
|
145.3
|
|
|
21.7
|
|
Currency translation adjustments
|
|
(7.6
|
)
|
|
(17.5
|
)
|
Plan changes
|
|
(25.6
|
)
|
|
—
|
|
Curtailments and special termination benefits
|
|
—
|
|
|
2.9
|
|
Benefits paid
|
|
(67.0
|
)
|
|
(76.0
|
)
|
Projected benefit obligation at end of year
|
|
$
|
1,843.9
|
|
|
$
|
1,661.0
|
|
|
|
|
|
|
Funded status - plan assets less benefit obligations
|
|
$
|
162.4
|
|
|
$
|
348.8
|
|
The amounts recognized on the Consolidated Balance Sheets as of
June 30, 2016
and
2015
consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2016
|
|
2015
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
306.5
|
|
|
$
|
475.7
|
|
Current liabilities
|
|
(6.9
|
)
|
|
(5.9
|
)
|
Noncurrent liabilities
|
|
(137.2
|
)
|
|
(121.0
|
)
|
Net amount recognized
|
|
$
|
162.4
|
|
|
$
|
348.8
|
|
The accumulated benefit obligation for all defined benefit pension plans was
$1,825.1 million
and
$1,645.4 million
at
June 30, 2016
and
2015
, respectively.
The Company's pension plans with accumulated benefit obligations in excess of plan assets as of
June 30, 2016
and
2015
had the following projected benefit obligation, accumulated benefit obligation, and fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2016
|
|
2015
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
165.7
|
|
|
$
|
131.5
|
|
Accumulated benefit obligation
|
|
$
|
148.2
|
|
|
$
|
117.4
|
|
Fair value of plan assets
|
|
$
|
21.6
|
|
|
$
|
4.5
|
|
The components of net pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Service cost – benefits earned during the period
|
|
$
|
70.4
|
|
|
$
|
68.4
|
|
|
$
|
66.4
|
|
Interest cost on projected benefits
|
|
67.4
|
|
|
62.8
|
|
|
62.6
|
|
Expected return on plan assets
|
|
(131.2
|
)
|
|
(129.7
|
)
|
|
(119.4
|
)
|
Net amortization and deferral
|
|
11.0
|
|
|
17.2
|
|
|
20.1
|
|
Special termination benefits and plan curtailments
|
|
0.1
|
|
|
3.2
|
|
|
—
|
|
Net pension expense
|
|
$
|
17.7
|
|
|
$
|
21.9
|
|
|
$
|
29.7
|
|
Net pension expense for fiscal
2015
and
2014
includes
$4.3 million
and
$5.4 million
, respectively, reported within earnings from discontinued operations on the Statements of Consolidated Earnings. Included within pension expense related to discontinued operations for fiscal
2015
were total one-time charges of
$3.2 million
for curtailment charges and special termination benefits directly attributable to the spin-off of CDK.
The net actuarial loss and prior service credit for the defined benefit pension plans that are included in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost are
$464.0 million
and
$23.4 million
, respectively, at
June 30, 2016
. 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 into net periodic pension cost over the next fiscal year are
$21.3 million
and
$2.1 million
, respectively, at
June 30, 2016
.
Assumptions used to determine the actuarial present value of benefit obligations were:
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
|
|
|
|
Discount rate
|
|
3.40
|
%
|
|
4.25
|
%
|
Increase in compensation levels
|
|
4.00
|
%
|
|
4.00
|
%
|
Assumptions used to determine the net pension expense generally were:
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Discount rate
|
|
4.25
|
%
|
|
4.05
|
%
|
|
4.50
|
%
|
Expected long-term rate of return on assets
|
|
7.00
|
%
|
|
7.25
|
%
|
|
7.25
|
%
|
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, 2016
and
2015
by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Cash and cash equivalents
|
|
3
|
%
|
|
9
|
%
|
Fixed income securities
|
|
42
|
%
|
|
33
|
%
|
U.S. equity securities
|
|
18
|
%
|
|
17
|
%
|
International equity securities
|
|
14
|
%
|
|
19
|
%
|
Global equity securities
|
|
23
|
%
|
|
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 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, 2016
.
The following table presents the investments of the pension plans measured at fair value at
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Commingled trusts
|
|
$
|
—
|
|
|
$
|
1,029.2
|
|
|
$
|
—
|
|
|
$
|
1,029.2
|
|
Government securities
|
|
—
|
|
|
371.5
|
|
|
—
|
|
|
371.5
|
|
Mutual funds
|
|
76.6
|
|
|
—
|
|
|
—
|
|
|
76.6
|
|
Corporate and municipal bonds
|
|
—
|
|
|
433.4
|
|
|
—
|
|
|
433.4
|
|
Mortgage-backed security bonds
|
|
—
|
|
|
35.3
|
|
|
—
|
|
|
35.3
|
|
Total pension asset investments
|
|
$
|
76.6
|
|
|
$
|
1,869.4
|
|
|
$
|
—
|
|
|
$
|
1,946.0
|
|
In addition to the investments in the above table, the pension plans also held cash and cash equivalents of
$60.3 million
as of
June 30, 2016
, 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, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Commingled trusts
|
|
$
|
—
|
|
|
$
|
1,082.7
|
|
|
$
|
—
|
|
|
$
|
1,082.7
|
|
U.S. government securities
|
|
—
|
|
|
270.7
|
|
|
—
|
|
|
270.7
|
|
Mutual funds
|
|
89.0
|
|
|
—
|
|
|
—
|
|
|
89.0
|
|
Corporate and municipal bonds
|
|
—
|
|
|
347.5
|
|
|
—
|
|
|
347.5
|
|
Mortgage-backed security bonds
|
|
—
|
|
|
34.5
|
|
|
—
|
|
|
34.5
|
|
Total pension asset investments
|
|
$
|
89.0
|
|
|
$
|
1,735.4
|
|
|
$
|
—
|
|
|
$
|
1,824.4
|
|
In addition to the investments in the above table, the pension plans also held cash and cash equivalents of
$185.4 million
as of
June 30, 2015
, which have been classified as Level 2 in the fair value hierarchy.
Contributions
During fiscal
2016
, the Company contributed
$11.0 million
to the pension plans. The Company expects to contribute
$11.0 million
to the pension plans during fiscal
2017
.
Estimated Future Benefit Payments
The benefits expected to be paid in each year from fiscal
2017
to the year ended June 30, 2021 are
$79.0 million
,
$83.7 million
,
$91.0 million
,
$99.2 million
and
$110.2 million
, respectively. The aggregate benefits expected to be paid in the five fiscal years from the year ended June 30, 2022 to the year ended June 30, 2026 are
$673.3 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, 2016
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
$81.9 million
,
$69.7 million
, and
$66.0 million
for the calendar years ended December 31,
2015
,
2014
, and
2013
, respectively.
NOTE
10
. INCOME TAXES
Earnings from continuing operations before income taxes shown below are based on the geographic location to which such earnings are attributable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes:
|
|
|
|
|
|
|
United States
|
|
$
|
2,028.5
|
|
|
$
|
1,895.3
|
|
|
$
|
1,635.6
|
|
Foreign
|
|
206.2
|
|
|
175.4
|
|
|
243.6
|
|
|
|
$
|
2,234.7
|
|
|
$
|
2,070.7
|
|
|
$
|
1,879.2
|
|
The provision (benefit) for income taxes consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
579.0
|
|
|
$
|
576.3
|
|
|
$
|
552.1
|
|
Foreign
|
|
85.0
|
|
|
93.1
|
|
|
71.3
|
|
State
|
|
76.6
|
|
|
40.1
|
|
|
51.1
|
|
Total current
|
|
740.6
|
|
|
709.5
|
|
|
674.5
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
17.7
|
|
|
(1.3
|
)
|
|
(32.7
|
)
|
Foreign
|
|
(15.7
|
)
|
|
(17.0
|
)
|
|
(10.3
|
)
|
State
|
|
(1.3
|
)
|
|
3.0
|
|
|
5.1
|
|
Total deferred
|
|
0.7
|
|
|
(15.3
|
)
|
|
(37.9
|
)
|
Total provision for income taxes
|
|
$
|
741.3
|
|
|
$
|
694.2
|
|
|
$
|
636.6
|
|
A reconciliation between the Company's effective tax rate and the U.S. federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
2014
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes at U.S. statutory rate
|
|
$
|
782.1
|
|
|
35.0
|
|
|
$
|
724.8
|
|
|
35.0
|
|
|
$
|
657.7
|
|
|
35.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in provision from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit
|
|
47.2
|
|
|
2.1
|
|
|
34.8
|
|
|
1.7
|
|
|
33.4
|
|
|
1.8
|
|
U.S. tax on foreign income
|
|
122.6
|
|
|
5.5
|
|
|
155.3
|
|
|
7.5
|
|
|
26.6
|
|
|
1.4
|
|
Utilization of foreign tax credits
|
|
(155.4
|
)
|
|
(7.0
|
)
|
|
(177.1
|
)
|
|
(8.6
|
)
|
|
(26.2
|
)
|
|
(1.4
|
)
|
Section 199 - Qualified production activities
|
|
(31.9
|
)
|
|
(1.4
|
)
|
|
(28.9
|
)
|
|
(1.4
|
)
|
|
(23.0
|
)
|
|
(1.2
|
)
|
Other
|
|
(23.3
|
)
|
|
(1.0
|
)
|
|
(14.7
|
)
|
|
(0.7
|
)
|
|
(31.9
|
)
|
|
(1.7
|
)
|
|
|
$
|
741.3
|
|
|
33.2
|
|
|
$
|
694.2
|
|
|
33.5
|
|
|
$
|
636.6
|
|
|
33.9
|
|
The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:
|
|
|
|
|
|
|
|
|
|
Years ended June 30,
|
|
2016
|
|
2015
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
Accrued expenses not currently deductible
|
|
$
|
262.8
|
|
|
$
|
240.6
|
|
Stock-based compensation expense
|
|
74.6
|
|
|
72.3
|
|
Net operating losses
|
|
46.0
|
|
|
47.5
|
|
Other
|
|
70.8
|
|
|
23.5
|
|
|
|
454.2
|
|
|
383.9
|
|
Less: valuation allowances
|
|
(15.4
|
)
|
|
(23.7
|
)
|
Deferred tax assets, net
|
|
$
|
438.8
|
|
|
$
|
360.2
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Prepaid retirement benefits
|
|
$
|
77.2
|
|
|
$
|
147.9
|
|
Deferred revenue
|
|
43.2
|
|
|
36.6
|
|
Fixed and intangible assets
|
|
171.4
|
|
|
122.5
|
|
Prepaid expenses
|
|
118.0
|
|
|
108.5
|
|
Unrealized investment gains, net
|
|
176.2
|
|
|
71.9
|
|
Tax on unrepatriated earnings
|
|
—
|
|
|
5.1
|
|
Other
|
|
3.6
|
|
|
1.9
|
|
Deferred tax liabilities
|
|
$
|
589.6
|
|
|
$
|
494.4
|
|
Net deferred tax liabilities
|
|
$
|
150.8
|
|
|
$
|
134.2
|
|
The prospective adoption of ASU 2015-17 resulted in
no
current deferred tax assets included in other current assets and
no
current deferred tax liabilities included in accrued expenses and other current liabilities on the Consolidated Balance Sheets at
June 30, 2016
. There are
$33.0 million
of current deferred tax assets included in other current assets on the Consolidated Balance Sheets at
June 30, 2015
. There are
$57.0 million
of current deferred tax liabilities included in accrued expenses and other current liabilities on the Consolidated Balance Sheets at
June 30, 2015
. There are
$100.3 million
and
$61.9 million
of long-term deferred tax assets included in other assets on the Consolidated Balance Sheets at
June 30, 2016
and
2015
, respectively.
Income taxes have not been provided on undistributed earnings of certain foreign subsidiaries in an aggregate amount of approximately
$443.2 million
as of
June 30, 2016
, as the Company considers such earnings to be permanently reinvested outside of the United States. The additional U.S. income tax that would arise on repatriation of the remaining undistributed earnings could be offset, in part, by foreign tax credits on such repatriation. However, it is impracticable to estimate the amount of net income tax that might be payable.
The Company has estimated foreign net operating loss carry-forwards of approximately
$50.2 million
as of
June 30, 2016
, of which
$29.8 million
expire through
2036
and
$20.4 million
have an indefinite utilization period. As of
June 30, 2016
, the Company has approximately
$39.0 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
2031
.
The Company has state net operating loss carry-forwards of approximately
$242.3 million
as of
June 30, 2016
, which expire through
2035
.
The Company has recorded valuation allowances of
$15.4 million
and
$23.7 million
at
June 30, 2016
and
2015
, respectively, to reflect the estimated amount of domestic and foreign deferred tax assets that may not be realized.
Income tax payments were approximately
$651.6 million
,
$773.3 million
, and
$821.5 million
for fiscal
2016
,
2015
, and
2014
, respectively.
As of June 30,
2016
,
2015
, and
2014
the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were
$27.4 million
,
$27.1 million
, and
$56.5 million
respectively. The amount that, if recognized, would impact the effective tax rate is
$18.7 million
,
$16.9 million
, and
$31.0 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Unrecognized tax benefits at beginning of the year
|
|
$
|
27.1
|
|
|
$
|
56.5
|
|
|
$
|
67.0
|
|
Additions for tax positions
|
|
3.8
|
|
|
2.4
|
|
|
3.6
|
|
Additions for tax positions of prior periods
|
|
3.5
|
|
|
3.1
|
|
|
6.8
|
|
Reductions for tax positions of prior periods
|
|
(0.1
|
)
|
|
(6.5
|
)
|
|
(3.7
|
)
|
Settlement with tax authorities
|
|
(1.7
|
)
|
|
(12.2
|
)
|
|
(4.4
|
)
|
Expiration of the statute of limitations
|
|
(4.9
|
)
|
|
(14.0
|
)
|
|
(13.7
|
)
|
Impact of foreign exchange rate fluctuations
|
|
(0.3
|
)
|
|
(2.2
|
)
|
|
0.9
|
|
Unrecognized tax benefit at end of year
|
|
$
|
27.4
|
|
|
$
|
27.1
|
|
|
$
|
56.5
|
|
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
2016
,
2015
, and
2014
, the Company recorded interest expense (benefit) of
$1.1 million
,
$(2.7) million
, and
$(3.4) million
, respectively. Penalties incurred during fiscal years
2016
,
2015
, and
2014
were
no
t material.
At
June 30, 2016
, the Company had accrued interest of
$4.0 million
recorded on the Consolidated Balance Sheets, of which
$0.1 million
was recorded within income taxes payable, and the remainder was recorded within other liabilities. At
June 30, 2015
, the Company had accrued interest of
$3.8 million
recorded on the Consolidated Balance Sheets, of which
$0.1 million
was recorded within income taxes payable, and the remainder was recorded within other liabilities. At
June 30, 2016
, the Company had accrued penalties of
$0.2 million
recorded on the Consolidated Balance Sheets within other liabilities. At
June 30, 2015
, 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)
|
|
2015-2016
|
Arizona
|
|
2010-2013
|
California
|
|
2012-2014
|
Illinois
|
|
2007-2014
|
New York
|
|
2010-2014
|
New Jersey
|
|
2011-2014
|
Canada
|
|
2012-2014
|
India
|
|
2004-2011, 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
$2 million
in the next twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
In fiscal
2016
, the IRS completed its review of the examination of the Company's tax return for the year ended June 30,
2014
, which did not have a material impact to the consolidated financial statements of the Company.
NOTE
11
. COMMITMENTS AND CONTINGENCIES
The Company has obligations under various facilities, equipment leases and software license agreements. Minimum commitments under these obligations with a future life of greater than one year at
June 30, 2016
are as follows:
|
|
|
|
|
Years ending June 30,
|
|
|
|
2017
|
$
|
106.2
|
|
2018
|
106.1
|
|
2019
|
78.9
|
|
2020
|
59.6
|
|
2021
|
39.5
|
|
Thereafter
|
100.8
|
|
|
$
|
491.1
|
|
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, 2016
, the Company has purchase commitments of approximately
$625.2 million
, including a reinsurance premium with Chubb for the fiscal
2017
policy year, as
well as obligations related to purchase and maintenance agreements on our software, equipment, and other assets, of which
$331.1 million
relates to fiscal
2017
,
$111.3 million
relates to the fiscal year ending June 30,
2018
, and the remaining
$182.8 million
relates to fiscal years ending June 30,
2019
through fiscal
2021
.
In July 2016, Uniloc USA, Inc. and Uniloc Luxembourg, S.A. (“Uniloc”) filed a lawsuit against the Company in the United States District Court for the Eastern District of Texas alleging that Company products and services infringe four patents. Uniloc alleges infringement of its patents concerning centralized management of application programs on a network, distribution of application programs to a target station on a network, management of configurable application programs on a network, and license use management on a network. The complaint seeks unspecified monetary damages, costs, and injunctive relief. This litigation is still in its earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to this matter. The Company intends to vigorously defend against this lawsuit.
During the second quarter of fiscal 2016, in the course of a compliance review of its clients and vendors globally, the Company determined that subsidiaries of the Company had previously entered into service arrangements outside the United States of America ("U.S.") with several entities that are designated as Specially Designated Nationals (“SDNs”) by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of Treasury. Under these service arrangements, the Company provided managed service solutions to the SDNs. Immediately following the discovery of such service arrangements, the Company terminated the service arrangements with each SDN. The Company has voluntarily notified OFAC of the service arrangements and is cooperating fully with OFAC. The Company may be subject to fines and penalties, which amounts would be based on such factors OFAC may consider relevant. At this time, the Company is unable to estimate any reasonably possible loss, or range of reasonably possible loss, with respect to this matter. This is primarily because this matter involves a complex issue subject to inherent uncertainty. There can be no assurance that this matter will be resolved in a manner that is not adverse to the Company. For more information regarding this matter, see below in Part II Item 9B,
Other Information
of this Annual Report on Form 10-K.
In June 2011, the Company received a Commissioner’s Charge from the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging that the Company has violated Title VII of the Civil Rights Act of 1964 by refusing to recruit, hire, transfer and promote certain persons on the basis of their race, in the State of Illinois from at least the period of January 1, 2007 to the present. In July 2016, the Company entered into a settlement with the EEOC that resolved all matters related to the Commissioner’s Charge without admitting any of the EEOC’s allegations. The terms of the settlement did not have a material adverse impact on the Company's consolidated results of operations, financial condition, or cash flows.
The Company is subject to various claims and litigation 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 and litigation 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
12
. RECLASSIFICATION OUT OF ACCUMULATED OTHER COMPREHENSIVE 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
$45.5 million
,
$(350.6) million
, and
$162.8 million
in fiscal
2016
,
2015
, and
2014
, respectively. Changes in Accumulated Other Comprehensive Income ("AOCI") by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustment
|
|
Net Gains on Available-for-sale Securities
|
|
|
Pension Liability
|
|
|
Accumulated Other Comprehensive Income / (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
39.6
|
|
|
$
|
186.7
|
|
|
|
$
|
(210.9
|
)
|
|
|
$
|
15.4
|
|
Other comprehensive income before
reclassification adjustments
|
|
58.4
|
|
|
53.5
|
|
|
|
102.8
|
|
|
|
214.7
|
|
Tax effect
|
|
|
|
(18.2
|
)
|
|
|
(39.7
|
)
|
|
|
(57.9
|
)
|
Reclassification adjustments to
net earnings
|
|
1.5
|
|
(A)
|
(16.5
|
)
|
(B)
|
|
20.7
|
|
(C)
|
|
5.7
|
|
Tax effect
|
|
|
|
6.1
|
|
|
|
(5.8
|
)
|
|
|
0.3
|
|
Balance at June 30, 2014
|
|
$
|
99.5
|
|
|
$
|
211.6
|
|
|
|
$
|
(132.9
|
)
|
|
|
$
|
178.2
|
|
Other comprehensive loss before
reclassification adjustments
|
|
(240.8
|
)
|
|
(103.0
|
)
|
|
|
(87.4
|
)
|
|
|
(431.2
|
)
|
Tax effect
|
|
|
|
38.6
|
|
|
|
32.7
|
|
|
|
71.3
|
|
Reclassification adjustments to net earnings
|
|
1.2
|
|
(A)
|
(4.9
|
)
|
(B)
|
|
17.9
|
|
(C)
|
|
14.2
|
|
Tax effect
|
|
|
|
1.6
|
|
|
|
(6.5
|
)
|
|
|
(4.9
|
)
|
Reclassification adjustments to
retained earnings
|
|
(88.2
|
)
|
(D)
|
—
|
|
|
|
—
|
|
|
|
(88.2
|
)
|
Balance at June 30, 2015
|
|
$
|
(228.3
|
)
|
|
$
|
143.9
|
|
|
|
$
|
(176.2
|
)
|
|
|
$
|
(260.6
|
)
|
Other comprehensive (loss)/income before
reclassification adjustments
|
|
(25.5
|
)
|
|
288.8
|
|
|
|
(199.4
|
)
|
|
|
63.9
|
|
Tax effect
|
|
—
|
|
|
(102.2
|
)
|
|
|
72.9
|
|
|
|
(29.3
|
)
|
Reclassification adjustments to
net earnings
|
|
—
|
|
|
5.0
|
|
(B)
|
|
12.0
|
|
(C)
|
|
17.0
|
|
Tax effect
|
|
—
|
|
|
(1.7
|
)
|
|
|
(4.4
|
)
|
|
|
(6.1
|
)
|
Balance at June 30, 2016
|
|
$
|
(253.8
|
)
|
|
$
|
333.8
|
|
|
|
$
|
(295.1
|
)
|
|
|
$
|
(215.1
|
)
|
(A) Reclassification adjustments out of AOCI are included within net earnings from discontinued operations, on the Statements of Consolidated Earnings.
(B) Reclassification adjustments out of AOCI are included within Other income, net, on the Statements of Consolidated Earnings.
(C) Reclassification adjustments out of AOCI are included in net pension expense (see Note
9
).
(D) Reclassification adjustment out of AOCI is related to the CDK spin-off and included in retained earnings on the Consolidated Balance Sheets.
NOTE
13
. 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 the results of operations of ADP Indemnity, non-recurring gains and losses, miscellaneous processing services, the elimination of intercompany transactions, interest expense, certain charges and expenses that have not been allocated to the reportable segments, such as stock-based compensation expense, and beginning in the first quarter of fiscal 2016, the historical results of the AMD business, which was previously reported in the Employer Services segment. This change, which is adjusted for both the current period and the prior period in the table above, did not significantly affect reportable segment results and is consistent with the way the chief operating decision maker assesses the performance of the reportable segments.
Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. There is a reconciling item for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services and PEO Services at a standard rate of
4.5%
. This allocation is made for management reasons so that the reportable segments' results are presented on a consistent basis without the impact of fluctuations in interest rates. This reconciling adjustment to the reportable segments' revenues and earnings from continuing operations before income taxes is eliminated in consolidation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Services
|
|
PEO Services
|
|
Other
|
|
Client Fund Interest
|
|
Total
|
Year ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
9,211.9
|
|
|
$
|
3,073.1
|
|
|
$
|
1.9
|
|
|
$
|
(619.1
|
)
|
|
$
|
11,667.8
|
|
Earnings from continuing operations before income taxes
|
|
2,867.9
|
|
|
371.7
|
|
|
(385.8
|
)
|
|
(619.1
|
)
|
|
2,234.7
|
|
Assets from continuing operations
|
|
36,637.5
|
|
|
534.6
|
|
|
6,497.9
|
|
|
—
|
|
|
43,670.0
|
|
Capital expenditures from continuing operations
|
|
71.1
|
|
|
1.0
|
|
|
93.6
|
|
|
—
|
|
|
165.7
|
|
Depreciation and amortization
|
|
230.7
|
|
|
1.5
|
|
|
56.4
|
|
|
—
|
|
|
288.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
8,815.1
|
|
|
$
|
2,647.2
|
|
|
$
|
69.8
|
|
|
$
|
(593.6
|
)
|
|
$
|
10,938.5
|
|
Earnings from continuing operations before income taxes
|
|
2,693.0
|
|
|
302.8
|
|
|
(331.5
|
)
|
|
(593.6
|
)
|
|
2,070.7
|
|
Assets from continuing operations
|
|
27,507.3
|
|
|
377.7
|
|
|
5,225.5
|
|
|
—
|
|
|
33,110.5
|
|
Capital expenditures from continuing operations
|
|
94.8
|
|
|
1.3
|
|
|
75.1
|
|
|
—
|
|
|
171.2
|
|
Depreciation and amortization
|
|
221.2
|
|
|
1.2
|
|
|
55.5
|
|
|
—
|
|
|
277.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
8,437.6
|
|
|
$
|
2,270.9
|
|
|
$
|
67.5
|
|
|
$
|
(549.6
|
)
|
|
$
|
10,226.4
|
|
Earnings from continuing operations before income taxes
|
|
2,521.2
|
|
|
233.6
|
|
|
(326.0
|
)
|
|
(549.6
|
)
|
|
1,879.2
|
|
Assets from continuing operations
|
|
21,684.9
|
|
|
472.6
|
|
|
7,472.1
|
|
|
—
|
|
|
29,629.6
|
|
Capital expenditures from continuing operations
|
|
90.4
|
|
|
0.9
|
|
|
69.7
|
|
|
—
|
|
|
161.0
|
|
Depreciation and amortization
|
|
211.0
|
|
|
1.2
|
|
|
54.4
|
|
|
—
|
|
|
266.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Europe
|
|
Canada
|
|
Other
|
|
Total
|
Year ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
9,870.0
|
|
|
$
|
1,063.7
|
|
|
$
|
284.1
|
|
|
$
|
450.0
|
|
|
$
|
11,667.8
|
|
Assets from continuing operations
|
|
$
|
39,194.2
|
|
|
$
|
2,064.3
|
|
|
$
|
1,949.4
|
|
|
$
|
462.1
|
|
|
$
|
43,670.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
9,101.8
|
|
|
$
|
1,086.6
|
|
|
$
|
320.8
|
|
|
$
|
429.3
|
|
|
$
|
10,938.5
|
|
Assets from continuing operations
|
|
$
|
28,138.1
|
|
|
$
|
2,059.5
|
|
|
$
|
2,488.9
|
|
|
$
|
424.0
|
|
|
$
|
33,110.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
8,354.2
|
|
|
$
|
1,132.7
|
|
|
$
|
334.7
|
|
|
$
|
404.8
|
|
|
$
|
10,226.4
|
|
Assets from continuing operations
|
|
$
|
25,228.8
|
|
|
$
|
2,057.2
|
|
|
$
|
1,898.6
|
|
|
$
|
445.0
|
|
|
$
|
29,629.6
|
|
NOTE
14
. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results of our operations for the two fiscal years ended June 30,
2016
and June 30,
2015
are as follows:
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Year ended June 30, 2016
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First
Quarter (A)
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Second Quarter (B)
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Third
Quarter
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Fourth
Quarter (C)
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Revenues from continuing operations
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$
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2,714.0
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$
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2,807.0
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$
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3,248.6
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$
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2,898.2
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Gross profit from continuing operations
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$
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1,067.5
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$
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1,124.5
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$
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1,435.9
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$
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1,199.7
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Earnings from continuing operations before income taxes
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$
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505.0
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$
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507.9
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$
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794.8
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$
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427.0
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Net earnings from continuing operations
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$
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337.5
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$
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341.4
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$
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532.5
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$
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282.0
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Net loss from discontinued operations
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$
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(0.9
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)
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$
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—
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$
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—
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$
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—
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Net earnings
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$
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336.6
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$
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341.4
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$
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532.5
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$
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282.0
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Basic per common share amounts:
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Basic earnings per share from continuing operations
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$
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0.73
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$
|
0.75
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$
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1.17
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$
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0.62
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Diluted per common share amounts:
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Diluted earnings per share from continuing operations
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$
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0.72
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$
|
0.74
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$
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1.17
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$
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0.62
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Year ended June 30, 2015
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First
Quarter
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Second Quarter
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Third
Quarter
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Fourth
Quarter
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Revenues from continuing operations
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$
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2,566.1
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$
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2,653.6
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$
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3,024.3
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$
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2,694.5
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Gross profit from continuing operations
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$
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1,007.8
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$
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1,070.3
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$
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1,340.0
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$
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1,092.7
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Earnings from continuing operations before income taxes
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$
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450.4
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$
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498.8
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$
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739.9
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$
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381.6
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Net earnings from continuing operations
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$
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296.6
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$
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332.5
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$
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490.3
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$
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257.0
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Net (loss)/earnings from discontinued operations
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$
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(1.4
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)
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$
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(1.0
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)
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$
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(0.7
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)
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$
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79.2
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Net earnings
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$
|
295.2
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$
|
331.5
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$
|
489.6
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$
|
336.2
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Basic per common share amounts:
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Basic earnings per share from continuing operations
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$
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0.62
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$
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0.70
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$
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1.04
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$
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0.55
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Basic earnings per share from discontinued operations
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$
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—
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$
|
—
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|
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$
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—
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|
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$
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0.17
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Diluted per common share amounts:
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Diluted earnings per share from continuing operations
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$
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0.62
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$
|
0.69
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$
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1.03
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|
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$
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0.55
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Diluted earnings per share from discontinued operations
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$
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—
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$
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—
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$
|
—
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$
|
0.17
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(A) Earnings from continuing operations before income taxes; net earnings from continuing operations; net earnings; and basic and diluted EPS from continuing operations include the gain on the sale of AMD. This increased earnings from continuing operations before income taxes by
$29.1 million
, net earnings from continuing operations and net earnings by
$21.8 million
, and basic and diluted earnings per share from continuing operations by
$0.05
.
(B) Earnings from continuing operations before income taxes; net earnings from continuing operations; net earnings; and basic and diluted EPS from continuing operations include the gain on sale of a building. This increased earnings from continuing operations before income taxes by
$13.9 million
, net earnings from continuing operations and net earnings by
$8.6 million
and basic and diluted earnings per share from continuing operations by
$0.02
.
(C) Earnings from continuing operations before income taxes; net earnings from continuing operations; net earnings; and basic and diluted EPS from continuing operations include the charge for the workforce optimization effort. This decreased earnings from continuing operations before income taxes by
$48.2 million
, net earnings from continuing operations and net earnings by
$31.8 million
and basic and diluted earnings per share from continuing operations by
$0.07
.
NOTE
15
. SUBSEQUENT EVENTS
With the exception of the legal claim filed in July 2016 and the settlement of the EEOC matter, both of which are discussed in Note 11, and the items listed below, there are no further subsequent events for disclosure.
In July 2016, ADP announced its service alignment initiative intended to align the Company's client service operations with its platform simplification strategy.
The Company's subsidiary captive insurance company, ADP Indemnity, paid a premium of
$221.0 million
in July 2016 to enter into a reinsurance arrangement with Chubb to cover substantially all losses for the fiscal 2017 policy year on terms substantially similar to the fiscal 2016 reinsurance policy to cover losses up to
$1 million
per occurrence related to the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services worksite employees.