Notes to the Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation
The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc. and its subsidiaries (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Consolidated Financial Statements and footnotes thereto are unaudited. In the opinion of the Company’s management, the Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, that are necessary for a fair statement of the Company’s results for the interim periods.
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 other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto. Actual results may differ from those estimates. All relevant footnotes have been adjusted for discontinued operations.
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,
2013
(“fiscal
2013
”).
Certain prior period amounts have been reclassified to conform to the current-period presentation (see Note 16). These changes did not significantly affect reportable segment results.
Note 2. New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax position. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective adoption is permitted. The adoption of ASU 2013-11 will not have a material impact on the Company's results of operations, financial condition, or cash flows.
In July 2013, the Company adopted ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires entities to disclose the amount of income (loss) reclassified out of accumulated other comprehensive income to each respective line item on the income statement. The guidance allows companies to elect whether to disclose the reclassification either on the face of the income statement or in the notes to the financial statements, including cross-referencing other disclosures which provide additional details about these amounts. The Company has elected to disclose the reclassification in the notes to the financial statements with cross-references to other disclosures which provide additional details about the amounts. The adoption of ASU 2013-02 did not have an impact on the Company's consolidated results of operations, financial condition, or cash flows.
Note 3. Earnings per Share (“EPS”)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Effect of Employee Stock Option Shares
|
|
Effect of
Employee
Restricted
Stock
Shares
|
|
Diluted
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
$
|
328.6
|
|
|
|
|
|
|
|
|
$
|
328.6
|
|
Weighted average shares (in millions)
|
|
480.1
|
|
|
3.1
|
|
|
1.2
|
|
|
484.3
|
|
EPS from continuing operations
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
$
|
0.68
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
$
|
302.5
|
|
|
|
|
|
|
|
|
$
|
302.5
|
|
Weighted average shares (in millions)
|
|
483.5
|
|
|
3.6
|
|
|
1.3
|
|
|
488.4
|
|
EPS from continuing operations
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
$
|
0.62
|
|
Options to purchase
0.1 million
and
0.9 million
shares of common stock for the
three months ended
September 30, 2013
and
2012
, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market price of outstanding common shares for the respective periods.
Note 4. Other Income, Net
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
|
2013
|
|
2012
|
Interest income on corporate funds
|
$
|
(19.0
|
)
|
|
$
|
(23.8
|
)
|
Realized gains on available-for-sale securities
|
(4.3
|
)
|
|
(4.9
|
)
|
Realized losses on available-for-sale securities
|
0.8
|
|
|
0.4
|
|
Other, net
|
(0.1
|
)
|
|
(0.8
|
)
|
Other income, net
|
$
|
(22.6
|
)
|
|
$
|
(29.1
|
)
|
Note 5. Acquisitions
Assets acquired and liabilities assumed in business combinations were 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 have been 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 was 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 acquired
one
business during the
three months ended
September 30, 2013
for approximately
$12.5 million
, net of cash acquired. The acquisition was not material to the Company's results of operations, financial position, or cash flows.
The Company did not acquire any businesses during the
three months ended
September 30, 2012
.
The Company made contingent payments relating to previously consummated acquisitions of
$0.5 million
during the
three months ended
September 30, 2012
.
Note 6. Divestitures
On
December 17, 2012
, the Company completed the sale of its Taxware Enterprise Service business ("Taxware") for a pre-tax gain of
$58.8 million
, less costs to sell. In connection with the disposal of Taxware, the Company classified the results of this business as discontinued operations for the
three months ended
September 30, 2012
. Taxware was previously reported in the Employer Services segment.
Operating results for discontinued operations were as follows:
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
|
2012
|
Revenues
|
$
|
12.9
|
|
|
|
Earnings from discontinued operations before income taxes
|
4.5
|
|
Provision for income taxes
|
1.7
|
|
Net earnings from discontinued operations
|
$
|
2.8
|
|
There were no assets or liabilities of discontinued operations as of
September 30, 2013
or
June 30, 2013
.
Note 7. Corporate Investments and Funds Held for Clients
Corporate investments and funds held for clients at
September 30, 2013
and
June 30, 2013
were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value (A)
|
Type of issue:
|
|
|
|
|
|
|
|
Money market securities and other cash equivalents
|
$
|
2,498.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,498.0
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
7,719.6
|
|
|
166.4
|
|
|
(42.9
|
)
|
|
7,843.1
|
|
U.S. Treasury and direct obligations of
U.S. government agencies
|
5,983.3
|
|
|
142.5
|
|
|
(32.6
|
)
|
|
6,093.2
|
|
Asset-backed securities
|
1,351.8
|
|
|
4.7
|
|
|
(14.3
|
)
|
|
1,342.2
|
|
Canadian government obligations and
Canadian government agency obligations
|
1,024.7
|
|
|
10.0
|
|
|
(3.6
|
)
|
|
1,031.1
|
|
Canadian provincial bonds
|
702.5
|
|
|
20.3
|
|
|
(5.1
|
)
|
|
717.7
|
|
Municipal bonds
|
526.9
|
|
|
16.7
|
|
|
(3.6
|
)
|
|
540.0
|
|
Other securities
|
1,070.3
|
|
|
42.4
|
|
|
(2.2
|
)
|
|
1,110.5
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
18,379.1
|
|
|
403.0
|
|
|
(104.3
|
)
|
|
18,677.8
|
|
|
|
|
|
|
|
|
|
Total corporate investments and funds held for clients
|
$
|
20,877.1
|
|
|
$
|
403.0
|
|
|
$
|
(104.3
|
)
|
|
$
|
21,175.8
|
|
(A) Included within available-for-sale securities are corporate investments with fair values of
$3,090.9 million
and funds held for clients with fair values of
$15,586.9 million
. At
September 30, 2013
, Level 1 securities included
$8.0 million
of corporate investments classified within "Other securities." All remaining available-for-sale securities were included in Level 2.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value (B)
|
Type of issue:
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities and other cash equivalents
|
$
|
5,431.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,431.2
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
7,868.3
|
|
|
166.2
|
|
|
(56.7
|
)
|
|
7,977.8
|
|
U.S. Treasury and direct obligations of
U.S. government agencies
|
5,983.7
|
|
|
152.6
|
|
|
(37.4
|
)
|
|
6,098.9
|
|
Asset-backed securities
|
1,374.1
|
|
|
5.3
|
|
|
(19.7
|
)
|
|
1,359.7
|
|
Canadian government obligations and
Canadian government agency obligations
|
998.2
|
|
|
10.7
|
|
|
(4.5
|
)
|
|
1,004.4
|
|
Canadian provincial bonds
|
695.7
|
|
|
20.7
|
|
|
(5.6
|
)
|
|
710.8
|
|
Municipal bonds
|
536.9
|
|
|
16.7
|
|
|
(4.4
|
)
|
|
549.2
|
|
Other securities
|
1,094.4
|
|
|
46.3
|
|
|
(2.8
|
)
|
|
1,137.9
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
18,551.3
|
|
|
418.5
|
|
|
(131.1
|
)
|
|
18,838.7
|
|
|
|
|
|
|
|
|
|
Total corporate investments and funds held for clients
|
$
|
23,982.5
|
|
|
$
|
418.5
|
|
|
$
|
(131.1
|
)
|
|
$
|
24,269.9
|
|
(B) Included within available-for-sale securities are corporate investments with fair values of
$342.0 million
and funds held for clients with fair values of
$18,496.7 million
. At
June 30, 2013
, Level 1 securities included
$9.5 million
of corporate investments classified within "Other securities." All remaining 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" in the Company's Annual Report on Form 10-K for fiscal
2013
. The Company did not transfer any assets between Level 1 and Level 2 during the quarter ended
September 30, 2013
, or the year ended
June 30, 2013
. 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 3.
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, 2013
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
Unrealized
losses
less than
12 months
|
|
Fair market
value less than
12 months
|
|
Unrealized
losses
greater than
12 months
|
|
Fair market
value greater
than 12 months
|
|
Total gross
unrealized
losses
|
|
Total fair
market value
|
Corporate bonds
|
$
|
(41.7
|
)
|
|
$
|
2,224.3
|
|
|
$
|
(1.2
|
)
|
|
$
|
15.3
|
|
|
$
|
(42.9
|
)
|
|
$
|
2,239.6
|
|
U.S. Treasury and direct obligations of
U.S. government agencies
|
(32.6
|
)
|
|
1,361.7
|
|
|
—
|
|
|
—
|
|
|
(32.6
|
)
|
|
1,361.7
|
|
Asset-backed securities
|
(14.3
|
)
|
|
1,001.9
|
|
|
—
|
|
|
—
|
|
|
(14.3
|
)
|
|
1,001.9
|
|
Canadian government obligations and
Canadian government agency obligations
|
(3.6
|
)
|
|
456.8
|
|
|
—
|
|
|
—
|
|
|
(3.6
|
)
|
|
456.8
|
|
Canadian provincial bonds
|
(5.1
|
)
|
|
240.8
|
|
|
—
|
|
|
—
|
|
|
(5.1
|
)
|
|
240.8
|
|
Municipal bonds
|
(3.6
|
)
|
|
155.0
|
|
|
—
|
|
|
0.8
|
|
|
(3.6
|
)
|
|
155.8
|
|
Other securities
|
(2.2
|
)
|
|
89.1
|
|
|
—
|
|
|
—
|
|
|
(2.2
|
)
|
|
89.1
|
|
|
$
|
(103.1
|
)
|
|
$
|
5,529.6
|
|
|
$
|
(1.2
|
)
|
|
$
|
16.1
|
|
|
$
|
(104.3
|
)
|
|
$
|
5,545.7
|
|
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, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
Unrealized
losses
less than
12 months
|
|
Fair market
value less than
12 months
|
|
Unrealized
losses
greater than
12 months
|
|
Fair market
value greater
than 12 months
|
|
Total gross
unrealized
losses
|
|
Total fair
market value
|
Corporate bonds
|
$
|
(56.7
|
)
|
|
$
|
2,724.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(56.7
|
)
|
|
$
|
2,724.9
|
|
U.S. Treasury and direct obligations of U.S. government agencies
|
(37.4
|
)
|
|
1,374.6
|
|
|
—
|
|
|
—
|
|
|
(37.4
|
)
|
|
1,374.6
|
|
Asset-backed securities
|
(19.7
|
)
|
|
1,060.1
|
|
|
—
|
|
|
—
|
|
|
(19.7
|
)
|
|
1,060.1
|
|
Canadian government obligations and
Canadian government agency obligations
|
(4.5
|
)
|
|
444.7
|
|
|
—
|
|
|
—
|
|
|
(4.5
|
)
|
|
444.7
|
|
Canadian provincial bonds
|
(5.6
|
)
|
|
239.7
|
|
|
—
|
|
|
—
|
|
|
(5.6
|
)
|
|
239.7
|
|
Municipal bonds
|
(4.4
|
)
|
|
188.7
|
|
|
—
|
|
|
—
|
|
|
(4.4
|
)
|
|
188.7
|
|
Other securities
|
(2.8
|
)
|
|
109.3
|
|
|
—
|
|
|
—
|
|
|
(2.8
|
)
|
|
109.3
|
|
|
$
|
(131.1
|
)
|
|
$
|
6,142.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(131.1
|
)
|
|
$
|
6,142.0
|
|
At
September 30, 2013
, Corporate bonds included within total corporate investments and funds held for clients comprised 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
October 2013
to
June 2023
. U.S. Treasury and direct obligations of U.S. government agencies primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of
$4,390.7 million
and
$1,228.5 million
, respectively. At
June 30, 2013
, U.S. Treasury and direct obligations of U. S. government agencies primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks with fair values of
$4,325.4 million
and
$1,229.0 million
, respectively. U.S. Treasury and direct obligations of U.S. government agencies represent senior, unsecured, non-callable debt that primarily carries a credit rating of Aaa, as rated by Moody's, and AA+, as rated by Standard & Poor's, and has maturities ranging from
October 2013
through
May 2023
.
At
September 30, 2013
, asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed rate credit card, auto loan, and rate reduction receivables with fair values of
$898.0 million
,
$313.1 million
, and
$86.8 million
, respectively. At
June 30, 2013
, asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed rate credit card, auto loan, and rate reduction receivables with fair values of
$904.5 million
,
$315.7 million
, and
$95.4 million
, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables. The primary risk associated with these securities is the collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through
September 30, 2013
.
At
September 30, 2013
, other securities and their fair value primarily represent: AA and AAA rated supranational bonds of
$434.6 million
, AA and AAA rated sovereign bonds of
$417.3 million
, AAA rated commercial mortgage-backed securities of
$136.9 million
, and AA rated mortgage-backed securities of
$103.9 million
that are guaranteed by Federal National Mortgage Association ("Fannie Mae") or Federal Home Loan Mortgage Corporation ("Freddie Mac"). At
June 30, 2013
, other securities and their fair value primarily represent: AA and AAA rated supranational bonds of
$426.9 million
, AA and AAA rated sovereign bonds of
$415.4 million
, AAA rated commercial mortgage-backed securities of
$163.5 million
, and AA rated mortgage-backed securities of
$112.6 million
that are guaranteed by Fannie Mae or Freddie Mac. 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 or Freddie Mac as to the timely payment of principal and interest.
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
|
2013
|
|
2013
|
Corporate investments:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,149.0
|
|
|
$
|
1,699.1
|
|
Short-term marketable securities
|
|
541.9
|
|
|
28.0
|
|
Long-term marketable securities
|
|
2,549.0
|
|
|
314.0
|
|
Total corporate investments
|
|
$
|
4,239.9
|
|
|
$
|
2,041.1
|
|
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,
|
|
|
2013
|
|
2013
|
Funds held for clients:
|
|
|
|
|
Restricted cash and cash equivalents held to satisfy client funds obligations
|
|
$
|
1,349.0
|
|
|
$
|
3,732.1
|
|
Restricted short-term marketable securities held to satisfy client funds obligations
|
|
928.0
|
|
|
1,407.7
|
|
Restricted long-term marketable securities held to satisfy client funds obligations
|
|
14,658.9
|
|
|
17,089.0
|
|
Total funds held for clients
|
|
$
|
16,935.9
|
|
|
$
|
22,228.8
|
|
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
$16,718.0 million
and
$21,956.3 million
as of
September 30, 2013
and
June 30, 2013
, 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
90 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 decrease in client funds obligations in the financing activities section of the Statements of Consolidated Cash Flows.
Approximately
84%
of the available-for-sale securities held a AAA or AA rating at
September 30, 2013
, as rated by Moody's, Standard & Poor's and, for Canadian securities, Dominion Bond Rating Service. All available-for-sale securities were rated as investment grade at
September 30, 2013
.
Expected maturities of available-for-sale securities at
September 30, 2013
are as follows:
|
|
|
|
|
One year or less
|
$
|
1,469.9
|
|
One year to two years
|
4,105.8
|
|
Two years to three years
|
4,414.8
|
|
Three years to four years
|
3,162.3
|
|
After four years
|
5,525.0
|
|
|
|
|
Total available-for-sale securities
|
$
|
18,677.8
|
|
Note 8. Receivables
Accounts receivable, net, includes the Company's trade receivables, which are recorded based upon the amount the Company expects to receive from its clients, net of an allowance for doubtful accounts. The Company's receivables also include notes receivable for the financing of the sale of computer systems, primarily from auto, truck, motorcycle, marine, recreational vehicle, and heavy equipment retailers and manufacturers. Notes receivable are recorded based upon the amount the Company expects to receive from its clients, net of an allowance for doubtful accounts and unearned income. The allowance for doubtful accounts is the Company's best estimate of probable credit losses related to trade receivables and notes receivable based upon the aging of the receivables, historical collection data, internal assessments of credit quality, and the economic conditions in the automobile industry as well as in the economy as a whole. The Company charges off uncollectable amounts against the reserve in the period in which it determines they are uncollectable. Unearned income on notes receivable is amortized using the effective interest method.
The Company’s receivables, whose carrying value approximates fair value, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
June 30, 2013
|
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
Trade receivables
|
$
|
1,558.2
|
|
|
$
|
—
|
|
|
$
|
1,564.8
|
|
|
$
|
—
|
|
Notes receivable
|
90.5
|
|
|
156.2
|
|
|
91.0
|
|
|
154.7
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts - trade receivables
|
(50.9
|
)
|
|
—
|
|
|
(45.6
|
)
|
|
—
|
|
Allowance for doubtful accounts - notes receivable
|
(5.6
|
)
|
|
(9.7
|
)
|
|
(5.3
|
)
|
|
(9.0
|
)
|
Unearned income - notes receivable
|
(6.4
|
)
|
|
(6.5
|
)
|
|
(6.6
|
)
|
|
(7.0
|
)
|
|
$
|
1,585.8
|
|
|
$
|
140.0
|
|
|
$
|
1,598.3
|
|
|
$
|
138.7
|
|
The Company determines the allowance for doubtful accounts related to notes receivable based upon a specific reserve for known collection issues, as well as a non-specific reserve based upon aging, both of which are based upon history of such losses and current economic conditions. Based upon the Company's methodology, the notes receivable balances with specific and non-specific reserves and the specific and non-specific reserves associated with those balances are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
Notes Receivable
|
|
Reserve
|
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
Specific reserve
|
$
|
0.3
|
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
|
$
|
0.5
|
|
Non-specific reserve
|
90.2
|
|
|
155.7
|
|
|
5.3
|
|
|
9.2
|
|
|
$
|
90.5
|
|
|
$
|
156.2
|
|
|
$
|
5.6
|
|
|
$
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
Notes Receivable
|
|
Reserve
|
|
Current
|
|
Long-term
|
|
Current
|
|
Long-term
|
Specific reserve
|
$
|
0.3
|
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
|
$
|
0.5
|
|
Non-specific reserve
|
90.7
|
|
|
154.2
|
|
|
5.0
|
|
|
8.5
|
|
|
$
|
91.0
|
|
|
$
|
154.7
|
|
|
$
|
5.3
|
|
|
$
|
9.0
|
|
The rollforward of the allowance for doubtful accounts related to notes receivable is as follows:
|
|
|
|
|
|
|
|
|
|
Current
|
|
Long-term
|
Balance at June 30, 2013
|
$
|
5.3
|
|
|
$
|
9.0
|
|
Incremental provision
|
0.4
|
|
|
0.6
|
|
Recoveries and other
|
—
|
|
|
0.3
|
|
Chargeoffs
|
(0.1
|
)
|
|
(0.2
|
)
|
Balance at September 30, 2013
|
$
|
5.6
|
|
|
$
|
9.7
|
|
The allowance for doubtful accounts as a percentage of notes receivable was approximately
6%
as of
September 30, 2013
and
June 30, 2013
.
On an ongoing basis, the Company evaluates the credit quality of its financing receivables, utilizing aging of receivables, collection experience and charge-offs. In addition, the Company evaluates economic conditions in the auto industry and specific dealership matters, such as bankruptcy. As events related to a specific client dictate, the credit quality of a client is reevaluated. Approximately
99%
and 100% of notes receivable were current at
September 30, 2013
and
June 30, 2013
, respectively.
Note 9. Goodwill and Intangibles Assets, net
Changes in goodwill for the
three months ended
September 30,
2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Services
|
|
PEO
Services
|
|
Dealer
Services
|
|
Total
|
Balance at June 30, 2013 (A)
|
$
|
1,878.8
|
|
|
$
|
4.8
|
|
|
$
|
1,169.0
|
|
|
$
|
3,052.6
|
|
Additions and other adjustments, net
|
1.0
|
|
|
—
|
|
|
11.1
|
|
|
12.1
|
|
Currency translation adjustments
|
23.9
|
|
|
—
|
|
|
7.1
|
|
|
31.0
|
|
Balance at September 30, 2013 (A)
|
$
|
1,903.7
|
|
|
$
|
4.8
|
|
|
$
|
1,187.2
|
|
|
$
|
3,095.7
|
|
(A) The goodwill balance at
June 30, 2013
and
September 30, 2013
is net of accumulated impairment losses of
$42.7 million
related to the Employer Services segment.
Components of intangible assets, net, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
June 30,
|
|
|
2013
|
|
2013
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
Software and software licenses
|
|
$
|
1,545.8
|
|
|
$
|
1,511.1
|
|
Customer contracts and lists
|
|
858.8
|
|
|
848.9
|
|
Other intangibles
|
|
241.8
|
|
|
241.7
|
|
|
|
2,646.4
|
|
|
2,601.7
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
Software and software licenses
|
|
(1,267.0
|
)
|
|
(1,239.5
|
)
|
Customer contracts and lists
|
|
(552.4
|
)
|
|
(534.3
|
)
|
Other intangibles
|
|
(187.9
|
)
|
|
(184.7
|
)
|
|
|
(2,007.3
|
)
|
|
(1,958.5
|
)
|
Intangible assets, net
|
|
$
|
639.1
|
|
|
$
|
643.2
|
|
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
7 years
(
4 years
for software and software licenses,
10 years
for customer contracts and lists, and
7 years
for other intangibles). Amortization of intangible assets was
$41.5 million
and
$42.0 million
for the
three months ended
September 30,
2013
and
2012
, respectively.
Estimated future amortization expenses of the Company's existing intangible assets are as follows:
|
|
|
|
|
|
Amount
|
Nine months ending June 30, 2014
|
$
|
123.4
|
|
Twelve months ending June 30, 2015
|
$
|
136.9
|
|
Twelve months ending June 30, 2016
|
$
|
99.5
|
|
Twelve months ending June 30, 2017
|
$
|
71.6
|
|
Twelve months ending June 30, 2018
|
$
|
46.2
|
|
Twelve months ending June 30, 2019
|
$
|
32.1
|
|
Note 10. Short-term Financing
The Company has a
$2.0 billion
,
364
-day credit agreement with a group of lenders that matures in
June 2014
. In addition, the Company has a four-year
$3.25 billion
credit facility maturing in
June 2015
that contains an accordion feature under which the aggregate commitment can be increased by
$500.0 million
, subject to the availability of additional commitments. The Company also has an existing
$2.0 billion
five
-year credit facility that matures in
June 2018
that also contains an accordion feature under which the aggregate commitment can be increased by
$500.0 million
, subject to the availability of additional commitments. The interest rate applicable to committed borrowings is tied to LIBOR, the federal funds effective 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, 2013
under the credit agreements.
The Company’s 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 up to
$7.25 billion
in aggregate maturity value of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. 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
September 30, 2013
, the Company had
$2.5 billion
of commercial paper outstanding, which was subsequently repaid on
October 2, 2013
. At
June 30, 2013
, the Company had
no
commercial paper outstanding. For the
three months ended
September 30, 2013
and
2012
, the Company's average borrowings were
$3.1 billion
and
$3.2 billion
, respectively, at weighted average interest rates of
0.1%
and
0.2%
, respectively. The weighted average maturity of the Company’s commercial paper issued during
three months ended
September 30, 2013
approximated
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
. The Company has
$3.0 billion
available to it on a committed basis under these reverse repurchase agreements. At
September 30, 2013
, the Company had
$340.9 million
of outstanding obligations related to reverse repurchase agreements, which were subsequently repaid on
October 1, 2013
. At
June 30, 2013
, the Company had
$245.9 million
of obligations outstanding related to reverse repurchase agreements, which were repaid on
July 2, 2013
. For the
three months ended
September 30, 2013
and
2012
, the Company had average outstanding balances under reverse repurchase agreements of
$529.4 million
and
$534.5 million
, respectively, at weighted average interest rates of
0.5%
and
0.7%
, respectively.
Note 11. 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 prior to July 1, 2008 generally vest ratably over
five years
and 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 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. Employees are eligible to receive dividends on shares awarded under the time-based restricted stock program.
Time-based restricted stock units are settled in cash. 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. 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 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 measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends on shares awarded under the performance-based restricted stock program.
Performance-based restricted stock units are settled in cash. Compensation expense relating to the issuance of performance-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 one-year performance period, based upon the probability that the performance target will be met. No dividend equivalents are paid on awards under the performance-based restricted stock unit program.
|
|
•
|
Employee Stock Purchase Plan.
The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to
95%
of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory, and therefore no compensation expense has been recorded.
|
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company repurchased
4.2 million
shares in the
three months ended
September 30, 2013
as compared to
3.3 million
shares repurchased in the
three months ended
September 30, 2012
. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.
The following table represents stock-based compensation expense and related income tax benefits for the
three months ended
September 30, 2013
and
2012
, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
|
2013
|
|
2012
|
Operating expenses
|
$
|
4.6
|
|
|
$
|
3.7
|
|
Selling, general and administrative expenses
|
19.4
|
|
|
13.8
|
|
System development and programming costs
|
3.2
|
|
|
3.5
|
|
Total pretax stock-based compensation expense
|
$
|
27.2
|
|
|
$
|
21.0
|
|
|
|
|
|
Income tax benefit
|
$
|
9.7
|
|
|
$
|
7.5
|
|
As of
September 30, 2013
, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to
$8.1 million
,
$40.2 million
, and
$174.7 million
, respectively, which will be amortized over the weighted-average remaining requisite service periods of
1.9 years
,
1.7 years
, and
1.8 years
, respectively.
During the
three months ended
September 30, 2013
, 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, 2013
|
|
11,110
|
|
|
$
|
44
|
|
Options granted
|
|
52
|
|
|
$
|
74
|
|
Options exercised
|
|
(1,295
|
)
|
|
$
|
40
|
|
Options canceled
|
|
(6
|
)
|
|
$
|
48
|
|
Options outstanding at September 30, 2013
|
|
9,861
|
|
|
$
|
45
|
|
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, 2013
|
|
1,313
|
|
|
280
|
|
Restricted shares/units granted
|
|
1,226
|
|
|
308
|
|
Restricted shares/units vested
|
|
(41
|
)
|
|
—
|
|
Restricted shares/units forfeited
|
|
(17
|
)
|
|
(1
|
)
|
Restricted shares/units outstanding at September 30, 2013
|
|
2,481
|
|
|
587
|
|
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, 2013
|
|
521
|
|
|
38
|
|
Restricted shares/units granted
|
|
843
|
|
|
58
|
|
Restricted shares/units vested
|
|
—
|
|
|
(6
|
)
|
Restricted shares/units forfeited
|
|
(11
|
)
|
|
(1
|
)
|
Restricted shares/units outstanding at September 30, 2013
|
|
1,353
|
|
|
89
|
|
The fair value of each stock option issued is estimated on the date of grant using a binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial 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 model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the 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.
The fair value for stock options granted was estimated at the date of grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
|
2013
|
|
2012
|
Risk-free interest rate
|
1.5%
|
|
|
0.8%
|
|
Dividend yield
|
2.4%
|
|
|
2.7%
|
|
Weighted average volatility factor
|
23.6%
|
|
|
24.4%
|
|
Weighted average expected life (in years)
|
5.4
|
|
|
5.3
|
|
Weighted average fair value (in dollars)
|
$
|
12.44
|
|
|
$
|
8.90
|
|
B. Pension Plans
The components of net pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
|
2013
|
|
2012
|
Service cost – benefits earned during the period
|
$
|
16.6
|
|
|
$
|
16.8
|
|
Interest cost on projected benefits
|
15.6
|
|
|
13.8
|
|
Expected return on plan assets
|
(29.8
|
)
|
|
(27.4
|
)
|
Net amortization and deferral
|
5.0
|
|
|
7.7
|
|
Net pension expense
|
$
|
7.4
|
|
|
$
|
10.9
|
|
During the
three months ended
September 30, 2013
, the Company contributed
$77.3 million
to the pension plans and expects to contribute an additional
$6.9 million
to the pension plans during the remainder of the fiscal year ended June 30,
2014
.
Note 12. Income Taxes
The effective tax rate for the
three months ended
September 30, 2013
and
2012
was
33.9%
and
35.0%
, respectively. The decrease in the effective tax rate is due to the resolution of certain tax matters during the three months ended
September 30, 2013
.
Note 13. Commitments and Contingencies
On July 18, 2011, athenahealth, Inc. filed a patent infringement lawsuit against ADP AdvancedMD, Inc. ("ADP AdvancedMD"), a subsidiary of the Company, seeking monetary damages, injunctive relief, and costs. The allegations include a claim that ADP AdvancedMD's activities in providing medical practice management and billing and revenue management software and associated services to physicians and medical practice managers infringe a patent owned by athenahealth, Inc. The parties are currently engaged in the discovery process and are awaiting a claim construction order from the court. The Company believes that it has meritorious defenses to this lawsuit and continues to vigorously defend itself against the allegations.
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. The Company continues to investigate the allegations set forth in the Commissioner’s Charge and is cooperating with the EEOC’s investigation.
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. At this time, the Company is unable to estimate any reasonably possible loss, or range of reasonably possible loss, with respect to the matters described above. This is primarily because these matters involve complex issues subject to inherent uncertainty. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company.
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.
The Company has obligations related to purchase and maintenance agreements on the software, equipment, and other assets that were disclosed in its Annual Report on Form 10-K for the year ended June 30, 2013. In
August 2013
, the Company extended the term of a contract, which resulted in incremental obligations of
$64.5 million
and
$43.5 million
for the fiscal years ending June 30, 2018 and June 30, 2019, respectively.
Note 14. Foreign Currency Risk Management Programs
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. The Company had
no
derivative financial instruments outstanding at
September 30, 2013
or
June 30, 2013
.
Note 15. Reclassifications out of Accumulated Other Comprehensive Income
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
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
39.6
|
|
|
$
|
186.7
|
|
|
|
$
|
(210.9
|
)
|
|
|
$
|
15.4
|
|
Other comprehensive income before
reclassification adjustments
|
|
43.3
|
|
|
14.8
|
|
|
|
—
|
|
|
|
58.1
|
|
Tax effect
|
|
—
|
|
|
(5.0
|
)
|
|
|
—
|
|
|
|
(5.0
|
)
|
Reclassification adjustments to
net earnings
|
|
—
|
|
|
(3.5
|
)
|
(A)
|
|
5.1
|
|
(B)
|
|
1.6
|
|
Tax effect
|
|
—
|
|
|
1.3
|
|
|
|
(0.9
|
)
|
|
|
0.4
|
|
Balance at September 30, 2013
|
|
$
|
82.9
|
|
|
$
|
194.3
|
|
|
|
$
|
(206.7
|
)
|
|
|
$
|
70.5
|
|
(A) Reclassification adjustments out of AOCI are included within Other income, net, on the Statements of Consolidated Earnings.
(B) Reclassification adjustments out of AOCI are included in net pension expense (see Note 11).
Note 16. Interim Financial Data by Segment
Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following three reportable segments: Employer Services, PEO Services, and Dealer Services. The primary components of the “Other” segment are the results of operations of ADP Indemnity (a wholly-owned captive insurance company that provides workers’ compensation and employer’s liability deductible reimbursement insurance protection for PEO Services worksite employees), non-recurring gains and losses, miscellaneous processing services, such as customer financing transactions, and certain charges and expenses that have not been allocated to the reportable segments, such as stock-based compensation expense.
Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. 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.
To align financial reporting with the manner in which the Company's chief operating decision maker assesses performance and makes decisions about resources to be allocated to the reportable segments, effective July 1, 2013, the Company no longer allocates a cost of capital charge to its reportable segments and no longer adjusts the operating results of its reportable segments on a constant exchange rate basis. As a result of these changes, all prior period amounts have been reclassified to conform to the current period presentation. These changes did not significantly affect reportable segment results.
Segment Results:
|
|
|
|
|
|
|
|
|
|
Revenues from Continuing Operations
|
|
Three Months Ended
|
|
September 30,
|
|
2013
|
|
2012
|
Employer Services
|
$
|
1,968.0
|
|
|
$
|
1,818.9
|
|
PEO Services
|
505.1
|
|
|
451.9
|
|
Dealer Services
|
472.8
|
|
|
440.1
|
|
Other
|
0.1
|
|
|
0.7
|
|
Reconciling item:
|
|
|
|
Client fund interest
|
(106.4
|
)
|
|
(74.1
|
)
|
|
$
|
2,839.6
|
|
|
$
|
2,637.5
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from Continuing Operations before Income Taxes
|
|
Three Months Ended
|
|
September 30,
|
|
2013
|
|
2012
|
Employer Services
|
$
|
522.6
|
|
|
$
|
455.1
|
|
PEO Services
|
51.9
|
|
|
46.3
|
|
Dealer Services
|
96.8
|
|
|
85.8
|
|
Other
|
(67.6
|
)
|
|
(47.5
|
)
|
Reconciling item:
|
|
|
|
Client fund interest
|
(106.4
|
)
|
|
(74.1
|
)
|
|
$
|
497.3
|
|
|
$
|
465.6
|
|
During the
three months ended
September 30, 2013
and
2012
, Dealer Services earned
11%
of its segment revenues from one client. The Company did not have any customers that individually accounted for more than 10% of the Company's consolidated revenue from continuing operations.
Note 17. Subsequent Events
With the exception of the repayments of the reverse repurchase obligations and the commercial paper obligation in October 2013 discussed in Note 10, there are no further subsequent events for disclosure.