Analysis of Consolidated Operations
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Three Months Ended
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Nine Months Ended
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March 31,
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% Change
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March 31,
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% Change
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2019
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2018
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As Reported
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Constant Currency Basis
(Note 1)
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2019
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2018
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As Reported
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Constant Currency Basis
(Note 1)
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*As Restated
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*As Restated
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Total revenues
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$
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3,847.4
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$
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3,696.0
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4
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%
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5
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%
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|
$
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10,676.5
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$
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10,011.5
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7
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%
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7
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%
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Costs of revenues:
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Operating expenses
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1,874.5
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1,845.2
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2
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%
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3
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%
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5,370.4
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5,185.0
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4
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%
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4
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%
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Systems development and programming costs
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160.1
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163.9
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(2
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)%
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—
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%
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474.2
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481.5
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(2
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)%
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1
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%
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Depreciation and amortization
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77.2
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70.2
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10
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%
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11
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%
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221.5
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202.1
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10
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%
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10
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%
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Total costs of revenues
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2,111.8
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2,079.3
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2
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%
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3
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%
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6,066.1
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5,868.6
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3
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%
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|
4
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%
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Selling, general and administrative expenses
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750.4
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750.1
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—
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%
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1
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%
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2,209.4
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2,149.0
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3
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%
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3
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%
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Interest expense
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21.7
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18.6
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n/m
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n/m
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96.2
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74.1
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n/m
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n/m
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Total expenses
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2,883.9
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2,848.0
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1
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%
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2
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%
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8,371.7
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8,091.7
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3
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%
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|
4
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%
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Other income, net
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(21.0
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)
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(27.2
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)
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n/m
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n/m
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(67.5
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)
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(107.9
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)
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n/m
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n/m
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Earnings before income taxes
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$
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984.5
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$
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875.2
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12
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%
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13
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%
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$
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2,372.3
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$
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2,027.7
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17
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%
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17
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%
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Margin
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25.6
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%
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23.7
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%
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22.2
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%
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20.3
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%
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Provision for income taxes
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$
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230.8
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$
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214.2
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8
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%
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8
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%
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$
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554.9
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$
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283.7
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96
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%
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96
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%
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Effective tax rate
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23.4
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%
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24.5
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%
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23.4
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%
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14.0
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%
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Net earnings
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$
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753.7
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$
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661.0
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14
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%
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14
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%
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$
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1,817.4
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$
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1,744.0
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4
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%
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4
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%
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Diluted earnings per share
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$
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1.73
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$
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1.49
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16
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%
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16
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%
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$
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4.15
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$
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3.93
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6
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%
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6
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%
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*See
Note 2
of the Consolidated Financial Statements for a summary of adjustments.
n/m - not meaningful
Note 1 - Non GAAP Financial Measures
In addition to our U.S. GAAP results, we use the adjusted results and other non-GAAP metrics set forth in the table below to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods:
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Adjusted Financial Measure
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U.S. GAAP Measures
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Adjusted EBIT
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Net earnings
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Adjusted provision for income taxes
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Provision for income taxes
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Adjusted net earnings
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Net earnings
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Adjusted diluted earnings per share
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Diluted earnings per share
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Adjusted effective tax rate
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Effective tax rate
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Constant Currency Basis
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U.S. GAAP P&L line items
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We believe that the exclusion of the identified items below helps us reflect the fundamentals of our underlying business model and analyze results against our expectations and against prior period, and to plan for future periods by focusing on our underlying operations. We believe that the adjusted results provide relevant and useful information for investors because it allows investors to view performance in a manner similar to the method used by management and improves their ability to understand and assess our operating performance. The nature of these exclusions are for specific items that are not fundamental to our underlying business operations. Since these adjusted financial measures and other non-GAAP metrics are not measures of performance calculated in accordance with U.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to their corresponding U.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies.
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Three Months Ended
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Nine Months Ended
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March 31,
|
|
% Change
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|
March 31,
|
|
% Change
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|
2019
|
|
2018
|
|
As Reported
|
|
Constant Currency Basis
(g)
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2019
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2018
|
|
As Reported
|
|
Constant Currency Basis
(g)
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*As Restated
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*As Restated
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Net earnings
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$
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753.7
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$
|
661.0
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14
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%
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14
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%
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$
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1,817.4
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$
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1,744.0
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4
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%
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4
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%
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Adjustments:
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Provision for income taxes
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230.8
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214.2
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554.9
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283.7
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All other interest expense (a)
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14.8
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14.8
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44.8
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44.8
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All other interest income (a)
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(8.7
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)
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(6.1
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)
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(22.9
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)
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(16.7
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)
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Transformation initiatives (b)
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22.8
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39.7
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92.3
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39.7
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Proxy contest matters (c)
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—
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—
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—
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33.2
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Adjusted EBIT
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$
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1,013.4
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$
|
923.6
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10
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%
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10
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%
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|
$
|
2,486.5
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$
|
2,128.7
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|
17
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%
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17
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%
|
Adjusted EBIT Margin
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26.3
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%
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25.0
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%
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23.3
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%
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|
21.3
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%
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Provision for income taxes
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$
|
230.8
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$
|
214.2
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8
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%
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|
8
|
%
|
|
$
|
554.9
|
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|
$
|
283.7
|
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|
96
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%
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|
96
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%
|
Adjustments:
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|
|
|
|
|
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|
|
|
|
|
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|
|
Income tax benefit for transformation initiatives (d)
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5.6
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9.7
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22.8
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|
9.6
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|
Income tax benefit for proxy contest matters (d)
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|
—
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|
|
—
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|
|
|
|
|
|
—
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|
10.4
|
|
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|
Tax Cuts and Jobs Act (e)
|
|
—
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|
(4.5
|
)
|
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|
0.5
|
|
|
228.1
|
|
|
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|
|
Adjusted provision for income taxes
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|
$
|
236.4
|
|
|
$
|
219.4
|
|
|
8
|
%
|
|
8
|
%
|
|
$
|
578.2
|
|
|
$
|
531.8
|
|
|
9
|
%
|
|
9
|
%
|
Adjusted effective tax rate (f)
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|
23.5
|
%
|
|
24.0
|
%
|
|
|
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|
23.5
|
%
|
|
25.3
|
%
|
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Net earnings
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$
|
753.7
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$
|
661.0
|
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|
14
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%
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|
14
|
%
|
|
$
|
1,817.4
|
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|
$
|
1,744.0
|
|
|
4
|
%
|
|
4
|
%
|
Adjustments:
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|
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|
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|
|
|
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|
|
|
Transformation initiatives (b)
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22.8
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|
39.7
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|
92.3
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|
39.7
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|
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|
Income tax benefit for transformation initiatives (d)
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|
(5.6
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)
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|
(9.7
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)
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(22.8
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)
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(9.6
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)
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|
Proxy contest matters (c)
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—
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—
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—
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33.2
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|
Income tax benefit for proxy contest matters (d)
|
|
—
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—
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—
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(10.4
|
)
|
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|
Tax Cuts and Jobs Act (e)
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|
—
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4.5
|
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(0.5
|
)
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(228.1
|
)
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Adjusted net earnings
|
|
$
|
770.9
|
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$
|
695.5
|
|
|
11
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%
|
|
11
|
%
|
|
$
|
1,886.4
|
|
|
$
|
1,568.8
|
|
|
20
|
%
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Diluted EPS
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$
|
1.73
|
|
|
$
|
1.49
|
|
|
16
|
%
|
|
16
|
%
|
|
$
|
4.15
|
|
|
$
|
3.93
|
|
|
6
|
%
|
|
6
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation initiatives (b) (d)
|
|
0.04
|
|
|
0.07
|
|
|
|
|
|
|
0.16
|
|
|
0.07
|
|
|
|
|
|
Proxy contest matters (c) (d)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
0.05
|
|
|
|
|
|
Tax Cuts and Jobs Act (e)
|
|
—
|
|
|
0.01
|
|
|
|
|
|
|
—
|
|
|
(0.51
|
)
|
|
|
|
|
Adjusted diluted EPS
|
|
$
|
1.77
|
|
|
$
|
1.57
|
|
|
13
|
%
|
|
13
|
%
|
|
$
|
4.31
|
|
|
$
|
3.53
|
|
|
22
|
%
|
|
22
|
%
|
*See
Note 2
of the Consolidated Financial Statements for a summary of adjustments.
(a) We continue to include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model. The adjustments in the table above represent the interest income and interest expense that is not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”
(b) The charges within transformation initiatives are comprised of charges for our VERP, Service Alignment Initiative and other transformation initiatives. Charges related to our VERP in the three and
nine months ended
March 31, 2019
include
$7.8 million
and
$35.9 million
for non-cash pension settlement charge and special termination benefits, and
$2.2 million
and
$23.6 million
of expenses related to the continuing health coverage, respectively. We also recorded charges of
$20.5 million
and
$51.4 million
related to our other transformation initiatives during the three and
nine months ended
March 31, 2019
, respectively. These charges were partially offset by net reversals of charges and gain on sale of assets related to our Service Alignment Initiative of
$7.7 million
and
$18.6 million
for the three and
nine months ended
March 31, 2019
, respectively. Unlike other severance charges which are not included as an adjustment to get to adjusted results, these specific charges relate to actions that are part of our broad-based, company-wide transformation initiative. Refer to Note 5 and
Note 12
of the Consolidated Financial Statements for a description of the Service Alignment Initiative and charges associated with VERP, respectively.
(c) Represents non-operational costs relating to proxy contest matters.
(d) The tax benefit on the transformation initiatives and non-operational charges related to proxy contest matters was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.
(e) The net benefit for the
nine months ended
March 31, 2018
is comprised of the re-measurement of deferred tax balances resulting in a one-time benefit, primarily as a result of ASC 606, using the lower tax rates enacted under the Tax Cuts and Jobs Act (“Act”), adjustments to the one-time transition tax on the earnings and profits of our foreign subsidiaries, foreign withholding taxes, and a valuation allowance against our foreign tax credits which may not be realized under the Act. Refer to
Note 13
of our Consolidated Financial statements for additional detail.
(f) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings, plus our Adjusted provision for income taxes.
(g) “Constant currency basis” provides information that isolates the actual growth of our operations. “Constant currency basis” is determined by calculating the current year result using foreign exchange rates consistent with the prior year.
Total Revenues
Our revenues, as reported,
increased
4%
and
7%
for the three and
nine months ended
March 31, 2019
, respectively. For the three months ended
March 31, 2019
, our revenue growth includes
one
percentage point of pressure from foreign currency partially offset by benefits from acquisitions. For the
nine months ended
March 31, 2019
, our revenue growth includes
one
percentage point of pressure from foreign currency offset by benefits from acquisitions. Revenues for the three and
nine months ended
March 31, 2019
increased
primarily due to new business started from New Business Bookings and continued strong retention. Refer to “Analysis of Reportable Segments” for additional discussion of the increases in revenue for both of our reportable segments, Employer Services and Professional Employer Organization (“PEO”) Services.
Total revenues for the three months ended
March 31, 2019
include interest on funds held for clients of
$167.4 million
, as compared to
$134.8 million
for the three months ended
March 31, 2018
. The
increase
in the consolidated interest earned on funds held for clients resulted from an increase in the average interest rate earned to
2.2%
for the three months ended
March 31, 2019
, as compared to
1.9%
for the three months ended
March 31, 2018
, coupled with a
increase
in our average client funds balance of
4.1%
to
$30.0 billion
for the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
.
Total revenues for the
nine months ended
March 31, 2019
include interest on funds held for clients of
$415.0 million
, as compared to
$340.9 million
for the
nine months ended
March 31, 2018
. The
increase
in the consolidated interest earned on funds held for clients resulted from an increase in the average interest rate earned to
2.2%
during the
nine months ended
March 31, 2019
, as compared to
1.9%
during the
nine months ended
March 31, 2018
, coupled with an increase in our average client funds balance of
4.5%
to
$25.2 billion
for the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
.
Total Expenses
Our total expenses, as reported,
increased
1%
for the three months ended
March 31, 2019
, as compared to the same period in the prior year. The
increase
is primarily due to
an increase
in PEO Services benefits pass-through costs, increased selling and marketing expenses and costs related to our acquisitions. The increase was partially offset by the impact of foreign currency, decrease in charges related to transformation initiatives and operating efficiencies as a result of our continued successful execution on our broader transformation initiatives.
Our total expenses, as reported,
increased
3%
for the
nine months ended
March 31, 2019
, as compared to the same period in the prior year. The
increase
is primarily due to
an increase
in PEO Services benefits pass-through costs, costs related to our acquisitions, increased selling and marketing expenses and the impact of charges related to our transformation initiatives. The increase was partially offset by the impact of foreign currency, operating efficiencies as a result of our continued successful execution on our broader transformation initiatives and costs related to proxy contest matters in fiscal 2018.
Operating expenses, as reported,
increased
2%
and
4%
for the three and
nine months ended
March 31, 2019
, respectively, as compared to the three and
nine months ended
March 31, 2018
, respectively. PEO Services benefits pass-through costs were
$684.5 million
and
$626.4 million
for the three months ended
March 31, 2019
and
2018
, respectively, and
$2,011.1 million
and
$1,828.7 million
for the
nine months ended
March 31, 2019
and
2018
, respectively. Additionally, operating expenses
increase
d due to costs related to our acquisitions partially offset by the impact of foreign currency and operating efficiencies as a result of our continued successful execution on our broader transformation initiatives.
Systems development and programming costs, as reported,
decreased
2%
for the three and
nine months ended
March 31, 2019
, when compared to the prior year, due to the impact of foreign currency translation and reduced costs as a result of our transformation initiatives partially offset by increased investments in product innovation, primarily in our Next Gen platforms.
Selling, general and administrative expenses, as reported, was flat
for the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
. This was primarily due to increased selling and marketing expenses and increased costs related to our acquisitions offset by the decrease in charges related to transformation initiatives and the impact of foreign currency translation
for the three months ended
March 31, 2019
.
Selling, general and administrative expenses, as reported,
increased
3%
for the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
. The
increase
was due to increased selling and marketing expenses and increased costs related to our acquisitions and transformation initiatives. These increases were partially offset by efficiencies as a result of our transformation initiatives and the impact of foreign currency translation
for the
nine months ended
March 31, 2019
and costs related to proxy contest matters during the
nine months ended
March 31, 2018
.
Other Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
|
2019
|
|
2018
|
|
$ Change
|
|
2019
|
|
2018
|
|
$ Change
|
Interest income on corporate funds
|
$
|
(15.0
|
)
|
|
$
|
(11.0
|
)
|
|
$
|
4.0
|
|
|
$
|
(71.6
|
)
|
|
$
|
(59.4
|
)
|
|
$
|
12.2
|
|
Realized gains on available-for-sale securities
|
(0.6
|
)
|
|
(1.3
|
)
|
|
(0.7
|
)
|
|
(1.2
|
)
|
|
(1.9
|
)
|
|
(0.7
|
)
|
Realized losses on available-for-sale securities
|
0.5
|
|
|
1.6
|
|
|
1.1
|
|
|
2.6
|
|
|
3.2
|
|
|
0.6
|
|
Impairment of intangible assets
|
—
|
|
|
—
|
|
|
—
|
|
|
12.1
|
|
|
—
|
|
|
(12.1
|
)
|
Gain on sale of assets
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.1
|
)
|
|
(0.4
|
)
|
|
3.7
|
|
Non-service components of pension expense, net
|
(5.9
|
)
|
|
(16.5
|
)
|
|
(10.6
|
)
|
|
(5.3
|
)
|
|
(49.4
|
)
|
|
(44.1
|
)
|
Other income, net
|
$
|
(21.0
|
)
|
|
$
|
(27.2
|
)
|
|
$
|
(6.2
|
)
|
|
$
|
(67.5
|
)
|
|
$
|
(107.9
|
)
|
|
$
|
(40.4
|
)
|
During the three and
nine months ended
March 31, 2019
, we adopted Accounting Standards Update ("ASU") 2017-07 and as a result we reclassified the non-service cost components of the net periodic benefit cost from within the respective line items of our Statements of Consolidated Earnings to Other income, net. During the three months ended
March 31, 2019
, non-service components of pension expense included a
$7.8 million
non-cash settlement charge and special termination benefits, partially offset by
$13.7 million
related to other components of net periodic pension cost. During the
nine months ended
March 31, 2019
, non-service components of pension expense included a
$35.9 million
non-cash settlement charge and special termination benefits, partially offset by
$41.2 million
related to other components of net periodic pension cost. See
Note 2
and
Note 12
of our Consolidated Financial Statements for additional detail.
Other income, net,
decrease
d
$6.2 million
and
$40.4 million
for the three and
nine months ended
March 31, 2019
, as compared to the three and
nine months ended
March 31, 2018
. The
decrease
was primarily due to the charges within non-service
components of pension expense discussed above partially offset by the gain on sale of assets of
$4.1 million
in relation to the Service Alignment Initiative during the three months ended December 31, 2018. Additionally, during the three months ended September 30, 2018, we wrote down
$12.1 million
of internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition.
Earnings before Income Taxes
Earnings before income taxes, as reported,
increased
12%
and
17%
for the three and
nine months ended
March 31, 2019
, respectively, primarily due to the increases in revenues partially offset by increases in expenses discussed above.
Overall margin
increased
from
23.7%
for the three months ended
March 31, 2018
to
25.6%
for the three months ended
March 31, 2019
, primarily due to operational efficiencies aided by an increase in interest earned on funds held for clients and a decrease in charges of
$16.9 million
related to our transformation initiatives, partially offset by incremental pressure from growth in our benefits pass-throughs, increased selling and marketing expenses and costs related to our acquisitions during the three months ended
March 31, 2019
. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.
Overall margin
increased
from
20.3%
for the
nine months ended
March 31, 2018
to
22.2%
for the
nine months ended
March 31, 2019
, primarily due to operational efficiencies aided by an increase in interest earned on funds held for clients, and the impact of costs related to proxy contest matters in fiscal 2018, partially offset by additional charges of
$52.6 million
related to our transformation initiatives, incremental pressure from growth in our benefits pass-throughs, increased selling and marketing expenses and costs related to our acquisitions during the
nine months ended
March 31, 2019
. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.
Adjusted EBIT
For the three and
nine months ended
March 31, 2019
, adjusted EBIT
increase
d
10%
and
17%
, respectively, due to the increases in revenues offset by the increases in expenses discussed above. Overall adjusted EBIT margin increased due to operational efficiencies discussed above, aided by an increase in interest earned on funds held for clients, partially offset by incremental pressure from growth in our benefits pass-throughs, increased selling and marketing expenses and costs related to our acquisitions.
Provision for Income Taxes
The effective tax rate for the three months ended
March 31, 2019
and
2018
was
23.4%
and
24.5%
, respectively. The
decrease
in the effective tax rate is primarily due to the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act partially offset by the loss of qualified production activities tax deductions as a result of the Act in the three months ended
March 31, 2019
, the release of reserves for uncertain tax positions and the benefit of a tax accounting method change filed with the IRS in the three months ended
March 31, 2018
.
The effective tax rate for the
nine months ended
March 31, 2019
and
2018
was
23.4%
and
14.0%
, respectively. The
increase
in the effective tax rate is primarily due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the release of reserves for uncertain tax positions during the
nine months ended
March 31, 2018
and the loss of qualified production activities tax deductions as a result of the Act during the
nine months ended
March 31, 2019
. This is partially offset by reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act. Refer to
Note 13
, within the Notes to the Consolidated Financial Statements for further discussion.
Adjusted Provision for Income Taxes
The adjusted effective tax rate for the three months ended
March 31, 2019
and
2018
was
23.5%
and
24.0%
, respectively. The drivers of the
decrease
in the adjusted effective tax rate are the same as the effective tax rate as discussed above.
The adjusted effective tax rate for the
nine months ended
March 31, 2019
and
2018
was
23.5%
and
25.3%
, respectively. The
decrease
in the adjusted effective tax rate is primarily due to the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1%, partially offset by the loss of qualified production activities tax deductions as a
result of the Act in the
nine months ended
March 31, 2019
, the release of reserves for uncertain tax positions and the benefit of a tax accounting method change filed with the IRS in the
nine months ended
March 31, 2018
.
Net Earnings and Diluted Earnings per Share
Net earnings, as reported,
increase
d
14%
for the three months ended
March 31, 2019
due to an increase in earnings before income taxes combined with the reduction in our effective tax rate described above when compared to the three months ended March 31, 2018.
Net earnings, as reported, increased
4%
for the
nine months ended
March 31, 2019
due to an
increase
in earnings before income taxes described above partially offset by an increase in our effective tax rate, when compared to the
nine months ended
March 31, 2018
.
For the three and
nine months ended
March 31, 2019
, diluted earnings per share
increased
16%
and
6%
, respectively, as a result of an
increase
in net earnings and the impact of fewer shares outstanding, resulting from the repurchase of approximately
5.4 million
shares during the
nine months ended
March 31, 2019
and
5.3 million
shares for the
nine months ended
March 31, 2018
, partially offset by the issuances of shares under our employee benefit plans.
Adjusted Net Earnings and Adjusted Diluted Earnings per Share
Adjusted net earnings
increase
d
11%
for the three months ended
March 31, 2019
, when compared to the three months ended
March 31, 2018
, due to the
increase
in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above.
Adjusted net earnings
increase
d
20%
for the
nine months ended
March 31, 2019
, when compared to the
nine months ended
March 31, 2018
, due to the
increase
in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above.
For the three and
nine months ended
March 31, 2019
, our adjusted diluted EPS
increase
d
13%
and
22%
, respectively, and reflects the changes described above in our adjusted net earnings and shares outstanding.
Analysis of Reportable Segments
Beginning in the first quarter of fiscal 2019, our chief operating decision maker (“CODM”) reviews segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity. Additionally, the CODM reviews results with the effects of changes to certain corporate allocations. These changes represent a change in the measure of segment performance. Effective July 1, 2018, we adopted ASC 606 (see
Note 2
of the Consolidated Financial Statements). The segment results in the table below reflect the impacts of the adoption of ASC 606, the inclusion of client funds interest in our segments at actual interest rates, the inclusion of ADP Indemnity in the PEO segment, and changes to certain corporate allocations. We reflected these new segment measures beginning in the first quarter of fiscal 2019 and prior period segment results are restated for comparability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
March 31,
|
|
% Change
|
|
March 31,
|
|
% Change
|
|
2019
|
|
2018
|
|
As
Reported
|
|
Constant Currency Basis
|
|
2019
|
|
2018
|
|
As
Reported
|
|
Constant Currency Basis
|
Employer Services
|
$
|
2,719.1
|
|
|
$
|
2,628.5
|
|
|
3
|
%
|
|
5
|
%
|
|
$
|
7,507.7
|
|
|
$
|
7,105.7
|
|
|
6
|
%
|
|
7
|
%
|
PEO Services
|
1,134.7
|
|
|
1,067.3
|
|
|
6
|
%
|
|
6
|
%
|
|
3,180.7
|
|
|
2,909.5
|
|
|
9
|
%
|
|
9
|
%
|
Other
|
(6.4
|
)
|
|
0.2
|
|
|
n/m
|
|
|
n/m
|
|
|
(11.9
|
)
|
|
(3.7
|
)
|
|
n/m
|
|
|
n/m
|
|
|
$
|
3,847.4
|
|
|
$
|
3,696.0
|
|
|
4
|
%
|
|
5
|
%
|
|
$
|
10,676.5
|
|
|
$
|
10,011.5
|
|
|
7
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before Income Taxes
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
March 31,
|
|
% Change
|
|
March 31,
|
|
% Change
|
|
2019
|
|
2018
|
|
As Reported
|
|
Constant Currency Basis
|
|
2019
|
|
2018
|
|
As
Reported
|
|
Constant Currency Basis
|
Employer Services
|
$
|
962.1
|
|
|
$
|
870.1
|
|
|
11
|
%
|
|
11
|
%
|
|
$
|
2,333.0
|
|
|
$
|
1,988.4
|
|
|
17
|
%
|
|
17
|
%
|
PEO Services
|
155.7
|
|
|
147.1
|
|
|
6
|
%
|
|
6
|
%
|
|
458.6
|
|
|
403.6
|
|
|
14
|
%
|
|
14
|
%
|
Other
|
(133.3
|
)
|
|
(142.0
|
)
|
|
n/m
|
|
|
n/m
|
|
|
(419.3
|
)
|
|
(364.3
|
)
|
|
n/m
|
|
|
n/m
|
|
|
$
|
984.5
|
|
|
$
|
875.2
|
|
|
12
|
%
|
|
13
|
%
|
|
$
|
2,372.3
|
|
|
$
|
2,027.7
|
|
|
17
|
%
|
|
17
|
%
|
n/m - not meaningful
Employer Services
Revenues
Employer Services' revenues, as reported,
increase
d
3%
for the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
. Revenues
increase
d primarily due to new business started from New Business Bookings and continued strong retention. Our revenue growth includes
one
percentage point of pressure from foreign currency partially offset by benefits from acquisitions. Our revenues also
increase
d due to the interest earned on funds held for clients, which benefited from improvement in the average yield earned on our client fund investments and growth in average client funds balances, and an increase in the number of employees on our clients’ payrolls as our pays per control increased
3.1%
for the three months ended
March 31, 2019
as compared to the three months ended
March 31, 2018
. Our pays per control metric measures the number of employees on our clients' payrolls as measured on a same-store-sales basis utilizing a representative subset of payrolls ranging from small to large businesses that are reflective of a broad range of U.S. geographic regions.
Employer Services' revenues, as reported,
increase
d
6%
for the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
. Revenues
increase
d primarily due to new business started from New Business Bookings and continued strong retention. Our revenue growth includes
one
percentage point of pressure from foreign currency offset by benefits from acquisitions. Our revenues also
increase
d due to the interest earned on funds held for clients, which benefited from improvement in the average yield earned on our client fund investments and growth in average client funds balances, and an increase in the number of employees on our clients’ payrolls as our pays per control increased
2.3%
for the
nine months ended
March 31, 2019
as compared to the
nine months ended
March 31, 2018
.
Earnings before Income Taxes
Employer Services’ earnings before income taxes, as reported,
increase
d
11%
for the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
. This
increase
was due to increased revenues discussed above combined with
decrease
d expenses primarily due to operating efficiencies and impact from foreign currency partially offset by increased selling and marketing expenses and cost related to our acquisitions.
Employer Services' overall margin
increase
d from
33.1%
to
35.4%
for the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
. This
increase
was primarily due to operating efficiencies aided by an increase in interest earned on funds held for clients, partially offset by increased selling and marketing expenses and costs related to our acquisitions in the three months ended
March 31, 2019
. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.
Employer Services’ earnings before income taxes, as reported,
increase
d
17%
for the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
. This
increase
was due to increased revenues discussed above and partially offset by an
increase
in expenses of
$57.4 million
, which were primarily due to costs related to our acquisitions, increased selling and marketing expenses offset by operating efficiencies and impact from foreign currency.
Employer Services' overall margin
increase
d from
28.0%
to
31.1%
for the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
. This
increase
was primarily due to operating efficiencies aided by an increase in interest earned on funds held for clients, partially offset by increased selling and marketing expenses and costs related to our acquisitions in the
nine months ended
March 31, 2019
. The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.
PEO Services
Revenues
PEO Services' revenues, as reported,
increase
d
6%
and
9%
, respectively, for the three and
nine months ended
March 31, 2019
, as compared to the three and
nine months ended
March 31, 2018
. PEO Services' revenues, excluding benefits pass-through costs,
increase
d from
$440.9 million
and
$1,080.8 million
for the three and
nine months ended
March 31, 2018
, respectively, to
$450.2 million
and
$1,169.6 million
for the three and
nine months ended
March 31, 2019
, respectively. The
increase
was due to an
8%
and
9%
increase
in the average number of Worksite Employees for the three and
nine months ended
March 31, 2019
, respectively, driven by an increase in the number of new PEO Services clients and growth in our existing clients. The increase for the three months ended
March 31, 2019
was partially offset by the pull-forward of our State Unemployment Insurance (“SUI”) revenues in the second quarter of fiscal 2019.
PEO Services' revenues include benefits pass-through costs associated with benefits coverage which increased to
$684.5 million
and
$2,011.1 million
for the three and
nine months ended
March 31, 2019
, respectively, from
$626.4 million
and
$1,828.7 million
for the three and
nine months ended
March 31, 2018
, respectively.
Earnings before Income Taxes
PEO Services' earnings before income taxes
increase
d
6%
for the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
. The
increase
was due to the
increase
d revenues discussed above offset by
an increase
in expenses of
$58.8 million
. The
increase
in expenses was primarily related to
an increase
in benefits pass-through costs of
$58.1 million
described above.
PEO Services' overall margin
decreased
from
13.8%
to
13.7%
for the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
, due to increased selling expenses and changes in our estimated incurred losses related to ADP Indemnity in the three months ended
March 31, 2019
, as compared to the three months ended
March 31, 2018
.
PEO Services' earnings before income taxes
increase
d
14%
for the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
. The
increase
was due to the
increase
d revenues discussed above offset by
an increase
in expenses of
$216.2 million
. The
increase
in expenses was primarily related to
an increase
in benefits pass-through costs of
$182.4 million
described above.
PEO Services' overall margin
increased
from
13.9%
to
14.4%
for the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
, due to operating efficiencies partially offset by increased selling expenses and changes in our estimated incurred losses related to ADP Indemnity in the
nine months ended
March 31, 2019
, as compared to the
nine months ended
March 31, 2018
.
ADP Indemnity provides workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' Worksite Employees up to $1 million per occurrence. PEO Services has secured a workers’ compensation and employer’s liability insurance policy that has a $1 million per occurrence retention and, in fiscal years 2012 and prior, aggregate stop loss insurance that covers any aggregate losses within the $1 million retention that collectively exceed a certain level, from an admitted and licensed insurance company of AIG. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability, and changes in estimated ultimate incurred losses are included in the PEO segment. ADP Indemnity recorded a pre-tax benefit of approximately $6.0 million and $16.4 million for the three and
nine months ended
March 31, 2019
, respectively, compared to $9.4 million and $28.4 million for the three and
nine months ended
March 31, 2018
, respectively, which is primarily a result of changes in our estimated incurred losses. For the fiscal years 2013 to 2018, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited, to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limits our overall exposure incurred up to a certain limit. We believe the likelihood of ultimate losses exceeding this limit is remote. For the
nine months ended
March 31, 2019
, ADP Indemnity paid a premium of
$218.0
million
to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal
2019
policy year on terms substantially similar to the fiscal 2018 reinsurance policy.
Other
The primary components of the “Other” segment are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For corporate liquidity, we expect existing cash, cash equivalents, short-term marketable securities, long-term marketable securities, and cash flow from operations, together with our
$9.8 billion
of committed credit facilities and our ability to access both long-term and short-term debt financing from the capital markets, will be adequate to meet our operating, investing, and financing activities such as our regular quarterly dividends, share repurchases, and capital expenditures. Additionally, we will benefit from the Act and our estimated fiscal 2019 adjusted effective tax rate is
23.8%
.
For client funds liquidity, we have the ability to borrow through our financing arrangements under our U.S. short-term commercial paper program and our U.S., Canadian and United Kingdom short-term reverse repurchase agreements together with our
$9.8 billion
of committed credit facilities and our ability to use corporate liquidity when necessary to meet short-term funding requirements related to client funds obligations. Please see “Quantitative and Qualitative Disclosures about Market Risk” for a further discussion of the risks of our client funds extended investment strategy. See
Note 10
of our Consolidated Financial Statements for a description of our short-term financing including commercial paper.
As of
March 31, 2019
, cash and cash equivalents were
$1.8 billion
, which were primarily invested in time deposits and money market funds.
Operating, Investing and Financing Cash Flows
Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the
nine months ended
March 31, 2019
and
2018
, respectively, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2019
|
|
2018
|
|
$ Change
|
Cash provided by / (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,956.0
|
|
|
$
|
1,810.0
|
|
|
$
|
146.0
|
|
Investing activities
|
|
(1,197.9
|
)
|
|
(1,958.0
|
)
|
|
760.1
|
|
Financing activities
|
|
6,945.4
|
|
|
5,358.2
|
|
|
1,587.2
|
|
Effect of exchange rate changes on cash, cash equivalents, restricted cash, and restricted cash equivalents
|
|
(34.1
|
)
|
|
53.1
|
|
|
(87.2
|
)
|
Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents
|
|
$
|
7,669.4
|
|
|
$
|
5,263.3
|
|
|
$
|
2,406.1
|
|
Net cash flows provided by operating activities for the
nine months ended
March 31, 2019
and
March 31, 2018
include cash payments for reinsurance agreements of
$218.0
million and
$235.0
million, respectively, which represent the policy premium for the entire fiscal year. The increase in operating cash provided is primarily due to growth in our business offset by a net decrease in the components of working capital as compared to the
nine months ended
March 31, 2018
.
Net cash flows from investing activities changed primarily due to the timing of net proceeds from corporate and client funds marketable securities of
$355.0 million
, lower payments made related to acquisitions and reduced capital expenditures partially offset by the payments made related to acquisitions of intangibles in the
nine months ended
March 31, 2019
.
Net cash flows from financing activities changed primarily due to a
net increase
in client fund obligations of
$1,911.8 million
, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, more cash returned to shareholders via dividends and share repurchases for the
nine months ended
March 31, 2019
.
We purchased
5.4 million
shares of our common stock at an average price per share of
$139.11
during the
nine months ended
March 31, 2019
, as compared to purchases of
5.3 million
shares at an average price per share of
$110.79
during the
nine months ended
March 31, 2018
. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. 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.
Capital Resources and Client Funds Obligations
We have
$2.0 billion
of senior unsecured notes with maturity dates in 2020 and 2025. We may from time to time revisit the long-term debt market to refinance existing debt, finance investments including acquisitions for our growth, and maintain the appropriate capital structure. However, there can be no assurance that volatility in the global capital and credit markets would not impair our ability to access these markets on terms acceptable to us, or at all. See
Note 11
of our Consolidated Financial Statements for a description of our long-term financing.
Our U.S. short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. This commercial paper program provides for the issuance of up to
$9.8 billion
in aggregate maturity value. Our commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 (“P-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
March 31, 2019
and
June 30, 2018
, the Company had
no
commercial paper borrowing outstanding. For the three months ended
March 31, 2019
and
2018
, our average daily borrowings were
$1.1 billion
and
$1.0 billion
, respectively, at weighted average interest rates of
2.4%
and
1.5%
, respectively. For the
nine months ended
March 31, 2019
and
2018
, our average daily borrowings were
$2.9 billion
and
$2.8 billion
, respectively, at weighted average interest rates of
2.2%
and
1.2%
, respectively. The weighted average maturity of our commercial paper during the three and
nine months ended
March 31, 2019
was approximately
one day
and
two days
, respectively.
Our 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. We have successfully borrowed through the use of reverse repurchase agreements on an as-needed basis to meet short-term funding requirements related to client funds obligations. At
March 31, 2019
and
June 30, 2018
, there were
no
outstanding obligations related to the reverse repurchase agreements. For the three months ended
March 31, 2019
and
2018
, we had average outstanding balances under reverse repurchase agreements of
$93.1 million
and
$99.0 million
, at weighted average interest rates of
1.8%
and
1.2%
, respectively. For the
nine months ended
March 31, 2019
and
2018
, we had average outstanding balances under reverse repurchase agreements of
$306.1 million
and
$389.5 million
, respectively, at weighted average interest rates of
1.8%
and
1.1%
, respectively.
We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a
$3.8 billion
, 364-day credit agreement that matures in
June 2019
with a one year term-out option. In addition, we have a five-year
$2.25 billion
credit facility and a five-year
$3.75 billion
credit facility maturing in
June 2022
and
June 2023
, respectively, each with an accordion feature under which the aggregate commitment can be increased by
$500 million
, subject to the availability of additional commitments. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. We had no borrowings through
March 31, 2019
under the credit facilities. We believe that we currently meet all conditions set forth in the revolving credit agreements to borrow thereunder and we are not aware of any conditions that would prevent us from borrowing part or all of the
$9.8 billion
available to us under the revolving credit agreements. See
Note 10
of our Consolidated Financial Statements for a description of our short-term financing including credit facilities.
Our investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages, alternative-A mortgages, sub-prime auto loans or sub-prime home equity loans, collateralized debt obligations, collateralized loan obligations, credit default swaps, derivatives, auction rate securities, structured investment vehicles or non-investment grade fixed-income securities. We own AAA-rated senior tranches of fixed rate credit card, auto loan, equipment lease and rate
reduction receivables, secured predominantly by prime collateral. All collateral on asset-backed securities is performing as expected. In addition, we own senior debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations. See
Note 8
of our Consolidated Financial Statements for a description of our corporate investments and funds held for clients.
Capital expenditures for the
nine months ended
March 31, 2019
were $
116.8 million
, as compared to $
143.4 million
for the
nine months ended
March 31, 2018
. Capital expenditures for fiscal
2019
are expected to be about $
180 million
, as compared to $
192 million
in fiscal
2018
.