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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________ | | | | | | | | | | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2024
OR | | | | | | | | | | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 1-5397
__________________________
AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
__________________________ | | | | | | | | |
Delaware | 22-1467904 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
One ADP Boulevard | |
Roseland, | NJ | 07068 |
(Address of principal executive offices) | (Zip Code) |
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Registrant's telephone number, including area code: (973) 974-5000
__________________________ | | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.10 Par Value (voting) | ADP | NASDAQ Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | |
Large Accelerated Filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ☐ No ý
The number of shares outstanding of the registrant’s common stock as of October 29, 2024 was 407,456,901.
Table of Contents | | | | | | | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 5. | | |
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Item 6. | | |
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Earnings
(In millions, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2024 | | 2023 | | | | |
| | | |
REVENUES: | | | | | | | |
Revenues, other than interest on funds held for clients and PEO revenues | $ | 3,007.2 | | | $ | 2,843.0 | | | | | |
Interest on funds held for clients | 253.3 | | | 201.7 | | | | | |
PEO revenues (A) | 1,572.2 | | | 1,467.7 | | | | | |
TOTAL REVENUES | 4,832.7 | | | 4,512.4 | | | | | |
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EXPENSES: | | | | | | | |
Costs of revenues: | | | | | | | |
Operating expenses | 2,285.8 | | | 2,157.6 | | | | | |
Research and development | 232.6 | | | 236.5 | | | | | |
Depreciation and amortization | 115.3 | | | 121.3 | | | | | |
TOTAL COSTS OF REVENUES | 2,633.7 | | | 2,515.4 | | | | | |
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Selling, general, and administrative expenses | 926.7 | | | 880.3 | | | | | |
Interest expense | 137.8 | | | 91.6 | | | | | |
TOTAL EXPENSES | 3,698.2 | | | 3,487.3 | | | | | |
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Other (income)/expense, net | (101.7) | | | (67.7) | | | | | |
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EARNINGS BEFORE INCOME TAXES | 1,236.2 | | | 1,092.8 | | | | | |
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Provision for income taxes | 279.9 | | | 233.4 | | | | | |
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NET EARNINGS | $ | 956.3 | | | $ | 859.4 | | | | | |
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BASIC EARNINGS PER SHARE | $ | 2.34 | | | $ | 2.09 | | | | | |
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DILUTED EARNINGS PER SHARE | $ | 2.34 | | | $ | 2.08 | | | | | |
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Basic weighted average shares outstanding | 407.9 | | | 411.7 | | | | | |
Diluted weighted average shares outstanding | 409.5 | | | 413.6 | | | | | |
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(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes of $17,193.6 million and $15,994.6 million for the three months ended September 30, 2024 and 2023, respectively.
See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Comprehensive Income
(In millions)
(Unaudited)
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| Three Months Ended | | |
| September 30, | | |
| 2024 | | 2023 | | | | |
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Net earnings | $ | 956.3 | | | $ | 859.4 | | | | | |
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Other comprehensive income/(losses): | | | | | | | |
Currency translation adjustments | 49.2 | | | (44.6) | | | | | |
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Unrealized net (losses)/gains on available-for-sale securities | 864.4 | | | (150.6) | | | | | |
Tax effect | (197.9) | | | 30.1 | | | | | |
Reclassification of realized net losses on available-for-sale securities to net earnings | 0.2 | | | 1.9 | | | | | |
Tax effect | — | | | (0.4) | | | | | |
| | | | | | | |
Unrealized loss on cash flow hedging activities | (12.5) | | | — | | | | | |
Tax effect | 3.1 | | | — | | | | | |
Amortization of unrealized losses on cash flow hedging activities | 1.1 | | | 1.1 | | | | | |
Tax effect | (0.3) | | | (0.3) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Reclassification of pension liability adjustment to net earnings | 1.1 | | | 1.0 | | | | | |
Tax effect | (0.3) | | | (0.2) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other comprehensive (loss)/income, net of tax | 708.1 | | | (162.0) | | | | | |
Comprehensive income | $ | 1,664.4 | | | $ | 697.4 | | | | | |
See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited) | | | | | | | | | | | | | | |
| | September 30, | | June 30, |
| | 2024 | | 2024 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 2,104.9 | | | $ | 2,913.4 | |
Short-term marketable securities (A) | | 5,242.2 | | | 384.0 | |
Accounts receivable, net of allowance for doubtful accounts of $53.2 and $52.2, respectively | | 3,316.7 | | | 3,428.2 | |
Other current assets | | 1,070.5 | | | 820.8 | |
| | | | |
| | | | |
Total current assets before funds held for clients | | 11,734.3 | | | 7,546.4 | |
Funds held for clients | | 28,176.9 | | | 37,996.1 | |
Total current assets | | 39,911.2 | | | 45,542.5 | |
Long-term marketable securities (A) | | 940.6 | | | — | |
Long-term receivables, net of allowance for doubtful accounts of $0.2 and $0.1, respectively | | 6.6 | | | 7.3 | |
Property, plant and equipment, net | | 692.5 | | | 685.6 | |
Operating lease right-of-use asset | | 362.5 | | | 370.6 | |
Deferred contract costs | | 2,975.5 | | | 2,965.0 | |
Other assets | | 923.2 | | | 1,102.1 | |
Goodwill | | 2,369.0 | | | 2,353.6 | |
Intangible assets, net | | 1,330.3 | | | 1,336.0 | |
Total assets | | $ | 49,511.4 | | | $ | 54,362.7 | |
Liabilities and Stockholders' Equity | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 145.2 | | | $ | 100.6 | |
Accrued expenses and other current liabilities | | 2,973.9 | | | 3,349.0 | |
Accrued payroll and payroll-related expenses | | 552.7 | | | 958.7 | |
Dividends payable | | 565.9 | | | 566.4 | |
Short-term deferred revenues | | 188.6 | | | 199.8 | |
Obligations under reverse repurchase agreements (A) | | 679.1 | | | 385.4 | |
Obligations under commercial paper borrowing | | 4,375.4 | | | — | |
| | | | |
Short-term debt | | 1,000.3 | | | 1.1 | |
Income taxes payable | | 170.4 | | | 15.1 | |
| | | | |
Total current liabilities before client funds obligations | | 10,651.5 | | | 5,576.1 | |
Client funds obligations | | 28,720.9 | | | 39,503.9 | |
Total current liabilities | | 39,372.4 | | | 45,080.0 | |
Long-term debt | | 2,981.4 | | | 2,991.3 | |
Operating lease liabilities | | 316.1 | | | 328.6 | |
Other liabilities | | 977.0 | | | 990.8 | |
Deferred income taxes | | 154.4 | | | 64.3 | |
Long-term deferred revenues | | 361.5 | | | 360.1 | |
Total liabilities | | 44,162.8 | | | 49,815.1 | |
| | | | |
Commitments and contingencies (Note 13) | | | | |
| | | | |
Stockholders' equity: | | | | |
Preferred stock, $1.00 par value: authorized, 0.3 shares; issued, none | | — | | | — | |
Common stock, $0.10 par value: authorized, 1,000.0 shares; issued, 638.7 shares at September 30, 2024 and June 30, 2024; outstanding, 407.7 and 408.1 shares at September 30, 2024 and June 30, 2024, respectively | | 63.9 | | | 63.9 | |
Capital in excess of par value | | 2,528.6 | | | 2,406.9 | |
Retained earnings | | 24,001.2 | | | 23,622.2 | |
Treasury stock - at cost: 231.0 and 230.6 shares at September 30, 2024 and June 30, 2024, respectively | | (20,144.9) | | | (19,737.1) | |
Accumulated other comprehensive (loss)/ income | | (1,100.2) | | | (1,808.3) | |
Total stockholders’ equity | | 5,348.6 | | | 4,547.6 | |
Total liabilities and stockholders’ equity | | $ | 49,511.4 | | | $ | 54,362.7 | |
(A) As of September 30, 2024, $578.6 million of short-term marketable securities, $98.8 million of long-term marketable securities and $1.7 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements. As of June 30, 2024, $384.0 million of short-term marketable securities and $1.4 million of cash and cash equivalents have been pledged as collateral under the Company's reverse repurchase agreements (see Note 9).
See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | |
| | Three Months Ended | |
| | September 30, | |
| | 2024 | | 2023 | |
| | | |
Cash Flows from Operating Activities: | | | | | |
Net earnings | | $ | 956.3 | | | $ | 859.4 | | |
Adjustments to reconcile net earnings to cash flows provided by operating activities: | | | | | |
Depreciation and amortization | | 138.6 | | | 141.5 | | |
Amortization of deferred contract costs | | 281.4 | | | 262.3 | | |
| | | | | |
Deferred income taxes | | 42.7 | | | 26.8 | | |
Stock-based compensation expense | | 60.6 | | | 58.8 | | |
| | | | | |
Bad Debt Expense | | 11.2 | | | 13.1 | | |
Net pension income | | (4.9) | | | (5.8) | | |
| | | | | |
Net accretion of discounts and amortization of premiums on available-for-sale securities | | (15.5) | | | (5.5) | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other | | 0.9 | | | (10.4) | | |
Changes in operating assets and liabilities: | | | | | |
(Increase)/Decrease in accounts receivable | | 115.4 | | | (107.9) | | |
Increase in deferred contract costs | | (269.8) | | | (261.9) | | |
Increase in other assets | | (217.1) | | | (304.9) | | |
Increase/(Decrease) in accounts payable | | 48.0 | | | (30.4) | | |
Decrease in accrued expenses and other liabilities | | (323.4) | | | (308.6) | | |
| | | | | |
| | | | | |
Net cash flows provided by operating activities | | 824.4 | | | 326.5 | | |
| | | | | |
Cash Flows from Investing Activities: | | | | | |
Purchases of corporate and client funds marketable securities | | (2,771.7) | | | (710.2) | | |
Proceeds from the sales and maturities of corporate and client funds marketable securities | | 1,266.8 | | | 632.0 | | |
| | | | | |
Capital expenditures | | (58.8) | | | (39.3) | | |
Additions to intangibles | | (80.9) | | | (87.0) | | |
Acquisitions of businesses, net of cash acquired | | — | | | (33.6) | | |
Proceeds from sale of property, plant, and equipment and other assets | | 3.3 | | | 22.0 | | |
Other | | (3.1) | | | — | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net cash flows used in investing activities | | (1,644.4) | | | (216.1) | | |
| | | | | |
Cash Flows from Financing Activities: | | | | | |
Net decrease in client funds obligations | | (10,870.5) | | | (1,374.9) | | |
| | | | | |
Net cash distributed from the Internal Revenue Service | | (336.4) | | | — | | |
Payments of debt | | (0.3) | | | (0.2) | | |
Proceeds from the issuance of debt | | 988.9 | | | — | | |
Settlement of cash flow hedges | | (12.5) | | | — | | |
Repurchases of common stock | | (372.6) | | | (250.0) | | |
Net proceeds from stock purchase plan and stock-based compensation plans | | 12.0 | | | (36.6) | | |
| | | | | |
Dividends paid | | (572.6) | | | (515.8) | | |
Net proceeds related to reverse repurchase agreements | | 297.1 | | | 273.8 | | |
Net proceeds of commercial paper borrowings | | 4,375.4 | | | — | | |
| | | | | |
| | | | | |
| | | | | |
Net cash flows used in financing activities | | (6,491.5) | | | (1,903.7) | | |
| | | | | |
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents | | 17.0 | | | (16.3) | | |
| | | | | |
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents | | (7,294.5) | | | (1,809.6) | | |
| | | | | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | | 10,086.0 | | | 8,771.5 | | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | | $ | 2,791.5 | | | $ | 6,961.9 | | |
| | | | | |
| | | | | |
| | | | | |
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets | | | | | |
Cash and cash equivalents | | $ | 2,104.9 | | | $ | 1,441.4 | | |
Restricted cash and restricted cash equivalents included in funds held for clients (A) | | 686.6 | | | 5,520.5 | | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | | $ | 2,791.5 | | | $ | 6,961.9 | | |
| | | | | |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid for interest | | $ | 140.7 | | | $ | 97.0 | | |
Cash paid for income taxes, net of income tax refunds | | $ | 64.7 | | | $ | 87.9 | | |
| | | | | |
| | | | | |
| | | | | |
(A) See Note 6 for a reconciliation of restricted cash and restricted cash equivalents in funds held for clients on the Consolidated Balance Sheets.
See notes to the Consolidated Financial Statements.
Automatic Data Processing, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts or where otherwise stated)
(Unaudited)
Note 1. Basis of Presentation
The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc., its subsidiaries and variable interest entity (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair presentation of the Company’s interim financial results.
The Company has a grantor trust, which holds the majority of the funds provided by its clients pending remittance to employees of those clients, tax authorities, and other payees. The Company is the sole beneficial owner of the trust. The trust meets the criteria in Accounting Standards Codification (“ASC”) 810, “Consolidation” to be characterized as a variable interest entity (“VIE”). The Company has determined that it has a controlling financial interest in the trust because it has both (1) the power to direct the activities that most significantly impact the economic performance of the trust (including the power to make all investment decisions for the trust) and (2) the right to receive benefits that could potentially be significant to the trust (in the form of investment returns) and, therefore, consolidates the trust. Further information on these funds and the Company’s obligations to remit to its clients’ employees, tax authorities, and other payees is provided in Note 6, “Corporate Investments and Funds Held for Clients.”
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. Interim financial results are not necessarily indicative of financial results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2024 (“fiscal 2024”). Certain amounts from the prior year's financial statements have been reclassified in order to conform to the current year's presentation.
Note 2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
| | | | | | | | | | | |
Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures | This update enhances the transparency and decision usefulness of income tax disclosures to better assess how an entity’s operations and related tax risks, tax planning and operational opportunities affect its tax rate and prospects for future cash flows. | June 30, 2026 (Fiscal 2026) | The Company is assessing this guidance. The adoption will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, and cash flows. |
ASU 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | This update improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and certain quantitative disclosures. | June 30, 2025 (Fiscal 2025) | The Company is assessing this guidance. The adoption will modify disclosures but will not have an impact on the Company's consolidated results of operations, financial condition, and cash flows. |
Note 3. Revenue
Based upon similar operational and economic characteristics, the Company’s revenues are disaggregated by its three business pillars: Human Capital Management (“HCM”), HR Outsourcing (“HRO”), and Global Solutions (“Global”), with separate disaggregation for PEO zero-margin benefits pass-through revenues and client funds interest revenues. The Company believes
these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
The following tables provide details of revenue by our business pillars, and include a reconciliation to the Company’s reportable segments:
| | | | | | | | | | | | | | | |
| | | | | |
| Three Months Ended | | |
| September 30, | | |
Types of Revenues | 2024 | | 2023 | | | | |
HCM | $ | 2,025.4 | | | $ | 1,914.4 | | | | | |
HRO, excluding PEO zero-margin benefits pass-throughs | 865.2 | | | 811.7 | | | | | |
PEO zero-margin benefits pass-throughs | 1,049.2 | | | 976.7 | | | | | |
Global | 639.6 | | | 607.9 | | | | | |
Interest on funds held for clients | 253.3 | | | 201.7 | | | | | |
Total Revenues | $ | 4,832.7 | | | $ | 4,512.4 | | | | | |
Reconciliation of disaggregated revenue to our reportable segments for the three months ended September 30, 2024:
| | | | | | | | | | | | | | | | | | | | | | | |
Types of Revenues | Employer Services | | PEO | | Other | | Total |
HCM | $ | 2,027.6 | | | $ | — | | | $ | (2.2) | | | $ | 2,025.4 | |
HRO, excluding PEO zero-margin benefits pass-throughs | 342.8 | | | 523.0 | | | (0.6) | | | 865.2 | |
PEO zero-margin benefits pass-throughs | — | | | 1,049.2 | | | — | | | 1,049.2 | |
Global | 639.6 | | | — | | | — | | | 639.6 | |
Interest on funds held for clients | 251.0 | | | 2.3 | | | — | | | 253.3 | |
Total Segment Revenues | $ | 3,261.0 | | | $ | 1,574.5 | | | $ | (2.8) | | | $ | 4,832.7 | |
Reconciliation of disaggregated revenue to our reportable segments for the three months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
Types of Revenues | Employer Services | | PEO | | Other | | Total |
HCM | $ | 1,916.7 | | | $ | — | | | $ | (2.3) | | | $ | 1,914.4 | |
HRO, excluding PEO zero-margin benefits pass-throughs | 322.0 | | | 491.0 | | | (1.3) | | | 811.7 | |
PEO zero-margin benefits pass-throughs | — | | | 976.7 | | | — | | | 976.7 | |
Global | 607.9 | | | — | | | — | | | 607.9 | |
Interest on funds held for clients | 199.8 | | | 1.9 | | | — | | | 201.7 | |
Total Segment Revenues | $ | 3,046.4 | | | $ | 1,469.6 | | | $ | (3.6) | | | $ | 4,512.4 | |
Contract Balances
The timing of revenue recognition for HCM, HRO and Global is consistent with the invoicing of clients, as invoicing occurs in the period the services are provided. Therefore, the Company does not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.
Changes in deferred revenues related to set up fees for the three months ended September 30, 2024 were as follows: | | | | | |
Contract Liability | |
Contract liability, July 1, 2024 | $ | 491.6 | |
Recognition of revenue included in beginning of year contract liability | (35.9) | |
Contract liability, net of revenue recognized on contracts during the period | 28.0 | |
Currency translation adjustments | 10.8 | |
Contract liability, September 30, 2024 | $ | 494.5 | |
Note 4. Earnings per Share (“EPS”) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Basic | | Effect of Employee Stock Option Shares | | Effect of Employee Restricted Stock Shares | | Diluted |
Three Months Ended September 30, 2024 | | | | | | | | |
Net earnings | | $ | 956.3 | | | | | | | $ | 956.3 | |
Weighted average shares (in millions) | | 407.9 | | | 0.7 | | | 0.9 | | | 409.5 | |
EPS | | $ | 2.34 | | | | | | | $ | 2.34 | |
Three Months Ended September 30, 2023 | | | | | | | | |
Net earnings | | $ | 859.4 | | | | | | | $ | 859.4 | |
Weighted average shares (in millions) | | 411.7 | | | 0.9 | | | 1.0 | | | 413.6 | |
EPS | | $ | 2.09 | | | | | | | $ | 2.08 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
For the three months ended September 30, 2024 and 2023, there were no stock options excluded from the calculation of diluted earnings per share due to anti-dilution.
Note 5. Other (Income)/Expense, Net | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2024 | | 2023 | | | | |
Interest income on corporate funds | $ | (91.7) | | | $ | (46.5) | | | | | |
| | | | | | | |
| | | | | | | |
Realized losses on available-for-sale securities, net | 0.2 | | | 1.9 | | | | | |
| | | | | | | |
Gain on sale of assets | (2.4) | | | (14.6) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Non-service components of pension income, net (see Note 11) | (7.8) | | | (8.5) | | | | | |
Other (income)/expense, net | $ | (101.7) | | | $ | (67.7) | | | | | |
Note 6. Corporate Investments and Funds Held for Clients
Corporate investments and funds held for clients at September 30, 2024 and June 30, 2024 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | | | Fair Market Value (A) |
Type of issue: | | | | | | | | | |
Money market securities, cash and other cash equivalents | $ | 2,791.5 | | | $ | — | | | $ | — | | | | | $ | 2,791.5 | |
Available-for-sale securities: | | | | | | | | | |
Corporate bonds | 17,705.4 | | | 129.0 | | | (578.6) | | | | | 17,255.8 | |
U.S. Treasury securities | 8,197.1 | | | 94.8 | | | (81.7) | | | | | 8,210.2 | |
Canadian government obligations and Canadian government agency obligations | 2,295.7 | | | 18.2 | | | (52.2) | | | | | 2,261.7 | |
U.S. government agency securities | 1,582.4 | | | 3.7 | | | (98.2) | | | | | 1,487.9 | |
Asset-backed securities | 1,614.4 | | | 22.6 | | | (25.6) | | | | | 1,611.4 | |
Canadian provincial bonds | 1,140.4 | | | 17.5 | | | (35.6) | | | | | 1,122.3 | |
Commercial mortgage-backed securities | 509.0 | | | 0.6 | | | (21.7) | | | | | 487.9 | |
Other securities | 1,279.9 | | | 7.2 | | | (51.2) | | | | | 1,235.9 | |
| | | | | | | | | |
Total available-for-sale securities | 34,324.3 | | | 293.6 | | | (944.8) | | | | | 33,673.1 | |
| | | | | | | | | |
Total corporate investments and funds held for clients | $ | 37,115.8 | | | $ | 293.6 | | | $ | (944.8) | | | | | $ | 36,464.6 | |
(A) Included within available-for-sale securities are corporate investments with fair values of $6,182.8 million and funds held for clients with fair values of $27,490.3 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Market Value (B) |
Type of issue: | | | | | | | |
Money market securities, cash and other cash equivalents | $ | 10,086.0 | | | $ | — | | | $ | — | | | $ | 10,086.0 | |
Available-for-sale securities: | | | | | | | |
Corporate bonds | 16,833.3 | | | 11.5 | | | (944.8) | | | 15,900.0 | |
U.S. Treasury securities | 7,701.2 | | | 9.0 | | | (164.5) | | | 7,545.7 | |
Canadian government obligations and Canadian government agency obligations | 2,130.7 | | | 1.7 | | | (86.6) | | | 2,045.8 | |
U.S. government agency securities | 1,645.0 | | | 0.5 | | | (140.6) | | | 1,504.9 | |
Asset-backed securities | 1,394.9 | | | 3.9 | | | (43.0) | | | 1,355.8 | |
Canadian provincial bonds | 1,116.3 | | | 2.3 | | | (56.2) | | | 1,062.4 | |
Commercial mortgage-backed securities | 535.9 | | | — | | | (35.1) | | | 500.8 | |
Other securities | 1,366.0 | | | 2.0 | | | (75.9) | | | 1,292.1 | |
| | | | | | | |
Total available-for-sale securities | 32,723.3 | | | 30.9 | | | (1,546.7) | | | 31,207.5 | |
| | | | | | | |
Total corporate investments and funds held for clients | $ | 42,809.3 | | | $ | 30.9 | | | $ | (1,546.7) | | | $ | 41,293.5 | |
(B) Included within available-for-sale securities are corporate investments with fair values of $384.0 million and funds held for clients with fair values of $30,823.5 million. All available-for-sale securities were included in Level 2 of the fair value hierarchy.
For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 “Summary of Significant Accounting Policies” in the Company's Annual Report on Form
10-K for fiscal 2024. The Company concurred with and did not adjust the prices obtained from the independent pricing service. The Company had no available-for-sale securities included in Level 1 or Level 3 at September 30, 2024.
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of September 30, 2024, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 |
| Securities in Unrealized Loss Position Less Than 12 Months | | Securities in Unrealized Loss Position Greater Than 12 Months | | Total |
| Gross Unrealized Losses | | Fair Market Value | | Gross Unrealized Losses | | Fair Market Value | | Gross Unrealized Losses | | Fair Market Value |
Corporate bonds | $ | (2.4) | | | $ | 346.9 | | | $ | (576.2) | | | $ | 12,170.6 | | | $ | (578.6) | | | $ | 12,517.5 | |
U.S. Treasury securities | (5.5) | | | 77.9 | | | (76.2) | | | 3,172.5 | | | (81.7) | | | 3,250.4 | |
Canadian government obligations and Canadian government agency obligations | — | | | 1.4 | | | (52.2) | | | 1,607.2 | | | (52.2) | | | 1,608.6 | |
U.S. government agency securities | — | | | 0.8 | | | (98.2) | | | 1,384.3 | | | (98.2) | | | 1,385.1 | |
Asset-backed securities | (0.4) | | | 96.1 | | | (25.2) | | | 624.0 | | | (25.6) | | | 720.1 | |
Canadian provincial bonds | — | | | 1.1 | | | (35.6) | | | 661.2 | | | (35.6) | | | 662.3 | |
Commercial mortgage-backed securities | (0.3) | | | 15.3 | | | (21.4) | | | 460.1 | | | (21.7) | | | 475.4 | |
Other securities | (6.2) | | | 118.9 | | | (45.0) | | | 719.1 | | | (51.2) | | | 838.0 | |
| $ | (14.8) | | | $ | 658.4 | | | $ | (930.0) | | | $ | 20,799.0 | | | $ | (944.8) | | | $ | 21,457.4 | |
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, 2024, are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 |
| Securities in Unrealized Loss Position Less Than 12 Months | | Securities in Unrealized Loss Position Greater Than 12 Months | | Total |
| Gross Unrealized Losses | | Fair Market Value | | Gross Unrealized Losses | | Fair Market Value | | Gross Unrealized Losses | | Fair Market Value |
Corporate bonds | $ | (25.8) | | | $ | 2,173.6 | | | $ | (919.0) | | | $ | 12,413.4 | | | $ | (944.8) | | | $ | 14,587.0 | |
U.S. Treasury securities | (23.1) | | | 2,186.2 | | | (141.4) | | | 4,076.9 | | | (164.5) | | | 6,263.1 | |
Canadian government obligations and Canadian government agency obligations | (0.9) | | | 304.6 | | | (85.7) | | | 1,591.6 | | | (86.6) | | | 1,896.2 | |
U.S. government agency securities | (0.7) | | | 51.5 | | | (139.9) | | | 1,428.2 | | | (140.6) | | | 1,479.7 | |
Asset-backed securities | (2.3) | | | 351.4 | | | (40.7) | | | 668.0 | | | (43.0) | | | 1,019.4 | |
Canadian provincial bonds | (1.3) | | | 193.0 | | | (54.9) | | | 717.4 | | | (56.2) | | | 910.4 | |
Commercial mortgage-backed securities | (0.5) | | | 11.2 | | | (34.6) | | | 489.6 | | | (35.1) | | | 500.8 | |
Other securities | (12.2) | | | 288.5 | | | (63.7) | | | 864.8 | | | (75.9) | | | 1,153.3 | |
| $ | (66.8) | | | $ | 5,560.0 | | | $ | (1,479.9) | | | $ | 22,249.9 | | | $ | (1,546.7) | | | $ | 27,809.9 | |
At September 30, 2024, corporate bonds include investment-grade debt securities with a wide variety of issuers, industries, and sectors, primarily carrying credit ratings of A and above, and have maturities ranging from October 2024 through September 2034.
At September 30, 2024, asset-backed securities include AAA-rated senior tranches of securities with predominantly prime collateral of fixed-rate auto loan, credit card, and equipment lease receivables with fair values of $759.5 million, $486.8 million, and $189.5 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables. The primary risk associated with these securities is the collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through September 30, 2024.
At September 30, 2024, U.S. government agency securities primarily include debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks with fair values of $969.0 million and $482.2 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 October 2024 through August 2034.
At September 30, 2024, U.S. government agency commercial mortgage-backed securities of $487.9 million include those issued by Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.
At September 30, 2024, other securities primarily include municipal bonds, diversified with a variety of issuers, with credit ratings of A and above with fair values of $543.2 million, AA-rated United Kingdom Gilt securities of $313.0 million, and AAA-rated supranational bonds of $218.3 million.
Classification of corporate investments on the Consolidated Balance Sheets is as follows: | | | | | | | | | | | | | | |
| | September 30, | | June 30, |
| | 2024 | | 2024 |
Corporate investments: | | | | |
Cash and cash equivalents | | $ | 2,104.9 | | | $ | 2,913.4 | |
Short-term marketable securities | | 5,242.2 | | | 384.0 | |
Long-term marketable securities | | 940.6 | | | — | |
Total corporate investments | | $ | 8,287.7 | | | $ | 3,297.4 | |
Funds held for clients represent assets that, based upon the Company's intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets.
Funds held for clients have been invested in the following categories: | | | | | | | | | | | | | | |
| | September 30, | | June 30, |
| | 2024 | | 2024 |
Funds held for clients: | | | | |
Restricted cash and cash equivalents held to satisfy client funds obligations | | $ | 686.6 | | | $ | 7,172.6 | |
Restricted short-term marketable securities held to satisfy client funds obligations | | 1,211.8 | | | 5,538.1 | |
Restricted long-term marketable securities held to satisfy client funds obligations | | 26,278.5 | | | 25,285.4 | |
Total funds held for clients | | $ | 28,176.9 | | | $ | 37,996.1 | |
Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll, tax, and other payee payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $28,720.9 million and $39,503.9 million at September 30, 2024 and June 30, 2024, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client funds obligations. Of the Company’s funds held for clients at September 30, 2024 and June 30, 2024, $25,338.3 million and $34,940.0 million, respectively, are held in the grantor trust. The liabilities held within the trust are intercompany liabilities to other Company subsidiaries and are eliminated in consolidation.
The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash and cash equivalents related to client funds investments with original maturities of ninety days or less, within the beginning and ending balances of cash, cash equivalents, restricted cash, and restricted cash equivalents. 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 / (decrease) in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.
All available-for-sale securities were rated as investment grade at September 30, 2024.
Expected maturities of available-for-sale securities at September 30, 2024 are as follows: | | | | | |
One year or less | $ | 6,454.0 | |
One year to two years | 7,883.9 | |
Two years to three years | 4,589.9 | |
Three years to four years | 5,437.6 | |
After four years | 9,307.7 | |
Total available-for-sale securities | $ | 33,673.1 | |
Note 7. Leases
The Company records leases on the Consolidated Balance Sheets as operating lease right-of-use (“ROU”) assets, records the current portion of operating lease liabilities within accrued expenses and other current liabilities and, separately, records long-term operating lease liabilities. The difference between total ROU assets and total lease liabilities is primarily attributable to prepayments of our obligations and the recognition of various lease incentives.
The Company has entered into operating lease agreements for facilities and equipment. The Company's leases have remaining lease terms of up to approximately eleven years.
The components of operating lease expense were as follows: | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2024 | | 2023 | | | | |
Operating lease cost | $ | 27.5 | | | $ | 34.0 | | | | | |
Short-term lease cost | 0.3 | | | 0.5 | | | | | |
Variable lease cost | 6.6 | | | 3.2 | | | | | |
Total operating lease cost | $ | 34.4 | | | $ | 37.7 | | | | | |
| | | | | | | |
The following table provides supplemental cash flow information related to the Company's leases: | | | | | | | | | | | |
| Three Months Ended |
| September 30, |
| 2024 | | 2023 |
Cash paid for operating lease liabilities | $ | 28.8 | | | $ | 30.5 | |
Operating lease ROU assets obtained in exchange for new operating lease liabilities | $ | 13.7 | | | $ | 26.9 | |
| | | |
| | | |
Other information related to our operating lease liabilities is as follows:
| | | | | | | | | | | |
| September 30, | | June 30, |
| 2024 | | 2024 |
Weighted-average remaining lease term (in years) | 5 | | 5 |
Weighted-average discount rate | 3.3 | % | | 3.3 | % |
Current operating lease liability | $ | 96.0 | | | $ | 92.2 | |
As of September 30, 2024, maturities of operating lease liabilities are as follows: | | | | | |
Nine months ending June 30, 2025 | $ | 82.4 | |
Twelve months ending June 30, 2026 | 98.5 | |
Twelve months ending June 30, 2027 | 85.2 | |
Twelve months ending June 30, 2028 | 64.7 | |
Twelve months ending June 30, 2029 | 42.2 | |
Thereafter | 76.9 | |
Total undiscounted lease obligations | 449.9 | |
Less: Imputed interest | (37.8) | |
Net lease obligations | $ | 412.1 | |
Note 8. Goodwill and Intangible Assets, net
Changes in goodwill for the three months ended September 30, 2024 are as follows: | | | | | | | | | | | | | | | | | | | |
| Employer Services | | PEO Services | | | | Total |
Balance at June 30, 2024 | $ | 2,348.8 | | | $ | 4.8 | | | | | $ | 2,353.6 | |
| | | | | | | |
Currency translation adjustments | 15.4 | | | — | | | | | 15.4 | |
| | | | | | | |
Balance at September 30, 2024 | $ | 2,364.2 | | | $ | 4.8 | | | | | $ | 2,369.0 | |
Components of intangible assets, net, are as follows: | | | | | | | | | | | | | | |
| | September 30, | | June 30, |
| | 2024 | | 2024 |
Intangible assets: | | | | |
Software and software licenses | | $ | 3,874.3 | | | $ | 3,803.7 | |
Customer contracts and lists | | 1,192.9 | | | 1,181.6 | |
Other intangibles | | 242.2 | | | 242.0 | |
| | 5,309.4 | | | 5,227.3 | |
Less accumulated amortization: | | | | |
Software and software licenses | | (2,707.0) | | | (2,642.6) | |
Customer contracts and lists | | (1,030.5) | | | (1,007.6) | |
Other intangibles | | (241.6) | | | (241.1) | |
| | (3,979.1) | | | (3,891.3) | |
Intangible assets, net | | $ | 1,330.3 | | | $ | 1,336.0 | |
Other intangibles consist primarily of purchased rights, trademarks and trade names (acquired directly or through acquisitions). All intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is 5 years (6 years for software and software licenses, 3 years for customer contracts and lists, and 1 year for other intangibles). Amortization of intangible assets was $89.0 million and $95.7 million for the three months ended September 30, 2024 and 2023, respectively.
Estimated future amortization expenses of the Company's existing intangible assets are as follows: | | | | | |
| Amount |
Nine months ending June 30, 2025 | $ | 327.7 | |
Twelve months ending June 30, 2026 | $ | 265.5 | |
Twelve months ending June 30, 2027 | $ | 195.1 | |
Twelve months ending June 30, 2028 | $ | 152.2 | |
Twelve months ending June 30, 2029 | $ | 124.0 | |
Twelve months ending June 30, 2030 | $ | 86.0 | |
Note 9. Short-term Financing
The Company has a $4.55 billion, 364-day credit agreement that matures in June 2025 with a one year term-out option. The Company also has a $2.25 billion, five year credit facility that matures in June 2028 that 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 also has a five year, $3.5 billion credit facility maturing in June 2029 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 SOFR, 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 September 30, 2024 under the credit agreements.
The Company's U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to $10.3 billion in aggregate maturity value. The Company’s commercial paper program is rated A-1+ by Standard & Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At September 30, 2024, the Company had $4.4 billion of commercial paper outstanding, which was repaid in early October 2024. At June 30, 2024, the Company had no commercial paper borrowing outstanding. Details of the borrowings under the commercial paper program are as follows: | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2024 | | 2023 | | | | |
Average daily borrowings (in billions) | $ | 4.8 | | | $ | 4.1 | | | | | |
Weighted average interest rates | 5.3 | % | | 5.3 | % | | | | |
Weighted average maturity (approximately in days) | 2 days | | 2 days | | | | |
The Company’s U.S., Canadian and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. At September 30, 2024 and June 30, 2024, the Company had $679.1 million and $385.4 million of outstanding obligations related to reverse repurchase agreements. All outstanding reverse repurchase obligations matured and were fully paid in early October 2024 and early July 2024, respectively. The Company has $7.3 billion available on a committed basis under the U.S. reverse repurchase agreements. Details of the reverse repurchase agreements are as follows: | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2024 | | 2023 | | | | |
Average outstanding balances (in billions) | $ | 3.8 | | | $ | 1.4 | | | | | |
Weighted average interest rates | 5.3 | % | | 5.3 | % | | | | |
Note 10. Debt
The Company issued four series of fixed-rate notes with staggered maturities of 7 and 10 years totaling $4.0 billion (collectively the “Notes”). The Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
During the three months ended September 30, 2024, the Company issued $1.0 billion of senior notes due in 2034 bearing a fixed interest rate of 4.450%. In connection with the senior notes issuance, the Company terminated several derivative contracts in place to hedge exposure in changes in benchmark interest rates for the senior notes issued with an aggregate notional amount totaling $1.0 billion (of which $400.0 million were executed during the three months ended September 30, 2024 and $600.0 million were executed on the day of issuance). Since these derivative contracts were classified as cash flow hedges, the unamortized loss of $12.5 million was deferred in accumulated other comprehensive income and will be amortized to earnings over the life of the issued Notes as the interest payments are made.
The principal amounts and associated effective interest rates of the Notes and other debt as of September 30, 2024 and June 30, 2024, are as follows: | | | | | | | | | | | | | | | | | | | | |
Debt instrument | | Effective Interest Rate | | September 30, 2024 | | June 30, 2024 |
| | | | | | |
Fixed-rate 3.375% notes due September 15, 2025 | | 3.47% | | $ | 1,000.0 | | | $ | 1,000.0 | |
Fixed-rate 1.700% notes due May 15, 2028 | | 1.85% | | 1,000.0 | | | 1,000.0 | |
Fixed-rate 1.250% notes due September 1, 2030 | | 1.83% | | 1,000.0 | | | 1,000.0 | |
Fixed-rate 4.450% notes due September 9, 2034 | | 4.75% | | 1,000.0 | | | — | |
Other | | | | 3.7 | | | 4.1 | |
| | | | 4,003.7 | | | 3,004.1 | |
Less: current portion | | | | (1,000.3) | | | (1.1) | |
Less: unamortized discount and debt issuance costs | | | | (22.0) | | | (11.7) | |
Total long-term debt | | | | $ | 2,981.4 | | | $ | 2,991.3 | |
The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.
As of September 30, 2024, the fair value of the Notes, based on Level 2 inputs, was $3,779.3 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” in the Company's Annual Report on Form 10-K for fiscal 2024.
Note 11. Employee Benefit Plans
A. Stock-based Compensation Plans. Stock-based compensation consists of the following:
The Company's share-based compensation consists of stock options, time-based restricted stock, time-based restricted stock units, performance-based restricted stock, and performance-based restricted stock units. The Company also offers an employee stock purchase plan for eligible employees. Beginning in September 2022, the Company discontinued granting stock options, time-based restricted stock and performance-based restricted stock. Any such future awards will be grants of time-based restricted stock units and/or performance-based restricted stock units, depending on employee eligibility. Time-based restricted stock unit awards and performance-based restricted stock unit awards granted to employees with a home country of the United States are settled in stock, and for awards granted to employees with a home country outside the United States are generally settled in cash.
•Restricted Stock.
•Time-Based Restricted Stock Units. Time-based restricted stock units generally vest ratably over 3 years. Awards are generally forfeited if the employee ceases to be employed by the Company prior to vesting.
Time-based restricted stock unit awards granted to employees with a home country of the United States are settled in stock and cannot be transferred during the vesting period. Time-based restricted stock unit awards granted to employees with a home country outside the United States are generally settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the issuance of share-settled units
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. Compensation expense relating to the issuance of cash-settled units is recorded over the vesting period and is initially based on the fair value of the award on the grant date and is subsequently remeasured at each reporting date during the vesting period based on the change in the ADP stock price. Dividend cash equivalents are paid on share-settled units, and dividend cash equivalents are not paid on cash-settled units.
•Performance-Based Restricted Stock Units. Performance-based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 38 months. Under these programs, the Company communicates “target awards” at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 200% 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 units cannot be transferred and are settled in either cash or stock, depending on the employee's home country. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is remeasured at each reporting period during the vesting period based on the change in the ADP stock price. Compensation expense relating to the issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets. Dividend equivalents are paid on awards under the performance-based restricted stock unit program.
•Employee Stock Purchase Plan. The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory and, therefore, no compensation expense has been recorded.
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase program. The Company repurchased 1.4 million and 1.0 million shares in the three months ended September 30, 2024 and 2023, respectively. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
The following table represents pre-tax stock-based compensation expense for the three months ended September 30, 2024 and 2023, respectively:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| September 30, | | |
| 2024 | | 2023 | | | | |
Operating expenses | $ | 9.1 | | | $ | 7.4 | | | | | |
Selling, general and administrative expenses | 42.3 | | | 42.8 | | | | | |
Research and development | 9.2 | | | 8.6 | | | | | |
Total stock-based compensation expense | $ | 60.6 | | | $ | 58.8 | | | | | |
| | | | | | | |
| | | | | | | |
During the three months ended September 30, 2024, 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, 2024 | | 2,042 | | | $ | 159 | |
Options granted | | — | | | $ | — | |
Options exercised | | (498) | | | $ | 162 | |
Options forfeited/cancelled | | — | | | $ | — | |
Options outstanding at September 30, 2024 | | 1,544 | | | $ | 158 | |
| | | | |
| | | | |
| | | | |
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, 2024 | | 124 | | | 1,053 | |
Restricted shares/units granted | | — | | | 578 | |
Restricted shares/units vested | | (114) | | | (418) | |
Restricted shares/units forfeited | | — | | | (11) | |
Restricted shares/units outstanding at September 30, 2024 | | 10 | | | 1,202 | |
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, 2024 | | 88 | | | 753 | |
Restricted shares/units granted | | — | | | 293 | |
Restricted shares/units vested | | (58) | | | (293) | |
Restricted shares/units forfeited | | (2) | | | (2) | |
Restricted shares/units outstanding at September 30, 2024 | | 28 | | | 751 | |
B. Pension Plans
The components of net pension income were as follows: | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| September 30, | | | | |
| 2024 | | 2023 | | | | | | | | |
Service cost – benefits earned during the period | $ | 1.5 | | | $ | 1.3 | | | | | | | | | |
Interest cost on projected benefits | 21.9 | | | 21.2 | | | | | | | | | |
Expected return on plan assets | (29.0) | | | (29.0) | | | | | | | | | |
Net amortization and deferral | 0.7 | | | 0.7 | | | | | | | | | |
| | | | | | | | | | | |
Net pension (income)/expense | $ | (4.9) | | | $ | (5.8) | | | | | | | | | |
Note 12. Income Taxes
The effective tax rate for the three months ended September 30, 2024 and 2023 was 22.6% and 21.4%, respectively. The increase in the effective tax rate is primarily due to lower reserves for uncertain tax positions and a valuation allowance release in the three months ended September 30, 2023.
Note 13. Commitments and Contingencies
In May 2020, a putative class action complaint was filed against ADP, TotalSource and related defendants in the U.S. District Court, District of New Jersey. The complaint asserts violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with the ADP TotalSource Retirement Savings Plan’s fiduciary administrative and investment decision-making. The complaint seeks statutory and other unspecified monetary damages, injunctive relief and attorney’s fees. The Company is unable to estimate any reasonably possible loss, or range of loss, with respect to this matter. The Company is vigorously defending against this lawsuit.
The Company is subject to various claims, litigation, and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims, litigation and regulatory compliance matters against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.
It is not the Company’s business practice to enter into off-balance sheet arrangements. In the normal course of business, the Company may enter into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
Note 14. Stockholders' Equity
Changes in stockholders' equity by component are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2024 |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | AOCI | | Total |
Balance at June 30, 2024 | $ | 63.9 | | | $ | 2,406.9 | | | $ | 23,622.2 | | | $ | (19,737.1) | | | $ | (1,808.3) | | | $ | 4,547.6 | |
Net earnings | — | | | — | | | 956.3 | | | — | | | — | | | 956.3 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 708.1 | | | 708.1 | |
Stock-based compensation expense | — | | | 54.8 | | | — | | | — | | | — | | | 54.8 | |
Issuances relating to stock compensation plans | — | | | 66.9 | | | — | | | 49.7 | | | — | | | 116.6 | |
Treasury stock acquired (1.4 million shares repurchased) | — | | | — | | | — | | | (457.5) | | | — | | | (457.5) | |
Dividends declared ($1.40 per share) | — | | | — | | | (577.3) | | | — | | | — | | | (577.3) | |
| | | | | | | | | | | |
Balance at September 30, 2024 | $ | 63.9 | | | $ | 2,528.6 | | | $ | 24,001.2 | | | $ | (20,144.9) | | | $ | (1,100.2) | | | $ | 5,348.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2023 |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | AOCI | | Total |
Balance at June 30, 2023 | $ | 63.9 | | | $ | 2,102.3 | | | $ | 22,118.0 | | | $ | (18,469.3) | | | $ | (2,305.8) | | | $ | 3,509.1 | |
Net earnings | — | | | — | | | 859.4 | | | — | | | — | | | 859.4 | |
Other comprehensive income | — | | | — | | | — | | | — | | | (162.0) | | | (162.0) | |
Stock-based compensation expense | — | | | 54.0 | | | — | | | — | | | — | | | 54.0 | |
Issuances relating to stock compensation plans | — | | | 32.4 | | | — | | | 49.4 | | | — | | | 81.8 | |
Treasury stock acquired (1.0 million shares repurchased) | — | | | — | | | — | | | (347.5) | | | — | | | (347.5) | |
Dividends declared ($1.25 per share) | — | | | — | | | (522.0) | | | — | | | — | | | (522.0) | |
| | | | | | | | | | | |
Balance at September 30, 2023 | $ | 63.9 | | | $ | 2,188.7 | | | $ | 22,455.4 | | | $ | (18,767.4) | | | $ | (2,467.8) | | | $ | 3,472.8 | |
Note 15. Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”)
Changes in AOCI by component are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2024 |
| Currency Translation Adjustment | | Net Gains/Losses on Available-for-sale Securities | | Cash Flow Hedging Activities | | Pension Liability | | | | Accumulated Other Comprehensive (Loss) /Income |
Balance at June 30, 2024 | $ | (378.8) | | | $ | (1,178.0) | | | $ | (20.0) | | | $ | (231.5) | | | | | $ | (1,808.3) | |
Other comprehensive income/(loss) before reclassification adjustments | 49.2 | | | 864.4 | | | (12.5) | | | — | | | | | 901.1 | |
Tax effect | — | | | (197.9) | | | 3.1 | |