UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
[ ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5397
AUTOMATIC DATA PROCESSING, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
Delaware
22-1467904
One ADP Boulevard, Roseland, New Jersey
(Address of principal executive offices)
07068
(Zip Code)
Registrant's telephone number, including area code: 973-974-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.10 Par Value
(voting)
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered
NASDAQ Global Select Market
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ x ] No [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [ x ]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ x ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most
recently completed second fiscal quarter was approximately $33,868,790,841 . On July 29, 2016 there were 456,176,951 shares of Common Stock outstanding .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2016 Annual Meeting of Stockholders.
Part III
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
Signatures
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
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Item 1. Business
General
Part I
CORPORATE BACKGROUND
ADP ® was founded in 1949 on an innovative idea: to help business owners focus on core business activities by relieving them of certain administrative
tasks such as payroll. Automatic Data Processing, Inc. was incorporated in the State of Delaware in June 1961 and completed its initial public offering in
September 1961. A pioneer in business process outsourcing, today we are one of the world’s leading providers of human capital management (“HCM”) solutions
to employers, offering solutions to businesses of all sizes, whether they have simple or complex needs. We serve more than 650,000 clients in more than 110
countries and territories. Our common stock is listed on the NASDAQ Global Select Market® under the symbol “ADP.”
When we refer to “we,” “us,” “our,” “ADP,” or the “Company” in this Annual Report on Form 10-K, we mean Automatic Data Processing, Inc. and its
consolidated subsidiaries.
Available Information
Our corporate website, www.adp.com , provides materials for investors and information about our services. ADP’s Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders
are made available, free of charge, on our corporate website as soon as reasonably practicable after such reports have been filed with or furnished to the Securities
and Exchange Commission (“SEC”) and are also available at the SEC’s website at www.sec.gov . The content on any website referenced in this filing is not
incorporated by reference into this filing unless expressly noted otherwise.
ADP ’ s Mission and Strategy
BUSINESS OVERVIEW
ADP’s mission is to power organizations with insightful solutions that drive business success. Our commitment to service excellence lies at the core of
our relationship with each of our clients, whether a small, mid-sized or large organization, in one or multiple countries. We innovate to deliver new solutions that
anticipate client needs in all of our markets. We help businesses focus on and optimize the most important investment they make – their investment in their people.
From recruitment to talent management to retirement, our combination of expertise and technology offers insights that help our clients leverage HCM to drive
better business results.
Our business strategy is based upon the following three strategic pillars, which are designed to position ADP as the global market leader in technology-
enabled HCM services:
•
•
•
grow a complete suite of cloud-based HCM solutions;
grow and scale our market-leading Human Resources (“HR”) Business Process Outsourcing solutions by leveraging our platforms and processes; and
leverage our global presence to offer clients HCM solutions where they do business.
Reportable Segments
ADP’s two reportable business segments are Employer Services and Professional Employer Organization (“PEO”) Services. For financial data by
segment and by geographic area, see Note 13 to the “Consolidated Financial Statements” contained in this Annual Report on Form 10-K.
Employer
Services
. Our Employer Services segment offers a comprehensive range of HR Business Process Outsourcing and technology-enabled HCM
solutions. These offerings include:
•
•
•
•
Payroll Services
Benefits Administration
Talent Management
HR Management
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•
•
•
•
Time and Attendance Management
Insurance Services
Retirement Services
Tax and Compliance Services
Employer Services serves clients ranging from single-employee small businesses to large enterprises with multinational operations.
Professional
Employer
Organization
Services
. ADP’s PEO business, called ADP TotalSource ® , serves approximately 9,700 clients with
comprehensive employment administration outsourcing solutions through a relationship in which employees who work at a client’s location (referred to as
“worksite employees”) are co-employed by us and the client. ADP TotalSource is the largest PEO in the United States based on the number of worksite employees,
serving approximately 439,000 worksite employees in all 50 states.
Employer Services’ Products and Services
PRODUCTS AND SERVICES
Human
Capital
Management.
In order to serve the unique needs of diverse types of businesses, ADP provides a range of solutions, via a software- and
service-based delivery model, which businesses of all sizes can use to recruit, staff, pay, manage, and retain employees. We serve approximately 530,000 clients
via ADP’s strategic software as a service (“SaaS”) offerings, commonly referred to as “the cloud.” As a leader in the growing HR Business Process Outsourcing
market, we also offer seamless outsourcing solutions that enable our clients to outsource their HR, time and attendance management, payroll, and benefits
administration functions to ADP. In addition, our mobile applications enable businesses to process their payroll, and give more than 8.1 million of our clients’
employees convenient access to their HR information, via multiple mobile device platforms, around the world and in more than 27 languages. ADP has also
opened access to developers and system integrators through certain of our platforms’ Application Programming Interface Libraries. This access enables the
exchange of data housed in ADP's databases in order to create a unified HCM ecosystem informed by a single repository of workforce data.
Integrated HCM Solutions. Our premier suite of HCM products offers complete solutions to assist employers of all sizes in all stages of the employment
cycle, from recruitment to retirement:
•
•
•
•
•
RUN Powered by ADP® is used by more than approximately 470,000 small businesses in the United States. It combines a software platform for
managing small business payroll, HR management and tax compliance administration, with 24/7 service and support from our team of small business
experts. RUN Powered by ADP also integrates with other available ADP services, such as time and attendance tracking, workers’ compensation
insurance premium payment plans, and certain retirement plans.
ADP Workforce Now® is a flexible HCM solution used by more than 60,000 mid-sized businesses to manage their employees. More businesses use
ADP Workforce Now than any other HCM solution designed for mid-sized businesses.
ADP Vantage HCM® is a solution for large enterprises in the United States. It offers a comprehensive set of HCM capabilities within a single
solution that unifies the five major areas of HCM: HR management, benefits administration, payroll, time and attendance management, and talent
management.
ADP® GlobalView® HCM is a solution for multinational organizations of all sizes. As an integrated and flexible infrastructure supported by a team
of experts, ADP GlobalView HCM allows companies of all sizes – from those with small and mid-sized operations to the largest multinational
corporations – to standardize their HCM strategies globally (including payroll, HR, talent, time and benefits management) and adapt to changing
local needs, while helping to drive overall organizational agility and engagement.
Outside the United States, ADP offers comprehensive HCM solutions on local, country-specific platforms. These suites of services offer various
combinations of payroll, HR management, time and attendance management, and talent management, depending on the country in which the solution
is provided.
Payroll Services . ADP provides flexible payroll services to employers of all sizes, including the preparation of employee paychecks, pay statements,
supporting journals, summaries, and management reports. ADP provides employers with
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a wide range of payroll options, including entering their payroll data online with an internet-based solution or via a mobile device, and outsourcing their entire
payroll process to ADP. ADP also enables its clients to connect their major enterprise resource planning (“ERP”) applications with ADP’s outsourced payroll
services. Employers can choose a variety of payroll payment options ranging from professionally printed checks to ADP’s electronic wage payment and, in the
United States, payroll card solutions. On behalf of our clients, ADP prepares and files federal, state and local payroll tax returns and quarterly and annual Social
Security, Medicare, and federal, state and local income tax withholding reports in the United States, and prepares and files similar reports internationally . In
addition, as part of our payroll services globally, ADP supplies year-end regulatory and legislative tax statements and other forms to our clients’ employees. For
those clients who choose to process payroll in-house, in the United States, ADP also delivers our Payment and Compliance Solutions described below.
Benefits Administration . In the United States, ADP provides flexible solutions for outsourced employee benefits administration. Employee benefits
administration options in the United States include health and welfare administration, spending account management (health care spending accounts, dependent
care spending accounts, health reimbursement arrangements, health savings accounts, commuter benefits, and employee reimbursement services), Consolidated
Omnibus Budget Reconciliation Act (“COBRA”) administration, direct bill services, leave administration services, insurance carrier enrollment services, employee
communication services, and dependent verification services. In addition, ADP benefits administration solutions offer employers an efficient cloud-based
eligibility and enrollment system that provides their employees with tools, communications, and other resources they need to understand their benefits options and
make informed choices.
Talent Management . ADP’s Talent Management solutions simplify the talent acquisition and performance management process from recruitment to
ongoing employee development. ADP’s proprietary recruiting automation platform helps employers find, recruit, and hire talent quickly and cost effectively.
Employers can also meet their hiring needs by outsourcing their internal recruitment function to ADP. ADP’s pre-employment services enable employers to track
candidates, screen candidate backgrounds, and integrate data to facilitate the onboarding process for new hires. ADP’s performance and compensation management
applications provide tools to automate the entire performance management process, from goal planning to employee evaluations and help employers align
compensation with employee performance within budgetary constraints. When combined with ADP’s performance management applications, ADP’s career
development and succession management solutions offer tools that allow employees to build and update their employee profiles, search for potential positions
within the organization, and create forward-looking career paths, while enabling managers to identify and mitigate potential retention risks. In addition, ADP’s
learning management solutions provide a single point of access to learning and knowledge management capabilities via multiple online delivery methods.
Human Resources Management . Commonly referred to as Human Resource Information Systems (HRIS), ADP’s Human Resources Management
Solutions provide employers with a single system of record to support the entry, validation, maintenance, and reporting of data required for effective HR
management, such as employee names, addresses, job types, salary grades, employment history, and educational background. ADP’s Human Resources
Management Solutions can also be combined with ADP’s Talent Management Solutions and other HCM offerings.
Time and Attendance Management . ADP offers multiple options for employers of all sizes to collect employee time and attendance information,
including electronic timesheets, badge cards, biometric and touch-screen time clocks, telephone/interactive voice response, and mobile smartphones and tablets.
ADP’s time and attendance tracking tools simplify employee scheduling and automate the calculation and reporting of hours worked, helping employers enforce
leave and attendance policies more consistently, control overtime, and manage compliance with wage and hour regulations.
Insurance Services . ADP’s Insurance Services business, in conjunction with our licensed insurance agency, Automatic Data Processing Insurance
Agency, Inc., facilitates access in the United States to workers’ compensation and group health insurance for small and mid-sized clients through a variety of
insurance carriers. ADP’s automated Pay-by-Pay ® premium payment program calculates and collects workers’ compensation premium payments each pay period
in order to simplify this task for employers.
Retirement Services . ADP Retirement Services helps employers in the United States administer various types of retirement plans, such as 401(k)
(including “safe harbor” 401(k) and Roth 401(k)), profit sharing (including new comparability), SIMPLE IRA, and executive deferred compensation plans. ADP
Retirement Services offers a full service 401(k) plan program, which provides recordkeeping and administrative services, combined with an investment platform
offered through ADP Broker-Dealer, Inc. that gives our clients’ employees access to a wide range of non-proprietary investment options and online tools to
monitor the performance of their investments. ADP Retirement Services also offers trustee services through a third-party.
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Tax
and
Compliance
Services
ADP SmartCompliance . In the United States, the ADP SmartCompliance® solution integrates client data delivered from ADP integrated HCM platforms
or third-party payroll, HR and financial systems into a single, cloud-based platform enabling clients to consolidate their data in one location. ADP’s specialized
teams use the data and work with clients to help them manage changing regulatory landscapes and improve business processes. ADP SmartCompliance integrates
several HCM-related compliance processes, including health care reform under the Affordable Care Act, employment tax, wage payments, tax credits, wage
garnishments, unemployment claims, and employment verifications.
ADP SmartCompliance Employment Tax . As part of ADP’s employment tax services in the United States, ADP prepares and files employment tax
returns on our clients’ behalf with federal, state, and local tax agencies. In connection with these services, ADP collects federal, state, and local employment taxes
from clients and remits these taxes, as appropriate, to approximately 7,100 federal, state, and local tax agencies. ADP also responds to inquiries from tax agencies.
In addition to our full service employment tax solution, ADP offers a software solution for do-it-yourself employment tax management that can complement a
client’s in-house payroll system. In our fiscal year ended June 30, 2016 (“fiscal 2016 ”), ADP in the United States processed and delivered approximately 60
million employee year-end tax statements and approximately 53 million employer payroll tax returns and deposits, and moved approximately $1.7 trillion in client
funds to taxing and other agencies and our clients’ employees and other payees via electronic transfer, direct deposit, and check.
ADP SmartCompliance Wage Payments . In the United States, in addition to ADPCheck, ADP’s traditional payroll check offering, ADP offers electronic
payroll disbursement options that can be integrated with the client’s payroll systems and ERP applications. With ALINE Pay by ADP®, payroll can be disbursed
via ALINE Check by ADP®, direct deposit, or the ALINE Card by ADP®, a network-branded payroll card. ALINE Check by ADP provides employees with the
ability to receive wages from a self-completed payroll check that includes the standard features available with a traditionally issued payroll check. Using the
ALINE Card by ADP, employees can access their payroll funds immediately in several ways, including via a network member bank, an ATM or a point of sale
terminal. The ALINE Card by ADP can also be used to make purchases or pay bills. Additional features of the ALINE Card by ADP include the ability to load
additional funds onto the card, receive electronic payments such as government benefits or tax refunds, and transfer funds from the card to a bank account in the
United States.
ADP SmartCompliance Tax Credits . ADP helps clients in the United States take advantage of tax credit and incentive opportunities as they hire new
employees and expand or relocate their business operations, including federal, state, and local tax credits and incentives based on geography, demographics, and
other criteria, including work opportunity tax credits, federal empowerment zone employment credits, economic development incentives, training grants, and many
other credits and incentives. Integrating the entire employment tax credits process with clients’ existing hiring programs, ADP helps clients screen job applicants
and process eligibility forms, monitor and manage screening and form compliance, submit forms to state agencies for tax credit certification, calculate credits, and
produce a detailed audit trail.
ADP SmartCompliance Wage Garnishments . ADP offers an integrated solution to help our clients manage the wage garnishment process through
integration with their payroll systems. In the United States, ADP helps employers process and submit required correspondence and responses to federal and state
agencies, courts and third parties. In addition, ADP’s Wage Garnishment services in the United States include wage garnishment order evaluation and processing,
disbursement services and a call center to field garnishment-related inquiries from employees, payees, and other third parties.
ADP SmartCompliance Unemployment Claims . ADP offers a single-source solution to help manage the entire unemployment claims process in the
United States, including pre-separation planning, claim protests and administration, appeal processing, hearing representation, and audits of benefit charges.
ADP SmartCompliance Employment Verification. ADP offers an automated solution to securely provide credentialed verifiers with information to verify
employment and income such as when an employee applies for a loan, credit card, lease or government assistance.
ADP Health Compliance. ADP Health Compliance helps businesses manage crucial employer-related elements of the U.S. Patient Protection and
Affordable Care Act, including determining offer of coverage eligibility, assessing affordability, and providing a critical regulatory management solution. The
solution helps clients identify and address compliance issues that may result from interactions with government agencies.
6
Professional Employer Organization Services’ Products and Services
ADP TotalSource, ADP’s PEO business, offers small and mid-sized businesses a comprehensive HR outsourcing solution through a co-employment
model. As a PEO, ADP TotalSource provides complete HR management services while the client continues to direct the day-to-day job-related duties of the
employees. ADP TotalSource combines key HR management and employee benefits functions, including HR administration, employee benefits, and employer
liability management, into a single-source solution:
HR
Administration.
ADP TotalSource offers a variety of comprehensive HR administration services, such as:
•
•
•
•
•
•
•
employee recruitment and selection
payroll and tax administration
time and attendance management
benefits administration
employee training and development
online HR management tools
employee leave administration
Employee
Benefits
. Through the co-employment model, ADP TotalSource provides eligible worksite employees with access to:
•
•
•
•
•
•
group health, dental and vision coverage
a 401(k) retirement savings plan
health savings accounts
flexible spending accounts
group term life and disability coverage
an employee assistance program
Employer
Liability
Management.
ADP TotalSource helps clients manage and limit employment related risks and related costs by providing:
•
•
•
•
•
a workers’ compensation program
unemployment claims management
safety compliance guidance and access to safety training
access to employment practices liability insurance
guidance on compliance with federal, state and local employment laws and regulations
The scale of ADP TotalSource allows us to deliver a variety of benefits and services with efficiency and value typically out of reach to small and mid-sized
businesses. ADP TotalSource serves approximately 9,700 clients and approximately 439,000 worksite employees in all 50 states.
MARKETS AND SALES
Employer Services’ HCM solutions are offered in more than 110 countries and territories. The most material markets for our HCM solutions are the
United States, Canada and Europe and, for each market, we have both country-specific solutions and solutions based on our multi-country offerings, for employers
of different sizes and complexities. The major components of our HCM offering throughout these geographies are payroll, HR outsourcing and time and attendance
management. In addition, we offer wage and tax collection and remittance services in the United States, Canada, the United Kingdom, the Netherlands, France,
Australia, India, and China. PEO Services offers services exclusively in the United States.
We market our solutions primarily through our direct sales force. Employer Services also markets its solutions through indirect sales channels, such as
marketing relationships with banks and certified public accountants, among others. None of ADP’s major business groups has a single homogenous client base or
market. While concentrations of clients exist in specific industries, no one client or industry group is material to ADP’s overall revenues. ADP enjoys a leadership
position in each of its major service offerings and does not believe any major service or major business unit of ADP is subject to unique market risk.
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COMPETITION
The industries in which ADP operates are highly competitive. ADP knows of no reliable statistics by which it can determine the number of its
competitors, but it believes that it is one of the largest providers of HR outsourcing solutions in the world. Employer Services competes with other business
outsourcing companies, companies providing ERP services, providers of cloud-based HCM solutions and financial institutions. PEO Services competes with other
PEOs providing similar services, as well as business outsourcing companies, companies providing ERP services and providers of cloud-based HCM solutions.
Other competitive factors include a company’s in-house function, whereby a company installs and operates its own business processing systems.
Competition for business outsourcing solutions is primarily based on service and product quality, reputation, ease of use and accessibility of technology,
breadth of services and products, and price. We believe that ADP is competitive in each of these areas and that our commitment to service excellence, together
with our leading-edge technology, distinguishes us from our competitors.
INDUSTRY REGULATION
Our business is subject to a wide range of complex U.S. and foreign laws and regulations. In addition, many of our solutions are designed to assist clients
with their compliance with certain U.S. and foreign laws and regulations that apply to them. We have, and continue to enhance, compliance programs and policies
to monitor and address the legal and regulatory requirements applicable to our operations and client solutions, including dedicated compliance personnel and
training programs.
As one of the world’s largest providers of HR outsourcing solutions, our systems contain a significant amount of sensitive data related to clients,
employees of our clients, vendors and our employees. We are, therefore, subject to compliance obligations under federal, state and foreign privacy and data
security-related laws. For instance, in the United States, the Health Insurance Portability and Accountability Act of 1996 applies to our COBRA, flexible spending
account and insurance services businesses, and ADP TotalSource. We are also subject to federal, state and foreign security breach notification laws with respect to
both our own employee data and client employee data. Additionally, the changing nature of privacy laws in the United States, the European Union and elsewhere,
including the invalidation in the European Union of the Safe Harbor Principles for the transfer of personal data between the European Union and the United States
and the adoption by the European Union of a general data protection regulation, will impact our processing of personal information of our employees and on behalf
of our clients.
As part of our payroll and payroll tax management services, we move client funds to taxing authorities and our clients’ employees via electronic transfer,
direct deposit, prepaid access and ADPCheck. Certain elements of our U.S. money transmission activities, including our electronic payment and prepaid access
(payroll pay card) offerings, are subject to certain licensing requirements. In addition, our U.S. prepaid access offering is subject to the anti-money laundering and
reporting provisions of The Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2000 (the “BSA”). Elements of our money transmission
activities outside of the United States are subject to similar licensing and anti-money laundering and reporting laws and requirements in the countries in which we
provide such services. Our employee screening and selection services business offers background checking services that are subject to the Fair Credit Reporting
Act. ADP TotalSource is subject to various state licensing requirements. Because ADP TotalSource is a co-employer with respect to its clients’ worksite
employees, we may be subject to certain obligations and responsibilities of an employer under federal and state tax, insurance and employment laws.
In addition, many of our businesses offer solutions that assist our clients in complying with certain U.S. and foreign laws and regulations that apply to
them. Although these laws and regulations apply to our clients and not to ADP, changes in such laws or regulations may affect our operations, products and
services. For example, our HCM solutions help clients manage their compliance with certain requirements of the Patient Protection and Affordable Care Act in the
United States. Our COBRA administration services and flexible spending account services in the United States are designed to help our clients comply with
relevant federal guidelines relating to, respectively, employers’ benefits continuation obligations and the requirements of Section 125 of the Internal Revenue
Code. Similarly, our Tax Credit Services business, which helps clients in the United States take advantage of tax credit opportunities as they hire new employees,
is based on federal, state, or local tax laws and regulations allowing for tax credits.
The foregoing description does not include an exhaustive list of the laws and regulations governing and impacting our business. See the discussion
contained in the “Risk Factors” section in Part I, Item 1A of this Annual Report on Form 10-K for
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information regarding changes in laws and regulations that could have a materially adverse effect on our reputation, results of operations or financial condition or
have other adverse consequences.
CLIENTS AND CLIENT CONTRACTS
ADP provides its services to more than 650,000 clients. In fiscal 2016, no single client or group of affiliated clients accounted for revenues in excess of
2% of ADP’s annual consolidated revenues.
ADP is continuously in the process of performing implementation services for new clients. Depending on the service agreement and/or the size of the
client, the installation or conversion period for new clients could vary from a short period of time for a small Employer Services client (as little as 24 hours) to a
longer period for a large Employer Services client with multiple deliverables (generally six to twelve months), and in some cases may exceed two years for a large
GlobalView client or other large, complicated implementation. Although we monitor sales that have not yet been installed, we do not view this metric as material
to an understanding of our overall business in light of the recurring nature of our business. This metric is not a reported number, but it is used by management as a
planning tool to allocate resources needed to install services, and as a means of assessing our performance against the expectations of our clients. In addition, some
of our products and services are sold under longer term contracts with initial terms ranging from two to seven years. However, this anticipated future revenue under
contract is not a significant portion of ADP’s expected future revenue, is not a meaningful indicator of our future performance and is not used by management
internally to estimate ADP’s future revenue.
Our business is typically characterized by long-term client relationships that result in recurring revenue. Our services are provided under written price
quotations or service agreements having varying terms and conditions. No one price quotation or service agreement is material to ADP. ADP’s client retention is
estimated at approximately 11 years in Employer Services, and approximately 7 years in PEO Services, and has not varied significantly from period to period.
PRODUCT DEVELOPMENT
ADP continually upgrades, enhances, and expands its solutions and services. In general, new solutions and services supplement rather than replace our
existing solutions and services and, given our recurring revenue model, do not have a material and immediate effect on ADP's revenues. ADP believes that our
strategic solutions and services have significant remaining life cycles.
SYSTEMS DEVELOPMENT AND PROGRAMMING
During the fiscal years ended June 30, 2016 , 2015 , and 2014 , ADP invested approximately $818 million, $767 million, and $686 million, respectively,
from continuing operations, in systems development and programming, which includes expenses for activities such as client migrations to our new strategic
platforms, the development of new products and maintenance of our existing technologies, including purchases of new software and software licenses.
ADP is the licensee under a number of agreements for computer programs and databases. ADP’s business is not dependent upon a single license or group
of licenses. Third-party licenses, patents, trademarks, and franchises are not material to ADP’s business as a whole.
LICENSES
ADP employed approximately 57,000 persons as of June 30, 2016 .
NUMBER OF EMPLOYEES
Item 1A. Risk Factors
Our businesses routinely encounter and address risks, some of which may cause our future results to be different than we currently anticipate. Risk
factors described below represent our current view of some of the most important risks facing our businesses and are important to understanding our business. The
following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative
and Qualitative Disclosures About Market Risk and the consolidated financial statements and related notes included in this Annual Report on Form 10-K. This
discussion includes a number of forward-looking statements. You should refer to the description of the
9
qualifications and limitations on forward-looking statements in the first paragraph under Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in this Annual Report on Form 10-K. The level of importance of each of the following risks may vary from time to time, and any of
these risks may have a material effect on our business.
Failure to comply with, or changes in, laws and regulations applicable to our businesses could have a materially adverse effect on our reputation, results
of operations or financial condition, or have other adverse consequences
Our business is subject to a wide range of complex U.S. and foreign laws and regulations, including, but not limited to, the laws and regulations described
in the “Industry Regulation” section in Part I, Item 1 of this Annual Report on Form 10-K. Failure to comply with laws and regulations applicable to our operations
or client solutions could result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and the imposition
of consent orders or civil and criminal penalties, including fines, that could damage our reputation and have a materially adverse effect on our results of operation
or financial condition.
In addition, changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, may decrease our revenues
and earnings and may require us to change the manner in which we conduct some aspects of our business. For example, a change in regulations either decreasing
the amount of taxes to be withheld or allowing less time to remit taxes to government authorities would adversely impact average client balances and, thereby
adversely impact interest income from investing client funds before such funds are remitted to the applicable taxing authorities. Changes in taxation regulations
could adversely affect our effective tax rate and our net income. Changes in laws that govern the co-employment arrangement between a professional employer
organization and its worksite employees may require us to change the manner in which we conduct some aspects of our PEO business. Health care reform under
the U.S. Patient Protection and Affordable Care Act, as amended, related state laws, and the regulations adopted or to be adopted thereunder, have the potential to
impact substantially the way that employers provide health insurance to employees and the health insurance market for the small and mid-sized businesses that
constitute our PEO business’s clients and prospects. We are unable to determine the ultimate impact that health care reform will have on our PEO business and our
ability to attract and retain PEO clients.
Amendments to money transmitter statutes have required us to obtain licenses in some jurisdictions. The adoption of new money transmitter statutes in
other jurisdictions, changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, or
disagreement by a regulatory authority with our interpretation of such existing statutes or regulations, could require additional registration or licensing, limit certain
of our business activities until they are appropriately licensed, and expose us to financial penalties. These occurrences could also require changes to the manner in
which we conduct some aspects of our money movement business or client funds investment strategy, which could adversely impact interest income from
investing client funds before such funds are remitted.
Failure to comply with anti-corruption laws and regulations, anti-money laundering laws and regulations, economic and trade sanctions, and similar laws
could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences
Regulators worldwide are exercising heightened scrutiny with respect to anti-corruption, economic and trade sanctions, and anti-money laundering laws
and regulations. Such heightened scrutiny has resulted in more aggressive enforcement of such laws and more burdensome regulations, which could adversely
impact our business. We operate our business around the world, including in numerous developing economies where companies and government officials are more
likely to engage in business practices that are prohibited by domestic and foreign laws and regulations, including the United States Foreign Corrupt Practices Act
(the “FCPA”) and the U.K. Bribery Act. Such laws generally prohibit improper payments or offers of payments to foreign government officials and leaders of
political parties, and in some cases, to other persons, for the purpose of obtaining or retaining business. We are also subject to economic and trade sanctions
programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), which prohibit or restrict transactions or
dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially designated,
including narcotics traffickers and terrorists or terrorist organizations, among others. In addition, some of our businesses in the U.S. and a number of countries in
which we operate are subject to anti-money laundering laws and regulations, including, for example, the BSA. Among other things, the BSA requires certain
financial institutions, including banks and money services businesses (such as money transmitters and providers of prepaid access), to develop and implement risk-
based anti-money laundering programs, report large cash transactions and suspicious activity, and maintain transaction records. We have registered our payroll
card business with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) as a provider of prepaid access pursuant to a FinCEN
regulation.
We have implemented policies and procedures to monitor and address compliance with applicable anti-corruption, economic and trade sanctions and anti-
money laundering laws and regulations, and we are continuously in the process of
10
reviewing, upgrading and enhancing certain of our policies and procedures; however, there can be no assurance that none of our employees, consultants or agents
will take actions in violation of our policies, for which we may be ultimately responsible, or that our policies and procedures will be adequate or will be determined
to be adequate by regulators. Any violations of applicable anti-corruption, economic and trade sanctions or anti-money laundering laws or regulations could limit
certain of our business activities until they are satisfactorily remediated and could result in civil and criminal penalties, including fines, that could damage our
reputation and have a materially adverse effect on our results of operation or financial condition. Further, bank regulators are imposing additional and stricter
requirements on banks to ensure they are meeting their BSA obligations, and banks are increasingly viewing money services businesses, as a class, to be higher
risk customers for money laundering. As a result, our banking partners may limit the scope of services they provide to us or may impose additional requirements on
us. These regulatory restrictions on banks and changes to banks’ internal risk-based policies and procedures may result in a decrease in the number of banks that
may do business with us, may require us to change the manner in which we conduct some aspects of our business, may decrease our revenues and earnings and
could have a materially adverse effect on our results of operation or financial condition.
Failure to comply with data privacy laws and regulations could have a materially adverse effect on our reputation, results of operations or financial
condition, or have other adverse consequences
The collection, hosting, transfer, disclosure, use, storage and security of personal information required to provide our services is subject to federal, state
and foreign data privacy laws. These laws, which are not uniform, do one or more of the following: regulate the collection, transfer (including in some cases, the
transfer outside the country of collection), processing, storage, use and disclosure of personal information, require notice to individuals of privacy practices; give
individuals certain access and correction rights with respect to their personal information; and prevent the use or disclosure of personal information for secondary
purposes such as marketing. Under certain circumstances, some of these laws require us to provide notification to affected individuals, data protection authorities
and/or other regulators in the event of a data breach. In many cases, these laws apply not only to third-party transactions, but also to transfers of information among
the Company and its subsidiaries. In addition, the European Union adopted a comprehensive general data privacy regulation (the “GDPR”) in May 2016 that will
replace the current EU Data Protection Directive and related country-specific legislation. The GDPR will become fully effective in May 2018. We are analyzing
the GDPR to determine its potential effects on our business practices, and are awaiting anticipated guidance from European Union regulators. Complying with the
enhanced obligations imposed by the GDPR may result in significant costs to our business and require us to amend certain of our business practices. Further,
enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The future enactment
of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have a materially adverse impact on us through increased
costs or restrictions on our businesses and noncompliance could result in regulatory penalties and significant legal liability.
Our businesses collect, host, transfer, disclose, use, store and secure personal and business information, and a security or privacy breach may damage or
disrupt our businesses, result in the disclosure of confidential information, damage our reputation, increase our costs and cause losses
In connection with our business, we collect, host, transfer, disclose, use, store and secure large amounts of personal and business information about our
clients, employees of our clients, our vendors and our employees, contractors and temporary staff, including payroll information, health care information, personal
and business financial data, social security numbers and their foreign equivalents, bank account numbers, tax information and other sensitive personal and business
information.
We are focused on ensuring that we safeguard and protect personal and business information, and we devote significant resources to maintain and
regularly update our systems and processes. Nonetheless, globally, attacks on information technology systems continue to grow in frequency, complexity and
sophistication, and we are regularly targeted by unauthorized parties using malicious tactics, code and viruses. Although this is a global problem, it may affect our
businesses more than other businesses because malevolent third-parties may focus on the amount and type of personal and business information that our businesses
collect, host, use, transmit and store.
We have programs in place to prevent, detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access,
disable or degrade service, or sabotage systems change frequently, are increasingly more complex and sophisticated and may be difficult to detect for long periods
of time, we may be unable to anticipate these techniques or implement adequate or timely preventive measures.
In addition, hardware, software or applications we develop or procure from third-parties may contain defects in design or manufacture or other problems
that could unexpectedly compromise the confidentiality, integrity or availability of data or
11
our systems. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third-parties with whom we do business, through fraud,
trickery, or other methods of deceiving our employees, contractors, and temporary staff. As these threats continue to evolve, we may be required to invest
significant additional resources to modify and enhance our information security and controls and to investigate and remediate any security vulnerabilities. In
addition, while our operating environments are designed to safeguard and protect personal and business information, we do not have the ability to monitor the
implementation or effectiveness of any safeguards by our clients, vendors or their respective employees, and, in any event, third-parties may be able to circumvent
those security measures.
Any cyber attack, unauthorized intrusion, malicious software infiltration, network disruption, denial of service, corruption of data, theft of non-public or
other sensitive information, or similar act by a malevolent party, or inadvertent acts by our own employees, contractors or temporary staff, could result in the
disclosure or misuse of confidential or proprietary information, and could have a materially adverse effect on our business operations, or that of our clients, create
financial liability, regulatory sanction or a loss of confidence in our ability to serve clients, or cause current or potential clients to choose another service provider.
Although we believe that we maintain a robust program of information security and controls and none of the threats that we have encountered to date have
materially impacted us, a data security incident could have a materially adverse effect on our business, results of operations and financial condition. While ADP
maintains insurance coverage that, subject to policy terms and conditions and a significant self-insured retention, is designed to address losses or claims that may
arise in connection with certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the
continually evolving area of cyber risk.
Our systems may be subject to disruptions that could have a materially adverse effect on our business and reputation
Many of our businesses are highly dependent on our ability to process, on a daily basis, a large number of complicated transactions. We rely heavily on
our payroll, financial, accounting, and other data processing systems. If any of these systems fails to operate properly or becomes disabled even for a brief period
of time, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or damage to our reputation, any of which could
have a materially adverse effect on our results of operation or financial condition. We have disaster recovery, business continuity, and crisis management plans and
procedures designed to protect our businesses against a multitude of events, including natural disasters, military or terrorist actions, power or communication
failures, or similar events. Despite our preparations, our plans may not be successful in preventing the loss of client data, service interruptions, disruptions to our
operations, or damage to our important facilities.
If we fail to adapt our technology and services to meet client needs and preferences, the demand for our solutions and services may diminish
Our businesses operate in industries that are subject to rapid technological advances and changing client needs and preferences. In order to remain
competitive and responsive to client demands, we continually upgrade, enhance, and expand our existing solutions and services. If we fail to respond successfully
to technology challenges and client needs and preferences, the demand for our solutions and services may diminish.
Political and economic factors may adversely affect our business and financial results
Trade, monetary and fiscal policies, and political and economic conditions may substantially change, and credit markets may experience periods of
constriction and volatility. When there is a slowdown in the economy, employment levels and interest rates may decrease with a corresponding impact on our
businesses. Clients may react to worsening conditions by reducing their spending on payroll and other outsourcing services or renegotiating their contracts with us,
which may adversely affect our business and financial results.
We invest our client funds in liquid, investment-grade marketable securities, money market securities, and other cash equivalents. Nevertheless, our client
fund assets are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated, individually or in unison, during periods of
unusual financial market volatility. In addition, as part of our client funds investment strategy, we extend the maturities of our investment portfolio for client funds
and utilize short-term financing arrangements to satisfy our short-term funding requirements related to client funds obligations. In order to satisfy these short term
funding requirements, we maintain access to various sources of liquidity, including borrowings under our commercial paper program and our committed credit
facilities, our ability to execute reverse repurchase transactions and corporate cash balances. A reduction in the availability of any such financing during periods of
disruption in the financial
12
markets or otherwise may require us to sell client fund assets to satisfy our short-term funding requirements, which may result in the recognition of losses and
adversely impact our results of operations, financial condition and cash flow.
We are dependent upon various large banks to execute electronic payments and wire transfers as part of our client payroll, tax and other money movement
services. While we have contingency plans in place for bank failures, a systemic shutdown of the banking industry would impede our ability to process funds on
behalf of our payroll, tax and other money movement services clients and could have an adverse impact on our financial results and liquidity.
We derive a significant portion of our revenues and operating income outside of the United States and, as a result, we are exposed to market risk from
changes in foreign currency exchange rates that could impact our results of operations, financial position and cash flows.
Change in our credit ratings could adversely impact our operations and lower our profitability
The major credit rating agencies periodically evaluate our creditworthiness and have given us very strong, investment grade long-term debt ratings and
the highest commercial paper ratings. Failure to maintain high credit ratings on long-term and short-term debt could increase our cost of borrowing, reduce our
ability to obtain intra-day borrowing required by our Employer Services business, and adversely impact our results of operations.
If the distribution of CDK Global® common stock to ADP’s stockholders does not qualify as a tax-free spinoff, we could incur substantial liabilities and
may not be fully indemnified for such liabilities
On September 30, 2014, the Company completed the tax-free spinoff of its former Dealer Services business through the distribution of all of the issued
and outstanding common stock of CDK Global, Inc. (“CDK Global”) to ADP’s stockholders. CDK Global was formed to hold ADP’s former Dealer Services
business and, as a result of the distribution, became an independent public company trading under the symbol “CDK” on the NASDAQ Global Select Market. Prior
to completing the spinoff of CDK Global, ADP received an opinion from Paul, Weiss, Rifkind, Wharton & Garrison LLP, its counsel, to the effect that, based on
certain facts, assumptions, representations and undertakings set forth in the opinion, the distribution qualified as a transaction that is tax-free under Section 355 and
other related provisions of the Internal Revenue Code. ADP also received a private letter ruling from the IRS with respect to certain discrete and significant issues
arising in connection with the transactions effected in connection with the separation and distribution. The opinion and the ruling were based upon various factual
representations and assumptions, as well as certain undertakings made by ADP and CDK Global. If any of those factual representations or assumptions was untrue
or incomplete in any material respect, any undertaking is not complied with, or the facts upon which the opinion and the ruling were based were materially
different from the facts at the time of the distribution, the distribution may not qualify for tax-free treatment. Although a private letter ruling from the IRS generally
is binding on the IRS, the IRS did not rule that the distribution satisfies every requirement for a tax-free distribution. Opinions of counsel are not binding on the
IRS or the courts. As a result, the conclusions expressed in an opinion of counsel could be challenged by the IRS, and if the IRS prevails in such challenge, the tax
consequences to ADP’s stockholders that received CDK Global common stock pursuant to the distribution could be materially less favorable.
If the distribution were determined not to qualify as a tax-free transaction under Section 355 of the Code, each United States holder of ADP common
stock that received CDK Global common stock pursuant to the distribution generally would be treated as receiving a distribution taxable as a dividend in an
amount equal to the fair market value of the shares of CDK Global common stock received by such holder. In addition, ADP generally would recognize gain with
respect to the distribution and certain related transactions, and CDK Global could be required to indemnify ADP for any resulting taxes and related expenses,
which could be material. The distribution and certain related transactions could be taxable to ADP if CDK Global or its stockholders were to engage in certain
transactions after the distribution. In such cases, ADP or its stockholders that received CDK Global common stock pursuant to the spinoff could incur significant
U.S. federal income tax liabilities, and CDK Global could be required to indemnify ADP for any resulting taxes and related expenses, which could be material.
CDK Global may be unable to indemnify us fully for any such taxes and related expenses.
We may be unable to attract and retain qualified personnel
Our ability to grow and provide our clients with competitive services is partially dependent on our ability to attract and retain highly motivated people
with the skills to serve our clients. Competition for skilled employees in the outsourcing and other markets in which we operate is intense and, if we are unable to
attract and retain highly skilled and motivated personnel, results of our operations may suffer.
13
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
ADP owns 10 of its processing/print centers, and 17 other operational offices, sales offices, and its corporate headquarters in Roseland, New Jersey,
which aggregate approximately 3,458,692 square feet. None of ADP's owned facilities is subject to any material encumbrances. ADP leases space for some of its
processing centers, other operational offices, and sales offices. All of these leases, which aggregate approximately 6,313,800 square feet worldwide, expire at
various times up to the year 2027. ADP believes its facilities are currently adequate for their intended purposes and are adequately maintained .
Item 3. Legal Proceedings
In the normal course of business, ADP is subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, ADP
believes that it has valid defenses with respect to the legal matters pending against it and that the ultimate resolution of these matters will not have a materially
adverse impact on its financial condition, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable
14
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Part II
Market for Registrant's Common Equity
The principal market for the Company’s common stock is the NASDAQ Global Select Market under the symbol ADP. The following table sets forth the
reported high and low sales prices of the Company’s common stock reported on the NASDAQ Global Select Market and the cash dividends per share of common
stock declared during each quarter for the two most recent fiscal years. As of June 30, 2016 , there were 42,827 holders of record of the Company’s common stock.
As of such date, 537,352 additional holders held their common stock in “street name.”
Fiscal 2016 quarter ended
June 30
March 31
December 31
September 30
Fiscal 2015 quarter ended
June 30
March 31
December 31
September 30
Price Per Share
High
Low
Dividends
Per Share
$91.87
$90.00
$90.67
$85.21
$88.40
$90.23
$86.54
$84.68
$84.36
$76.65
$78.74
$64.29
$79.80
$81.71
$70.50
$79.20
$0.530
$0.530
$0.530
$0.490
$0.490
$0.490
$0.490
$0.480
On September 30, 2014, we spun off our former Dealer Services business to our stockholders. Each of our stockholders of record after the market close on
September 24, 2014 received one share of common stock of CDK Global, Inc. for every three shares of the Company’s common stock. In the table above, stock
prices prior to September 30, 2014 have not been adjusted for the impact of the spin off. Stock prices beginning on October 1, 2014 reflect the impact of the spin
off.
15
Issuer Purchases of Equity Securities
Period
Total Number of Shares
Purchased (1)
Average Price Paid
per Share
April 1, 2016 to
April 30, 2016
May 1, 2016 to
May 31, 2016
June 1, 2016 to
June 30, 2016
Total
630,085
765
2,237
633,087
$89.94
$87.54
$88.02
Total Number of Shares
Purchased as Part of the
Publicly Announced
Common Stock Repurchase
Plan (2)
Maximum Number of
Shares that may yet be
Purchased under the
Common Stock
Repurchase Plan (2)
630,000
38,484,415
—
—
630,000
38,484,415
38,484,415
(1)
Pursuant to the terms of the Company’s restricted stock program, the Company purchased 3,087 shares at the then market value of the shares in
connection with the exercise by employees of their option under such program to satisfy certain tax withholding requirements through the
delivery of shares to the Company instead of cash.
(2)
The Company received the Board of Directors' approval to repurchase shares of the Company's common stock as follows:
Date of Approval
August 2014
August 2015
Shares
30 million
25 million
There is no expiration date for the common stock repurchase plan.
16
Performance Graph
The following graph compares the cumulative return on the Company’s common stock (a) for the most recent five years with the cumulative return on the
S&P 500 Index and the Peer Group Index, (b) assuming an initial investment of $100 on June 30, 2011, with all dividends reinvested. The stock price performance
shown on this graph may not be indicative of future performance.
(a)
(b)
On September 30, 2014, the Company completed the spinoff of its former Dealer Services business into an independent publicly traded company called
CDK Global, Inc. The cumulative returns of the Company’s common stock have been adjusted to reflect the spinoff.
We use the S&P 500 Information Technology Index as our Peer Group Index. The S&P 500 Information Technology Index is a broad index that includes
the Company and several competitors.
17
Item 6. Selected Financial Data
The following selected financial data is derived from our consolidated financial statements and should be read in conjunction with the consolidated
financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Quantitative and Qualitative
Disclosures About Market Risk included in this Annual Report on Form 10-K. The Company uses certain non-GAAP financial measures that we believe better
reflect the underlying operations of our business model, allows investors to assess our performance in a manner similar to the method used by management, and
improves our ability to understand and assess our operating performance against prior periods. Refer to (A) below for additional information about our non-GAAP
financial measures and our reconciliations to reported results. Additionally, prior period amounts have been adjusted to exclude discontinued operations (refer to
Note 2 of our Consolidated Financial Statements for additional information).
(Dollars and shares in millions, except per share amounts)
Years ended June 30,
Total revenues
Total costs of revenues
Earnings from continuing operations before income taxes
Net earnings from continuing operations
Adjusted earnings from continuing operations before interest and income taxes (A)
Adjusted net earnings from continuing operations (A)
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
Adjusted diluted earnings per share from continuing operations (A)
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Cash dividends declared per share
Return on equity ("ROE") from continuing operations (B)
At year end:
Cash, cash equivalents and marketable securities of continuing operations
Total assets of continuing operations
Total assets
Obligations under reverse repurchase agreements
Obligation under commercial paper borrowings
Long-term debt
Stockholders’ equity
(A) Non-GAAP Financial Measures
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
.
2016
2015
2014
2013
2012
$
$
$
$
$
$
$
$
$
11,667.8
6,840.3
2,234.7
1,493.4
2,274.2
1,494.8
3.27
3.25
3.26
457.0
459.1
$
$
$
$
$
$
$
$
$
10,938.5
6,427.6
2,070.7
1,376.5
2,061.5
1,376.5
2.91
2.89
2.89
472.6
475.8
$
$
$
$
$
$
$
$
$
10,226.4
6,041.0
1,879.2
1,242.6
1,870.3
1,242.6
2.59
2.57
2.57
478.9
483.1
$
$
$
$
$
$
$
$
$
9,442.0
5,574.1
1,710.1
1,122.2
1,746.5
1,164.9
2.32
2.30
2.39
482.7
487.1
$
2.08
32.2%
$
1.95
24.0%
$
1.88
19.3%
$
1.70
18.2%
3,222.4
43,670.0
43,670.0
$
$
$
— $
— $
$
$
2,007.7
4,481.6
1,694.8
33,110.5
33,110.5
$
$
$
— $
— $
$
$
9.2
4,808.5
3,670.3
29,629.6
32,059.8
$
$
$
— $
$
$
$
2,173.0
11.5
6,670.2
1,746.2
30,041.7
32,268.1
245.9
$
$
$
$
— $
$
$
14.7
6,189.9
8,897.4
5,217.9
1,805.3
1,192.2
1,727.0
1,151.0
2.45
2.42
2.34
487.3
492.2
1.55
19.7%
1,416.7
28,525.6
30,817.4
—
—
16.8
6,114.0
The following table reconciles our reported results to adjusted results that exclude our provision for income taxes; certain interest amounts; the charges
related to our workforce optimization effort in the year ended June 30, 2016 ("fiscal 2016"); the gain on the sale of assets, which includes a building in fiscal 2016
and assets related to rights and obligations to resell a third party expense management platform in the year ended June 30, 2012; the gain on the sale of our
AdvancedMD ("AMD") business in fiscal 2016; and a goodwill impairment charge related to our AMD business in the year ended June 30, 2013 ("fiscal 2013").
We use certain adjusted results, among other measures, to evaluate our operating performance in the absence of certain items and for planning and forecasting of
future periods. We believe that the exclusion of these items helps us reflect the fundamentals of our underlying business model and analyze results against our
expectations, against prior period, and to plan for future periods by focusing on our underlying operations. We believe that these 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. Generally, the nature of these exclusions are for specific items that are not fundamental to our
underlying business operations. Specifically, we have excluded the impact of certain interest expense (as a result of the issuance of our $2.0 billion fixed-rate notes
in September
18
2015 - refer to Note 8 of our Consolidated Financial Statements for additional information), and certain interest income from adjusted earnings from continuing
operations before interest and income taxes ("Adjusted EBIT") and have also excluded certain interest expense and certain interest income in prior years for
comparability. However, we continue to include the interest income earned on investments associated with our client funds 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 amounts included as adjustments in the table below 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." The charges related to our workforce optimization
effort represent severance charges. Severance charges have been taken in the past and not included as an adjustment to get to adjusted results. Unlike severance
charges in prior periods, these specific charges relate to a broad-based, company-wide workforce optimization effort. Since Adjusted EBIT, Adjusted net earnings
from continuing operations and Adjusted diluted earnings per share (“Adjusted diluted EPS”) from continuing operations are not measures of performance
calculated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), they should not be considered in isolation
from, as a substitute for, or superior to net earnings from continuing operations and diluted EPS from continuing operations and they may not be comparable to
similarly titled measures used by other companies.
(Dollars and shares in millions, except per share amounts)
Years ended June 30,
2016
2015
2014
2013
2012
Net earnings from continuing operations
$
1,493.4
$
1,376.5
$
1,242.6 $
1,122.2 $
1,192.2
Adjustments:
Provision for income taxes
All other interest expense
All other interest income
Gain on sale of AMD
Gain on sale of assets
Workforce optimization effort
Goodwill impairment charge
Adjusted EBIT
Net earnings from continuing operations
Adjustments:
Gain on sale of AMD
Gain on sale of assets
Workforce optimization effort
Goodwill impairment charge (C)
Provision for income taxes on gain on sale of AMD (C)
Provision for income taxes on gain on sale of assets (C)
Provision for income taxes on workforce optimization effort (C)
Adjusted net earnings from continuing operations
741.3
47.9
(13.6)
(29.1)
(13.9)
48.2
—
694.2
1.5
(10.7)
—
—
—
—
2,274.2
$
2,061.5
$
636.6
1.6
(10.5)
—
—
—
—
1,870.3 $
587.9
2.3
(8.6)
—
—
—
42.7
1,746.5 $
613.1
2.7
(15.0)
—
(66.0)
—
—
1,727.0
1,493.4
$
1,376.5
$
1,242.6 $
1,122.2 $
1,192.2
$
$
(29.1)
(13.9)
48.2
—
7.3
5.3
(16.4)
—
—
—
—
—
—
—
$
1,494.8
$
1,376.5
$
—
—
—
—
—
—
—
1,242.6 $
—
—
—
42.7
—
—
—
1,164.9 $
—
(66.0)
—
—
—
24.8
—
1,151.0
Diluted earnings per share from continuing operations
$
3.25
$
2.89
$
2.57 $
2.30 $
2.42
Adjustments:
Gain on sale of AMD
Gain on sale of assets
Workforce optimization effort
Goodwill impairment charge
Adjusted diluted earnings per share from continuing operations
(0.05)
(0.02)
0.07
—
3.26
$
—
—
—
—
2.89
$
—
—
—
—
2.57 $
—
—
—
0.09
2.39 $
—
(0.08)
—
—
2.34
$
19
(B) Return on Equity
Return on equity from continuing operations has been calculated as net earnings from continuing operations divided by average total stockholders' equity.
Our ROE for fiscal 2016 includes the gain on the sale of assets, the gain on the sale of AMD, and the charges related to our workforce optimization effort which
did not significantly impact the ROE calculation. Our ROE for fiscal 2013 includes the impact of a goodwill impairment charge which decreased ROE by 0.6% .
Our ROE for fiscal 2012 includes the impact from the sale of assets related to rights and obligations to resell a third-party expense management platform which
increased ROE by 0.6% .
(C) Provision for Income Taxes
To calculate the provision for income taxes on non-GAAP adjustments to arrive at an Adjusted net earnings from continuing operations we use the
marginal tax rate in effect during the quarter of the adjustment and then adjust for differences in the book vs. tax basis. The goodwill impairment charge in fiscal
2013 was non tax-deductible.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This document and other written or oral statements made from time to time by ADP may contain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,”
“assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” “is designed to” and other words of similar meaning, are forward-looking statements.
These statements are based on management’s expectations and assumptions and depend upon or refer to future events or conditions and are subject to risks and
uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those
contemplated by the forward-looking statements or that could contribute to such difference include: ADP's success in obtaining, and retaining clients, and selling
additional services to clients; the pricing of products and services; compliance with existing or new legislation or regulations; changes in, or interpretations of,
existing legislation or regulations; overall market, political and economic conditions, including interest rate and foreign currency trends; competitive conditions;
our ability to maintain our current credit ratings and the impact on our funding costs and profitability; security or privacy breaches, fraudulent acts, and system
interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; and the impact of new acquisitions and
divestitures. ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as
required by law. These risks and uncertainties, along with the risk factors discussed under “Item 1A. Risk Factors,” and in other written or oral statements made
from time to time by ADP, should be considered in evaluating any forward-looking statements contained herein.
EXECUTIVE OVERVIEW
We are one of the largest providers of cloud-based Human Capital Management ("HCM") solutions - including payroll, talent management, Human
Resources and benefits administration, and time and attendance management - to employers around the world. As a leader in this industry, we are focused on
driving product innovation, enhancing our distribution and service capabilities, and assisting our clients with their HCM needs in the face of ever increasing
regulatory complexity.
Highlights from our 2016 fiscal year include:
•
•
•
•
•
•
•
•
New business bookings grew 12% from the year ended June 30, 2015 ("fiscal 2015")
Revenue grew 7% ; 8% on a constant dollar basis
Pre-tax margin increased 20 basis points to 19.2% ; Adjusted EBIT margin increased 60 basis points to 19.5%
Net earnings from continuing operations increased 8% ; Adjusted net earnings from continuing operations grew 9%
Diluted earnings per share from continuing operations increased to $3.25 from $2.89 in the prior year; Adjusted diluted earnings per share from
continuing operations increased to $3.26 from $2.89 in the prior year
Enhanced our capital structure by issuing $2 billion of senior notes
Continued our shareholder friendly actions by returning $1.2 billion via share repurchases and over $900 million via dividends, which increased on a per-
share basis for the 41 st consecutive year
Delivered nearly 10 million Form 1095-Cs to client employees to assist with the Affordable Care Act ("ACA") reporting requirements
20
During the year ended June 30, 2016 ("fiscal 2016 "), we continued to focus on our global HCM strategy and our results reflect the strength of our
underlying business model, our success in the market, and our focus on growth. This focus is evidenced by our investments in product innovation, service, and our
sales force, as well as the disposition of the Advanced MD ("AMD") business.
Our focus on product innovation, the high demand for additional HCM solutions (including products that assist businesses in complying with the ACA),
investments in and productivity of our salesforce, and continued positive economic growth in the United States of America ("U.S."), led our sales force to deliver
strong new business bookings during fiscal 2016 . Our sales force's ability to sell to new and existing clients as well as our implementation team's ability to
implement new clients on our solutions and implement new services to existing clients drove solid revenue growth during fiscal 2016 . In the second half of fiscal
year 2016 , we began to see a contribution to revenue growth from our ACA compliance solutions, as our upfront investments in selling and implementation of
these products in late fiscal 2015 and throughout fiscal 2016 began to translate into recurring revenue.
This revenue growth was apparent within both of our business segments during fiscal 2016 despite pressure on Employer Services revenues from foreign
currency translation. Revenue retention declined compared to fiscal 2015 primarily due to elevated losses on our legacy client platforms. This metric continues to
be a point of internal focus as we upgrade our clients from legacy platforms to our new modern cloud-based solutions and focus on improving the client
experience. Our revenue growth also benefited from the continued increase in our pays per control metric, which we measure as 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.
During the fourth quarter of fiscal 2016, we incurred a $48 million charge for a broad-based workforce optimization effort undertaken during the period.
Additionally, in July 2016, we announced a multi-year service alignment initiative intended to align our client service operations with our platform simplification
strategy. In connection with this service alignment initiative, we anticipate incurring pre-tax charges of $100 million to $125 million through the year ended June
30, 2018.
We have a strong business model with a high percentage of recurring revenues, good margins, the ability to generate consistent, healthy cash flows, strong
client retention, and low capital expenditure requirements. Our financial condition and balance sheet remain solid at June 30, 2016 , with cash and cash equivalents
and marketable securities of approximately $ 3.2 billion . Additionally, during fiscal 2016 , we changed our capital structure via the issuance of $2 billion in senior
notes, the proceeds of which we have begun to return to shareholders via share repurchases. The introduction of long-term debt to our capital structure and the
anticipated share repurchases are intended to enhance total shareholder return over the longer term.
Fiscal 2016 was another exciting and dynamic year that showcased our agility as we continued to adapt to the evolving needs of our clients and the
changing regulatory environment within our HCM industry as evidenced by our ability to respond to the challenges presented by the ACA. We continue to be
pleased with the success of our sales operations, our ability to continuously innovate and offer new and exciting products to our clients, and the ability of our
service organization to adapt to these new services and strategic platforms. Exiting fiscal 2016, we believe that our efforts during the fiscal year, in conjunction
with our service alignment initiative announced in July, positions us well as we head into fiscal 2017.
21
RESULTS OF OPERATIONS
ANALYSIS OF CONSOLIDATED OPERATIONS
Prior period amounts have been adjusted to exclude discontinued operations (refer to Note 2 of our Consolidated Financial Statements for additional
information).
(In millions, except per share amounts)
Years Ended
June 30,
2015
2016
% Change
As Reported
Constant Dollar Basis
2014
2016
2015
2016
2015
Total revenues from continuing operations
$
11,667.8
$
10,938.5
$
10,226.4
7%
7%
8%
9%
Costs of revenues:
Operating expenses
Systems development and programming costs
Depreciation and amortization
Total costs of revenues
Selling, general and administrative costs
Interest expense
Total expenses
6,025.0
603.7
211.6
6,840.3
2,637.0
56.2
9,533.5
5,625.3
595.4
206.9
6,427.6
2,496.9
6.5
8,931.0
5,290.8
551.2
199.0
6,041.0
2,370.3
6.1
8,417.4
7%
1%
2%
6%
6%
n/m
7%
6%
8%
4%
6%
5%
n/m
6%
9%
4%
5%
5%
7%
n/m
8%
8%
11%
6%
8%
7%
n/m
8%
Other income, net
(100.4)
(63.2)
(70.2)
n/m
n/m
n/m
n/m
Earnings from continuing operations before
income taxes
$
2,234.7
$
2,070.7
$
1,879.2
8%
10%
9%
12%
Margin
19.2%
18.9%
18.4%
Provision for income taxes
Effective tax rate
$
741.3
$
694.2
$
636.6
7%
9%
8%
11%
33.2%
33.5%
33.9%
Net earnings from continuing operations
$
1,493.4
$
1,376.5
$
1,242.6
8%
11%
10%
12%
Diluted earnings per share ("EPS") from
continuing operations
n/m - not meaningful
$
3.25
$
2.89
$
2.57
12%
12%
13%
14%
22
Note 1. Non-GAAP measures
Within the tables above and below, we use the term "constant dollar basis" so that certain financial measures can be viewed without the impact of foreign
currency fluctuations to facilitate period-to-period comparisons of business performance. The financial results on a "constant dollar basis" are determined by
calculating the current year result using foreign exchange rates consistent with the prior year. We believe "constant dollar basis" provides information that isolates
the actual growth of our operations. Our constant dollar results are not measures of performance calculated in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") and should not be considered in isolation from, as a substitute for, or superior to the U.S. GAAP measures
presented.
The following table reconciles our reported results to adjusted results that exclude our provision for income taxes; certain interest amounts; the charges
related to our workforce optimization effort; the gain on the sale of a building; and the gain on the sale of our AMD business in fiscal 2016. We use certain
adjusted results, among other measures, to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods.
We believe that the exclusion of these items helps us reflect the fundamentals of our underlying business model and analyze results against our expectations,
against prior period, and to plan for future periods by focusing on our underlying operations. We believe that these 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. Generally, the nature of these exclusions are for specific items that are not fundamental to our underlying
business operations. Specifically, we have excluded the impact of certain interest expense (as a result of the issuance of our $2.0 billion fixed-rate notes in
September 2015 - refer to Note 8 of our Consolidated Financial Statements for additional information), and interest income from adjusted earnings from continuing
operations before interest and income taxes ("Adjusted EBIT") and have also excluded certain interest expense and certain interest income in prior years for
comparability. However, we continue to include the interest income earned on investments associated with our client funds 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 amounts included as adjustments in the table below 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." The charges related to our workforce optimization
effort represent severance charges. Severance charges have been taken in the past and not included as an adjustment to get to adjusted results. Unlike severance
charges in prior periods, these specific charges relate to a broad-based, company-wide workforce optimization effort. Since Adjusted EBIT, Adjusted provision for
income taxes, Adjusted net earnings from continuing operations, Adjusted diluted earnings per share ("Adjusted diluted EPS") from continuing operations and
Adjusted EBIT margin 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 earnings from continuing operations before income taxes, provision for income taxes, net earnings from continuing operations and diluted EPS
from continuing operations and they may not be comparable to similarly titled measures used by other companies.
23
Net earnings from continuing operations
$
1,493.4
$
1,376.5
$
Years Ended
June 30,
2015
2016
% Change
As Reported
Constant Dollar Basis
2016
2015
2016
2015
8%
11%
10%
12%
2014
1,242.6
636.6
1.6
(10.5)
—
—
—
741.3
47.9
(13.6)
(29.1)
(13.9)
48.2
694.2
1.5
(10.7)
—
—
—
$
2,274.2
$
2,061.5
$
1,870.3
10%
10%
11%
12%
19.5%
18.8%
18.3%
$
741.3
$
694.2
$
636.6
7%
9%
8%
11%
(7.3)
(5.3)
16.4
—
—
—
$
$
745.1
33.3%
$
694.2
33.5%
—
—
—
636.6
33.9%
7%
9%
8%
11%
Adjustments:
Provision for income taxes
All other interest expense
All other interest income
Gain on sale of AMD
Gain on sale of building
Workforce optimization effort
Adjusted EBIT
Adjusted EBIT Margin
Provision for income taxes
Adjustments:
Gain on sale of AMD (a)
Gain on sale of building (b)
Workforce optimization effort (b)
Adjusted provision for income taxes
Adjusted effective tax rate (c)
Net earnings from continuing operations
$
1,493.4
$
1,376.5
$
1,242.6
8%
11%
10%
12%
Adjustments:
Gain on sale of AMD
Gain on sale of building
Workforce optimization effort
Provision for income taxes on gain on sale of
AMD (a)
Provision for income taxes on gain on sale of
building (b)
Income tax benefit for workforce optimization
effort (b)
Adjusted net earnings from continuing operations
Diluted EPS from continuing operations
Adjustments:
Gain on sale of AMD
Gain on sale of building
Workforce optimization effort
Adjusted diluted EPS from continuing operations
$
(29.1)
(13.9)
48.2
7.3
5.3
(16.4)
—
—
—
—
—
—
—
—
—
—
—
—
$
$
1,494.8
$
1,376.5
$
1,242.6
3.25
$
2.89
$
2.57
9%
12%
11%
12%
10%
13%
12%
14%
(0.05)
(0.02)
0.07
3.26
—
—
—
—
—
—
$
2.89
$
2.57
13%
12%
14%
14%
(a) - The tax on the gain on the sale of the AMD business was calculated based on the marginal rate in effect during the quarter of the adjustment adjusted for
a book vs. tax basis difference primarily due to a previously recorded non tax-deductible goodwill impairment charge.
(b) - The tax provision/benefit on the gain on the sale of the building and the workforce optimization effort was calculated based on the marginal rate in effect
during the quarter of the adjustment.
(c) - The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings from continuing operations
plus our Adjusted provision for income taxes.
24
Fiscal 2016 Compared to Fiscal 2015
Total Revenues
Our revenues, as reported, increase d 7% in fiscal 2016 , despite two percentage points of combined pressure from foreign currency translation and the
disposition of the AMD business in September 2015, primarily due to new business started during the past twelve months from new business bookings growth.
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 in fiscal 2016 include interest on funds held for clients of $377.3 million , as compared to $377.7 million in fiscal 2015 . The decrease in
the consolidated interest earned on funds held for clients resulted from the decrease in the average interest rate earned in fiscal 2016 , as compared to fiscal 2015 ,
partially offset by the increase in our average client funds balances of 2.8% to $22,418.7 million in fiscal 2016 .
Total Expenses
Our total expenses, as reported, increase d 7% in fiscal 2016 , as compared to the same period in the prior year. The increase is primarily due to an
increase in PEO services pass-through costs as well as an increase in selling and implementation expenses to support our growth in new business bookings as we
experienced continued demand for additional HCM solutions, including products that assist businesses in complying with the ACA. Total expenses also increase d
due to increase d costs to service our client base in support of our growing revenue, and an increase in severance expenses, primarily related to our workforce
optimization effort. These increases were partially offset by the impact of foreign currency translation.
Operating expenses, as reported, increase d 7% in fiscal 2016 , as compared to fiscal 2015 . PEO Services pass-through costs were $2,336.3 million for
fiscal 2016 , which included costs for benefits coverage of $1,906.0 million and costs for workers’ compensation and payment of state unemployment taxes of
$430.3 million . These pass-through costs were $2,015.9 million for fiscal 2015 , which included costs for benefits coverage of $1,627.1 million and costs for
workers’ compensation and payment of state unemployment taxes of $388.8 million . Additionally, operating expenses increase d due to higher costs to implement
and service our client base in support of our growing revenue, including products that assist with ACA compliance which contributed to our strong new business
bookings over the past several quarters. These increases were partially offset by the impact of foreign currency translation.
Systems development and programming costs, as reported, increased 1% in fiscal 2016 , when compared to the same period in the prior year, due to
increased investments and costs to develop, support, and maintain our products, partially offset by a higher proportion of capitalized costs of our strategic projects
and the impact of foreign currency translation.
Selling, general and administrative expenses, as reported, increased 6% in fiscal 2016 , as compared to fiscal 2015 . The increase was primarily related to
an increase in selling expenses to support our growth in new business bookings as we experienced continued demand for our HCM products, particularly those that
are designed to assist businesses in complying with the ACA. Selling, general and administrative expenses also increased due to $57.6 million of additional
severance charges, of which $48.2 million relate to our workforce optimization effort, and a $10.7 million reversal of reserves in fiscal 2015 related to our former
Dealer Services business financing arrangements which were sold to a third party. These increases were partially offset by the impact of foreign currency
translation.
Other Income, net
(In millions)
Years ended June 30,
Interest income on corporate funds
Realized gains on available-for-sale securities
Realized losses on available-for-sale securities
Gain on sale of notes receivable
Gain on sale of AMD
Gain on sale of building
Other income, net
2016
2015
$ Change
$
(62.4) $
(56.9) $
(5.1)
10.1
—
(29.1)
(13.9)
(6.8)
1.9
(1.4)
—
—
$
(100.4) $
(63.2) $
5.5
(1.7)
(8.2)
(1.4)
29.1
13.9
37.2
25
Other income, net, increase d $37.2 million in fiscal 2016 , as compared to fiscal 2015 . The increase was primarily due to the gain on the sale of the
AMD business of $29.1 million and the gain on the sale of a building of $13.9 million .
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increased 8% due to increases in revenues and expenses discussed above and includes an
unfavorable impact from foreign currency translation of one percentage point. Overall margin increased from 18.9% in fiscal 2015 to 19.2% in fiscal 2016 due to
the gain on the sale of the AMD business, the gain on the sale of the building and decreased selling expenses in the fourth quarter of fiscal 2016 as compared to
fiscal 2015 . These increases were offset by an increase in interest expense related to our September 2015 $2.0 billion senior note issuance, investments in
implementation and operational resources to support our revenue growth, and the charges related to our workforce optimization effort.
Adjusted EBIT
Adjusted EBIT, which excludes certain interest amounts, the impact of the AMD business sale, the gain on the sale of a building and the charges related
to our workforce optimization effort, increase d 10% due to the increases in revenues and expenses discussed above. Overall Adjusted EBIT margin increase d
from 18.8% in fiscal 2015 to 19.5% in fiscal 2016 due to lower selling expenses in the fourth quarter of fiscal 2016 as compared to fiscal 2015, partially offset by
investments in implementation and operational resources to support our revenue growth.
Provision for Income Taxes
The effective tax rate in fiscal 2016 and 2015 was 33.2% and 33.5% , respectively. The decrease in the effective tax rate was due to the usage of foreign
tax credits in a repatriation of foreign earnings in fiscal 2016 , partially offset by the resolution of certain tax matters in fiscal 2015 .
Adjusted Provision for Income Taxes
The effective tax rate, adjusted for the impact of the workforce optimization effort, sale of the AMD business, and a gain on the sale of a building, for
fiscal 2016 and 2015 was 33.3% and 33.5% , respectively. The decrease in the Adjusted effective tax rate was due to the usage of foreign tax credits in a
repatriation of foreign earnings in fiscal 2016 , partially offset by the resolution of certain tax matters during fiscal 2015 .
Net Earnings from Continuing Operations and Diluted EPS from Continuing Operations
Net earnings from continuing operations increased 8% on higher earnings from continuing operations before income taxes and a lower effective tax rate,
as described above. Net earnings from continuing operations growth was unfavorably impacted one percentage point by foreign currency translation in fiscal 2016 .
Diluted EPS from continuing operations increased 12% to $3.25 in fiscal 2016 , as compared to $2.89 in fiscal 2015 . Diluted EPS growth was unfavorably
impacted one percentage point due to foreign currency translation in fiscal 2016 , as compared to fiscal 2015 .
In fiscal 2016 , our diluted EPS from continuing operations reflects the increase in net earnings from continuing operations and the impact of fewer shares
outstanding, resulting from the repurchase of approximately 13.8 million shares in fiscal 2016 and 18.2 million shares in fiscal 2015 , partially offset by the
issuances of shares under our employee benefit plans.
Adjusted Net Earnings from Continuing Operations and Adjusted Diluted EPS from Continuing Operations
Adjusted net earnings from continuing operations increased 9% in fiscal 2016 due to the increase in revenues and expenses described above and the
impact of the lower Adjusted effective tax rate when compared to fiscal 2015 .
For fiscal 2016 , our Adjusted diluted EPS from continuing operations reflects the increase in Adjusted net earnings from continuing operations and the
impact of fewer shares outstanding as a result of the repurchase of 13.8 million shares during fiscal 2016 and the repurchase of 18.2 million shares in fiscal 2015 ,
offset by shares issued under our employee benefit plans.
26
Fiscal 2015 Compared to Fiscal 2014
Total Revenues
Despite pressure from foreign currency translation, our total revenue increased 7% in fiscal 2015 , as compared to the year ended June 30, 2014 ("fiscal
2014 "), primarily due to new business started during the year from new business bookings growth. Refer to "Analysis of Reportable Segments" for additional
discussion of the increases in revenue for both of our reportable segments, Employer Services and PEO Services. For fiscal 2015 , total revenue was negatively
impacted two percentage points by unfavorable foreign currency translation.
Total revenues in fiscal 2015 include interest on funds held for clients of $377.7 million , as compared to $373.4 million in fiscal 2014 . The increase in
the consolidated interest earned on funds held for clients resulted from an increase in our average client funds balance of 5% to $21.8 billion in fiscal 2015 ,
partially offset by a decrease in the average interest rate earned to 1.7% in fiscal 2015 , as compared to 1.8% in fiscal 2014 . Total interest on funds held for clients
was impacted one percentage point from unfavorable foreign currency translation.
Total Expenses
Total expenses increased 6% in fiscal 2015 , as compared to fiscal 2014 primarily due to increased costs to service our expanding client base and support
our growing revenue. Total expenses also increased due to additional investments in product innovation and expenses directly related to the increase in new
business bookings. For fiscal 2015 , our total expense growth decreased two percentage points from foreign currency translation.
Operating expenses include the costs directly attributable to servicing our clients. Additionally, operating expenses include PEO Services pass-through
costs that are re-billable and which include costs for benefits coverage, workers' compensation coverage, and state unemployment taxes for worksite employees.
These pass-through costs were $2,015.9 million for fiscal 2015 , which included costs for benefits coverage of $1,627.1 million and costs for workers’
compensation and payment of state unemployment taxes of $388.8 million . These pass-through costs were $1,736.0 million for fiscal 2014 , which included costs
for benefits coverage of $1,383.3 million and costs for workers’ compensation and payment of state unemployment taxes of $352.7 million .
Systems development and programming costs increased $44.2 million , in fiscal 2015 , as compared to fiscal 2014 , due to increased costs to develop,
support, and maintain our products, partially offset by a higher proportion of capitalized costs of our strategic projects.
Selling, general and administrative expenses increased $126.6 million , due to an increase in selling expenses to support our growth in new business
bookings as we experienced traction from our increased focus on product development, high demand for additional HCM solutions, including products that assist
businesses in complying with the ACA, improved productivity, and an improving economic backdrop in the U.S., partially offset by the impact of foreign currency
translation.
Other Income, net
(In millions)
Years ended June 30,
Interest income on corporate funds
Realized gains on available-for-sale securities
Realized losses on available-for-sale securities
Gain on sale of notes receivable
Other income, net
2015
2014
$ Change
$
(56.9) $
(6.8)
1.9
(1.4)
(53.7) $
(20.4)
3.9
—
$
(63.2) $
(70.2) $
3.2
(13.6)
2.0
1.4
(7.0)
Other income, net in fiscal 2015 includes a $1.4 million gain on the sale of notes receivable related to our Dealer Services financing agreements.
27
Earnings from Continuing Operations before Income Taxes
Earnings from continuing operations before income taxes increase d 10% due to increases in revenue and expenses discussed above and includes an
unfavorable impact from foreign currency translation of one percentage point. Overall margin increase d from 18.4% in fiscal 2014 to 18.9% in fiscal 2015 . This
increase was due to our operating costs related to servicing our clients increasing slower than our revenues, partially offset by the impact of higher selling expenses
to support our new business bookings.
Adjusted EBIT
Adjusted EBIT, which excludes certain interest amounts, increased 10% due to the increases in revenues and expenses discussed above. Overall Adjusted
EBIT margin increased to 18.8% in fiscal 2015 from 18.3% in fiscal 2014 due to our operating costs related to servicing our clients increasing slower than our
revenues, partially offset by the impact of higher selling expenses to support our new business bookings.
Provision for Income Taxes
The effective tax rates in fiscal 2015 and 2014 were 33.5% and 33.9% , respectively. The decrease in the effective tax rate was due to adjustments to the
tax liability, the usage of foreign tax credits in a planned repatriation of foreign earnings, and a change in tax law during fiscal 2015 , partially offset by the
resolution of certain tax matters during fiscal 2014 .
Net Earnings from Continuing Operations and Diluted EPS from Continuing Operations
Net earnings from continuing operations increase d 11% , on higher earnings from continuing operations before income taxes and a lower effective tax
rate as described above. Net earnings from continuing operations growth was unfavorably impacted one percentage point by foreign currency translation in fiscal
2015 , as compared to fiscal 2014 .
In fiscal 2015 , our diluted EPS from continuing operations reflects the increase in net earnings from continuing operations and the impact of fewer shares
outstanding resulting from the repurchase of approximately 18.2 million shares in fiscal 2015 and 9.0 million shares in fiscal 2014 , partially offset by the issuance
of shares under our stock-based compensation programs.
ANALYSIS OF REPORTABLE SEGMENTS
Revenues from Continuing Operations
(In millions)
Employer Services
PEO Services
Other
Reconciling item:
Client fund interest
Years Ended
June 30,
2015
2016
As Reported
Constant Dollar Basis
2014
2016
2015
2016
2015
% Change
$
9,211.9 $
8,815.1 $
8,437.6
3,073.1
2,647.2
2,270.9
1.9
69.8
67.5
(619.1)
(593.6)
(549.6)
$
11,667.8 $
10,938.5 $
10,226.4
5%
16%
n/m
n/m
7%
4%
17%
n/m
n/m
7%
6%
16%
n/m
n/m
8%
7%
17%
n/m
n/m
9%
28
Earnings from Continuing Operations before Income Taxes
(In millions)
Years Ended
June 30,
2015
2016
As Reported
Constant Dollar Basis
2014
2016
2015
2016
2015
% Change
$
2,867.9 $
2,693.0 $
2,521.2
371.7
(385.8)
302.8
(331.5)
233.6
(326.0)
(619.1)
(593.6)
(549.6)
$
2,234.7 $
2,070.7 $
1,879.2
6%
23%
n/m
n/m
8%
7%
30%
n/m
n/m
10%
7%
23%
n/m
n/m
9%
8%
30%
n/m
n/m
12%
Employer Services
PEO Services
Other
Reconciling item:
Client fund interest
Employer
Services
Fiscal 2016 Compared to Fiscal 2015
Revenues
Employer Services' revenues, as reported, increase d 5% in fiscal 2016 , as compared to fiscal 2015 , despite a negative impact of one percentage point
from foreign currency translation. Revenues increase d due to new business started from new business bookings, the impact of price increases, and an increase in
the number of employees on our clients’ payrolls as our U.S. pays per control increased 2.5% in fiscal 2016 as compared to fiscal 2015 . These increases were
partially offset by the impact of client losses and foreign currency translation. Our worldwide client revenue retention rate for fiscal 2016 decreased 100 basis
points to 90.5% as compared to our rate for fiscal 2015 primarily due to elevated losses on our legacy platforms.
Earnings
from
Continuing
Operations
before
Income
Taxes
Employer Services’ earnings from continuing operations before income taxes, as reported, increase d 6% in fiscal 2016 , as compared to fiscal 2015 . The
increase was due to increase d revenues discussed above, which was partially offset by an increase in expenses of $221.9 million . The increase in expenses is
related to increased costs of servicing our clients, as well as increased selling and implementation expenses due to new business bookings and associated
implementation costs, including an increase in costs related to assisting our clients with ACA compliance. These increases were partially offset by the impact of
foreign currency translation.
Employer Services' overall margin increase d from 30.5% to 31.1% for fiscal 2016 , as compared to fiscal 2015 . This increase is due to lower selling
expenses in the fourth quarter of fiscal 2016 as compared to fiscal 2015 as well as an increase of 30 basis points from foreign currency translation, partially offset
by investments in implementation and operational resources to support our revenue growth.
Fiscal 2015 Compared to Fiscal 2014
Revenues
from
continuing
operations
Employer Services' revenues from continuing operations increase d 4% due to new business started during the year from new business bookings growth,
an increase in the number of employees on our clients payrolls, and the impact of price increases. During fiscal 2015 , Employer Services' revenue growth was
negatively impacted two percentage points by unfavorable foreign currency translation. Our worldwide client revenue retention rate remained at a record level of
91.4% in fiscal 2015 when compared to fiscal 2014 and our U.S. pays per control increased 3.0% in fiscal 2015 .
29
Earnings
from
Continuing
Operations
before
Income
Taxes
Employer Services' earnings from continuing operations before income taxes increase d 7% due to the increase in revenues from continuing operations of
$377.5 million discussed above, partially offset by an increase in expenses of $205.7 million . This growth includes an unfavorable impact from foreign currency
translation of one percentage point. Expenses increased in fiscal 2015 , as compared to fiscal 2014 , due to labor related costs to support our growing revenues and
an increase in selling expenses as we experienced traction from our increased focus on product development, high demand for additional HCM solutions, including
products that assist businesses in complying with the ACA, improved productivity, and an improving economic backdrop in the U.S. Overall margin increase d
approximately 60 basis points from 29.9% to 30.5% in fiscal 2015 , as compared to fiscal 2014 , due to our operating costs related to servicing our clients
increasing at a slower rate than our revenues partially offset by an increase in selling expense due to higher new business bookings.
PEO
Services
Fiscal 2016 Compared to Fiscal 2015
Revenues
PEO Services' revenues as reported increased 16% in fiscal 2016 , as compared to fiscal 2015 . Such revenues include pass-through costs of $2,336.3
million for fiscal 2016 and $2,015.9 million for fiscal 2015 associated with benefits coverage, workers' compensation coverage, and state unemployment taxes for
worksite employees. The increase in revenues was due to a 13% increase in the average number of worksite employees, driven by an increase in the number of new
PEO Services clients and growth in our existing clients, as well as higher client participation and higher benefit pass-through costs in our PEO benefit offerings.
Earnings
from
Continuing
Operations
before
Income
Taxes
PEO Services’ earnings from continuing operations before income taxes increased 23% in fiscal 2016 , as compared to fiscal 2015 . The increase was due
to increase d revenues discussed above, which was partially offset by an increase in expenses of $357.0 million . This increase in expenses is primarily related to an
increase in pass-through costs of $320.4 million described above. Overall margin increase d from 11.4% to 12.1% for fiscal 2016 , as compared to fiscal 2015 , due
to operating efficiencies, as our operating costs related to servicing our clients increased slower than our revenues, and sales efficiencies.
Fiscal 2015 Compared to Fiscal 2014
Revenues
PEO Services' revenues increase d 17% in fiscal 2015 , as compared to fiscal 2014 . Such revenues include pass-through costs of $2,015.9 million for
fiscal 2015 and $1,736.0 million for fiscal 2014 associated with benefits coverage, workers' compensation coverage, and state unemployment taxes for worksite
employees. The increase in revenues was due to a 14% increase in the average number of worksite employees, resulting from an increase in the number of new
clients and growth in our existing clients.
Earnings
from
Continuing
Operations
before
Income
Taxes
PEO Services' earnings from continuing operations before income taxes increase d 30% in fiscal 2015 , as compared to fiscal 2014 . The increase was due
to increased revenues of $376.3 million discussed above, partially offset by an increase in expenses of $307.1 million . This increase in expenses is primarily
related to the increase in pass-through costs of $279.9 million described above. Overall margin increased from 10.3% to 11.4% for fiscal 2015 , as compared to
fiscal 2014 , due to sales productivity and increased operating efficiencies, as our costs related to acquiring new business and servicing our clients increased slower
than our revenues.
30
Other
The primary components of the “Other” segment are the results of operations of ADP Indemnity, non-recurring gains and losses, miscellaneous
processing services, the elimination of intercompany transactions, interest expense, certain charges and expenses that have not been allocated to the reportable
segments, such as stock-based compensation expense, and beginning in the first quarter of fiscal 2016, the historical results of the AMD business, which was
previously reported in the Employer Services segment. This change, which is adjusted for both the current period and the prior period in the table above, did not
significantly affect reportable segment results and is consistent with the way the chief operating decision maker assesses the performance of the reportable
segments.
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 for the PEO Services business. Premiums are charged by ADP Indemnity to PEO Services to cover the claims expected to
be incurred by the PEO Services' worksite employees. Changes in estimated ultimate incurred losses are recognized by ADP Indemnity. For the fiscal years 2013
to 2017, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb
Limited ("Chubb"), to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limits our
overall exposure incurred up to a certain limit. We believe the likelihood of ultimate losses exceeding this limit is remote. During fiscal 2016 , ADP Indemnity paid
a premium of $202.0 million to cover substantially all losses incurred by ADP Indemnity for the fiscal 2016 policy year up to $1 million per occurrence related to
the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' worksite employees. ADP Indemnity paid a
premium of $221.0 million in July 2016 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the year
ended June 30, 2017 ("fiscal 2017 ") policy year on terms substantially similar to the fiscal 2016 reinsurance policy.
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 $9.25 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 regular quarterly dividend, share repurchases, and capital expenditures.
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. and Canadian short-term reverse repurchase agreements together with our $9.25 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 investment strategy. See Note 7 of our consolidated financial statements for a description of our short-term
financing including commercial paper.
As of June 30, 2016 , cash and short-term marketable securities were $ 3,214.6 million , which were primarily invested in time deposits, money market
funds and asset-backed commercial paper.
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 years ended 2016 ,
2015 , and 2014 , are summarized as follows:
31
(In millions)
Years ended June 30,
$ Change
2016
2015
2014
2016
2015
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash
equivalents
$
1,859.9 $
1,905.6 $
1,821.4 $
(45.7) $
(9,087.2)
8,790.1
(11.0)
(3,760.3)
1,616.7
813.3
(2,358.2)
(5,326.9)
7,173.4
(106.3)
(344.3) $
8.0
95.3
284.5 $
1,896.1 $
84.2
(4,573.6)
3,974.9
(114.3)
(628.8)
Net change in cash and cash equivalents
$
1,551.8 $
Fiscal
2016
Compared
to
Fiscal
2015
Net cash flows provided by operating activities decrease d due to $226.7 million received from the sale of notes receivable related to Dealer Services
financing arrangements during fiscal 2015.
Net cash flows used in investing activities increased due to the timing of receipts and disbursements of restricted cash and cash equivalents held to satisfy
client funds obligations of $5,257.6 million and the receipt of the CDK Global, Inc.("CDK") dividend during fiscal 2015 , partially offset by the timing of
purchases of and proceeds from corporate and client funds marketable securities of $545.7 million.
Net cash flows provided by financing activities increased due to the net increase in client funds obligations of $2,728.9 million , as a result of the timing
of cash received and payments made related to client funds, proceeds from our $2.0 billion September 2015 debt issuance, a decrease in our repurchases of
common stock, and the timing of borrowings and repayments of commercial paper. We purchased approximately 13.8 million shares of our common stock at an
average price per share of $82.88 during fiscal 2016 as compared to purchases of 18.2 million shares at an average price per share of $85.28 during fiscal 2015 .
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.
Fiscal
2015
Compared
to
Fiscal
2014
Net cash flows provided by operating activities increased due to $226.7 million received from the sale of notes receivable related to Dealer Services
financing arrangements and a lower pension contribution of $74.8 million for fiscal 2015, as compared to fiscal 2014.
Net cash flows of investing activities changed due to the timing of receipts and disbursements of restricted cash and cash equivalents held to satisfy client
funds obligations of $5,498.4 million, partially offset by the receipt of the CDK dividend during fiscal 2015.
Net cash flows of financing activities changed due to the net increase in client funds obligations of $9,063.9 million, as a result of the timing of cash
received and payments made related to client funds, partially offset by an increase in our repurchases of common stock and the timing of borrowings and
repayments of commercial paper.
Capital Resources and Client Fund Obligations
In September 2015, we issued $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 8 of our consolidated financial statements for a description of our long-term financing including this fiscal 2016 debt issuance.
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. During the majority of fiscal 2016 , this
commercial paper program provided for the issuance of up to $8.25 billion in aggregate maturity value and in June 2016, we increased our commercial paper
program to
32
$9.25 billion . Our commercial paper program is rated A-1+ by Standard and 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. For fiscal 2016 , our average daily borrowings were $2.7 billion at a
weighted average interest rate of 0.3% . The weighted average maturity of the Company’s commercial paper during fiscal 2016 was approximately two days . At
June 30, 2016 and 2015, we had no outstanding obligations under our short-term commercial paper program.
Our 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. 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 June 30, 2016 and 2015, there were no outstanding obligations related to the reverse repurchase agreements. For fiscal 2016 and 2015 ,
we had average outstanding balances under reverse repurchase agreements of $341.0 million and $421.2 million , respectively, at weighted average interest rates of
0.4% . See Note 4 of our consolidated financial statements for client fund investments used as collateral for reverse repurchase agreements.
We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a $3.25 billion , 364-day credit
agreement with a group of lenders that matures in June 2017 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 2020 and June 2021 , 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 June 30, 2016 under the credit agreements.
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 $9.25 billion available to us under the revolving credit agreements. See Note 7 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, rate reduction, and other asset-backed securities, secured predominately 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. We do own mortgage-
backed securities, which 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 primarily by Federal National Mortgage Association as to the
timely payment of principal and interest. 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 4 of our consolidated financial statements for a description of our corporate investments and funds held for clients.
Capital expenditures for continuing operations for fiscal 2016 were $165.7 million , as compared to $171.2 million for fiscal 2015 . We expect capital
expenditures in fiscal 2017 to be about $250 million.
33
Contractual Obligations
The following table provides a summary of our contractual obligations with a future life of greater than one year at June 30, 2016 .
(In millions)
Contractual Obligations
Less than
1 year
1-3
years
Payments due by period
3-5
years
More than
5 years
Unknown
Total
Debt Obligations (1)
Operating Lease and Software
License Obligations (2)
Purchase Obligations (3)
Obligations Related to Unrecognized
Tax Benefits (4)
Other Long-Term Liabilities Reflected
on our Consolidated Balance Sheets:
Compensation and Benefits (5)
Total
$
$
$
$
$
$
58.2 $
121.9 $
1,105.3 $
1,158.8 $
— $
2,444.2
106.2 $
185.0 $
331.1 $
199.7 $
99.1 $
94.4 $
100.8 $
— $
— $
— $
491.1
625.2
— $
— $
— $
— $
27.4 $
27.4
3.5 $
231.2 $
121.8 $
499.0 $
737.8 $
1,420.6 $
262.7 $
1,522.3 $
91.4 $
118.8 $
710.6
4,298.5
(1) These amounts represent the principal and interest payments of our debt.
(2)
(3)
Included in these amounts are various facilities and equipment leases and software license agreements. We enter into operating leases in the normal course of business relating to
facilities and equipment, as well as the licensing of software. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and
equipment leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease
obligations could change if we exit certain contracts or if we enter into additional operating lease agreements.
Purchase obligations are comprised of a $221.0 million reinsurance premium with Chubb for the fiscal 2017 policy year, as well as obligations related to purchase and maintenance
agreements on our software, equipment, and other assets.
(4) We are unable to make reasonably reliable estimates as to the period in which cash payments related to unrecognized tax benefits are expected to be paid.
(5) Compensation and benefits primarily relates to amounts associated with our employee benefit plans and other compensation arrangements. These amounts exclude the estimated
contributions to our defined benefit plans, which are expected to be $11.0 million in fiscal 2017 .
In addition to the obligations quantified in the table above, we had obligations for the remittance of funds relating to our payroll and payroll tax filing
services. As of June 30, 2016 , the obligations relating to these matters, which are expected to be paid in fiscal 2017 , total $33,331.8 million and were recorded in
client funds obligations on our Consolidated Balance Sheets. We had $33,841.2 million of cash and cash equivalents and marketable securities that have been
impounded from our clients to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as of June 30, 2016 .
Separately, ADP Indemnity paid a premium of $221.0 million in July 2016 to enter into a reinsurance agreement with Chubb to cover substantially all
losses incurred by ADP Indemnity for the fiscal 2017 policy year on terms substantially similar to the fiscal 2016 reinsurance policy. At June 30, 2016 , ADP
Indemnity had total assets of $456.2 million to satisfy the actuarially estimated unpaid losses of $416.5 million for the policy years since July 1, 2003. ADP
Indemnity paid claims of $8.3 million and $26.0 million , net of insurance recoveries, in fiscal 2016 and 2015 , respectively. Refer to the "Analysis of Reportable
Segments - Other" above for additional information regarding ADP Indemnity.
In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the performance of our
services and products. We do not expect any material losses related to such representations and warranties.
Quantitative and Qualitative Disclosures about Market Risk
Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, short-term marketable securities, and long-term
marketable securities) and client funds assets (funds that have been collected from clients but not yet remitted to the applicable tax authorities or client employees).
34
Our corporate investments are invested in cash and cash equivalents and highly liquid, investment-grade marketable securities. These assets are available
for repurchases of common stock for treasury and/or acquisitions, as well as other corporate operating purposes. All of our short-term and long-term fixed-income
securities are classified as available-for-sale securities.
Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary objectives. Consistent with those objectives, we
also seek to maximize interest income and to minimize the volatility of interest income. Client funds assets are invested in highly liquid, investment-grade
marketable securities, with a maximum maturity of 10 years at the time of purchase, and money market securities and other cash equivalents.
We utilize a strategy by which we extend the maturities of our investment portfolio for funds held for clients and employ short-term financing
arrangements to satisfy our short-term funding requirements related to client funds obligations. 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). As part of our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other
unrelated client funds obligations, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. We
minimize the risk of not having funds collected from a client available at the time such client’s obligation becomes due by impounding, in virtually all instances,
the client’s funds in advance of the timing of payment of such client’s obligation. As a result of this practice, we have consistently maintained the required level of
client funds assets to satisfy all of our obligations.
There are inherent risks and uncertainties involving our investment strategy relating to our client funds assets. Such risks include liquidity risk, including
the risk associated with our ability to liquidate, if necessary, our available-for-sale securities in a timely manner in order to satisfy our client funds
obligations. However, our investments are made with the safety of principal, liquidity, and diversification as the primary goals to minimize the risk of not having
sufficient funds to satisfy all of our client funds obligations. We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our
client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our
$9.25 billion commercial paper program (rated A-1+ by Standard and Poor’s and Prime-1 ("P-1") by Moody’s, the highest possible credit ratings), ability to engage
in reverse repurchase agreements and available borrowings under our $9.25 billion committed credit facilities. The reduced availability of financing during periods
of economic turmoil, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our
business. In addition to liquidity risk, our investments are subject to interest rate risk and credit risk, as discussed below.
We have established credit quality, maturity, and exposure limits for our investments. The minimum allowed credit rating at time of purchase for
corporate and Canadian provincial bonds is BBB, for asset-backed securities is AAA, and for municipal bonds is A. The maximum maturity at time of purchase
for BBB rated securities is 5 years, for single A rated securities is 7 years, and for AA rated and AAA rated securities is 10 years. Time deposits and commercial
paper must be rated A-1 and/or P-1. Money market funds must be rated AAA/Aaa-mf.
35
Details regarding our overall investment portfolio are as follows:
(In millions)
Years ended June 30,
Average investment balances at cost:
Corporate investments
Funds held for clients
Total
Average interest rates earned exclusive of realized
(gains)/losses on:
Corporate investments
Funds held for clients
Total
Realized gains on available-for-sale securities
Realized losses on available-for-sale securities
Net realized losses/(gains) on available-for-sale securities
As of June 30:
2016
2015
2014
$
$
5,610.1
$
4,560.4
$
22,418.7
21,798.4
28,028.8
$
26,358.8
$
4,072.4
20,726.5
24,798.9
1.1%
1.7%
1.6%
1.3%
1.7%
1.7%
$
$
(5.1)
$
(6.8)
$
10.1
1.9
5.0
$
(4.9)
$
1.4%
1.8%
1.7%
(20.4)
3.9
(16.5)
Net unrealized pre-tax gains on available-for-sale securities
$
510.2 $
216.5 $
324.4
Total available-for-sale securities at fair value
$
21,605.0 $
20,873.8 $
20,156.5
We are exposed to interest rate risk in relation to securities that mature, as the proceeds from maturing securities are reinvested. Factors that influence the
earnings impact of interest rate changes include, among others, the amount of invested funds and the overall portfolio mix between short-term and long-term
investments. This mix varies during the fiscal year and is impacted by daily interest rate changes. The annualized interest rate earned on our entire portfolio
declined to 1.6% for fiscal 2016 , as compared to 1.7% for fiscal 2015 . A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the
federal funds rate) and intermediate-term interest rates of 25 basis points applied to the estimated average investment balances and any related short-term
borrowings would result in approximately a $13 million impact to earnings from continuing operations before income taxes over the ensuing twelve-month period
ending June 30, 2017 . A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated average short-term investment balances
and any related short-term borrowings would result in approximately a $7 million impact to earnings from continuing operations before income taxes over the
ensuing twelve-month period ending June 30, 2017 .
We are exposed to credit risk in connection with our available-for-sale securities through the possible inability of the borrowers to meet the terms of the
securities. We limit credit risk by investing in investment-grade securities, primarily AAA and AA rated securities, as rated by Moody’s, Standard & Poor’s, and
for Canadian securities, DBRS. Approximately 80% of our available-for-sale securities held a AAA or AA rating at June 30, 2016 . In addition, we limit amounts
that can be invested in any security other than U.S. and Canadian government or government agency securities.
We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign currency exchange
rates that could impact our consolidated results of operations, financial position, or cash flows. We experienced pressure from foreign currency translation on our
revenue and earnings from continuing operations before income taxes in fiscal 2015 and the first three quarters of fiscal 2016. We manage our exposure to these
market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We may use
derivative financial instruments as risk management tools and not for trading purposes. We had no derivative financial instruments outstanding at June 30, 2016 or
2015 .
36
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1, New Accounting Pronouncements, of Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial
statements requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. We
continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. The estimates are based on historical experience
and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by
management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are
discussed below.
Revenue Recognition. Our revenues are primarily attributable to fees for providing services ( e.g., Employer Services' payroll processing fees), investment
income on payroll funds, payroll tax filing funds and other Employer Services' client-related funds, and fees charged to implement clients on the Company's
solutions. We enter into agreements for a fixed fee per transaction ( e.g., number of payees or number of payrolls processed). Fees associated with services are
recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is
reasonably assured.
PEO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and
administering state unemployment insurance, among other human resources functions. Amounts collected from PEO worksite employers include payroll, fees for
benefits, and an administrative fee that also includes payroll taxes, fees for workers’ compensation and state unemployment taxes.
The payroll and payroll taxes collected from the worksite employers is presented in revenue net, as the Company is not the primary obligor with respect to
this aspect of the PEO arrangement. With respect to the payroll and payroll taxes, the worksite employer is the primary obligor, has latitude in establishing price,
selects suppliers, and determines the service specifications.
The fees collected from the worksite employers for benefits, workers’ compensation and state unemployment taxes are presented in revenues and the
associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as the Company acts as a principal with
respect to this aspect of the arrangement. With respect to the fees for benefits, workers’ compensation and state unemployment taxes, the Company is the primary
obligor, has latitude in establishing price, selects suppliers, determines the service specifications and is liable for credit risk.
We recognize interest income on collected but not yet remitted funds held for clients in revenues as earned, as the collection, holding and remittance of
these funds are critical components of providing these services.
Client implementation fees are charged to set clients up on our solutions and are deferred until the client has gone live and services have begun. These
fees are amortized to revenue over the longer of the contractual term or expected client life, including estimated renewals of client contracts.
We assess the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as
the customer's payment history.
Goodwill . We account for goodwill in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other," which
requires that goodwill be tested for impairment annually whenever events or changes in circumstances indicate the carrying value may not be recoverable.
According to ASC 350, we can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or can directly perform the two-step
impairment test. Based on a qualitative assessment, if it is determined that the fair value of a reporting unit is more likely than not less than its carrying amount, the
two-step impairment test prescribed by ASC 350 would be performed.
Our annual goodwill impairment assessment as of June 30, 2016 was performed using a qualitative approach. The qualitative assessment considered
industry and market considerations for any deterioration in the environment in which we operate, the competitive environment, a decline (both absolute and
relative to peers) in market-dependent multiples or metrics, any changes in the market for our services, and regulatory and political development. Additionally, we
assessed financial
37
performance by reporting unit and considered cost factors, such as labor or other costs, that would have a negative effect on results. The annual goodwill
impairment assessments performed for fiscal 2016 have indicated that it is more likely than not that the fair value of our reporting units is substantially in excess of
carrying value and not at risk of failing step one of the quantitative goodwill impairment test. Based on our qualitative assessment, the Company has determined
that goodwill is not impaired.
Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred
tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required
in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns ( e.g. , realization of deferred
tax assets, changes in tax laws or interpretations thereof). In addition, we are subject to the continuous examination of our income tax returns by the Internal
Revenue Service ("IRS") and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial
statements.
There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Specifically,
the likelihood of an entity's tax benefits being sustained must be “more likely than not” assuming that those positions will be examined by taxing authorities with
full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If a tax position drops below the “more likely than
not” standard, the benefit can no longer be recognized. Assumptions, judgment and the use of estimates are required in determining if the “more likely than not”
standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard could materially impact
our consolidated financial statements. As of June 30, 2016 and 2015 , the Company's liabilities for unrecognized tax benefits, which include interest and penalties,
were $27.4 million and $27.1 million , respectively.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax
years and jurisdictions. Based on current estimates, favorable settlements related to various jurisdictions and tax periods could increase earnings up to $2 million in
the next twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount
of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision
become known.
Stock-Based Compensation . We measure stock-based compensation expense based on the fair value of the award on the date of grant. We determine the
fair value of stock options issued by using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to
volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a
combination of implied market volatilities, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based on historical experience
and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also
incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of
the binomial model and represents the period of time that options granted are expected to be outstanding. Determining these assumptions is subjective and
complex, and, therefore, a change in the assumptions utilized could impact the calculation of the fair value of our stock options.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is provided under the caption “Quantitative and Qualitative Disclosures About Market Risk” under “Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
38
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the accompanying consolidated balance sheets of Automatic Data Processing, Inc. and subsidiaries (the “Company”) as of June 30, 2016
and 2015, and the related statements of consolidated earnings, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period
ended June 30, 2016. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a) 2. These financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial
statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Automatic Data Processing, Inc. and
subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016, in
conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal
control over financial reporting as of June 30, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated August 5, 2016 expressed an unqualified opinion on the Company’s internal control
over financial reporting.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 5, 2016
39
Statements of Consolidated Earnings
(In millions, except per share amounts)
Years ended June 30,
2016
2015
2014
REVENUES:
Revenues, other than interest on funds held
for clients and PEO revenues
Interest on funds held for clients
PEO revenues (A)
TOTAL REVENUES
EXPENSES:
Costs of revenues:
Operating expenses
Systems development and programming costs
Depreciation and amortization
TOTAL COSTS OF REVENUES
Selling, general, and administrative expenses
Interest expense
TOTAL EXPENSES
Other income, net
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
Provision for income taxes
NET EARNINGS FROM CONTINUING OPERATIONS
(LOSSES)/EARNINGS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES
(Benefit)/provision for income taxes
NET (LOSS)/EARNINGS FROM DISCONTINUED OPERATIONS
NET EARNINGS
Basic Earnings Per Share from Continuing Operations
Basic Earnings Per Share from Discontinued Operations
BASIC EARNINGS PER SHARE
Diluted Earnings Per Share from Continuing Operations
Diluted Earnings Per Share from Discontinued Operations
DILUTED EARNINGS PER SHARE
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
$
8,234.0
$
377.3
3,056.5
11,667.8
6,025.0
603.7
211.6
6,840.3
2,637.0
56.2
9,533.5
7,928.3 $
377.7
2,632.5
10,938.5
7,595.4
373.4
2,257.6
10,226.4
5,625.3
595.4
206.9
6,427.6
2,496.9
6.5
8,931.0
5,290.8
551.2
199.0
6,041.0
2,370.3
6.1
8,417.4
(100.4)
(63.2)
(70.2)
2,234.7
2,070.7
1,879.2
741.3
$
1,493.4
$
694.2
1,376.5 $
636.6
1,242.6
$
$
$
$
$
$
(1.4)
(0.5)
(0.9)
$
171.5
95.5
76.0 $
414.9
141.6
273.3
1,492.5
$
1,452.5 $
1,515.9
3.27
$
—
3.27
$
3.25
$
—
3.25
$
2.91 $
0.16
3.07 $
2.89 $
0.16
3.05 $
457.0
459.1
472.6
475.8
2.59
0.57
3.17
2.57
0.57
3.14
478.9
483.1
(A) For the years ended June 30, 2016 ("fiscal 2016 "), June 30, 2015 ("fiscal 2015 "), and June 30, 2014 ("fiscal 2014 ") Professional Employer Organization ("PEO") revenues are net of direct
pass-through costs, primarily consisting of payroll wages and payroll taxes, of $30,928.6 million , $26,674.1 million , and $23,192.2 million , respectively.
See notes to the consolidated financial statements.
40
Statements of Consolidated Comprehensive Income
(In millions)
Years ended June 30,
Net earnings
Other comprehensive income:
Currency translation adjustments
Unrealized net gains/(losses) on available-for-sale securities
Tax effect
Reclassification of net losses/(gains) on available-for-sale securities to net earnings
Tax effect
Pension net (losses)/gains arising during the period
Tax effect
Reclassification of pension liability adjustment to net earnings
Tax effect
Other comprehensive income/(loss), net of tax
Comprehensive income
2016
2015
2014
$
1,492.5 $
1,452.5 $
1,515.9
(25.5)
(239.6)
59.9
288.8
(102.2)
5.0
(1.7)
(199.4)
72.9
12.0
(4.4)
(103.0)
38.6
(4.9)
1.6
(87.4)
32.7
17.9
(6.5)
53.5
(18.2)
(16.5)
6.1
102.8
(39.7)
20.7
(5.8)
45.5
(350.6)
162.8
$
1,538.0 $
1,101.9 $
1,678.7
See notes to the consolidated financial statements.
41
Consolidated Balance Sheets
(In millions, except per share amounts)
June 30,
Assets
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net of allowance for doubtful accounts of $38.1 and $35.5, respectively
Other current assets
Total current assets before funds held for clients
Funds held for clients
Total current assets
Long-term marketable securities
Long-term receivables, net of allowance for doubtful accounts of $0.5 and $0.6, respectively
Property, plant and equipment, net
Other assets
Goodwill
Intangible assets, net
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Accrued payroll and payroll-related expenses
Dividends payable
Short-term deferred revenues
Income taxes payable
Total current liabilities before client funds obligations
Client funds obligations
Total current liabilities
Long-term debt
Other liabilities
Deferred income taxes
Long-term deferred revenues
Total liabilities
Commitments and Contingencies (Note 11)
Stockholders' equity:
Preferred stock, $1.00 par value: Authorized, 0.3 shares; issued, none
Common stock, $0.10 par value: Authorized, 1,000.0 shares; issued 638.7 shares at June 30, 2016
and 2015, outstanding, 455.7 and 466.4 shares at June 30, 2016 and 2015, respectively
Capital in excess of par value
Retained earnings
Treasury stock - at cost: 183.0 and 172.3 shares at June 30, 2016 and June 30, 2015, respectively
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to the consolidated financial statements.
42
2016
2015
$
3,191.1
$
23.5
1,742.8
701.8
5,659.2
33,841.2
39,500.4
7.8
27.1
685.0
1,233.5
1,682.0
534.2
1,639.3
26.6
1,546.9
731.1
3,943.9
24,865.3
28,809.2
28.9
32.2
672.7
1,270.8
1,793.5
503.2
$
43,670.0
$
33,110.5
$
152.3
$
1,246.8
616.7
238.4
233.2
28.2
2,515.6
33,331.8
35,847.4
2,007.7
701.1
251.1
381.1
194.5
1,159.2
627.3
226.4
228.6
27.2
2,463.2
24,650.5
27,113.7
9.2
644.3
172.1
362.7
39,188.4
28,302.0
—
63.9
768.1
14,003.3
(10,138.6)
(215.1)
4,481.6
$
43,670.0
$
—
63.9
663.3
13,460.3
(9,118.4)
(260.6)
4,808.5
33,110.5
Statements of Consolidated Stockholders' Equity
(In millions, except per share amounts)
Balance at June 30, 2013
Net earnings
Other comprehensive income
Stock-based compensation expense
Issuances relating to stock compensation plans
Tax benefits from stock compensation plans
Treasury stock acquired (9.0 shares)
Dividends ($1.88 per share)
Balance at June 30, 2014
Net earnings
Other comprehensive (loss)
Stock-based compensation expense
Issuances relating to stock compensation plans
Tax benefits from stock compensation plans
Treasury stock acquired (18.2 shares)
Spin-off of CDK Global, Inc.
Dividend from CDK Global, Inc.
Dividends ($1.95 per share)
Balance at June 30, 2015
Net earnings
Other comprehensive income
Stock-based compensation expense
Issuances relating to stock compensation plans
Tax benefits from stock compensation plans
Treasury stock acquired (13.8 shares)
Other
Dividends ($2.08 per share)
Balance at June 30, 2016
Common Stock
Shares
Amount
Capital in Excess of
Par Value
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Income
638.7 $
—
—
—
—
—
—
—
638.7 $
—
—
—
—
—
—
—
—
—
638.7 $
—
—
—
—
—
—
—
—
638.7 $
63.9 $
—
—
—
—
—
—
—
63.9 $
—
—
—
—
—
—
—
—
—
63.9 $
—
—
—
—
—
—
—
—
63.9 $
456.9 $
—
—
110.3
(78.6)
56.6
—
—
545.2 $
—
—
112.8
(67.8)
73.1
—
—
—
—
663.3 $
—
—
117.2
(47.5)
35.1
—
—
—
768.1 $
13,020.3 $
1,515.9
—
—
—
—
—
(903.3)
13,632.9 $
1,452.5
—
—
—
—
—
(1,523.0)
825.0
(927.1)
13,460.3 $
1,492.5
—
—
—
—
—
6.2
(955.7)
14,003.3 $
(7,366.6) $
—
—
—
314.5
—
(697.9)
—
(7,750.0) $
—
—
—
243.0
—
(1,611.4)
—
—
—
(9,118.4) $
—
—
—
182.5
—
(1,202.7)
—
—
15.4
—
162.8
—
—
—
—
—
178.2
—
(350.6)
—
—
—
—
(88.2)
—
—
(260.6)
—
45.5
—
—
—
—
—
—
(10,138.6) $
(215.1)
See notes to the consolidated financial statements.
43
Statements of Consolidated Cash Flows
(In millions)
Years ended June 30,
Cash Flows from Operating Activities:
Net earnings
Adjustments to reconcile net earnings to cash flows provided by operating activities:
Depreciation and amortization
Deferred income taxes
Stock-based compensation expense
Excess tax benefit related to exercise of stock options and restricted stock
Net pension expense
Net realized loss / (gain) from the sales of marketable securities
Net amortization of premiums and accretion of discounts on available-for-sale securities
Gain on sale of building
Gain on sale of divested businesses, net of tax
Other
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
Increase in accounts receivable
Increase in other assets
(Decrease) / increase in accounts payable
Increase in accrued expenses and other liabilities
Proceeds from the sale of notes receivable
Operating activities of discontinued operations
Net cash flows provided by operating activities
Cash Flows from Investing Activities:
Purchases of corporate and client funds marketable securities
Proceeds from the sales and maturities of corporate and client funds marketable securities
Net (increase) / decrease in restricted cash and cash equivalents held to satisfy client funds obligations
Capital expenditures
Additions to intangibles
Acquisitions of businesses, net of cash acquired
Proceeds from the sale of property, plant, and equipment and other assets
Dividend received from CDK Global, Inc.
Cash retained by CDK Global, Inc.
Proceeds from the sale of divested businesses
Investing activities of discontinued operations
Net cash flows (used in) / provided by investing activities
Cash Flows from Financing Activities:
Net increase / (decrease) in client funds obligations
Proceeds from debt issuance
Payments of debt
Repurchases of common stock
Proceeds from stock purchase plan and exercises of stock options
Excess tax benefit related to exercise of stock options and restricted stock
Dividends paid
Net repayments from reverse repurchase agreements
Net (repayments) / proceeds from issuance of commercial paper
Other
Financing activities of discontinued operations
Net cash flows provided by / (used in) financing activities
2016
2015
2014
$
1,492.5
$
1,452.5 $
1,515.9
288.6
0.7
137.6
(37.4)
17.7
5.0
94.1
(13.9)
(21.8)
25.7
(224.6)
(108.9)
(15.9)
220.5
—
—
1,859.9
(5,876.3)
5,215.4
(8,218.2)
(168.5)
(217.5)
—
15.7
—
—
162.2
—
(9,087.2)
8,803.3
1,998.3
(1.5)
(1,155.7)
75.3
37.4
(943.6)
—
—
(23.4)
—
8,790.1
277.9
(15.3)
143.2
(68.4)
17.6
(4.9)
100.3
—
(78.4)
6.7
(175.1)
(109.1)
13.1
122.1
226.7
(3.3)
1,905.6
(5,047.6)
3,841.0
(2,960.6)
(158.8)
(176.7)
(8.1)
23.6
825.0
(180.0)
98.6
(16.7)
(3,760.3)
6,074.4
—
(2.3)
(1,557.2)
109.1
68.4
(927.6)
—
(2,173.0)
23.4
1.5
1,616.7
266.6
(37.9)
117.1
(49.9)
24.3
(16.5)
94.4
—
(10.5)
17.0
(170.7)
(246.2)
9.6
263.8
—
44.4
1,821.4
(3,414.9)
2,059.5
2,537.8
(159.8)
(143.6)
—
0.4
—
—
24.4
(90.5)
813.3
(2,989.5)
—
(3.3)
(667.3)
194.2
49.9
(883.1)
(245.9)
2,173.0
(1.1)
14.9
(2,358.2)
Effect of exchange rate changes on cash and cash equivalents
(11.0)
(106.3)
8.0
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Less cash and cash equivalents of discontinued operations, end of period
Cash and cash equivalents of continuing operations, end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes, net of income tax refunds
See notes to the consolidated financial statements.
44
1,551.8
1,639.3
3,191.1
—
$
3,191.1
$
(344.3)
284.5
1,983.6
1,639.3
—
1,639.3 $
1,699.1
1,983.6
399.6
1,584.0
$
$
37.5
651.6
$
$
5.7 $
773.3 $
5.5
821.5
Notes to Consolidated Financial Statements
(Tabular dollars in millions, except per share amounts)
NOTE 1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Preparation. The accompanying Consolidated Financial Statements and footnotes thereto of Automatic Data Processing, Inc. and its
subsidiaries (“ADP” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the assets,
liabilities, revenue, costs, expenses, and accumulated other comprehensive income that are reported in the Consolidated Financial Statements and footnotes thereto.
Actual results may differ from those estimates. The Consolidated Financial Statements and all relevant footnotes have been adjusted for all businesses that qualify
as a discontinued operation (see Note 2 ). The Financial Data by Segment and Geographic Area (Note 13) has also been adjusted to reflect the historical results of
AdvancedMD ("AMD") within the Other segment.
B. Description of Business. The Company is a provider of cloud-based Human Capital Management ("HCM") solutions. The Company classifies its
operations into the following two reportable segments: Employer Services and Professional Employer Organization (“PEO”) Services. The primary components of
the “Other” segment are the results of operations of ADP Indemnity, non-recurring gains and losses, miscellaneous processing services, the elimination of
intercompany transactions, interest expense, certain charges and expenses that have not been allocated to the reportable segments, such as stock-based
compensation expense, and beginning in the first quarter of fiscal 2016, the historical results of the AMD business, which was previously reported in the Employer
Services segment. This change did not significantly affect reportable segment results and is consistent with the way the chief operating decision maker assesses the
performance of the reportable segments. Prior to October 1, 2014, the Company had a third reportable segment, Dealer Services. Refer to Note 2 for further
information.
C. Revenue Recognition. Revenues are primarily attributable to fees for providing services ( e.g., Employer Services' payroll processing fees),
investment income on payroll funds, payroll tax filing funds, other Employer Services' client-related funds, and fees charged to implement clients on the
Company's solutions. The Company enters into agreements for a fixed fee per transaction ( e.g., number of payees or number of payrolls processed). Fees
associated with services are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or
determinable and collectability is reasonably assured.
PEO provides a comprehensive human resources outsourcing solution, including offering benefits, providing workers’ compensation insurance, and
administering state unemployment insurance, among other human resources functions. Amounts collected from PEO worksite employers include payroll, fees for
benefits, and an administrative fee that also includes payroll taxes, fees for workers’ compensation and state unemployment taxes.
The payroll and payroll taxes collected from the worksite employers is presented in revenue net, as the Company is not the primary obligor with respect to
this aspect of the PEO arrangement. With respect to the payroll and payroll taxes, the worksite employer is the primary obligor, has latitude in establishing price,
selects suppliers, and determines the service specifications.
The fees collected from the worksite employers for benefits, workers’ compensation and state unemployment taxes are presented in revenues and the
associated costs of benefits, workers’ compensation and state unemployment taxes are included in operating expenses, as the Company acts as a principal with
respect to this aspect of the arrangement. With respect to the fees for benefits, workers’ compensation and state unemployment taxes, the Company is the primary
obligor, has latitude in establishing price, selects suppliers, determines the service specifications and is liable for credit risk.
Interest income on collected but not yet remitted funds held for clients is recognized in revenues as earned, as the collection, holding and remittance of
these funds are critical components of providing these services.
Client implementation fees are charged to set clients up on the Company's platform and are deferred until the client has gone live on the Company's
solutions and services have begun. These fees are amortized to revenue over the longer of the contractual term or the expected client life, including estimated
renewals of client contracts. Additionally, certain
45
implementation costs are deferred until the client has gone live on the Company's solution and services have begun and are then amortized over the longer of the
contractual term or the expected client life, including estimated renewals of client contracts.
The Company assesses the collectability of revenues based primarily on the creditworthiness of the customer as determined by credit checks and analysis,
as well as the customer's payment history.
D. Cash and Cash Equivalents. Investment securities with a maturity of ninety days or less at the time of purchase are considered cash equivalents. The
fair value of our cash and cash equivalents approximates carrying value.
E. Corporate Investments and Funds Held for Clients. All of the Company's marketable securities are considered to be “available-for-sale” and,
accordingly, are carried on the Consolidated Balance Sheets at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a separate component of accumulated other comprehensive income on the Consolidated Balance Sheets until realized. Realized gains and losses
from the sale of available-for-sale securities are determined on a specific-identification basis and are included in other income, net on the Statements of
Consolidated Earnings.
If the fair value of an available-for-sale debt security is below its amortized cost, the Company assesses whether it intends to sell the security or if it is
more likely than not the Company will be required to sell the security before recovery. If either of those two conditions is met, the Company would recognize a
charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value. If the Company does not intend to sell a security or it
is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss,
which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income.
Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-
interest method. Dividend and interest income are recognized when earned.
F. Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement date and is based upon the Company’s principal, or most advantageous, market for a specific
asset or liability.
U.S. GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:
Level 1 Fair value is determined based upon quoted prices for identical assets or liabilities that are traded in active markets.
Level 2 Fair value is determined based upon inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the asset or liability, including:
· quoted prices for similar assets or liabilities in active markets;
· quoted prices for identical or similar assets or liabilities in markets that are not active;
· inputs other than quoted prices that are observable for the asset or liability; or
· inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Fair value is determined based upon inputs that are unobservable and reflect the Company’s own assumptions about the assumptions that market
participants would use in pricing the asset or liability based upon the best information available in the circumstances (e.g., internally derived assumptions
surrounding the timing and amount of expected cash flows).
The Company's corporate investments and funds held for clients (see Note 4) and its long term debt are measured at fair value on a recurring basis as
described below. Over 99% of the Company's available-for-sale securities included in Level 2 are valued based on prices obtained from an independent pricing
service. To determine the fair value of the Company's Level 2 investments, the independent pricing service uses various pricing models for each asset class that are
consistent with what other market participants would use, including the market approach. Inputs and assumptions to the pricing model of the independent pricing
service are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids,
offers and other market-related data. Since many fixed income securities do not trade on a daily basis, the independent pricing service applies available
information, as applicable, through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare
valuations. For the purposes of valuing the Company’s asset-backed securities, as well as the mortgage-backed securities that are included within Other securities
in Note 4, the independent pricing service includes additional inputs to the model such as monthly payment
46
information, new issue data, and collateral performance. For the purposes of valuing the Company’s Municipal bonds, the independent pricing service includes
Municipal Market Data benchmark yield curves as additional inputs to the model. While the Company is not provided access to the proprietary models of the third
party pricing service, each quarterly reporting period, the Company reviews the inputs utilized by the independent pricing service and compares the valuations
received from the independent pricing service to valuations from at least one other observable source for reasonableness. The Company has not adjusted the prices
obtained from the independent pricing service and the Company believes the prices received from the independent pricing service are representative of the prices
that would be received to sell the assets at the measurement date (exit price). The Company has no available-for-sale securities included in Level 1 and Level 3.
In September 2015 , the Company issued fixed-rate notes with 5 -year and 10 -year maturities for an aggregate principal amount of $2.0 billion
(collectively the "Notes"). The Notes are valued utilizing a variety of inputs obtained from an independent pricing service, including benchmark yields, reported
trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. The Company reviews the
values generated by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations
from at least one other observable source. The Company has not adjusted the prices obtained from the independent pricing service.
The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of
assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the
fair value hierarchy. The significant input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
G. Long-term Receivables. Long-term receivables primarily relate to implementation and transition costs charged to clients acquiring ADP’s products
and services. Unearned income from finance receivables represents the excess of gross receivables over the amount financed. Unearned income is amortized using
the effective-interest method to maintain a constant rate of return over the term of each contract.
Notes receivable aged over 30 days past due are considered delinquent and notes receivable aged over 60 days past due with known collection issues are
placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual
receivables are applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for
notes receivable is resumed.
The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the
Company's existing note receivables.
H. Property, Plant and Equipment. Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The
estimated useful lives of assets are primarily as follows:
Data processing equipment
Buildings
Furniture and fixtures
2 to 5 years
20 to 40 years
4 to 7 years
The Company has obligations under various facilities, equipment leases, and software license agreements. The Company assesses whether these
arrangements meet the criteria for capital leases by determining whether the agreement transfers ownership of the asset, whether the lease includes a bargain
purchase option, whether the lease term is for greater than 75% of the asset's useful life, or whether the minimum lease payments exceed 90% of the leased
equipment's fair market value. All of the Company's leases are classified as operating leases. Total expense under these operating lease agreements was
approximately $271.3 million , $237.9 million , and $227.4 million in fiscal 2016 , 2015 , and 2014 , respectively.
I. Goodwill. The Company accounts for goodwill in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and
Other," which requires that goodwill be tested for impairment annually whenever events or changes in circumstances indicate the carrying value may not be
recoverable. According to ASC 350, the Company can opt to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or can directly
perform the two-step impairment test. Based on a qualitative assessment, if it is determined that the fair value of a reporting unit is more likely than not less than its
carrying amount, the two-step impairment test prescribed by ASC 350 would be performed.
47
The Company's annual goodwill impairment assessment as of June 30, 2016 was performed using a qualitative approach. The qualitative assessment
considered industry and market considerations for any deterioration in the environment in which the Company operates, the competitive environment, a decline
(both absolute and relative to peers) in market-dependent multiples or metrics, any changes in the market for the Company's products and services, and regulatory
and political developments. Additionally, the Company assessed financial performance by reporting unit and considered cost factors, such as labor or other costs,
that would have a negative effect on results. Based on the qualitative assessment, the Company has determined that goodwill is not impaired.
J. Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
K. Foreign Currency. The net assets of the Company's foreign subsidiaries are translated into U.S. dollars based on exchange rates in effect for each
period, and revenues and expenses are translated at average exchange rates in the periods. Gains or losses from balance sheet translation are included in
accumulated other comprehensive income on the Consolidated Balance Sheets. Currency transaction gains or losses, which are included in the results of
operations, are not significant for all periods presented.
L. Foreign Currency Risk Management Programs and Derivative Financial Instruments. The Company transacts business in various foreign
jurisdictions and is therefore exposed to market risk from changes in foreign currency exchange rates that could impact its consolidated results of operations,
financial position, or cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. The Company does not use derivative financial instruments for trading purposes.
M. Earnings per Share (“EPS”). The Company computes EPS in accordance with ASC 260.
The calculations of basic and diluted EPS are as follows:
Years ended June 30,
2016
Net earnings from continuing operations
Weighted average shares (in millions)
EPS from continuing operations
2015
Net earnings from continuing operations
Weighted average shares (in millions)
EPS from continuing operations
2014
Net earnings from continuing operations
Weighted average shares (in millions)
EPS from continuing operations
Effect of
Employee Stock
Option Shares
Basic
Effect of
Employee
Restricted
Stock
Shares
Diluted
$
1,493.4
457.0
3.27
$
$
1,376.5
472.6
2.91
$
$
1,242.6
478.9
2.59
$
0.8
1.6
2.7
$
1,493.4
1.3
$
459.1
3.25
$
1,376.5
1.6
$
475.8
2.89
$
1,242.6
1.5
$
483.1
2.57
Options to purchase 1.8 million , 0.4 million , and 1.5 million shares of common stock for fiscal 2016 , fiscal 2015 , and fiscal 2014 , respectively, were
excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
48
N. Stock-Based Compensation. The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the
date of the grant, and in the case of international units settled in cash, adjusts this fair value based on changes in the Company's stock price during the vesting
period. The Company determines the fair value of stock options issued using a binomial option-pricing model. The binomial option-pricing model considers a
range of assumptions related to volatility, dividend yield, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial
option-pricing model are based on a combination of implied market volatilities, historical volatility of the Company's stock price, and other factors. Similarly, the
dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of
grant. The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of a stock
option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. Restricted stock
units and restricted stock awards are valued based on the closing price of the Company's common stock on the date of the grant and, in the case of performance
based restricted stock units and restricted stock, are adjusted for changes to probabilities of achieving performance targets. International restricted stock units are
settled in cash and are marked-to-market based on changes in the Company's stock price. Refer to Note 9 for additional information on the Company's stock-based
compensation programs.
O. Internal Use Software. Expenditures for major software purchases and software developed or obtained for internal use are capitalized and amortized
over a three to five -year period on a straight-line basis. The Company's policy provides for the capitalization of external direct costs of materials and services
associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes certain payroll and payroll-related costs for
employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is
limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-
implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and enhancements, as it is
impractical to separate these costs from normal maintenance activities.
P. Acquisitions. Assets acquired and liabilities assumed in business combinations are recorded on the Company’s Consolidated Balance Sheets as of the
respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company are included in
the Statements of Consolidated Earnings since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the
underlying assets acquired and liabilities assumed is allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon
preliminary estimates and assumptions and subject to revision when the Company receives final information, including appraisals and other analysis. Accordingly,
the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes available, but will not exceed
twelve months. The Company did not acquire any businesses during fiscal 2016 or fiscal 2014 . The Company acquired one business during fiscal 2015 for
approximately $10.1 million , net of cash acquired. The acquisition was not material to the Company's operations, financial position, or cash flows. Purchase
accounting has been finalized for all acquisitions completed to date.
Q. Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. The
Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities.
There is a financial statement recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Specifically,
the likelihood of an entity's tax benefits being sustained must be “more likely than not,” assuming that these positions will be examined by taxing authorities with
full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If a tax position drops below the “more likely than
not” standard, the benefit can no longer be recognized. Assumptions, judgment, and the use of estimates are required in determining if the “more likely than not”
standard has been met when developing the provision for income taxes. As of June 30, 2016 and 2015 , the Company's liabilities for unrecognized tax benefits,
which include interest and penalties, were $27.4 million and $27.1 million , respectively.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may increase or decrease for all open tax
years and jurisdictions. Based on current estimates, favorable settlements related to various jurisdictions and tax periods could increase earnings by up to $2
million . Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually assess the likelihood and amount of potential
adjustments and adjust the income tax provision, the current tax liability, and deferred taxes in the period in which the facts that give rise to a revision become
known.
49
R. Workers' Compensation Costs. The Company employs a third-party actuary to assist in determining the estimated claim liability related to workers'
compensation and employer's liability coverage for PEO Services worksite employees. In estimating ultimate loss rates, we utilize historical loss experience,
exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the worksite employee's job responsibilities, their location,
the historical frequency and severity of workers' compensation claims, and an estimate of future cost trends. For each reporting period, changes in the actuarial
assumptions resulting from changes in actual claims experience and other trends are incorporated into our workers' compensation claims cost estimates. PEO
Services has secured a workers’ compensation and employer’s liability insurance policy that has a $1 million per occurrence retention and, in fiscal years 2012 and
prior, aggregate stop loss insurance that covers any aggregate losses within the $1 million retention that collectively exceed a certain level, from an admitted and
licensed insurance company of AIG. For the fiscal years 2013 to 2016, as well as in July 2016 for the year ended June 30, 2017 ("fiscal 2017") policy year, ADP
Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited
("Chubb"), to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limit our overall
exposure incurred up to a certain limit. The Company believes the likelihood of ultimate losses exceeding this limit is remote.
S. Recently Issued Accounting Pronouncements.
Recently Adopted Accounting Pronouncements
In fiscal 2016, the Company prospectively adopted Accounting Standards Update ("ASU") 2015-17, "Balance Sheet Classification of Deferred Taxes."
The update simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets, including valuation allowances, be classified as
noncurrent in the consolidated balance sheets. ASU 2015-17 did not have a material impact on the Company’s consolidated statement of financial condition and
had no impact on the Company's consolidated results of operations or cash flows. Prior periods were not retrospectively adjusted.
In fiscal 2016, the Company prospectively adopted ASU 2015-16, "Simplifying the Accounting for Measurement Period Adjustments." The update
eliminates the need to retrospectively adjust prior period information in the financial statements for acquisition adjustments to goodwill during the measurement
period. The adoption had no impact on the Company's consolidated results of operations, financial condition, or cash flows as presented, however, the future
impact of ASU 2015-16 will be dependent on future acquisitions, if any.
In fiscal 2016, the Company retrospectively adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." Debt issuance costs have been
presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. ASU 2015-03 did not have a material
impact on the Company's consolidated results of operations, financial condition, or cash flows.
In fiscal 2016, the Company prospectively adopted ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity." ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business
activity classified as held for sale should be reported as a discontinued operation. Per the criteria of ASU 2014-08, the Company did not classify the sale of AMD
as a discontinued operation. The businesses classified as a discontinued operation prior to June 30, 2015 continue to be classified as a discontinued operation (see
Note 3 ).
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that credit losses relating to available-for-sale debt securities will be recorded
through an allowance for credit losses rather than as a direct write-down to the security. ASU 2016-13 is effective for fiscal years beginning after December 15,
2019, including interim periods within that reporting period. Early adoption is permitted for annual periods beginning after December 15, 2018. The adoption of
ASU 2016-13 is not expected to have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.
In March 2016, FASB issued ASU 2016-09 "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting
(Topic 718)." Under this standard, among other changes, income tax benefits and deficiencies with respect to stock-based compensation will be recognized as
income tax expense or benefit in the income statement, excess tax benefits will be classified as an operating activity on the statement of cash flows and stock-based
compensation awards can qualify as equity awards even if the entity permits tax withholdings greater than the statutory minimum. ASU 2016-09 is effective for
fiscal years beginning after December 15, 2016, including interim periods within that
50
reporting period. Early adoption is permitted. The adoption of ASU 2016-09 is expected to impact the Company's provision for income taxes on its Statements of
Consolidated Earnings and its operating and financing cash flows on its Statements of Consolidated Cash Flows. The magnitude of such impacts are dependent
upon the Company's future grants of stock-based compensation, the Company's stock price in relation to the fair value of awards on grant date, and the exercise
behavior of the Company's equity compensation holders.
In February 2016, FASB issued ASU 2016-02 "Leases (Topic 842)." This update amends the existing accounting standards for lease accounting, and
requires lessees to recognize most lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. ASU 2016-02
requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. ASU 2016-02 will be effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet
determined the impact of ASU 2016-02 on its consolidated results of operations, financial condition, or cash flows.
In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." The update provides
guidance on whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer
should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company intends to prospectively adopt ASU 2015-05 on
July 1, 2016. ASU 2015-05 is expected to change the geography of certain software licenses on the Statements of Consolidated Earnings (from operating expenses
to depreciation and amortization) and the Consolidated Statements of Cash Flow (from operating cash flows to investing cash flows), as well as result in additional
intangible assets on the Consolidate Balance Sheet. The magnitude of these changes is dependent upon new or materially modified software licenses entered into
after July 1, 2016.
In April 2015, the FASB issued ASU 2015-04, "Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an
Employer's Defined Benefit Obligation and Plan Assets." The update allows an entity to remeasure their pension and other post-retirement benefit plan assets and
liabilities at the month-end closest to a significant event such as a plan amendment, curtailment, or settlement. ASU 2015-04 is to be applied prospectively and is
effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2015. Early adoption is permitted. The impact of ASU
2015-04 is dependent upon the nature of future significant events impacting the Company's pension plans, if any.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance,
and has since issued additional amendments to ASU 2014-09. These new standards require an entity to recognize revenue depicting the transfer of goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new
standards will also result in enhanced revenue related disclosures. Entities have the option to apply the new guidance under a retrospective approach to each prior
reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial
application within the Statements of Consolidated Financial Position. The new standards are effective for fiscal years, and interim reporting periods within those
years, beginning after December 15, 2017. Early adoption is permitted. The Company has not yet determined the impact of these new revenue recognition
standards on its consolidated results of operations, financial condition, or cash flows.
51
NOTE 2 . DIVESTITURES
A. Disposition
On September 1, 2015 , the Company completed the sale of its AMD business for a pre-tax gain of $29.1 million , less costs to sell, and recorded such
gain within Other income, net on the Statements of Consolidated Earnings. The Company determined that the disposition did not meet the criteria for reporting
discontinued operations under ASU 2014-08, which was adopted prospectively on July 1, 2015, as the disposition of this business does not represent a strategic
shift that has a major effect on the Company's operations or financial results. The historical results of AMD are being reported in the Other segment (see Note 13 ).
B. Discontinued Operations
On June 26, 2015 , the Company completed the sale of its Procure-to-Pay business ("P2P") for a pre-tax gain of $100.9 million , less costs to sell, and
recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings.
On September 30, 2014 , the Company completed the tax free spin-off of its former Dealer Services business, which was a separate reportable segment,
into an independent publicly traded company called CDK Global, Inc. ("CDK"). As a result of the spin-off, ADP stockholders of record on September 24, 2014
(the "record date") received one share of CDK common stock on September 30, 2014, par value $0.01 per share, for every three shares of ADP common stock held
by them on the record date and cash for any fractional shares of CDK common stock. ADP distributed approximately 160.6 million shares of CDK common stock
in the distribution. During the first quarter of fiscal 2016 , the Company became aware that 1.0 million of the 160.6 million shares of CDK stock distributed at the
distribution date were inadvertently issued and distributed with respect to certain unvested Company equity awards. The 1.0 million shares were canceled during
the first quarter of fiscal 2016 . Such shares distributed as part of the spin-off did not have any impact to previously reported results of operations, financial
condition, or cash flows. The spin-off was made without the payment of any consideration or the exchange of any shares by ADP stockholders. The spin-off,
transitional, and on-going relationships between ADP and CDK are governed by the Separation and Distribution Agreement entered into between ADP and CDK
and certain other ancillary agreements.
Incremental costs associated with the spin-off of CDK and divestiture of P2P of $50.1 million for fiscal 2015 are included in discontinued operations on
the Statements of Consolidated Earnings.
On February 28, 2014 , the Company completed the sale of its Occupational Health and Safety services business ("OHS") for a pre-tax gain of $15.6
million , less costs to sell, and recorded such gain within earnings from discontinued operations on the Statements of Consolidated Earnings. In connection with the
disposal of OHS, the Company classified the results of this business as discontinued operations for all periods presented. OHS was previously reported in the
Employer Services segment.
Results for discontinued operations were as follows:
Years ended June 30,
Revenues
Earnings from discontinued operations before income taxes
Provision for income taxes
Net (loss) / earnings from discontinued operations before gain on disposal of
discontinued operations
Gain on disposal of discontinued operations, less costs to sell
(Benefit) / provision for income taxes
Net gain on disposal of discontinued operations
2016
2015
2014
$
— $
538.8 $
1,993.1
—
—
—
(1.4)
(0.5)
(0.9)
69.2
71.6
399.3
136.5
(2.4)
262.8
102.3
23.9
78.4
15.6
5.1
10.5
Net (loss) / earnings from discontinued operations
$
(0.9) $
76.0 $
273.3
52
NOTE 3 . OTHER INCOME, NET
Other income, net consists of the following:
Years ended June 30,
Interest income on corporate funds
Realized gains on available-for-sale securities
Realized losses on available-for-sale securities
Gain on sale of notes receivable
Gain on sale of AMD (see Note 2)
Gain on sale of building
Other income, net
2016
2015
2014
$
(62.4) $
(56.9) $
(5.1)
10.1
—
(29.1)
(13.9)
(6.8)
1.9
(1.4)
—
—
(53.7)
(20.4)
3.9
—
—
—
$
(100.4) $
(63.2) $
(70.2)
During fiscal 2016 , the Company sold a building and, as a result, recorded a gain of $13.9 million in Other income, net, on the Statements of
Consolidated Earnings.
During fiscal 2015 , the Company sold notes receivable related to Dealer Services financing arrangements for $226.7 million . Although the sale of the
notes receivable transfers the majority of the risk to the purchaser, the Company does retain a minimal level of credit risk on the sold receivables. The cash
received in exchange for the notes receivable sold was recorded within the operating activities on the Statements of Consolidated Cash Flows and the gain on sale
of $1.4 million was recorded within Other income, net on the Statements of Consolidated Earnings.
NOTE 4 . CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS
Corporate investments and funds held for clients at June 30, 2016 and 2015 were as follows:
Type of issue:
Money market securities and other cash equivalents
$
15,458.6 $
— $
— $
15,458.6
June 30, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value (A)
Available-for-sale securities:
Corporate bonds
U.S. government agency securities
Asset-backed securities
Canadian government securities and
Canadian government agency securities
Canadian provincial bonds
U.S. Treasury securities
Municipal bonds
Other securities
9,429.2
4,298.8
3,761.9
995.1
735.4
746.9
594.2
533.3
261.8
91.3
59.0
12.8
30.8
16.3
23.9
15.8
(0.6)
—
(0.3)
—
(0.1)
—
(0.3)
(0.2)
9,690.4
4,390.1
3,820.6
1,007.9
766.1
763.2
617.8
548.9
Total available-for-sale securities
21,094.8
511.7
(1.5)
21,605.0
Total corporate investments and funds held for clients
$
36,553.4 $
511.7 $
(1.5)
$
37,063.6
(A) Included within available-for-sale securities are corporate investments with fair values of $31.3 million and funds held for clients with fair values of $21,573.7
million . All available-for-sale securities were included in Level 2.
53
Type of issue:
Money market securities and other cash equivalents
$
5,686.3 $
— $
— $
5,686.3
June 30, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value (B)
Available-for-sale securities:
Corporate bonds
U.S. government agency securities
Asset-backed securities
Canadian government securities and
Canadian government agency securities
Canadian provincial bonds
U.S. Treasury securities
Municipal bonds
Other securities
9,497.5
5,624.1
2,442.4
923.2
723.9
140.2
586.6
719.4
115.7
61.4
11.1
15.4
27.9
3.2
14.3
16.1
(29.6)
(9.5)
(6.1)
(0.2)
(0.8)
(0.3)
(1.4)
(0.7)
9,583.6
5,676.0
2,447.4
938.4
751.0
143.1
599.5
734.8
Total available-for-sale securities
20,657.3
265.1
(48.6)
20,873.8
Total corporate investments and funds held for clients
$
26,343.6 $
265.1 $
(48.6) $
26,560.1
(B) Included within available-for-sale securities are corporate investments with fair values of $55.5 million and funds held for clients with fair values of $20,818.3
million . All available-for-sale securities were included in Level 2.
For a description of the fair value hierarchy and the Company's fair value methodologies, including the use of an independent third-party pricing service,
see Note 1 "Summary of Significant Accounting Policies." The Company did not transfer any assets between Levels during fiscal 2016 or 2015 . In addition, the
Company did not adjust the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 1 or Level 3
as of June 30, 2016 .
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than
12 months as of June 30, 2016 , are as follows:
June 30, 2016
Securities in unrealized loss position
less than
12 months
Securities in unrealized loss position
greater than 12 months
Total
Unrealized
losses
Fair market
value
Unrealized
losses
Fair market
value
Gross
unrealized
losses
Fair
market value
Corporate bonds
$
(0.5)
$
138.0 $
(0.1)
$
35.1 $
(0.6)
$
173.1
U.S. government agency securities
Asset-backed securities
Canadian government securities and
Canadian government agency securities
Canadian provincial bonds
U.S. Treasury securities
Municipal bonds
Other securities
—
(0.1)
—
(0.1)
—
—
(0.1)
—
58.8
53.2
19.1
3.4
12.9
10.5
—
(0.2)
—
—
—
(0.3)
(0.1)
—
154.8
—
7.8
1.6
10.6
8.0
—
(0.3)
—
(0.1)
—
(0.3)
(0.2)
—
213.6
53.2
26.9
5.0
23.5
18.5
$
(0.8)
$
295.9 $
(0.7)
$
217.9 $
(1.5)
$
513.8
54
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than
12 months as of June 30, 2015 are as follows:
June 30, 2015
Securities in unrealized loss
position less than
12 months
Securities in unrealized loss
position greater than 12 months
Unrealized
losses
Fair market
value
Unrealized
losses
Fair market
value
Total
Gross
unrealized
losses
Fair
market value
$
(27.3) $
2,403.5 $
(2.3)
$
228.1 $
(29.6) $
2,631.6
(6.9)
(3.2)
(0.2)
(0.8)
(0.3)
(1.2)
(0.4)
836.5
606.8
85.8
101.5
28.6
143.6
36.6
(2.6)
(2.9)
—
—
—
(0.2)
(0.3)
374.0
443.6
—
10.0
—
6.0
13.7
(9.5)
(6.1)
(0.2)
(0.8)
(0.3)
(1.4)
(0.7)
1,210.5
1,050.4
85.8
111.5
28.6
149.6
50.3
$
(40.3) $
4,242.9 $
(8.3)
$
1,075.4 $
(48.6) $
5,318.3
Corporate bonds
U.S. government agency securities
Asset-backed securities
Canadian government securities and
Canadian government agency securities
Canadian provincial bonds
U.S. Treasury securities
Municipal bonds
Other securities
At June 30, 2016 , Corporate bonds include investment-grade debt securities, which include a wide variety of issuers, industries, and sectors, primarily
carry credit ratings of A and above, and have maturities ranging from July 2016 to April 2024 .
At June 30, 2016 , U.S. government agency securities primarily include debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks
with fair values of $3,220.0 million and $976.2 million , respectively. U.S. government agency securities represent senior, unsecured, non-callable debt that
primarily carry ratings of Aaa by Moody's and AA+ by Standard & Poor's with maturities ranging from July 2016 through May 2024 .
At June 30, 2016 , asset-backed securities include AAA rated senior tranches of securities with predominately prime collateral of fixed-rate credit card,
auto loan, equipment lease and rate reduction receivables with fair values of $2,172.3 million , $1,054.8 million , $338.2 million , and $255.2 million
respectively. These securities are collateralized by the cash flows of the underlying pools of receivables. The primary risk associated with these securities is the
collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through June 30, 2016 .
At June 30, 2016 , other securities and their fair value primarily represent: AAA and AA rated supranational bonds of $189.8 million , AAA and AA rated
sovereign bonds of $188.9 million , and AA rated mortgage-backed securities of $99.0 million that are guaranteed primarily by Federal National Mortgage
Association ("Fannie Mae"). The Company's mortgage-backed securities represent an undivided beneficial ownership interest in a group or pool of one or more
residential mortgages. These securities are collateralized by the cash flows of 15 -year and 30 -year residential mortgages and are guaranteed by Fannie Mae as to
the timely payment of principal and interest.
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
June 30,
Corporate investments:
Cash and cash equivalents
Short-term marketable securities
Long-term marketable securities
Total corporate investments
2016
2015
$
3,191.1 $
1,639.3
23.5
7.8
26.6
28.9
$
3,222.4 $
1,694.8
Funds held for clients represent assets that, based upon the Company's intent, are restricted for use solely for the purposes of satisfying the obligations to
remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets.
55
Funds held for clients have been invested in the following categories:
June 30,
Funds held for clients:
Restricted cash and cash equivalents held to satisfy client funds obligations
Restricted short-term marketable securities held to satisfy client funds obligations
Restricted long-term marketable securities held to satisfy client funds obligations
Total funds held for clients
2016
2015
$
12,267.5 $
3,032.1
18,541.6
$
33,841.2 $
4,047.0
4,497.7
16,320.6
24,865.3
Client funds obligations represent the Company's contractual obligations to remit funds to satisfy clients' payroll and tax payment obligations and are
recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds obligations represent liabilities that will
be repaid within one year of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets
totaling $33,331.8 million and $24,650.5 million as of June 30, 2016 and 2015 , respectively. The Company has classified funds held for clients as a current asset
since these funds are held solely for the purposes of satisfying the client funds obligations. The Company has reported the cash flows related to the purchases of
corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a
gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash inflows and outflows related to client funds
investments with original maturities of ninety days or less on a net basis within net increase in restricted cash and cash equivalents and other restricted assets held
to satisfy client funds obligations in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash flows related to the
cash received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing section of the Statements of
Consolidated Cash Flows.
Approximately 80% of the available-for-sale securities held a AAA or AA rating at June 30, 2016 , as rated by Moody's, Standard & Poor's and, for
Canadian securities, DBRS. All available-for-sale securities were rated as investment grade at June 30, 2016 .
Expected maturities of available-for-sale securities at June 30, 2016 are as follows:
Due in one year or less
Due after one year to two years
Due after two years to three years
Due after three years to four years
Due after four years
Total available-for-sale securities
$
$
NOTE 5 . PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost and accumulated depreciation at June 30, 2016 and 2015 are as follows:
June 30,
Property, plant, and equipment:
Land and buildings
Data processing equipment
Furniture, leaseholds, and other
Less: accumulated depreciation
Property, plant, and equipment, net
2016
2015
$
$
745.7 $
605.0
490.1
1,840.8
(1,155.8)
685.0 $
Depreciation of property, plant and equipment was $135.6 million , $127.2 million , and $124.1 million for fiscal 2016 , 2015 , and 2014 , respectively.
56
3,055.6
2,994.7
2,860.0
4,737.2
7,957.5
21,605.0
730.6
588.5
457.3
1,776.4
(1,103.7)
672.7
NOTE 6 . GOODWILL AND INTANGIBLE ASSETS, NET
Changes in goodwill for the fiscal years ended June 30, 2016 and 2015 are as follows:
Balance at June 30, 2014 (A)
Additions and other adjustments, net
Currency translation adjustments
Balance at June 30, 2015 (A)
Transfer of AMD goodwill (see Note 15)
Currency translation adjustments
Disposition of AMD
Balance at June 30, 2016
Employer
Services
PEO
Services
Other
Total
$
$
1,878.7 $
6.8
(96.8)
1,788.7 $
(100.4)
(11.1)
—
4.8 $
—
—
4.8 $
—
—
—
— $
1,883.5
—
—
6.8
(96.8)
— $
1,793.5
100.4
—
(100.4)
—
(11.1)
(100.4)
$
1,677.2 $
4.8 $
— $
1,682.0
(A) The goodwill balance at June 30, 2015 and 2014 is net of accumulated impairment losses of $42.7 million related to the Employer Services segment.
Components of intangible assets, net, are as follows:
June 30,
Intangible assets:
Software and software licenses
Customer contracts and lists
Other intangibles
Less accumulated amortization:
Software and software licenses
Customer contracts and lists
Other intangibles
2016
2015
$
1,811.6 $
603.7
207.8
2,623.1
(1,403.8)
(486.4)
(198.7)
(2,088.9)
1,648.7
625.4
209.0
2,483.1
(1,308.7)
(478.6)
(192.6)
(1,979.9)
Intangible assets, net
$
534.2 $
503.2
Other intangibles consist primarily of purchased rights, covenants, patents, and trademarks (acquired directly or through acquisitions). All of the
intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is 5 years ( 4 years
for software and software licenses, 9 years for customer contracts and lists, and 2 years for other intangibles). Amortization of intangible assets was $153.0 million
, $150.7 million , and $142.5 million for fiscal 2016 , 2015 , and 2014 , respectively.
Estimated future amortization expenses of the Company's existing intangible assets are as follows:
Twelve months ending June 30, 2017
Twelve months ending June 30, 2018
Twelve months ending June 30, 2019
Twelve months ending June 30, 2020
Twelve months ending June 30, 2021
57
$
$
$
$
$
Amount
153.5
118.3
85.5
62.4
47.9
NOTE 7 . SHORT TERM FINANCING
The Company has a $3.25 billion , 364 -day credit agreement with a group of lenders that matures June 2017 . The Company also has a $2.25 billion five
-year credit facility that matures in June 2020 that also contains an accordion feature under which the aggregate commitment can be increased by $500 million ,
subject to the availability of additional commitments. In addition, the Company has a five -year $3.75 billion credit facility maturing in June 2021 that contains an
accordion feature under which the aggregate commitment can be increased by $500 million , subject to the availability of additional commitments. The interest
rate applicable to committed borrowings is tied to LIBOR, the effective federal funds rate, or the prime rate depending on the notification provided by the
Company to the syndicated financial institutions prior to borrowing. The Company is also required to pay facility fees on the credit agreements. The primary uses
of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary. The Company had no
borrowings through June 30, 2016 under the credit agreements.
Our U.S. short-term funding requirements related to client funds are sometimes obtained through a short-term commercial paper program, which provides
for the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.
During the majority of fiscal 2016 , this commercial paper program provided for the issuance of up to $8.25 billion in aggregate maturity value; in June 2016 , we
increased our U.S. short-term commercial paper program to provide for the issuance of up to $9.25 billion in aggregate maturity value. The Company’s
commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 by Moody’s. These ratings denote the highest quality commercial paper
securities. Maturities of commercial paper can range from overnight to up to 364 days . At June 30, 2016 and 2015, the Company had no commercial paper
outstanding. In fiscal 2016 and 2015 , the Company's average daily borrowings were $2.7 billion and $2.3 billion , respectively, at a weighted average interest rate
of 0.3% and 0.1% , respectively. The weighted average maturity of the Company’s commercial paper in fiscal 2016 and 2015 was approximately two days .
The Company’s U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through
the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-
collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five
business days . At June 30, 2016 and 2015 , there were no outstanding obligations related to the reverse repurchase agreements. In fiscal 2016 and 2015 , the
Company had average outstanding balances under reverse repurchase agreements of $341.0 million and $421.2 million , respectively, at weighted average interest
rates of 0.4% .
NOTE 8 . LONG TERM DEBT
In September 2015 , the Company issued fixed-rate notes with 5 -year and 10 -year maturities for an aggregate principal amount of $2.0 billion . The
Notes are senior unsecured obligations, and interest is payable in arrears, semi-annually.
The principal amounts and associated effective interest rates of the Notes and other debt as of June 30, 2016 , are as follows. Debt outstanding at the
comparative period of June 30, 2015 was not significant.
Debt instrument
Fixed-rate 2.250% notes due September 15, 2020
Fixed-rate 3.375% notes due September 15, 2025
Other
Less: current portion
Less: unamortized discount and debt issuance costs
Total long-term debt
June 30, 2016
Effective Interest Rate
2.39%
3.48%
$
$
1,000.0
1,000.0
22.3
2,022.3
(2.5)
(12.1)
2,007.7
The effective interest rates for the Notes include the interest on the Notes and amortization of the discount and debt issuance costs.
As of June 30, 2016 , the fair value of the Notes, based on level 2 inputs, was $2,126.4 million . For a description of the fair value hierarchy and the
Company's fair value methodologies, including the use of an independent third-party pricing service, see Note 1 "Summary of Significant Accounting Policies."
NOTE 9 . EMPLOYEE BENEFIT PLANS
A. Stock-based Compensation Plans. Stock-based compensation consists of the following:
•
Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates
of grant. Stock options are issued under a graded vesting schedule and have a term of 10 years . Options granted after July 1, 2008 generally vest
ratably over four years . Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the
requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed
by the Company prior to vesting.
•
Restricted Stock.
•
Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and time-based restricted stock units
granted prior to fiscal 2013 are subject to vesting periods of up to five years and awards granted in fiscal 2013 and later are generally subject to a
vesting period of two years . Awards are forfeited if the employee ceases to be employed by the Company prior to vesting.
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based
restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period.
Dividends are paid on shares awarded under the time-based restricted stock program.
Time-based restricted stock units are settled in cash and cannot be transferred during the vesting period. Compensation expense relating to the
issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant
date and is subsequently remeasured at each reporting date during the vesting period based on the change in ADP stock price. No dividend
equivalents are paid on units awarded under the time-based restricted stock unit program.
•
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-
based restricted stock units generally vest over a one to three year performance period and a subsequent service period of up to 26 months .
Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end
of the performance period ranging from 0% to 150% of the "target awards." Awards are generally forfeited if the employee ceases to be
employed by the Company prior to vesting.
Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of
performance-based restricted stock is recognized over the vesting period based on the fair value of the award on the grant date with subsequent
adjustments to the number of shares awarded during the performance period based on probable and actual performance against targets. After the
performance period, if the performance targets are achieved, employees are eligible to receive dividends during the remaining vesting period on
shares awarded under the performance-based restricted stock program.
Performance-based restricted stock units are settled in either cash or stock, depending on the employee's home country, and cannot be transferred
during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock units settled in cash is
recognized over the vesting period initially based on the fair value of the award on the grant date with subsequent adjustments to the number of
units awarded during the performance period based on probable and actual performance against targets. In addition, compensation expense is
remeasured at each reporting period during the vesting period based on the change in ADP stock price. Compensation expense relating to the
issuance of performance-based restricted stock units settled in stock is recorded over the vesting period based on the fair value of the award on
the grant date with subsequent adjustments to the number of units awarded based on the probable and actual performance against targets.
Dividend equivalents are paid on awards settled in stock under the performance-based restricted stock unit program.
58
•
Employee Stock Purchase Plan. The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common
stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed
non-compensatory and, therefore, no compensation expense has been recorded.
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and
restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The
Company repurchased 13.8 million shares in fiscal 2016 as compared to 18.2 million shares repurchased in fiscal 2015 . The Company considers several factors in
determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances
due to employee benefit plan activity, and market conditions. Cash payments related to the settlement of vested time-based restricted stock units and performance-
based restricted stock units were approximately $25.2 million , $25.2 million , and $1.2 million during fiscal years 2016 , 2015 , and 2014 , respectively.
The following table represents stock-based compensation expense and related income tax benefits in each of fiscal 2016 , 2015 , and 2014 , respectively:
Years ended June 30,
Operating expenses
Selling, general and administrative expenses
System development and programming costs
Total pretax stock-based compensation expense
Income tax benefit
2016
2015
2014
$
23.1 $
27.0 $
97.4
17.1
95.8
20.4
137.6 $
143.2 $
21.7
79.5
15.9
117.1
49.6 $
51.1 $
42.2
$
$
Stock-based compensation expense attributable to employees of the discontinued operations are included in discontinued operations on the Statements of
Consolidated Earnings and therefore not presented in the table above. For fiscal 2015 and 2014 , such stock-based compensation expense was $5.5 million and
$21.2 million , respectively.
As a result of the spin-off of CDK, the number of vested and unvested ADP stock options, their strike price, and the number of unvested performance-
based and time-based restricted shares and units were adjusted to preserve the intrinsic value of the awards immediately prior to the spin-off using an adjustment
ratio based on the market close price of ADP stock prior to the spin-off and the market open price of ADP stock subsequent to the spin-off. Since these adjustments
were considered to be a modification of the awards in accordance to ASC 718, "Stock Compensation," the Company compared the fair value of the awards
immediately prior to the spin-off to the fair value immediately after the spin-off to measure potential incremental stock-based compensation expense, if any. The
adjustments did not result in an increase in the fair value of the awards and, accordingly, the Company did not record incremental stock-based compensation
expense. Unvested ADP stock options, unvested restricted stock, and unvested restricted stock units held by CDK employees were replaced by CDK awards
immediately following the spin-off. The stock-based compensation expense associated with the original grant of ADP awards to remaining ADP employees will
continue to be recognized within earnings from continuing operations in the Company's Statements of Consolidated Earnings.
As of June 30, 2016 , the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock
awards amounted to $12.2 million , $28.0 million , and $67.7 million , respectively, which will be amortized over the weighted-average remaining requisite service
periods of 1.7 years , 1.2 years , and 1.3 years , respectively.
59
In fiscal 2016 , the following activity occurred under the Company’s existing plans.
Stock Options:
Options outstanding at July 1, 2015
Options granted
Options exercised
Options canceled
Options outstanding at June 30, 2016
Options exercisable at June 30, 2016
Shares available for future grants, end of year
Shares reserved for issuance under stock option plans, end of year
Time-Based Restricted Stock and Time-Based Restricted Stock Units:
Restricted shares/units outstanding at July 1, 2015
Restricted shares/units granted
Restricted shares/units vested
Restricted shares/units forfeited
Restricted shares/units outstanding at June 30, 2016
Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:
Restricted shares/units outstanding at July 1, 2015
Restricted shares/units granted
Restricted shares/units vested
Restricted shares/units forfeited
Restricted shares/units outstanding at June 30, 2016
Number
of Options
(in thousands)
Weighted
Average Price
(in dollars)
5,888 $
1,138 $
(1,982) $
(175) $
4,869 $
2,197 $
20,469
25,338
55
75
41
70
65
54
Number of Shares
(in thousands)
Number of Units
(in thousands)
2,137
1,018
(1,134)
(132)
1,889
486
244
(245)
(51)
434
Number of Shares
(in thousands)
Number of Units
(in thousands)
903
286
(540)
(75)
574
534
358
(37)
(44)
811
The aggregate intrinsic value of outstanding stock options and exercisable stock options as of June 30, 2016 was $130.1 million and $83.8 million ,
respectively, which have a remaining life of 7 years and 6 years , respectively. The aggregate intrinsic value for stock options exercised in fiscal 2016 , 2015 , and
2014 was $85.4 million , $125.3 million , and $156.3 million , respectively.
The fair value for stock options granted was estimated at the date of grant using the following assumptions:
Risk-free interest rate
Dividend yield
Weighted average volatility factor
Weighted average expected life (in years)
Weighted average fair value (in dollars) (A)
The weighted average fair values of shares granted were as follows:
60
2016
2015
2014
1.6%
2.6%
25.6%
5.4
1.5%
2.3%
23.4%
5.4
$
13.16
$
14.29
$
1.7%
2.4%
23.8%
5.4
11.89
Year ended June 30,
2016
2015
2014
Performance-based restricted stock (A)
$
75.95 $
Time-based restricted stock (A)
(A) The weighted average fair values of grants before September 30, 2014 were adjusted to reflect the impact of the spin-off of CDK.
76.09 $
$
64.91 $
73.83 $
53.08
62.85
B. Pension Plans
The Company has a defined benefit cash balance pension plan covering substantially all U.S. employees, under which employees are credited with a
percentage of base pay plus interest. The plan interest credit rate varies from year-to-year based on the ten-year U.S. Treasury rate . Employees are fully vested
upon completion of three years of service. The Company's policy is to make contributions within the range determined by generally accepted actuarial principles.
Effective January 1, 2015, associates hired on or after this date are not eligible to participate in the Company's U.S. pension plan. In addition, associates rehired on
or after January 1, 2015 will no longer be eligible to earn additional contributions but will continue to earn interest on any balance that remains in the pension plan.
The Company also has various retirement plans for its non-U.S. employees and maintains a Supplemental Officers Retirement Plan (“SORP”). The SORP is a
defined benefit plan pursuant to which the Company pays supplemental pension benefits to certain corporate officers upon retirement based upon the officers' years
of service and compensation. As of January 23, 2014, newly appointed corporate officers are no longer eligible to participate in the SORP.
A June 30 measurement date was used in determining the Company's benefit obligations and fair value of plan assets.
The Company is required to (a) recognize in its Consolidated Balance Sheets an asset for a plan's net overfunded status or a liability for a plan's net
underfunded status, (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year, and (c) recognize
changes in the funded status of a defined benefit plan in the year in which the changes occur in accumulated other comprehensive income (loss).
The Company's pension plans' funded status as of June 30, 2016 and 2015 is as follows:
June 30,
2016
2015
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Currency translation adjustments
Benefits paid
Fair value of plan assets at end of year
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial losses
Currency translation adjustments
Plan changes
Curtailments and special termination benefits
Benefits paid
Projected benefit obligation at end of year
Funded status - plan assets less benefit obligations
61
$
2,009.8 $
2,024.1
61.2
11.0
(8.7)
(67.0)
60.6
9.9
(8.8)
(76.0)
$
2,006.3 $
2,009.8
$
1,661.0 $
1,598.7
70.4
67.4
145.3
(7.6)
(25.6)
—
(67.0)
1,843.9 $
68.4
62.8
21.7
(17.5)
—
2.9
(76.0)
1,661.0
162.4 $
348.8
$
$
The amounts recognized on the Consolidated Balance Sheets as of June 30, 2016 and 2015 consisted of:
June 30,
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net amount recognized
2016
2015
$
306.5 $
(6.9)
(137.2)
$
162.4 $
475.7
(5.9)
(121.0)
348.8
The accumulated benefit obligation for all defined benefit pension plans was $1,825.1 million and $1,645.4 million at June 30, 2016 and 2015 ,
respectively.
The Company's pension plans with accumulated benefit obligations in excess of plan assets as of June 30, 2016 and 2015 had the following projected
benefit obligation, accumulated benefit obligation, and fair value of plan assets:
June 30,
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
The components of net pension expense were as follows:
2016
2015
$
$
$
165.7 $
148.2 $
21.6 $
131.5
117.4
4.5
2016
2015
2014
Service cost – benefits earned during the period
$
70.4 $
68.4 $
Interest cost on projected benefits
Expected return on plan assets
Net amortization and deferral
Special termination benefits and plan curtailments
Net pension expense
67.4
(131.2)
11.0
0.1
62.8
(129.7)
17.2
3.2
$
17.7 $
21.9 $
66.4
62.6
(119.4)
20.1
—
29.7
Net pension expense for fiscal 2015 and 2014 includes $4.3 million and $5.4 million , respectively, reported within earnings from discontinued operations
on the Statements of Consolidated Earnings. Included within pension expense related to discontinued operations for fiscal 2015 were total one-time charges of $3.2
million for curtailment charges and special termination benefits directly attributable to the spin-off of CDK.
The net actuarial loss and prior service credit for the defined benefit pension plans that are included in accumulated other comprehensive income that have
not yet been recognized as components of net periodic benefit cost are $464.0 million and $23.4 million , respectively, at June 30, 2016 . There is no remaining
transition obligation for the defined benefit pension plans included in accumulated other comprehensive income. The estimated net actuarial loss and prior service
credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal
year are $21.3 million and $2.1 million , respectively, at June 30, 2016 .
Assumptions used to determine the actuarial present value of benefit obligations were:
Years ended June 30,
Discount rate
Increase in compensation levels
2016
2015
3.40%
4.00%
4.25%
4.00%
62
Assumptions used to determine the net pension expense generally were:
Years ended June 30,
2016
2015
2014
Discount rate
Expected long-term rate of return on assets
Increase in compensation levels
4.25%
7.00%
4.00%
4.05%
7.25%
4.00%
4.50%
7.25%
4.00%
The discount rate is based upon published rates for high-quality fixed-income investments that produce cash flows that approximate the timing and
amount of expected future benefit payments.
The expected long-term rate of return on assets is determined based on historical and expected future rates of return on plan assets considering the target
asset mix and the long-term investment strategy.
Plan Assets
The Company's pension plans' asset allocations at June 30, 2016 and 2015 by asset category were as follows:
Cash and cash equivalents
Fixed income securities
U.S. equity securities
International equity securities
Global equity securities
2016
2015
3%
42%
18%
14%
23%
100%
9%
33%
17%
19%
22%
100%
The Company's pension plans' asset investment strategy is designed to ensure prudent management of assets, consistent with long-term return objectives
and the prompt fulfillment of all pension plan obligations. The investment strategy and asset mix were developed in coordination with an asset liability study
conducted by external consultants to maximize the funded ratio with the least amount of volatility.
The pension plans' assets are currently invested in various asset classes with differing expected rates of return, correlations, and volatilities, including
large capitalization and small capitalization U.S. equities, international equities, U.S. fixed income securities, and cash.
The target asset allocation ranges for the U.S. plan are generally as follows:
U.S. fixed income securities
U.S. equity securities
International equity securities
Global equity securities
35% - 45%
14% - 24%
11% - 21%
20% - 30%
The pension plans' fixed income portfolio is designed to match the duration and liquidity characteristics of the pension plans' liabilities. In addition, the
pension plans invest only in investment-grade debt securities to ensure preservation of capital. The pension plans' equity portfolios are subject to diversification
guidelines to reduce the impact of losses in single investments. Investment managers are prohibited from buying or selling commodities and from the short selling
of securities.
None of the pension plans' assets are directly invested in the Company's stock, although the pension plans may hold a minimal amount of Company stock
to the extent of the Company's participation in equity indices.
The pension plans' investments included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. The
pension plans' investments included in Level 2 are valued utilizing inputs obtained from an independent pricing service, which are reviewed by the Company for
reasonableness. To determine the fair value of our Level
63
2 plan assets, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The pension plans have no Level 3 investments at June 30,
2016 .
The following table presents the investments of the pension plans measured at fair value at June 30, 2016 :
Commingled trusts
Government securities
Mutual funds
Corporate and municipal bonds
Mortgage-backed security bonds
Total pension asset investments
Level 1
Level 2
Level 3
Total
$
— $
1,029.2 $
— $
1,029.2
—
76.6
—
—
371.5
—
433.4
35.3
—
—
—
—
371.5
76.6
433.4
35.3
$
76.6 $
1,869.4 $
— $
1,946.0
In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $60.3 million as of June 30, 2016 , which have
been classified as Level 1 in the fair value hierarchy.
The following table presents the investments of the pension plans measured at fair value at June 30, 2015 :
Commingled trusts
U.S. government securities
Mutual funds
Corporate and municipal bonds
Mortgage-backed security bonds
Total pension asset investments
Level 1
Level 2
Level 3
Total
$
— $
1,082.7 $
— $
1,082.7
—
89.0
—
—
270.7
—
347.5
34.5
—
—
—
—
270.7
89.0
347.5
34.5
$
89.0 $
1,735.4 $
— $
1,824.4
In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $185.4 million as of June 30, 2015 , which have
been classified as Level 2 in the fair value hierarchy.
Contributions
During fiscal 2016 , the Company contributed $11.0 million to the pension plans. The Company expects to contribute $11.0 million to the pension plans
during fiscal 2017 .
Estimated Future Benefit Payments
The benefits expected to be paid in each year from fiscal 2017 to the year ended June 30, 2021 are $79.0 million , $83.7 million , $91.0 million , $99.2
million and $110.2 million , respectively. The aggregate benefits expected to be paid in the five fiscal years from the year ended June 30, 2022 to the year ended
June 30, 2026 are $673.3 million . The expected benefits to be paid are based on the same assumptions used to measure the Company's pension plans' benefit
obligations at June 30, 2016 and includes estimated future employee service.
C. Retirement and Savings Plan. The Company has a 401(k) retirement and savings plan, which allows eligible employees to contribute up to 50% of their
compensation annually and allows highly compensated employees to contribute up to 12% of their compensation annually. The Company matches a portion of
employee contributions, which amounted to approximately $81.9 million , $69.7 million , and $66.0 million for the calendar years ended December 31, 2015 ,
2014 , and 2013 , respectively.
NOTE 10 . INCOME TAXES
Earnings from continuing operations before income taxes shown below are based on the geographic location to which such earnings are attributable.
64
Years ended June 30,
2016
2015
2014
Earnings from continuing operations before income taxes:
United States
Foreign
$
$
2,028.5 $
1,895.3 $
206.2
175.4
2,234.7 $
2,070.7 $
1,635.6
243.6
1,879.2
The provision (benefit) for income taxes consists of the following components:
Years ended June 30,
2016
2015
2014
Current:
Federal
Foreign
State
Total current
Deferred:
Federal
Foreign
State
Total deferred
$
579.0 $
576.3 $
85.0
76.6
740.6
17.7
(15.7)
(1.3)
0.7
93.1
40.1
709.5
(1.3)
(17.0)
3.0
(15.3)
Total provision for income taxes
$
741.3 $
694.2 $
552.1
71.3
51.1
674.5
(32.7)
(10.3)
5.1
(37.9)
636.6
A reconciliation between the Company's effective tax rate and the U.S. federal statutory rate is as follows:
Years ended June 30,
2016
%
2015
%
2014
%
Provision for taxes at U.S. statutory rate
$
782.1
35.0 $
724.8
35.0 $
657.7
35.0
Increase (decrease) in provision from:
State taxes, net of federal tax benefit
U.S. tax on foreign income
Utilization of foreign tax credits
Section 199 - Qualified production activities
Other
2.1
5.5
(7.0)
(1.4)
(1.0)
33.2 $
34.8
155.3
(177.1)
(28.9)
(14.7)
694.2
1.7
7.5
(8.6)
(1.4)
(0.7)
33.4
26.6
(26.2)
(23.0)
(31.9)
33.5 $
636.6
1.8
1.4
(1.4)
(1.2)
(1.7)
33.9
47.2
122.6
(155.4)
(31.9)
(23.3)
741.3
65
$
The significant components of deferred income tax assets and liabilities and their balance sheet classifications are as follows:
Years ended June 30,
Deferred tax assets:
Accrued expenses not currently deductible
Stock-based compensation expense
Net operating losses
Other
Less: valuation allowances
Deferred tax assets, net
Deferred tax liabilities:
Prepaid retirement benefits
Deferred revenue
Fixed and intangible assets
Prepaid expenses
Unrealized investment gains, net
Tax on unrepatriated earnings
Other
Deferred tax liabilities
Net deferred tax liabilities
2016
2015
$
262.8 $
74.6
46.0
70.8
454.2
(15.4)
$
438.8 $
$
77.2 $
43.2
171.4
118.0
176.2
—
3.6
$
$
589.6 $
150.8 $
240.6
72.3
47.5
23.5
383.9
(23.7)
360.2
147.9
36.6
122.5
108.5
71.9
5.1
1.9
494.4
134.2
The prospective adoption of ASU 2015-17 resulted in no current deferred tax assets included in other current assets and no current deferred tax liabilities
included in accrued expenses and other current liabilities on the Consolidated Balance Sheets at June 30, 2016 . There are $33.0 million of current deferred tax
assets included in other current assets on the Consolidated Balance Sheets at June 30, 2015 . There are $57.0 million of current deferred tax liabilities included in
accrued expenses and other current liabilities on the Consolidated Balance Sheets at June 30, 2015 . There are $100.3 million and $61.9 million of long-term
deferred tax assets included in other assets on the Consolidated Balance Sheets at June 30, 2016 and 2015 , respectively.
Income taxes have not been provided on undistributed earnings of certain foreign subsidiaries in an aggregate amount of approximately $443.2 million as
of June 30, 2016 , as the Company considers such earnings to be permanently reinvested outside of the United States. The additional U.S. income tax that would
arise on repatriation of the remaining undistributed earnings could be offset, in part, by foreign tax credits on such repatriation. However, it is impracticable to
estimate the amount of net income tax that might be payable.
The Company has estimated foreign net operating loss carry-forwards of approximately $50.2 million as of June 30, 2016 , of which $29.8 million expire
through 2036 and $20.4 million have an indefinite utilization period. As of June 30, 2016 , the Company has approximately $39.0 million of federal net operating
loss carry-forwards from acquired companies. The net operating losses have an annual utilization limitation pursuant to section 382 of the Internal Revenue Code
and expire through 2031 .
The Company has state net operating loss carry-forwards of approximately $242.3 million as of June 30, 2016 , which expire through 2035 .
The Company has recorded valuation allowances of $15.4 million and $23.7 million at June 30, 2016 and 2015 , respectively, to reflect the estimated
amount of domestic and foreign deferred tax assets that may not be realized.
Income tax payments were approximately $651.6 million , $773.3 million , and $821.5 million for fiscal 2016 , 2015 , and 2014 , respectively.
66
As of June 30, 2016 , 2015 , and 2014 the Company's liabilities for unrecognized tax benefits, which include interest and penalties, were $27.4 million ,
$27.1 million , and $56.5 million respectively. The amount that, if recognized, would impact the effective tax rate is $18.7 million , $16.9 million , and $31.0
million , respectively. The remainder, if recognized, would principally impact deferred taxes.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
2016
2015
2014
Unrecognized tax benefits at beginning of the year
$
27.1 $
56.5 $
Additions for tax positions
Additions for tax positions of prior periods
Reductions for tax positions of prior periods
Settlement with tax authorities
Expiration of the statute of limitations
Impact of foreign exchange rate fluctuations
Unrecognized tax benefit at end of year
3.8
3.5
(0.1)
(1.7)
(4.9)
(0.3)
2.4
3.1
(6.5)
(12.2)
(14.0)
(2.2)
$
27.4 $
27.1 $
67.0
3.6
6.8
(3.7)
(4.4)
(13.7)
0.9
56.5
Interest expense and penalties associated with uncertain tax positions have been recorded in the provision for income taxes on the Statements of
Consolidated Earnings. During the fiscal years 2016 , 2015 , and 2014 , the Company recorded interest expense (benefit) of $1.1 million , $(2.7) million , and
$(3.4) million , respectively. Penalties incurred during fiscal years 2016 , 2015 , and 2014 were no t material.
At June 30, 2016 , the Company had accrued interest of $4.0 million recorded on the Consolidated Balance Sheets, of which $0.1 million was recorded
within income taxes payable, and the remainder was recorded within other liabilities. At June 30, 2015 , the Company had accrued interest of $3.8 million recorded
on the Consolidated Balance Sheets, of which $0.1 million was recorded within income taxes payable, and the remainder was recorded within other liabilities. At
June 30, 2016 , the Company had accrued penalties of $0.2 million recorded on the Consolidated Balance Sheets within other liabilities. At June 30, 2015 , the
Company had accrued penalties of $0.3 million recorded on the Consolidated Balance Sheets within other liabilities.
The Company is routinely examined by the IRS and tax authorities in foreign countries in which it conducts business, as well as tax authorities in states in
which it has significant business operations. The tax years currently under examination vary by jurisdiction. Examinations in progress in which the Company has
significant business operations are as follows:
Taxing Jurisdiction
Fiscal Years under Examination
U.S. (IRS)
Arizona
California
Illinois
New York
New Jersey
Canada
India
2015-2016
2010-2013
2012-2014
2007-2014
2010-2014
2011-2014
2012-2014
2004-2011, 2013-2015
The Company regularly considers the likelihood of assessments resulting from examinations in each of the jurisdictions. The resolution of tax matters is
not expected to have a material effect on the consolidated financial condition of the Company, although a resolution could have a material impact on the
Company's Statements of Consolidated Earnings for a particular future period and on the Company's effective tax rate.
If certain pending tax matters settle within the next twelve months, the total amount of unrecognized tax benefits may
67
increase or decrease for all open tax years and jurisdictions. Based on current estimates, settlements related to various jurisdictions and tax periods could increase
earnings up to $2 million in the next twelve months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. We continually
assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the
facts that give rise to a revision become known.
In fiscal 2016 , the IRS completed its review of the examination of the Company's tax return for the year ended June 30, 2014 , which did not have a
material impact to the consolidated financial statements of the Company.
NOTE 11 . COMMITMENTS AND CONTINGENCIES
The Company has obligations under various facilities, equipment leases and software license agreements. Minimum commitments under these obligations
with a future life of greater than one year at June 30, 2016 are as follows:
Years ending June 30,
2017
2018
2019
2020
2021
Thereafter
$
$
106.2
106.1
78.9
59.6
39.5
100.8
491.1
In addition to fixed rentals, certain leases require payment of maintenance and real estate taxes and contain escalation provisions based on future
adjustments in price indices.
As of June 30, 2016 , the Company has purchase commitments of approximately $625.2 million , including a reinsurance premium with Chubb for the
fiscal 2017 policy year, as well as obligations related to purchase and maintenance agreements on our software, equipment, and other assets, of which $331.1
million relates to fiscal 2017 , $111.3 million relates to the fiscal year ending June 30, 2018 , and the remaining $182.8 million relates to fiscal years ending June
30, 2019 through fiscal 2021 .
In July 2016, Uniloc USA, Inc. and Uniloc Luxembourg, S.A. (“Uniloc”) filed a lawsuit against the Company in the United States District Court for the
Eastern District of Texas alleging that Company products and services infringe four patents. Uniloc alleges infringement of its patents concerning centralized
management of application programs on a network, distribution of application programs to a target station on a network, management of configurable application
programs on a network, and license use management on a network. The complaint seeks unspecified monetary damages, costs, and injunctive relief. This
litigation is still in its earliest stages and the Company is unable to estimate any reasonably possible loss, or range of loss, with respect to this matter. The Company
intends to vigorously defend against this lawsuit.
During the second quarter of fiscal 2016, in the course of a compliance review of its clients and vendors globally, the Company determined that
subsidiaries of the Company had previously entered into service arrangements outside the United States of America ("U.S.") with several entities that are
designated as Specially Designated Nationals (“SDNs”) by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of Treasury. Under these
service arrangements, the Company provided managed service solutions to the SDNs. Immediately following the discovery of such service arrangements, the
Company terminated the service arrangements with each SDN. The Company has voluntarily notified OFAC of the service arrangements and is cooperating fully
with OFAC. The Company may be subject to fines and penalties, which amounts would be based on such factors OFAC may consider relevant. At this time, the
Company is unable to estimate any reasonably possible loss, or range of reasonably possible loss, with respect to this matter. This is primarily because this matter
involves a complex issue subject to inherent uncertainty. There can be no assurance that this matter will be resolved in a manner that is not adverse to the
Company. For more information regarding this matter, see below in Part II Item 9B, Other Information of this Annual Report on Form 10-K.
68
In June 2011, the Company received a Commissioner’s Charge from the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging that the
Company has violated Title VII of the Civil Rights Act of 1964 by refusing to recruit, hire, transfer and promote certain persons on the basis of their race, in the
State of Illinois from at least the period of January 1, 2007 to the present. In July 2016, the Company entered into a settlement with the EEOC that resolved all
matters related to the Commissioner’s Charge without admitting any of the EEOC’s allegations. The terms of the settlement did not have a material adverse impact
on the Company's consolidated results of operations, financial condition, or cash flows.
The Company is subject to various claims and litigation in the normal course of business. When a loss is considered probable and reasonably estimable,
the Company records a liability in the amount of its best estimate for the ultimate loss. Management currently believes that the resolution of these claims and
litigation against us, individually or in the aggregate, will not have a material adverse impact on our consolidated results of operations, financial condition or cash
flows. These matters are subject to inherent uncertainties and management's view of these matters may change in the future.
It is not the Company’s business practice to enter into off-balance sheet arrangements. In the normal course of business, the Company may enter into
contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect
any material losses related to such representations and warranties.
NOTE 12 . RECLASSIFICATION OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is a measure of income that includes both net earnings and other comprehensive income (loss). Other comprehensive income
(loss) results from items deferred on the Consolidated Balance Sheets in stockholders' equity. Other comprehensive income (loss) was $45.5 million , $(350.6)
million , and $162.8 million in fiscal 2016 , 2015 , and 2014 , respectively. Changes in Accumulated Other Comprehensive Income ("AOCI") by component are as
follows:
Currency
Translation
Adjustment
Net Gains on
Available-for-sale
Securities
Pension Liability
Accumulated Other
Comprehensive
Income / (Loss)
Balance at June 30, 2013
$
39.6
$
186.7
$
(210.9)
$
Other comprehensive income before
reclassification adjustments
Tax effect
Reclassification adjustments to
net earnings
Tax effect
Balance at June 30, 2014
Other comprehensive loss before
reclassification adjustments
Tax effect
58.4
1.5 (A)
53.5
(18.2)
(16.5) (B)
6.1
102.8
(39.7)
20.7 (C)
(5.8)
$
99.5
$
211.6
$
(132.9)
$
(240.8)
(103.0)
38.6
(87.4)
32.7
Reclassification adjustments to net earnings
1.2
(A)
(4.9)
(B)
17.9
(C)
Tax effect
Reclassification adjustments to
retained earnings
Balance at June 30, 2015
Other comprehensive (loss)/income before
reclassification adjustments
Tax effect
Reclassification adjustments to
net earnings
Tax effect
Balance at June 30, 2016
(88.2)
(D)
1.6
—
(6.5)
—
$
(228.3)
$
143.9
$
(176.2)
$
(25.5)
—
—
—
288.8
(102.2)
(199.4)
72.9
5.0
(B)
12.0
(C)
(1.7)
(4.4)
$
(253.8)
$
333.8
$
(295.1)
$
15.4
214.7
(57.9)
5.7
0.3
178.2
(431.2)
71.3
14.2
(4.9)
(88.2)
(260.6)
63.9
(29.3)
17.0
(6.1)
(215.1)
69
(A) Reclassification adjustments out of AOCI are included within net earnings from discontinued operations, on the Statements of Consolidated Earnings.
(B) Reclassification adjustments out of AOCI are included within Other income, net, on the Statements of Consolidated Earnings.
(C) Reclassification adjustments out of AOCI are included in net pension expense (see Note 9 ).
(D) Reclassification adjustment out of AOCI is related to the CDK spin-off and included in retained earnings on the Consolidated Balance Sheets.
NOTE 13 . FINANCIAL DATA BY SEGMENT AND GEOGRAPHIC AREA
Based upon similar economic and operational characteristics, the Company’s strategic business units have been aggregated into the following two
reportable segments: Employer Services and PEO Services. The primary components of the “Other” segment are the results of operations of ADP Indemnity, non-
recurring gains and losses, miscellaneous processing services, the elimination of intercompany transactions, interest expense, certain charges and expenses that
have not been allocated to the reportable segments, such as stock-based compensation expense, and beginning in the first quarter of fiscal 2016, the historical
results of the AMD business, which was previously reported in the Employer Services segment. This change, which is adjusted for both the current period and the
prior period in the table above, did not significantly affect reportable segment results and is consistent with the way the chief operating decision maker assesses the
performance of the reportable segments.
Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on
management responsibility. There is a reconciling item for the difference between actual interest income earned on invested funds held for clients and interest
credited to Employer Services and PEO Services at a standard rate of 4.5% . This allocation is made for management reasons so that the reportable segments'
results are presented on a consistent basis without the impact of fluctuations in interest rates. This reconciling adjustment to the reportable segments' revenues and
earnings from continuing operations before income taxes is eliminated in consolidation.
Year ended June 30, 2016
Revenues from continuing operations
Earnings from continuing operations before income taxes
Assets from continuing operations
Capital expenditures from continuing operations
Depreciation and amortization
Year ended June 30, 2015
Revenues from continuing operations
Earnings from continuing operations before income taxes
Assets from continuing operations
Capital expenditures from continuing operations
Depreciation and amortization
Year ended June 30, 2014
Revenues from continuing operations
Earnings from continuing operations before income taxes
Assets from continuing operations
Capital expenditures from continuing operations
Depreciation and amortization
Employer
Services
PEO Services
Other
Client Fund
Interest
Total
$
9,211.9 $
3,073.1 $
1.9 $
(619.1) $
11,667.8
2,867.9
36,637.5
71.1
230.7
371.7
534.6
1.0
1.5
(385.8)
6,497.9
93.6
56.4
(619.1)
—
—
—
2,234.7
43,670.0
165.7
288.6
$
8,815.1 $
2,647.2 $
69.8 $
(593.6) $
10,938.5
2,693.0
27,507.3
94.8
221.2
302.8
377.7
1.3
1.2
(331.5)
5,225.5
75.1
55.5
(593.6)
—
—
—
2,070.7
33,110.5
171.2
277.9
$
8,437.6 $
2,270.9 $
67.5 $
(549.6) $
10,226.4
2,521.2
21,684.9
90.4
211.0
70
233.6
472.6
0.9
1.2
(326.0)
7,472.1
69.7
54.4
(549.6)
—
—
—
1,879.2
29,629.6
161.0
266.6
Year ended June 30, 2016
Revenues from continuing operations
Assets from continuing operations
Year ended June 30, 2015
Revenues from continuing operations
Assets from continuing operations
Year ended June 30, 2014
Revenues from continuing operations
Assets from continuing operations
$
$
$
$
$
$
United States
Europe
Canada
Other
Total
9,870.0 $
39,194.2 $
1,063.7 $
2,064.3 $
284.1 $
1,949.4 $
450.0 $
11,667.8
462.1 $
43,670.0
9,101.8 $
28,138.1 $
1,086.6 $
2,059.5 $
320.8 $
2,488.9 $
429.3 $
10,938.5
424.0 $
33,110.5
8,354.2 $
25,228.8 $
1,132.7 $
2,057.2 $
334.7 $
1,898.6 $
404.8 $
10,226.4
445.0 $
29,629.6
NOTE 14 . QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results of our operations for the two fiscal years ended June 30, 2016 and June 30, 2015 are as follows:
Year ended June 30, 2016
First
Quarter (A)
Second Quarter
(B)
Third
Quarter
Fourth
Quarter (C)
Revenues from continuing operations
Gross profit from continuing operations
Earnings from continuing operations before income taxes
Net earnings from continuing operations
Net loss from discontinued operations
Net earnings
Basic per common share amounts:
Basic earnings per share from continuing operations
Diluted per common share amounts:
Diluted earnings per share from continuing operations
2,714.0 $
1,067.5 $
505.0 $
337.5 $
(0.9) $
336.6 $
2,807.0 $
1,124.5 $
507.9 $
341.4 $
— $
341.4 $
3,248.6 $
1,435.9 $
794.8 $
532.5 $
— $
532.5 $
0.73 $
0.75 $
1.17 $
0.72 $
0.74 $
1.17 $
2,898.2
1,199.7
427.0
282.0
—
282.0
0.62
0.62
$
$
$
$
$
$
$
$
71
Year ended June 30, 2015
First
Quarter
Second Quarter
Third
Quarter
Fourth
Quarter
Revenues from continuing operations
Gross profit from continuing operations
Earnings from continuing operations before income taxes
Net earnings from continuing operations
Net (loss)/earnings from discontinued operations
Net earnings
Basic per common share amounts:
Basic earnings per share from continuing operations
Basic earnings per share from discontinued operations
Diluted per common share amounts:
Diluted earnings per share from continuing operations
Diluted earnings per share from discontinued operations
$
$
$
$
$
$
$
$
$
$
2,566.1 $
1,007.8 $
450.4 $
296.6 $
(1.4) $
295.2 $
0.62 $
— $
0.62 $
— $
2,653.6 $
1,070.3 $
498.8 $
332.5 $
(1.0) $
331.5 $
0.70 $
— $
0.69 $
— $
3,024.3 $
1,340.0 $
739.9 $
490.3 $
(0.7) $
489.6 $
1.04 $
— $
1.03 $
— $
2,694.5
1,092.7
381.6
257.0
79.2
336.2
0.55
0.17
0.55
0.17
(A) Earnings from continuing operations before income taxes; net earnings from continuing operations; net earnings; and basic and diluted EPS from continuing
operations include the gain on the sale of AMD. This increased earnings from continuing operations before income taxes by $29.1 million , net earnings from
continuing operations and net earnings by $21.8 million , and basic and diluted earnings per share from continuing operations by $0.05 .
(B) Earnings from continuing operations before income taxes; net earnings from continuing operations; net earnings; and basic and diluted EPS from continuing
operations include the gain on sale of a building. This increased earnings from continuing operations before income taxes by $13.9 million , net earnings from
continuing operations and net earnings by $8.6 million and basic and diluted earnings per share from continuing operations by $0.02 .
(C) Earnings from continuing operations before income taxes; net earnings from continuing operations; net earnings; and basic and diluted EPS from continuing
operations include the charge for the workforce optimization effort. This decreased earnings from continuing operations before income taxes by $48.2 million , net
earnings from continuing operations and net earnings by $31.8 million and basic and diluted earnings per share from continuing operations by $0.07 .
NOTE 15 . SUBSEQUENT EVENTS
With the exception of the legal claim filed in July 2016 and the settlement of the EEOC matter, both of which are discussed in Note 11, and the items
listed below, there are no further subsequent events for disclosure.
In July 2016, ADP announced its service alignment initiative intended to align the Company's client service operations with its platform simplification
strategy.
The Company's subsidiary captive insurance company, ADP Indemnity, paid a premium of $221.0 million in July 2016 to enter into a reinsurance
arrangement with Chubb to cover substantially all losses for the fiscal 2017 policy year on terms substantially similar to the fiscal 2016 reinsurance policy to cover
losses up to $1 million per occurrence related to the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO
Services worksite employees.
72
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are certifications of ADP's Chief Executive Officer and Chief Financial Officer,
which are required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section should be
read in conjunction with the report of Deloitte & Touche LLP that appears in this Annual Report on Form 10-K and is hereby incorporated herein by reference.
Management's Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation (the “evaluation”), under the supervision and with the participation of the Company's management, including its
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2016 in ensuring that (i) information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure and (ii) such information is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and forms.
Management's Report on Internal Control over Financial Reporting
It is the responsibility of Automatic Data Processing, Inc.'s (“ADP”) management to establish and maintain effective internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance to ADP's
management and board of directors regarding the preparation of reliable financial statements for external purposes in accordance with generally accepted
accounting principles.
ADP's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of ADP; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of ADP are
being made only in accordance with authorizations of management and directors of ADP; and (iii) provide reasonable assurance regarding the prevention or timely
detection of unauthorized acquisition, use or disposition of ADP's assets that could have a material effect on the financial statements of ADP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management has performed an assessment of the effectiveness of ADP’s internal control over financial reporting as of June 30, 2016 based upon criteria
set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management determined that ADP’s internal control over financial reporting was effective as of June 30, 2016 .
73
Deloitte & Touche LLP, the independent registered public accounting firm that audited and reported on the consolidated financial statements of ADP
included in this Annual Report on Form 10-K, has issued an attestation report on the operating effectiveness of ADP's internal control over financial reporting. The
Deloitte & Touche LLP attestation report is set forth below.
/s/ Carlos A. Rodriguez
Carlos A. Rodriguez
President and Chief Executive Officer
/s/ Jan Siegmund
Jan Siegmund
Chief Financial Officer
Roseland, New Jersey
August 5, 2016
74
Changes in Internal Control over Financial Reporting
There were no changes in ADP's internal control over financial reporting that occurred during the quarter ended June 30, 2016 that have materially
affected, or are reasonably likely to materially affect, ADP's internal control over financial reporting.
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Automatic Data Processing, Inc.
Roseland, New Jersey
We have audited the internal control over financial reporting of Automatic Data Processing, Inc. and subsidiaries (the “Company”) as of June 30, 2016,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and
principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on the
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements and consolidated financial statement schedule as of and for the year ended June 30, 2016 of the Company and our report dated August 5, 2016 ,
expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 5, 2016
76
Item 9B. Other Information
Compliance Disclosure
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA, which added Section 13(r) to the Exchange Act, we are
required to disclose in our annual or quarterly reports, as applicable, whether we or any of our affiliates knowingly engaged in certain activities, transactions or
dealings relating to Iran or with individuals or entities that are subject to sanctions under U.S. law. Disclosure is generally required even where the activities,
transactions or dealings were conducted in compliance with applicable law.
Executive Order 12959 of May 6, 1995 prohibited, among other things, the exportation of any goods, technology or services from the United States to Iran, the
Government of Iran, or any entity owned or controlled by the Government of Iran. On January 9, 2007, the Office of Foreign Assets Control, or OFAC, designated
Bank Sepah as a Specially Designated National, or SDN, under Executive Order 13382 (“EO 13382”), and on October 25, 2007, OFAC designated Bank Melli as
an SDN under EO 13382. As of their respective designation dates, the property and interests in property of each of Bank Sepah and Bank Melli were blocked
pursuant to EO 13382 and the Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. part 544. On October 25, 2007, OFAC designated
Bank Saderat as an SDN under Executive Order 13224 (“EO 13224”), and Bank Saderat’s property and interests in property were blocked pursuant to EO 13224
and the Global Terrorism Sanctions Regulations, 31 C.F.R. Part 594. On February 6, 2012, the property and interests in property of all three banks were blocked
also under Executive Order 13599, which blocked all property and interests in property of the Government of Iran and any Iranian financial institution within the
United States or the possession or control of any U.S. person.
As previously disclosed, during the Company’s second quarter of fiscal 2016, in the course of a compliance review of its clients and vendors globally, the
Company determined that two of its French subsidiaries had previously entered into client service arrangements with each of the SDNs listed above (in 2001 in the
case of Bank Saderat and in 1996 in the case of each of Bank Sepah and Bank Melli). More specifically, the Company discovered that since 1996 for each of Bank
Sepah and Bank Melli, and since 2001 regarding Bank Saderat, these ADP subsidiaries had provided a managed services solution to these SDNs, involving the
monthly calculation of payroll data, and the associated preparation and filing (on behalf of the SDNs) of monthly, quarterly and annual social benefits declarations
to the applicable French governmental authorities. Neither of these ADP subsidiaries, nor any other affiliate of the Company, provided any money movement
services to such SDNs or to the employees of such SDNs. The aggregate gross revenue and aggregate net profits received by the Company since inception of the
service arrangements in 1996 and 2001 is estimated to be $185,000 of aggregate gross revenue and $35,000 of aggregate net profits.
Immediately following its discovery of such service arrangements, the Company terminated the service arrangements with each SDN and ceased providing such
services. The Company voluntarily notified OFAC of the service arrangements and is cooperating fully with OFAC. As part of its compliance review, the
Company completed a thorough analysis of all client and vendor relationships worldwide, and filed a report of its findings with OFAC on June 9, 2016. The report
did not identify any potential sanctions violations that had not been previously reported to OFAC. The Company may be subject to fines and penalties, which
amounts would be based on such factors as OFAC may consider relevant and are not reasonably estimable at this time.
77
Item 10. Directors, Executive Officers and Corporate Governance
Part III
The executive officers of the Company, their ages, positions, and the period during which they have been employed by ADP are as follows:
Name
Brock Albinson
John Ayala
Mark D. Benjamin
Maria Black
Michael A. Bonarti
Deborah L. Dyson
Michael C. Eberhard
Edward B. Flynn, III
Dermot J. O'Brien
Thomas Perrotti
Douglas Politi
Carlos A. Rodriguez
Stuart Sackman
Jan Siegmund
Donald Weinstein
Age
41
49
45
42
50
50
54
56
50
47
54
52
55
52
47
Corporate Controller and Principal Accounting Officer
President, Small Business Services, Retirement Services and
Position
Insurance Services
President, Global Enterprise Solutions
President, ADP TotalSource
Vice President, General Counsel and Secretary
Vice President, Client Experience and
Continuous Improvement
Vice President and Treasurer
Executive Vice President, Worldwide Sales and Marketing
Chief Human Resources Officer
President, Major Account Services and ADP Canada
President, Added Value Services
President and Chief Executive Officer
Vice President, Global Product and Technology
Chief Financial Officer
Chief Strategy Officer
Employed by
ADP Since
2007
2002
1992
1996
1997
1988
1998
1988
2012
1993
1992
1999
1992
1999
2006
Brock
Albinson
joined ADP in 2007. Prior to his appointment as Corporate Controller and Principal Accounting Officer in March 2015, he served as
Assistant Corporate Controller from December 2011 to February 2015, as Vice President, Corporate Finance from January 2011 to December 2011, and as Vice
President, Financial Policy from March 2007 to January 2011.
John
Ayala
joined ADP in 2002. Prior to his appointment as President, Small Business Services, Retirement Services and Insurance Services in
July 2014, he served as Vice President, Client Experience and Continuous Improvement from November 2012 to June 2014, as Senior Vice President, Services and
Operations - Small Business Services from February 2012 to October 2012, as President, TotalSource from July 2011 to January 2012, and as Senior Vice
President, Service and Operations, TotalSource from June 2008 to June 2011.
Mark
D.
Benjamin
joined ADP in 1992. Prior to his appointment as President, Global Enterprise Solutions, which includes National Account Services,
Benefit Services, Recruitment Process Outsourcing, Multinational Companies and Employer Services International, in July 2013, he served as President, Employer
Services International from July 2011 to June 2013, and as Senior Vice President, Services and Operations - Small Business Services and TotalSource from April
2008 to June 2011.
Maria
Black
joined ADP in 1996. Prior to her appointment as President, ADP TotalSource in July 2014, she served as General Manager, ADP United
Kingdom from April 2013 to June 2014, and as General Manager, Employer Services - TotalSource Western Central Region from January 2008 to March 2013.
Michael
A.
Bonarti
joined ADP in 1997. He has served as Vice President, General Counsel and Secretary since July 2010.
Deborah
L.
Dyson
joined ADP in 1988. Prior to her appointment as Vice President, Client Experience and Continuous Improvement in July 2014, she
served as Division Vice President / General Manager, Employer Services - Major
78
Account Services South Service Center from July 2012 to June 2014, and as Division Vice President / General Manager, Employer Services - Major Account
Services Northwest Service Center from July 2006 to June 2012.
Michael
C.
Eberhard
joined ADP in 1998. He has served as Vice President and Treasurer since November 2009.
Edward
B.
Flynn,
III
joined ADP in 1988. Prior to his appointment as Executive Vice President, Worldwide Sales and Marketing in November 2012, he
served as Vice President, Employer Services - Sales from April 2009 to October 2012.
Dermot
J.
O’Brien
joined ADP in 2012 as Chief Human Resources Officer. Prior to joining ADP, he was Executive Vice President of Human Resources
at TIAA-CREF from 2003 to 2012.
Thomas
Perrotti
joined ADP in 1993. Prior to his appointment as President, Major Account Services and ADP Canada in July 2015, he served as
Corporate Vice President and Senior Vice President, Service and Operations, Major Account Services from July 2014 to June 2015, as Senior Vice President,
Service & Operations, Small Business Services from April 2013 to June 2014, as Senior Vice President, Sales, Small Business Services from April 2011 to March
2013, and as Division Vice President, Global Sales Operations, Employer Services from November 2009 to March 2011.
Douglas
Politi
joined ADP in 1992. Prior to his appointment as President, Added Value Services in February 2013, he served as Senior Vice President,
CFO Suite (AVS) from October 2011 to January 2013, and as Senior Vice President, Retirement Services from September 2006 to September 2011.
Carlos
A.
Rodriguez
joined ADP in 1999. Prior to his appointment in November 2011 to President and Chief Executive Officer, he served as President
and Chief Operating Officer from May 2011 to November 2011, and as President, Employer Services International - National Account Services, ADP Canada, and
GlobalView and Employer Services International, from March 2010 to May 2011.
Stuart
Sackman
joined ADP in 1992. Prior to his appointment as Vice President, Global Product and Technology in March 2015, he served as Corporate
Vice President and General Manager of Multinational Corporations Services from June 2012 to February 2015, and as Division Vice President and General
Manager of the National Account Services’ East National Service Center from February 2008 to May 2012.
Jan
Siegmund
joined ADP in 1999. Prior to his appointment as Chief Financial Officer in November 2012, he served as President, Added Value Services
and Chief Strategy Officer from April 2009 to October 2012.
Donald
Weinstein
joined ADP in 2006. Prior to his appointment as Chief Strategy Officer in December 2015, he served as Senior Vice President, Product
Management from October 2010 to November 2015, and as Division Vice President, Strategy & Marketing from September 2007 to September 2010.
Directors
See “Election of Directors” in the Proxy Statement for the Company’s 2016 Annual Meeting of Stockholders, which information is incorporated herein by
reference.
Section 16(a) Beneficial Ownership Reporting Compliance
See “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for the Company’s 2016 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
Code of Ethics
ADP has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and persons
performing similar functions. The code of ethics may be viewed online on ADP’s website at www.adp.com under “Investor Relations” in the “Corporate
Governance” section. Any amendment to or waivers from the code of ethics will be disclosed on our website within four business days following the date of the
amendment or waiver.
Audit Committee; Audit Committee Financial Expert
See “Corporate Governance - Committees of the Board of Directors” and “Audit Committee Report” in the Proxy Statement for the Company’s 2016
Annual Meeting of Stockholders, which information is incorporated herein by reference.
79
Item 11. Executive Compensation
See “Corporate Governance,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation of Executive Officers” and
“Compensation of Non-Employee Directors” in the Proxy Statement for the Company’s 2016 Annual Meeting of Stockholders, which information is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See “Security Ownership of Certain Beneficial Owners and Managers” and “Equity Compensation Plan Information” in the Proxy Statement for the
Company’s 2016 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
See “Election of Directors” and “Corporate Governance” in the Proxy Statement for the Company’s 2016 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
See “Independent Registered Public Accounting Firm's Fees” in the Proxy Statement for the Company's 2016 Annual Meeting of Stockholders, which
information is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements
Part IV
The following report and consolidated financial statements of the Company are contained in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm
Statements of Consolidated Earnings - years ended June 30, 2016 , 2015 and 2014
Consolidated Balance Sheets - June 30, 2016 and 2015
Statements of Consolidated Stockholders' Equity - years ended June 30, 2016 , 2015 and 2014
Statements of Consolidated Cash Flows - years ended June 30, 2016 , 2015 and 2014
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Page in Form 10-K
84
All other Schedules have been omitted because they are inapplicable, are not required or the information is included elsewhere in the financial statements
or notes thereto.
(b) Exhibits
The following exhibits are filed with this Annual Report on Form 10-K or incorporated herein by reference to the document set forth next to the exhibit in
the list below:
3.1
3.2
4.1
Amended and Restated Certificate of Incorporation dated November 11, 1998 - incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 333-72023 on Form S-4 filed with the Commission on February 9, 1999
Amended and Restated By-laws of the Company - incorporated by reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K dated August 3, 2016
Form of Indenture between the Company and Wells Fargo Bank, National Association, as trustee - incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-3 (No. 333-206631), filed on August 28, 2015
80
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Form of First Supplemental Indenture between Automatic Data Processing, Inc. and Wells Fargo Bank, National Association, as
trustee - incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated September 15, 2015
Form of 2.250% Senior Note due 2020 - incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
dated September 15, 2015
Form of 3.375% Senior Note due 2025 - incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
dated September 15, 2015
364-Day Credit Agreement, dated as of June 15, 2016, among Automatic Data Processing, Inc., the Lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., BNP Paribas, Wells Fargo Bank, N.A., Citibank,
N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Syndication Agents, and Deutsche Bank Securities Inc. and Barclays Bank
PLC, as Documentation Agents - incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
June 15, 2016
Five-Year Credit Agreement, dated as of June 17, 2015, among Automatic Data Processing, Inc., the Lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., BNP Paribas, Wells Fargo Bank, N.A., and
Citibank, N.A., as Syndication Agents, and Deutsche Bank Securities Inc., Barclays Bank PLC and The Bank of Tokyo-Mitsubishi
UFJ, Ltd., as Documentation Agents - incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K
dated June 19, 2015
Five-Year Credit Agreement, dated as of June 15, 2016, among Automatic Data Processing, Inc., the Lenders Party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., BNP Paribas, Wells Fargo Bank, N.A., Citibank,
N.A.and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Syndication Agents, and Deutsche Bank Securities Inc. and Barclays Bank
PLC, as Documentation Agents - incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K dated
June 15, 2016
Separation and Distribution Agreement, dated as of March 20, 2007, between Automatic Data Processing, Inc. and Broadridge
Financial Solutions, LLC - incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
March 21, 2007
Separation and Distribution Agreement, dated September 29, 2014, by and between Automatic Data Processing, Inc. and CDK
Global Holdings, LLC - incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 1,
2014
Letter Agreement, dated as of March 15, 2012, between Automatic Data Processing, Inc. and Dermot O'Brien - incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2013
(Management Contract)
Separation Agreement and Release, dated April 21, 2014, by and between Regina R. Lee and Automatic Data Processing, Inc. -
incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 21, 2014
Automatic Data Processing, Inc. 2003 Director Stock Plan - incorporated by reference to Exhibit 4.4 to Registration Statement No.
333-147377 on Form S-8 filed with the Commission on November 14, 2007 (Management Compensatory Plan)
Amended and Restated Supplemental Officers Retirement Plan - incorporated by reference to Exhibit 10.4 to the Company’s
Current Report on Form 8-K dated November 12, 2009 (Management Compensatory Plan)
Automatic Data Processing, Inc. Deferred Compensation Plan, as Amended and Restated Effective July 25, 2014 - incorporated by
reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (Management
Compensatory Plan)
Automatic Data Processing, Inc. Change in Control Severance Plan for Corporate Officers, as amended - incorporated by reference
to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (Management
Compensatory Plan)
Automatic Data Processing, Inc. Amended and Restated Employees’ Savings-Stock Purchase Plan - incorporated by reference to
Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (Management Compensatory
Plan)
Automatic Data Processing, Inc. Executive Retirement Plan - incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2015 (Management Compensatory Plan)
Automatic Data Processing, Inc. Retirement and Savings Restoration Plan - incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015 (Management Compensatory Plan)
Automatic Data Processing, Inc. Corporate Officer Severance Plan - incorporated by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015 (Management Compensatory Plan)
81
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
21
Automatic Data Processing, Inc. 2000 Stock Option Plan - incorporated by reference to Exhibit 10.8 to the Company’s Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2009 (Management Compensatory Plan)
2000 Stock Option Grant Agreement (Form for Employees) for grants prior to August 14, 2008 - incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004 (Management
Compensatory Plan)
2000 Stock Option Grant Agreement (Form for Non-Employee Directors) for grants prior to August 14, 2008 - incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004
(Management Compensatory Plan)
2000 Stock Option Grant Agreement (Form for Employees) for grants beginning August 14, 2008 - incorporated by reference to
Exhibit 10.25 to the Company’s Current Report on Form 8-K dated August 13, 2008 (Management Compensatory Plan)
Automatic Data Processing, Inc. 2008 Omnibus Award Plan - incorporated by reference to Appendix A to the Company’s Proxy
Statement for its 2008 Annual Meeting of Stockholders filed with the Commission on September 26, 2008 (Management
Compensatory Plan)
French Sub Plan under the 2008 Omnibus Award Plan effective as of January 26, 2012 - incorporated by reference to Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012 (Management Compensatory Plan)
Amended French Sub Plan under the 2008 Omnibus Award Plan effective as of April 6, 2016 (Management Compensatory Plan)
Form of Stock Option Grant Agreement under the 2008 Omnibus Award Plan (Form for Non- Employee Directors) for grants prior
to November 12, 2008 - incorporated by reference to Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 2008 (Management Compensatory Plan)
Form of Deferred Stock Unit Award Agreement under the 2008 Omnibus Award Plan - incorporated by reference to Exhibit 10.33
to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (Management Compensatory Plan)
Form of Stock Option Grant Agreement under the 2008 Omnibus Award Plan (Form for Non- Employee Directors) for grants
beginning November 12, 2008 - incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2014 (Management Compensatory Plan)
Form of Stock Option Grant Agreement under the 2008 Omnibus Award Plan (Form for Employees) - incorporated by reference to
Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (Management Compensatory
Plan)
Form of Restricted Stock Award Agreement under the 2008 Omnibus Award Plan - incorporated by reference to Exhibit 10.31 to
the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2008 (Management Compensatory Plan)
Form of Performance Stock Unit Award Agreement under the 2008 Omnibus Award Plan - incorporated by reference to Exhibit
10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013 (Management Compensatory Plan)
Form of Performance Stock Unit Award Agreement under the 2008 Omnibus Award Plan (Form for Corporate Officers) -
incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2015 (Management Compensatory Plan)
Form of Restricted Stock Award Agreement under the 2008 Omnibus Award Plan (Form for Corporate Officers) - incorporated by
reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015
(Management Compensatory Plan)
Form of Stock Option Grant under the 2008 Omnibus Award Plan (Form for Corporate Officers) - incorporated by reference to
Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015 (Management
Compensatory Plan)
Form of Performance-Based Restricted Stock Unit Award Agreement under the 2008 Omnibus Award Plan - incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (Management
Compensatory Plan)
Form of Performance Stock Unit Award Agreement under the 2008 Omnibus Award Plan (Form for Corporate Officers)
(Management Compensatory Plan)
Form of Stock Option Grant Agreement under the 2008 Omnibus Award Plan (Form for Corporate Officers) (Management
Compensatory Plan)
Form of Performance-Based Restricted Stock Unit Award Agreement under the 2008 Omnibus Award Plan (Management
Compensatory Plan)
Subsidiaries of the Company
82
23
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Consent of Independent Registered Public Accounting Firm
Certification by Carlos A. Rodriguez pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Certification by Jan Siegmund pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Certification by Carlos A. Rodriguez pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Certification by Jan Siegmund pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
XBRL instance document
XBRL taxonomy extension schema document
XBRL taxonomy extension calculation linkbase document
XBRL taxonomy label linkbase document
XBRL taxonomy extension presentation linkbase document
XBRL taxonomy extension definition linkbase document
83
AUTOMATIC DATA PROCESSING, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A
Column B
(In thousands)
Column C
Additions
(1)
(2)
Column D
Column E
Balance at
beginning of
period
Charged to costs and
expenses
Charged to other
accounts (A)
Deductions
Balance at end
of period
Year ended June 30, 2016:
Allowance for doubtful accounts:
Current
Long-term
Deferred tax valuation allowance
Year ended June 30, 2015:
Allowance for doubtful accounts:
Current
Long-term
Deferred tax valuation allowance
Year ended June 30, 2014:
Allowance for doubtful accounts:
Current
Long-term
Deferred tax valuation allowance
$
$
$
$
$
$
$
$
$
35,493 $
634 $
23,707 $
42,749 $
8,349 $
35,542 $
37,393 $
9,033 $
33,724 $
18,626 $
216 $
1,364 $
15,554 $
746 $
1,551 $
13,575 $
2,964 $
6,254 $
(265) $
(15,743) (B)
93 $
(395) (B)
(1,022) $
(8,680)
(1,862) $
(20,948) (B)
(39) $
(8,422) (B)
(3,801) $
(9,584)
400 $
79 $
(8,619) (B)
(3,727) (B)
3,000 $
(7,436)
$
$
$
$
$
$
$
$
$
38,111
547
15,369
35,493
634
23,707
42,749
8,349
35,542
(A) Includes amounts related to foreign exchange fluctuation.
(B) Doubtful accounts written off, less recoveries on accounts previously written off.
84
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SIGNATURES
August 5, 2016
AUTOMATIC DATA PROCESSING, INC.
(Registrant)
By
/s/ Carlos A. Rodriguez
Carlos A. Rodriguez
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature
Title
Date
/s/ Carlos A. Rodriguez
President and Chief Executive
August 5, 2016
(Carlos A. Rodriguez)
Officer, Director
(Principal Executive Officer)
/s/ Jan Siegmund
(Jan Siegmund)
Chief Financial Officer
(Principal Financial Officer)
/s/ Brock Albinson
(Brock Albinson)
Corporate Controller
(Principal Accounting Officer)
August 5, 2016
August 5, 2016
/s/ Peter Bisson
(Peter Bisson)
/s/ Richard T. Clark
(Richard T. Clark)
/s/ Eric C. Fast
(Eric C. Fast)
/s/ Linda R. Gooden
(Linda R. Gooden)
Director
August 5, 2016
Director
August 5, 2016
Director
Director
August 5, 2016
August 5, 2016
/s/ Michael P. Gregoire
Director
August 5, 2016
(Michael P. Gregoire)
85
/s/ R. Glenn Hubbard
Director
August 5, 2016
(R. Glenn Hubbard)
/s/ John P. Jones
(John P. Jones)
Director
August 5, 2016
/s/ William J. Ready
Director
August 5, 2016
(William J. Ready)
/s/ Sandra S. Wijnberg
Director
August 5, 2016
(Sandra S. Wijnberg)
86
AUTOMATIC DATA PROCESSING, INC.
2008 OMNIBUS AWARD PLAN
FRENCH SUB PLAN
(EFFECTIVE APRIL 2016)
1.
Scope
This French stock option sub plan (the “ French Sub Plan ”) is established pursuant to and in accordance with the
Automatic Data Processing, Inc. 2008 Omnibus Award Plan (the “ Plan ”) as a Sub Plan defined in Article 1 of the Plan.
The purpose of the French Sub Plan is to ensure that the French Options (as defined below) comply with the relevant
provisions of Articles L. 225-177 to L. 225-186-1 of the French Commercial Code, French labor law and Article 80 bis of the French
tax code and tax administrative guidelines published by the French tax authorities (in particular, BOI-RSA-ES-20-10-10-20140812)
(“ French Law ”).
The French Sub Plan is applicable to Awards granted to employees of the Company’s French direct or indirect
subsidiaries and Corporate Officers (as defined below). The French Sub Plan shall also apply to employees and corporate officers of
the Company and of its non-French direct or indirect subsidiaries that have been granted Awards under the Plan if and when they
become subject to French income tax.
Solely for purposes of this French Sub Plan, any provision of the Plan or of the French Sub Plan in contradiction with
French Law shall be void and automatically replaced by the applicable provisions under French law.
Solely for purposes of this French Sub Plan, the provisions of this French Sub Plan shall take precedence over
conflicting provisions of the Plan.
2.
Definitions
Except as noted below, all capitalized terms not defined herein have the same meaning as such terms in the Plan.
“ Closed Period ” means any of the following periods if the Common Stock is listed on NYSE or NASDAQ or on any
other similar regulated stock exchange as defined by French administrative guidelines BOI-RSA-ES-20-10-10-20140812, n°180 to
210: (A) twenty (20) trading days after (i) the payment of a dividend; or (ii) an increase of share capital; (B) the period of ten (10)
trading days preceding and following the disclosure to the public of the consolidated financial statements of the Company; or (C) the
period as from the date the management of the Company (including the Board members) are aware of information which could, in
the case it would be disclosed to the public, significantly impact the market price of the Shares, until ten (10) trading days after the
date such information is disclosed to the public;
“ Corporate Officers ” means the president of the board of directors ( président du conseil d’administration ), the
chief executive officer ( directeur général ), deputy chief executive officers ( directeurs généraux délégués ), members of the
executive management board ( membres du directoire ) and
1
the manager ( gérant ) of a corporation as set forth in Article L. 186-5 of the French Commercial Code, in each case, of the French
Subsidiaries;
“ Date of Exercise ” shall mean the date of exercise of French Options by a French Participant;
“ French Effective Date ” shall have the meaning ascribed to it in Section 14 below;
“ French Eligible Employee ” shall have the meaning ascribed to it in Section 3 below;
“ French Exercise Price ” means:
(a)
(b)
If the Common Stock is listed on NYSE or NASDAQ or on any other similar regulated stock exchange as defined by
French administrative guidelines BOI-RSA-ES-20-10-10-20140812 n°160 to 200: the higher of (i) the Exercise Price,
(ii) 80% of the average of the closing trading prices of a Share during the twenty (20) trading days preceding the Date
of Grant and (iii) 80% of the average purchase price of the treasury Shares held by the Company on the Date of
Grant;
If the Common Stock is not listed on NYSE or NASDAQ or on any other similar regulated stock exchange as defined
by French administrative guidelines BOI-RSA-ES-20-10-10-20140812 n°160 to 200: the exercise price shall be
determined by the Committee in accordance with the objective methods applicable to the valuation of shares taking
into account the Company's net asset position, profitability and business plan, applying a specific weighting in each
case. Those criteria shall be assessed, if applicable, on a consolidated basis. Failing this, the exercise price shall be
determined by dividing the net asset value by the number of Shares.
“ French Law ” shall have the meaning ascribed to it in Section 1 above;
“ French Options ” shall have the meaning ascribed to it in Section 4 below;
“ French Participant ” means a French Eligible Employee who has been granted French Options in accordance with
the French Sub Plan;
“ French Sub Plan ” shall have the meaning ascribed to it in Section 1 above;
“ French Subsidiaries ” means Subsidiaries of the Company that are organized under the laws of France and the share
capital of which is at least 10% held by the Company (directly or indirectly) at the Date of Grant;
“ Share ” shall mean a share of Common Stock.
3.
French Eligible Employees
The beneficiaries of French Options (as defined below) (the “ French Eligible Employees ”) shall only be French
Subsidiaries’ employees or Corporate Officers who do not hold individually more than 10% of the share capital of the Company at
the Date of Grant.
4.
French Options
2
This French Sub-Plan is applicable only to Nonqualified Stock Options giving right to purchase existing Shares of the
Company (the “ French Options ”).
In particular, French Eligible Employees shall not receive under this French Sub-Plan Nonqualified Stock Options
giving right to subscribe for new Shares, Incentive Stock Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit,
Other Stock-Based Award, Performance Compensation Award or Substitute Award.
The total number of French Options outstanding that have not been exercised shall at all times not represent more
than one third of the share capital of the Company.
5.
6.
Date of Grant
The Date of Grant of the French Options shall not occur during a Closed Period.
French Exercise Price
The Exercise Price of the French Options shall be equal to the French Exercise Price.
The French Exercise Price (which is denominated in U.S. dollar) shall be paid by French Participants after conversion
in Euro by application of the Euro/U.S. dollar daily exchange rate as published by the Banque de France on the Date of Exercise or,
if no rate is available on that date, the first following daily rate published thereafter.
The method of exercise and form of payment of the French Options shall be determined by the Committee or the
Company acting as agent of the Committee, in accordance with French Law.
Article 7(d) of the Plan (“ Method of Exercise and Form of Payment ”) shall not be applicable to French Options.
7.
Vesting Period
French Options shall vest and become exercisable in such manner and on such date or dates determined by the
Committee and set forth in the Award Agreement, and shall expire after such period, not to exceed ten years, as may be determined
by the Committee (the “ Option Period ”).
Article 7(c) of the Plan shall not be applicable to French Options.
8.
Nontransferability
Article 14(b) of the Plan (“ Nontransferability ”) shall not be applicable to French Options.
No French Option shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a
Participant other than in case a French Participant dies, in which case the French Participant’s estate will have six months from the
date of the death of the French Participant to exercise the French Options granted to the deceased French Participant to the extent
that any vesting conditions that may be provided for such French Options (other than the condition provided for in Article 7, which
will not be applicable in the case of death of the Participant) are met before the end of such six-month period.
9.
No change of Beneficiary
3
Article 14(g) of the Plan (“ Designation and Change of Beneficiary ”) shall not be applicable to French Options.
10.
Clawback/Forfeiture
Article 14(j)(ii) of the Plan (“ Government and other regulations ”) shall not be applicable to French Options.
Article 14(u) of the Plan shall apply to French Options only to the extent the claw back/forfeiture provided for in such
Article is not considered as a monetary sanction prohibited by Article L. 1331-2 of the French Labor Code.
11.
Adjustments
Notwithstanding the provisions of Article 12 of the Plan, the French Exercise Price and the number of French Options
granted to French Eligible Employees shall not be modified once the French Options have been granted, except in cases which are
authorized or compulsory under French Law.
The French Exercise Price and the number of the Shares purchased under the French Sub Plan shall only be adjusted
upon the occurrence of the events provided for under Article L. 225-181 of the French Commercial Code. Any such adjustments
shall be made in accordance with French Law.
12.
Availability of Shares
The Company shall at any time hold a number of treasury Shares in excess of the number of French Options that are
exercisable pursuant to the French Sub Plan.
13.
Reporting requirements - French Subsidiaries
French Subsidiaries shall comply with the reporting requirements set forth by Article 38 septdecies of Annex III of
the French Tax Code.
In particular, before March 1 st of the year following the year of exercise of French Options by a French Participant,
the relevant French Subsidiary shall send (or cause to be sent) to the French Participant and to the French tax authorities an
individual report providing for, in particular, the Date of Grant, the Date of Exercise, the number of Shares purchased by the French
Participant, the French Exercise Price, the value of the Shares at the Date of Exercise and, if the French Exercise Price is less than
95% of the average of the closing trading prices of a Share during the twenty (20) trading days preceding the Date of Grant or of the
average purchase price of the treasury Shares held by the Company on the Date of Grant, the amount of the difference between (i)
95% of the higher of the average of the closing trading prices of a Share during the twenty (20) trading days preceding the Date of
Grant and the average purchase price of the treasury Shares held by the Company on the Date of Grant and (ii) the French Exercise
Price.
14.
Effective Date - Duration of the French Sub Plan
The French Sub Plan shall be effective as of April 6, 2016 (the “ French Effective Date ”).
4
The expiration date of the French Sub Plan shall be the expiration date of the Plan, i.e. the tenth anniversary of the
Effective Date. No French Options shall be granted under the French Sub Plan thereafter.
15.
Administration of the French Sub Plan - Amendments
Article 4(b)(v), (vi), (ix) and (x) of the Plan shall authorize the Committee to modify the key terms and conditions of
the French Options after the Date of Grant, it being precised that the Committee shall have the sole and plenary authority after the
Date of Grant to establish, amend, suspend, or waive any rules and regulations in accordance with French Law and appoint such
agents as the Committee shall deem appropriate for the proper administration of the Plan.
Any amendment of this French Sub Plan made according to Articles 4 and 13 of the Plan shall be made in accordance
with French Law.
16.
Award Agreement
The Award Agreement described in Article 14(a) of the Plan shall in particular indicate (i) the number of French
Options, (ii) the French Exercise Price and (iii) the Date of Grant.
17.
Governing Law
This French Sub Plan shall be governed by and construed in accordance with the internal laws of the State of
Delaware.
5
AUTOMATIC DATA PROCESSING, INC. 2008 OMNIBUS AWARD PLAN
FORM OF PERFORMANCE STOCK UNIT AWARD AGREEMENT
AUTOMATIC DATA PROCESSING, INC. (the “ Company ”), pursuant to the 2008 Omnibus Award Plan (the “ Plan ”), hereby irrevocably
grants you (“ Participant ”), on [DATE] (the “ Grant Date ”), a Performance Stock Unit Award (the “ Award ”) of forfeitable performance stock units of the
Company (“ PSUs ”), each PSU representing the right to receive one share of the Company’s common stock, par value $0.10 per share (“ Common Stock ”),
subject to the restrictions, terms and conditions herein.
Company’s 20[XX], 20[XX] and 20[XX] fiscal years, as described in the letter previously provided to Participant (the “ PSU Award Letter ”); and
WHEREAS, Participant has been selected as a participant in the three-year performance stock unit program of the Company covering the
WHEREAS, the Compensation Committee (the “ Committee ”) of the Board of Directors of the Company has determined that it would be in the
best interests of the Company and its stockholders to grant the award provided for herein to Participant, on the terms and conditions described in this Performance
Stock Unit Award Agreement (this “ Agreement ”).
NOW, THEREFORE, for and in consideration of the promises and the covenants of the parties contained in this Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, for themselves, and their permitted successors and
assigns, hereby agree as follows:
1.
Terms and Conditions .
(a)
Award . Subject to the other terms and conditions contained in this Agreement, the actual number of PSUs that are earned,
if any, pursuant to the terms and conditions of the Award will be determined by the Company (the “ Total Award ”) and shall be computed in
accordance with Section 3 below, as a percentage of the sum of (i) the Target Number of PSUs set forth in the PSU Award Letter (the “ Target
Award ”) plus (ii) any Dividend Equivalent PSUs (as defined below). The Total Award shall be a whole number of PSUs only.
(b)
Performance Period; Measurement Period . Subject to the other terms and conditions contained in this Agreement, the
performance period for the Award commenced on July 1, 20[XX] and shall terminate on June 30, 20[XX] (the “ Performance Period ”). During
the Performance Period there will be three (3) separate measurement periods (each, a “ Measurement Period ”) of the Company’s performance
based on a financial metric established by the Committee and communicated to the Participant (the “ Financial Metric ”).
(c)
Dividend Equivalents . Until shares of Common Stock are delivered to Participant in respect of the settlement of the
Award, at no time shall Participant be deemed for any purpose to be the owner of shares of Common Stock in connection with the Award and
Participant shall have no right to dividends in respect of the Award; provided , however , that each time the Company pays a dividend with
respect to a share of Common Stock during the period from the Grant Date to the Payout Date (as defined below), Participant shall be credited
with an additional number of PSUs (the “ Dividend Equivalent PSUs ”) equal to (i) the quotient obtained by dividing the amount of such
dividend by the Fair Market Value (as defined in the Plan) of a share of Common Stock on such date, multiplied by (ii) the Target Award.
(d)
Settlement . For Participants whose home country is the United States, subject to the other terms and conditions contained
in this Agreement, the Company shall settle the Award by causing one share of Common Stock for each PSU in the Total Award that is
outstanding (and not previously forfeited) as of the Payout Date to be registered in the name of Participant and held in book-entry form on the
Payout Date. For Participants whose home country is not the United States, subject to the other terms and conditions contained in this
Agreement, the Company shall settle the Award by the payment to the Participant in cash (without interest) of an amount equal to the Fair
Market Value of the PSUs (the U.S. dollar value of your PSUs will be converted into your local currency using the exchange rate determined by
the Company) on the Payout Date, in each case, subject to applicable withholding taxes.
2.
Forfeiture of PSUs .
(a)
Termination of Employment Generally . Except as otherwise determined by the Company in its sole discretion or as
provided in Section 2(b) or Section 3(d) below, all PSUs and Dividend Equivalent PSUs
shall be forfeited without consideration to Participant upon Participant’s termination of employment with the Company or its Affiliates for any
reason (and Participant shall forfeit any rights to receive shares of Common Stock or cash in respect of the Award).
(b)
Termination due to Death, Disability or Retirement . In the event that after completion of the first Measurement Period in
the Performance Period but prior to the end of the Performance Period, Participant’s employment with the Company is terminated due to death,
Disability (as defined in the Plan) or retirement (defined for purposes of this Agreement as voluntary termination of employment at or after age
65, or age 55 with 10 years of service with the Company or its Affiliates), Participant shall be entitled to receive a pro-rata portion of the Award
determined in accordance with Section 3. For the avoidance of doubt, if a Participant’s employment is terminated prior to June 30, 20[XX] due
to death, Disability or retirement, the Award and any rights to receive shares of Common Stock, cash and Dividend Equivalent PSUs with
respect thereto, will be forfeited without consideration.
3.
Performance Determinations .
(a)
Subject to the other terms and conditions contained in this Agreement, prior to or during each Measurement Period, the
Company will adopt a schedule setting forth for such Measurement Period potential ranges of the Company’s Financial Metric (which may be an
absolute dollar or other value for such period, or growth percentage relative to a prior period, as the Company may determine). If Participant is
employed with the Company or its Affiliates at the completion of the Performance Period, then following completion of the Performance Period
the Company will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU) equal to the product of (i) the
Target Award plus any Dividend Equivalent PSUs and (ii) the Final Payout Percentage.
(b)
If Participant’s employment with the Company or its Affiliates has terminated after the first Measurement Period within
the Performance Period but prior to the end of the Performance Period due to death or Disability, then as soon as administratively feasible (in the
Committee’s sole discretion) following such termination the Company will determine the Total Award, calculated as the number (rounded down
to the nearest whole PSU) equal to the product of (i) the Target Award plus any Dividend Equivalent PSUs, (ii) the Final Payout Percentage, and
(iii) the Pro-Rata Percentage.
(c)
If Participant’s employment with the Company and its Affiliates has terminated after the first Measurement Period within
the Performance Period but prior to the end of the Performance Period due to retirement, then following completion of the Performance Period
the Company will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU) equal to the product of (i) the
Target Award plus any Dividend Equivalent PSUs, (ii) the Final Payout Percentage, and (iii) the Pro-Rata Percentage.
(d)
If Participant’s employment with the Company or its Affiliates (or any successor thereto) is terminated within 24 months
following a Change in Control either (x) by the Company or its Affiliates (or any successor thereto) without Cause (as defined in the Company’s
Change in Control Severance Plan for Corporate Officers, as amended (the “CIC Plan”)) or (y) by Participant with Good Reason (as defined in
the CIC Plan), then as soon as administratively feasible following such termination by the Company or its Affiliates (or any successor thereto),
the Company (or any successor thereto) will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU)
equal to the product of (i) the Target Award plus any Dividend Equivalent PSUs and (ii) the Final Payout Percentage.
(e)
If in connection with a Change in Control the successor company, or a parent of the successor company, in the Change in
Control does not agree to assume, replace, or substitute the PSUs granted hereunder (as of the consummation of such Change in Control) with
PSUs on substantially identical terms, as determined by the Committee, then as of immediately prior to such Change in Control, the Company
will determine the Total Award, calculated as the number (rounded down to the nearest whole PSU) equal to the product of (i) the Target Award
plus any Dividend Equivalent PSUs and (ii) the Final Payout Percentage.
(f)
For purposes of this Agreement:
(i)
“ Final Payout Percentage ” is a number, expressed as a percentage, equal to the sum of each Yearly Performance Percentage during the
Performance Period, divided by 3; provided , however , that if the Company’s total shareholder return (“ TSR ”) for the Performance
Period is not positive, then the Final
Payout Percentage shall not exceed 100% (the “ TSR Cap ”); provided , further , that the TSR Cap shall not apply to any Participant
whose employment terminates due to death or Disability prior to completion of the Performance Period or if a Change of Control
occurs prior to the completion of the Performance Period.
(ii)
“ Payout Date ” shall be:
•
•
•
•
September 20[XX] or as soon as administratively feasible (but not later than 60 days) thereafter if Participant remains employed
with the Company or its Affiliates until the end of the Performance Period;
September 20[XX] or as soon as administratively feasible (but not later than 60 days) thereafter if Participant’s employment with
the Company and its Affiliates terminates due to retirement after completion of the first Measurement Period in the Performance
Period but prior to the end of the Performance Period; provided that if Participant subsequently dies or becomes Disabled during
the Performance Period, the Payout Date shall be as soon as administratively feasible (but not later than 60 days) after Participant’s
death or Disability;
as soon as administratively feasible (but not later than 60 days) after termination of employment if Participant’s employment with
the Company and its Affiliates terminates due to death or Disability after completion of the first Measurement Period in the
Performance Period but prior to the end of the Performance Period, or if Section 3(d) applies; and
immediately prior to the Change in Control if Section 3(e) applies.
(iii)
(iv)
“ Pro-Rata Percentage ” is a number, expressed as a percentage, equal to the quotient of (i) the number of completed months from July
1, 20[XX] until the date of Participant’s termination of employment, divided by (ii) 36.
“ Yearly Performance Percentage ” is a number, expressed as a percentage, determined by the Company using straight line interpolation
between the low and high of the Financial Metric range (whether a dollar or other value, or a growth percentage) for each Measurement
Period, based upon the Company’s actual performance with respect to such Financial Metric for such Measurement Period; provided ,
that if Participant’s employment with the Company and its Affiliates terminates due to death or Disability after completion of the first
Measurement Period in the Performance Period but prior to the end of the Performance Period, the Yearly Performance Percentage will
be deemed to be 100% for each Measurement Period in the Performance Period not completed prior to Participant’s termination of
employment; provided , further , that if Participant’s employment with the Company and its Affiliates terminates due to retirement after
completion of the first Measurement Period in the Performance Period and Participant subsequently dies or becomes Disabled prior to
completion of the Performance Period, the Yearly Performance Percentage will be deemed to be 100% for each Measurement Period in
the Performance Period not completed prior to Participant’s death or Disability; provided , further , that in the event of a Change in
Control, then the Yearly Performance Percentage will be deemed to be 100% for each Measurement Period in the Performance Period
not completed prior to such Change in Control.
(g)
All determinations with respect to the Award or this Agreement by the Company or Committee, including, without
limitation, determinations of the Financial Metric amount for any Measurement Period, the Financial Metric growth relative to a prior period,
TSR, Yearly Performance Percentage and Pro-Rata Percentage, and timing of settlements, shall be within the Company’s absolute discretion and
shall be final, binding and conclusive on Participant.
4.
Restrictive Covenant Agreement; Clawback; Incorporation by Reference .
(a)
Restrictive Covenant Agreement . This Award is conditioned upon the Participant’s agreement to the Restrictive Covenant
Agreement furnished herewith and which includes, among other provisions, certain non-competition, non-solicitation and non-disclosure
covenants. If Participant does not agree (whether electronically or otherwise) to the Restrictive Covenant Agreement within ninety (90) days
from the date of this Award, this Award shall be terminable by the Company.
5.
6.
7.
(b)
Clawback/Forfeiture . Notwithstanding anything to the contrary contained herein, the PSUs may be forfeited without
consideration if Participant, as determined by the Committee in its sole discretion (i) engages in an activity that is in conflict with or adverse to
the interests of the Company or any Affiliate, including but not limited to fraud or conduct contributing to any financial restatements or
irregularities, or (ii) without the consent of the Company, while employed by or providing services to the Company or any Affiliate or after
termination of such employment or service, violates a non-competition, non-solicitation or non-disclosure covenant or agreement (including the
Restrictive Covenant Agreement furnished herewith) between Participant and the Company or any Affiliate. If Participant engages in any
activity referred to in the preceding sentence, Participant shall, at the sole discretion of the Committee, forfeit any gain realized in respect of the
PSUs (which gain shall be deemed to be an amount equal to the Fair Market Value, on the applicable Payout Date, of the shares of Common
Stock or cash delivered to Participant under this Award), and repay such gain to the Company.
(c)
Incorporation by Reference, Etc . The provisions of the Plan are hereby incorporated herein by reference. Except as
otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms
not otherwise defined in this Agreement shall have the definitions set forth in the Plan. In the event of any inconsistency between this Agreement
and the terms of the CIC Plan that would otherwise apply to the PSUs herein granted, the terms of this Agreement shall control.
Compliance with Legal Requirements . The granting and delivery of the Award, and any other obligations of the Company under this
Agreement, shall be subject to all applicable federal, state, local and foreign laws, rules and regulations and to such approvals by any regulatory
or governmental agency as may be required.
Transferability . No PSUs may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant other than
by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or
encumbrance shall be void and unenforceable against the Company or an Affiliate.
Miscellaneous .
(a)
Waiver . Any right of the Company contained in this Agreement may be waived in writing by the Committee. No waiver
of any right hereunder by any party shall operate as a waiver of any other right, or as a waiver of the same right with respect to any subsequent
occasion for its exercise, or as a waiver of any right to damages. No waiver by any party of any breach of this Agreement shall be held to
constitute a waiver of any other breach or a waiver of the continuation of the same breach.
(b)
Severability . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement and each other provision of this Agreement shall be severable and enforceable to the
extent permitted by law.
(c)
No Right to Employment . Nothing contained in this Agreement shall be construed as giving Participant any right to be
retained, in any position, as an employee, consultant or director of the Company or its Affiliates or shall interfere with or restrict in any way the
right of the Company or its Affiliates, which are hereby expressly reserved, to remove, terminate or discharge Participant with or without cause
at any time for any reason whatsoever. Although over the course of employment terms and conditions of employment may change, the at-will
term of employment will not change.
(d)
Successors . The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors and
assigns, Participant and Participant’s beneficiaries, executors, administrators, heirs and successors.
(e)
Entire Agreement . This Agreement, the Plan and the Restrictive Covenant Agreement contain the entire agreement and
understanding of the parties hereto with respect to the subject matter contained herein and supersede all prior communications, representations
and negotiations in respect thereto; provided, however, that the Participant understands that Participant may have an existing agreement(s) with
the Company, through prior awards, acquisition of a prior employer or otherwise, that may include the same or similar covenants as those in
Restrictive Covenant Agreement furnished herewith, and acknowledges that the Restrictive Covenant Agreement is meant to supplement any
such agreement(s) such that the covenants in the agreements that provide the Company with the greatest protection enforceable under applicable
law shall control, and that the parties do not intend to create any ambiguity or conflict through the execution of the Restrictive Covenant
Agreement that
would release Participant from the obligations Participant has assumed under the restrictive covenants in any of these agreements. No change or
modification of any provision of this Agreement shall be valid unless the same be in writing and signed by the parties hereto, except for any
changes permitted without consent of Participant under the Plan.
(f)
Governing Law . This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware
without regard to principles of conflicts of law thereof, or principles of conflicts of laws of any other jurisdiction which could cause the
application of the laws of any jurisdiction other than the State of Delaware.
(g)
Headings . The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for
interpretation or construction, and shall not constitute a part, of this Agreement.
AUTOMATIC DATA PROCESSING, INC.
_____________________________________________
Non-Qualified
[DATE]
AUTOMATIC DATA PROCESSING, INC. 2008 OMNIBUS AWARD PLAN
STOCK OPTION GRANT AGREEMENT
AUTOMATIC DATA PROCESSING, INC. (the “Company”), pursuant to the 2008 Omnibus Award Plan (the “Plan”), hereby irrevocably grants you
(the “Participant”), on [DATE] the right and option to purchase shares of the Common Stock, par value $0.10 per share, of the Company subject to the restrictions,
terms and conditions herein.
WHEREAS, the Compensation Committee (the “Committee”) of the Board of Directors of the Company (the “Board”) has determined that it would be in
the best interests of the Company and its stockholders to grant the award of options provided for herein to the Participant, on the terms and conditions described in
this Stock Option Grant Agreement (this “Agreement”).
NOW, THEREFORE, for and in consideration of the premises and the covenants of the parties contained in this Agreement, and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, for themselves, their successors and assigns, hereby agree as follows:
1. The option herein granted shall become exercisable in whole or in part as follows:
(a) Exercisable as to 25% of the shares (rounded down to the nearest whole share) on the first anniversary of the grant date.
(b) Exercisable as to an additional 25% of the shares (rounded down to the nearest whole share) on the second anniversary of the grant date.
(c) Exercisable as to an additional 25% of the shares (rounded down to the nearest whole share) on the third anniversary of the grant date.
(d) Exercisable in its entirety on and after the fourth anniversary of the grant date; and
(e) Exercisable in its entirety ( i ) upon the death of the Participant, or ( ii ) in the event of total and permanent disability of the Participant.
(f)
(g)
(h)
(i)
If the Participant retires from the Company at any time following the first anniversary of this Agreement and at such time satisfies the Normal Retirement
Criteria, the option herein granted shall continue to become exercisable as set forth in clauses (b) through (d) of this Section 1. The Normal Retirement
Criteria will be satisfied if the Participant shall ( i ) retire ( and satisfy the Company’s criteria for retirement at such time ) from the Company or any of its
subsidiaries, divisions or business units, as the case may be, ( ii ) be at least 55 years of age at the time of such retirement, and ( iii ) have at least ten
credited years of service with the Company or its subsidiaries at the time of such retirement.
If a Participant who at the time of retirement satisfies the Normal Retirement Criteria subsequently dies or becomes totally and permanently disabled
before such Participant’s option herein granted becomes exercisable in its entirety as set forth in clause (d) of this Section 1, the option herein granted
shall become exercisable as set forth in clause (e) of this Section 1.
If a Participant who at the time of retirement satisfies the criteria set forth in Section 2(b)(iv) subsequently dies or becomes totally and permanently
disabled before the expiration of 12 months after the retirement of the Participant, such Participant’s option herein granted shall become exercisable as set
forth in clause (e) of this Section 1.
If, within 24 months following a Change in Control, the Participant’s employment with the Company or its Affiliates (or any successor thereto) is
terminated either (x) by the Company or its Affiliates (or any successor thereto) without Cause (as defined in the Company’s Change in Control
Severance Plan for Corporate Officers, as amended (the “CIC Plan”)) or (y) by the Participant with Good Reason (as defined in the CIC Plan), the option
granted hereunder shall become exercisable in its entirety as of the date of such termination.
(j) Except as provided in clauses (f) through (i) of this Section 1 or as the Committee may otherwise determine in its sole discretion, no option herein granted
shall become exercisable following termination of the Participant’s employment from
the Company or any of its subsidiaries (and no option herein granted shall become exercisable following the Company’s sale of the subsidiary, or the
Company’s or a subsidiary’s sale of the division or business unit, that employs such Participant).
(k) Notwithstanding clause (i) of this Section 1, the option granted hereunder shall become exercisable in its entirety as of immediately prior to the
consummation of a Change in Control, unless the successor company, or a parent of the successor company in the Change in Control agrees to assume,
replace, or substitute the option granted hereunder (as of the consummation of such Change in Control) with an option on substantially identical terms, as
determined by the Committee.
2. The unexercised portion of the option herein granted shall automatically and without notice terminate and become null and void at the time of the earliest of
the following to occur:
(a)
the expiration of ten years from the date on which the option was granted;
(b)
the expiration of 60 days from the date of termination of the Participant’s employment from the Company (including in connection with the sale of the
subsidiary, division or business unit that employs such Participant) or any of its subsidiaries; provided, however , that
( i )
if the Participant’s employment from the Company or any of its subsidiaries terminates because of total and permanent disability, the
provisions of sub-paragraph (c) shall apply,
( ii )
if the Participant shall die during employment by the Company or any of its subsidiaries or during the 60-day period following the date of
termination of such employment, the provisions of sub-paragraph (d) below shall apply,
( iii )
if the Participant shall retire and satisfy the Normal Retirement Criteria, the provisions of sub-paragraph (e) below shall apply, and
(iv)
if the Participant shall ( I ) retire ( and satisfy the Company’s criteria for retirement at such time ) from the Company or any of its subsidiaries,
divisions or business units, as the case may be, ( II ) be at least 55 years of age at the time of such retirement, and (III) have at least five (but
less than ten) credited years of service with the Company and its subsidiaries at the time of such retirement, the provisions of sub-paragraph (f)
below shall apply;
(c)
if Section 2(b)(i) applies, (i) if the Participant satisfied the Normal Retirement Criteria at the time of Participant’s total and permanent disability, the
expiration of 36 months after termination of Participant’s employment from the Company or any of its subsidiaries because of total and permanent
disability, or (ii) if the Participant did not satisfy the Normal Retirement Criteria at the time of Participant’s total and permanent disability, the expiration
of 12 months after termination of Participant’s employment from the Company or any of its subsidiaries because of total and permanent disability;
provided , however , that if the Participant shall die during the 36-month period specified in clause (i) of this Section 2(c) or the 12-month period specified
in clause (ii) of this Section 2(c), as applicable, then the unexercised portion shall become null and void upon the expiration of 12 months after death of
the Participant;
(d)
if Section 2(b)(ii) applies, ( i ) if the Participant satisfied the Normal Retirement Criteria at the time of death, the expiration of 36 months after death of
the Participant, or ( ii ) if the Participant did not satisfy the Normal Retirement Criteria at the time of death, 12 months after death of the Participant;
(e)
(f)
if Section 2(b)(iii) applies, the expiration of 37 months after the retirement of the Participant; provided , however , that if such Participant shall die during
the 37 month period following the date of such Participant’s retirement, then the unexercised portion shall become null and void on the later of ( i ) the
expiration of 37 months after the retirement of the Participant and ( ii ) 12 months after death of the Participant; and
if Section 2(b)(iv) applies, the expiration of 12 months after the retirement of the Participant; provided , however , that if such Participant shall die during
the 12 month period following the date of such Participant’s retirement, then the unexercised portion shall become null and void on the expiration of 12
months after death of the Participant.
3. Notwithstanding the foregoing, in the event that any unexercised portion of the option herein granted would terminate and become null and void in accordance
with Section 2 and the Fair Market Value of the unexercised portion of the option herein granted exceeds the full price for each of the shares purchased
pursuant to such option, the then vested portion of the option herein granted shall be deemed to be automatically exercised by the Participant on such last
trading day by means of a net
exercise without any action by the Participant. Upon such automatic exercise, the Company shall deliver to the Participant the number of shares of Common
Stock for which the option was deemed exercised less the number of shares of Common Stock having a Fair Market Value, as of such date, sufficient to
(1) pay the full price for each of the shares of Common Stock purchased pursuant to the option herein granted and (2) satisfy all applicable required tax
withholding obligations. Any fractional share shall be settled in cash. For the avoidance of doubt, and notwithstanding any provision (or interpretation) of
Section 2 to the contrary, the unexercised portion of the option herein granted shall automatically and without notice terminate and become null and void upon
the expiration of ten years from the date of this Agreement.
4. The full price for each of the shares purchased pursuant to the option herein granted shall be $ XX.XX .
5. Full payment for shares purchased by the Participant shall be made at the time of the exercise of the option in whole or in part. No shares shall be issued until
full payment therefore has been made, and the Participant shall have none of the rights of a shareholder with respect to any shares subject to this option until
such shares shall have been issued.
6. No option granted hereunder may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant other than by will or
by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable against the Company or any Affiliate.
7.
In the event of one or more stock splits, stock dividends, stock changes, reclassifications, recapitalizations or combinations of shares prior to complete exercise
of the option herein granted which change the character or amount of the shares subject to the option, this option to the extent that it shall not have been
exercised, shall entitle the Participant or the Participant’s executors or administrators to receive in substitution such number and kind of shares as he, she or
they would have been entitled to receive if the Participant or the Participant’s executors or administrators had actually owned the shares subject to this option
at the time of the occurrence of such change; provided, however that if the change is of such nature that the Participant or the Participant’s executors or
administrators, upon exercise of the option, would receive property other than shares of stock, then the Board shall adjust the option so that he, she or they
shall acquire only shares of stock upon exercise, making such adjustment in the number and kind of shares to be received as the Board shall, in its sole
judgment, deem equitable; provided , further , that the foregoing shall not limit the Company’s ability to otherwise adjust the option in a manner consistent
with Section 12 of the Plan.
8. The option granted hereunder is conditioned upon the Participant’s agreement to the Restrictive Covenant Agreement furnished herewith within six months
from the date of this Agreement. If the Company does not receive the signed (whether electronically or otherwise) restrictive covenant within such six-month
period, this Agreement shall be terminable by the Company.
9. Notwithstanding anything to the contrary contained herein, the option granted hereunder may be terminated and become null and void without consideration if
the Participant, as determined by the Committee in its sole discretion (i) engages in an activity that is in conflict with or adverse to the interests of the
Company or any Affiliate, including but not limited to fraud or conduct contributing to any financial restatements or irregularities, or (ii) without the consent
of the Company, while employed by or providing services to the Company or any Affiliate or after termination of such employment or service, violates a non-
competition, non-solicitation or non-disclosure covenant or agreement (including the Restrictive Covenant Agreement furnished herewith) between the
Participant and the Company or any Affiliate. If the Participant engages in any activity referred to in the preceding sentence, the Participant shall, at the sole
discretion of the Committee, forfeit any gain realized in respect of the option granted hereunder (which gain shall be deemed to be an amount equal to the
difference between the price for shares set forth in Section 4 above and the Fair Market Value (as defined in the Plan), on the applicable exercise date, of the
shares of Common Stock for which the option was exercised), and repay such gain to the Company.
10. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in
accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan. In
the event of any inconsistency between this Agreement and the terms of the CIC Plan that would otherwise apply to the option herein granted, the terms of this
Agreement shall control.
11. Any right of the Company contained in this Agreement may be waived in writing by the Committee. No waiver of any right hereunder by any party shall
operate as a waiver of any other right, or as a waiver of the same right with respect to any subsequent occasion for its exercise, or as a waiver of any right to
damages. No waiver by any party of any breach of this Agreement shall be held to constitute a waiver of any other breach or a waiver of the continuation of
the same breach.
12. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement,
and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.
13. Nothing contained in this Agreement shall be construed as giving the Participant any right to be retained, in any position, as an employee, consultant or
director of the Company or its Affiliates or shall interfere with or restrict in any way the right of the Company or its Affiliates, which are hereby expressly
reserved, to remove, terminate or discharge the Participant with or without cause at any time for any reason whatsoever. Although over the course of
employment terms and conditions of employment may change, the at-will term of employment will not change.
14. The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, the Participant and the beneficiaries,
executors, administrators, heirs and successors of the Participant.
15. This Agreement, the Plan and the Restrictive Covenant Agreement contain the entire agreement and understanding of the parties hereto with respect to the
subject matter contained herein and supersede all prior communications, representations and negotiations in respect thereto; provided, however, that the
Participant understands that Participant may have an existing agreement(s) with the Company, through prior awards, acquisition of a prior employer or
otherwise, that may include the same or similar covenants as those in the Restrictive Covenant Agreement furnished herewith, and acknowledges that the
Restrictive Covenant Agreement is meant to supplement any such agreement(s) such that the covenants in the agreements that provide the Company with the
greatest protection enforceable under applicable law shall control, and that the parties do not intend to create any ambiguity or conflict through the execution
of the Restrictive Covenant Agreement that would release Participant from the obligations Participant has assumed under the restrictive covenants in any of
these agreements. No change or modification of any provision of this Agreement shall be valid unless the same be in writing and signed by the parties hereto,
except for any changes permitted without consent of the Participant under the Plan.
16. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without regard to principles of conflicts of law
thereof, or principles of conflicts of laws of any other jurisdiction which could cause the application of the laws of any jurisdiction other than the State of
Delaware.
By: ______________________________________
[Name]
[Title]
AUTOMATIC DATA PROCESSING, INC. 2008 OMNIBUS AWARD PLAN
PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT
AUTOMATIC DATA PROCESSING, INC. (the “ Company ”), pursuant to the 2008 Omnibus Award Plan (the “ Plan ”), hereby irrevocably
grants you (the “ Participant ”), on [DATE] (the “ Grant Date ”), a Performance-Based Restricted Stock Unit Award (the “ PRSU Award ”) of forfeitable
performance-based restricted stock units of the Company (“ PRSUs ”), each PRSU representing the right to receive one share of the Company’s Common Stock,
par value $0.10 per share (“ Common Stock ”), subject to the restrictions, terms and conditions herein.
WHEREAS, the Compensation Committee (the “ Committee ”) of the Board of Directors of the Company has determined that it would be in the
best interests of the Company and its stockholders to grant the award provided for herein to the Participant, on the terms and conditions described in this
Performance-Based Restricted Stock Unit Award Agreement (this “ Agreement ”).
NOW, THEREFORE, for and in consideration of the promises and the covenants of the parties contained in this Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, for themselves, and their permitted successors and
assigns, hereby agree as follows:
1. Terms and Conditions.
(a)
Vesting of PRSUs . Subject to the other terms and conditions contained in this Agreement, the PRSUs shall vest upon the satisfaction of both
a time-based vesting condition and a performance-based vesting condition
(1) The time-based vesting condition shall be satisfied as to [XX]% of the PRSUs on July 1, 20[XX], and as to the remaining [XX]% of the PRSUs
on July 1, 20[XX]. [ Note: the time-based vesting condition may vary in terms of number of years and percentage of award that vests;
appropriate adjustments are made to Section 1(b) to reflect the time-based vesting condition.]
(2) The performance-based vesting condition shall be satisfied as to 100% of the PRSUs as of June 30, 20[XX], provided that the Company has
achieved the performance metric established by the Company and separately communicated to the Participant, such achievement to be
determined by the Committee at its regularly scheduled meeting on or around August 20[XX]; provided , however , that in the event of a Change
in Control, the performance-based vesting condition shall be deemed satisfied (as of immediately prior to such Change in Control) as to 100% of
the PRSUs.
(3)
(4)
If the Participant’s employment with the Company or its Affiliates (or any successor thereto) is terminated within 24 months following a Change
in Control either (x) by the Company or its Affiliates (or any successor thereto) without Cause (as defined in the Company’s Change in Control
Severance Plan for Corporate Officers, as amended (the “ CIC Plan ”)), or (y) by the Participant with Good Reason (as defined in the CIC Plan),
then 100% of the PRSUs granted hereunder shall vest in full as of such termination.
If in connection with a Change in Control the successor company, or a parent of the successor company, in the Change in Control does not agree
to assume, replace, or substitute the PRSUs granted hereunder (as of the consummation of such Change in Control) with PRSUs on substantially
identical terms, as determined by the Committee, then the PRSUs granted hereunder shall vest in full as of immediately prior to such Change in
Control.
(b)
Settlement . Subject to the other terms and conditions contained in this Agreement, the Company shall settle the PRSU Award by causing
one share of Common Stock for each PRSU that is outstanding (and not previously forfeited) as of the Payout Date (as defined below) to be registered in the name
of Participant and held in book-entry form on the Payout Date. As used herein, “ Payout Date ” shall mean, (w) with respect to the portion of the PRSU Award that
vests on July 1, 20[XX], as soon as administratively feasible (but not later than 60 days) thereafter, (x) with respect to the portion of the PRSU Award that vests on
July 1, 20[XX], as soon as administratively feasible (but not later than 60 days) thereafter, (y) if Section 1(a)(3) applies, as soon as administratively feasible (but
not later than 60 days) after termination of employment, and (z) if Section 1(a)(4) applies, immediately prior to the Change in Control.
(c)
Dividend Equivalents . Until shares of Common Stock are delivered to the Participant in respect of the settlement of the PRSU Award, at no
time shall the Participant be deemed for any purpose to be the owner of shares of Common Stock in
connection with the PRSU Award; provided , however , that each time the Company pays a dividend with respect to a share of Common Stock during the period
from the Grant Date to the Payout Date, the Participant shall be credited with or paid a cash amount equal to the product of (i) the number of PRSUs then
outstanding hereunder multiplied by (ii) the per-share dividend payable to holders of record of the Common Stock (the “ Dividend Equivalent Amount ”), as
follows: (x) with respect to each such dividend payable on or prior to the date on which the performance-based vesting condition is satisfied or deemed satisfied
(the “ Performance Vesting Date ”), the Participant shall be credited with the applicable Dividend Equivalent Amount to be paid, without interest, as soon as
administratively feasible (but not later than 60 days) after the Performance Vesting Date, or if either Section 1(a)(3) or Section 1(a)(4) applies, the Payout Date, if
earlier, and (y) with respect to each such dividend payable after the Performance Vesting Date, the Participant shall be paid the Dividend Equivalent Amount on
the same date on which such dividend is payable to the Company’s shareholders.
(d)
Forfeiture of PRSUs . Except as otherwise determined by the Committee in its sole discretion or as set forth in this Section 1, unvested
PRSUs (i.e., PRSUs as to which either or both of the vesting conditions have not been satisfied), and any associated unpaid Dividend Equivalent Payments, shall
be forfeited without consideration to the Participant upon the Participant’s termination of employment with the Company or its Affiliates for any reason. For the
avoidance of doubt, all PRSUs and Dividend Equivalent Payments shall be forfeited as of June 30, 20[XX], if the performance-based vesting condition is not been
achieved.
2. Restrictive Covenant Agreement; Clawback; Incorporation by Reference .
(a)
Restrictive Covenant Agreement . This PRSU Award is conditioned upon the Participant’s agreement to the Restrictive Covenant Agreement
furnished herewith and which includes, among other provisions, certain non-competition, non-solicitation and non-disclosure covenants. If Participant does not
agree (whether electronically or otherwise) to the Restrictive Covenant Agreement within ninety (90) days from the date of this PRSU Award, this PRSU Award
shall be terminable by the Company.
(b)
Clawback/Forfeiture . Notwithstanding anything to the contrary contained herein, the PRSUs may be forfeited without consideration if the
Participant, as determined by the Committee in its sole discretion (i) engages in an activity that is in conflict with or adverse to the interests of the Company or any
Affiliate, including but not limited to fraud or conduct contributing to any financial restatements or irregularities, or (ii) without the consent of the Company, while
employed by or providing services to the Company or any Affiliate or after termination of such employment or service, violates a non-competition, non-solicitation
or non-disclosure covenant or agreement (including the Restrictive Covenant Agreement furnished herewith) between the Participant and the Company or any
Affiliate. If the Participant engages in any activity referred to in the preceding sentence, the Participant shall, at the sole discretion of the Committee, forfeit any
gain realized in respect of the PRSUs (which gain shall be deemed to be an amount equal to the Fair Market Value, on the applicable Payout Date of the shares of
Common Stock delivered to the Participant plus the amount of any Dividend Equivalent Payments), and repay such gain to the Company. In addition to the
foregoing, the PRSUs (and any gain realized in respect thereof) shall in all respects be subject to the terms and conditions of any Company clawback/forfeiture
policy as in effect from time to time to which the Participant is subject.
(c)
Incorporation by Reference, Etc . The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set
forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement
shall have the definitions set forth in the Plan. In the event of any inconsistency between this Agreement and the terms of the CIC Plan that would otherwise apply
to the PRSUs herein granted, the terms of this Agreement shall control. For the avoidance of doubt: (1) the terms of Section 1.2 of the CIC Plan shall not apply to
the PRSUs granted under this Agreement, and (2) any acceleration of vesting of the PRSUs herein granted shall be deemed to be accelerated under the terms of the
CIC Plan for purposes of Section 1.3 of the CIC Plan.
3.
Compliance with Legal Requirements . The granting and delivery of the PRSU Award, and any other obligations of the Company under this
Agreement, shall be subject to all applicable federal, state, local and foreign laws, rules and regulations and to such approvals by any regulatory or governmental
agency as may be required.
4.
Transferability . Until it has fully vested in accordance with Section 1, no PRSU may be assigned, alienated, pledged, attached, sold or otherwise
transferred or encumbered by the Participant other than by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.
5. Miscellaneous .
(a)
Waiver . Any right of the Company contained in this Agreement may be waived in writing by the Committee. No waiver of any right
hereunder by any party shall operate as a waiver of any other right, or as a waiver of the same right with
respect to any subsequent occasion for its exercise, or as a waiver of any right to damages. No waiver by any party of any breach of this Agreement shall be held to
constitute a waiver of any other breach or a waiver of the continuation of the same breach.
(b)
Severability . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.
(c)
No Right to Employment . Nothing contained in this Agreement shall be construed as giving the Participant any right to be retained, in any
position, as an employee, consultant or director of the Company or its Affiliates or shall interfere with or restrict in any way the right of the Company or its
Affiliates, which are hereby expressly reserved, to remove, terminate or discharge the Participant with or without cause at any time for any reason whatsoever.
Although over the course of employment terms and conditions of employment may change, the at-will term of employment will not change.
(d)
Successors . The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, the
Participant and the beneficiaries, executors, administrators, heirs and successors of the Participant.
(e)
Entire Agreement . This Agreement, the Plan and the Restrictive Covenant Agreement contain the entire agreement and understanding of the
parties hereto with respect to the subject matter contained herein and supersede all prior communications, representations and negotiations in respect thereto;
provided, however, that the Participant understands that Participant may have an existing agreement(s) with the Company, through prior awards, acquisition of a
prior employer or otherwise, that may include the same or similar covenants as those in Restrictive Covenant Agreement furnished herewith, and acknowledges
that the Restrictive Covenant Agreement is meant to supplement any such agreement(s) such that the covenants in the agreements that provide the Company with
the greatest protection enforceable under applicable law shall control, and that the parties do not intend to create any ambiguity or conflict through the execution of
the Restrictive Covenant Agreement that would release Participant from the obligations Participant has assumed under the restrictive covenants in any of these
agreements. No change or modification of any provision of this Agreement shall be valid unless the same be in writing and signed by the parties hereto, except for
any changes permitted without consent of the Participant under the Plan.
(f)
Governing Law . This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without regard to
principles of conflicts of law thereof, or principles of conflicts of laws of any other jurisdiction which could cause the application of the laws of any jurisdiction
other than the State of Delaware.
(g)
Headings . The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for interpretation or
construction, and shall not constitute a part, of this Agreement.
AUTOMATIC DATA PROCESSING, INC.
________________________________________
Name of Subsidiary
ADP Atlantic, LLC
ADP Benefits Services KY, Inc.
ADP Brasil Ltda
ADP Broker-Dealer, Inc.
ADP Canada Co.
ADP Employer Services GmbH
ADP Europe SAS
ADP France SAS
ADP GlobalView B.V.
ADP GSI France SAS
ADP Indemnity, Inc.
ADP International Services BV
ADP, LLC.
ADP MasterTax, Inc.
ADP Private Limited
ADP Pacific, Inc.
ADP Payroll Services, Inc.
ADP Screening and Selection Services, Inc.
ADP Tax Services, Inc.
ADP Technology Services, Inc.
ADP TotalSource I, Inc.
ADP TotalSource CO XXI, Inc.
ADP TotalSource CO XXII, Inc.
ADP TotalSource of CO XXIII, Inc.
ADP TotalSource FL XVI, Inc.
ADP TotalSource FL XXIX, Inc.
ADP TotalSource Group, Inc.
Automatic Data Processing Insurance Agency, Inc.
Automatic Data Processing Limited
Automatic Data Processing Limited (UK)
EXHIBIT 21
Jurisdiction of
Incorporation
Delaware
Kentucky
Brazil
New Jersey
Canada
Germany
France
France
Netherlands
France
Vermont
Netherlands
Delaware
Arizona
India
Delaware
Delaware
Colorado
Delaware
Delaware
Florida
Colorado
Colorado
Colorado
Florida
Florida
Florida
New Jersey
Australia
United Kingdom
In accordance with Item 601(b)(21) of Regulation S-K, the Company has omitted the names of particular subsidiaries because the unnamed subsidiaries,
considered in the aggregate as a single subsidiary, would not have constituted a significant subsidiary as of June 30, 2016.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 33-46168, 333-10281, 333-10277, 333-110393,
333-147377, 333-155382, 333-169110, and 333-170506, on Form S-8, and Registration Statement No. 333-206631 on Form S-3
of our reports dated August 5, 2016, relating to the consolidated financial statements and consolidated financial statement
schedule of Automatic Data Processing, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s
internal control over financial reporting appearing in the Annual Report on Form 10-K of Automatic Data Processing, Inc.
for the year ended June 30, 2016.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 5, 2016
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Carlos A. Rodriguez, certify that:
I have reviewed this Annual Report on Form 10-K of Automatic Data Processing, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 5, 2016
/s/ Carlos A. Rodriguez
Carlos A. Rodriguez
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Jan Siegmund, certify that:
I have reviewed this Annual Report on Form 10-K of Automatic Data Processing, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 5, 2016
/s/ Jan Siegmund
Jan Siegmund
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Automatic Data Processing, Inc. (the “Company”) on Form 10-K for the fiscal year ending June 30, 2016 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Carlos A. Rodriguez, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: August 5, 2016
/s/ Carlos A. Rodriguez
Carlos A. Rodriguez
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Automatic Data Processing, Inc. (the “Company”) on Form 10-K for the fiscal year ending June 30, 2016 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Jan Siegmund, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: August 5, 2016
/s/ Jan Siegmund
Jan Siegmund
Chief Financial Officer