AUTOMATIC DATA PROCESSING, INC. FORWARD-LOOKING STATEMENTS
This document and other written or oral statements made from time to time byAutomatic Data Processing, Inc. and its subsidiaries ("ADP" or "the Company") 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" 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; the success of our new solutions; 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 cyber breaches, fraudulent acts, and system interruptions and failures; employment and wage levels; changes in technology; availability of skilled technical associates; the impact of new acquisitions and divestitures; the adequacy, effectiveness and success of our business transformation initiatives; and the impact of and uncertainties related to major natural disasters or catastrophic events, including the coronavirus ("COVID-19") pandemic. 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" in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 ("fiscal 2019") and within this Form 10-Q, 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.
NON-GAAP FINANCIAL MEASURES
In addition to ourU.S. GAAP results, we use adjusted results and other non-GAAP metrics to evaluate our operating performance in the absence of certain items and for planning and forecasting of future periods. Adjusted EBIT, adjusted EBIT margin, adjusted net earnings, adjusted diluted earnings per share, adjusted effective tax rate and organic constant currency are all non-GAAP financial measures. Please refer to the accompanying financial tables in the "Non-GAAP Financial Measures" section for a discussion of why ADP believes these measures are important and for a reconciliation of non-GAAP financial measures to their comparable GAAP financial measures.
EXECUTIVE OVERVIEW
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic. As the situation has developed over the past few months, our priority has been and continues to be the safety of our associates as well as the needs of our clients. As a result, we implemented our Business Continuity Plan and took steps to shift over 98% of our workforce to work from home or off-site locations to ensure uninterrupted service to our clients across our solutions. In addition, onMarch 22, 2020 , we announced for our employees, excluding corporate officers, a one-time global associate assistance payment of$1,000 (or equivalent, based on the average wage parity in each country) in response to COVID-19, totaling$50.4 million , which was not contemplated in our outlook issued onJanuary 29, 2020 . This one-time global associate assistance payment was made pursuant to the Stafford Disaster Relief and Emergency Assistance Act, and is tax-free to associates inthe United States and tax-deductible to ADP. We are also deeply embedded in our local communities and continue to support COVID-19 relief efforts through financial donations and donations of medical supplies for hospital workers globally. As a leading global provider of cloud-basedHuman Capital Management ("HCM") technology solutions to employers around the world, we have continued to process payroll and tax obligations and provide other HCM services to our clients, despite the unexpected challenges that our clients and their employees around the world are facing. ADP's efforts have also been focused on providing information and tools to help clients understand and navigate the governmental relief that has been adopted globally. For example, the federal government inthe United States enacted the Families First Coronavirus Response Act ("FFCRA") and the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. ADP has been working non-stop to provide support for all employers on the relief available under both laws. This includes an Employer Preparedness Toolkit that helps explain the federal and state government relief, as well as a website dedicated to providing critical information about the Small Business Administration Paycheck Protection Program ("PPP"). Additionally, ADP has prepared reports and added 26 -------------------------------------------------------------------------------- custom paycodes globally to help clients comply with regulatory changes and stimulus plans. Further, ADP call volumes increased significantly beginning in March with clients seeking assistance on a variety of matters. As the global economy continues to evolve for our clients, whether due to legislative changes or other factors, ADP is committed to supporting our clients to help them navigate these challenges. The significant impact the COVID-19 pandemic is having on our clients and the broader economy is in turn having an effect on our reported metrics, and in a much more abrupt fashion as compared to previous macroeconomic slowdowns. Employer Services New Business Bookings is down 9% and 1% for the three and nine months endedMarch 31, 2020 , respectively, as we saw bookings decline significantly and rapidly in mid-March due to the global social distancing guidelines coupled with the delayed decision making of our clients and prospects. The PEO average number of Worksite Employees increased 7% for the three and nine months endedMarch 31, 2020 , respectively; however, we are expecting slower growth in the fourth quarter due to layoffs and furloughs at our clients and an anticipated increase in out-of-business losses. Our pays per control metric, which represents growth of the employee base for a large portion of our client base, showed a decline in March resulting in deceleration of growth to 1.9% and 2.2% for the three and nine months endedMarch 31, 2020 , respectively. We expect further deterioration in our pays per control in the fourth quarter. In addition, though we had continued strong retention as ofMarch 31, 2020 , we are expecting deterioration in retention in the fourth quarter due to an increase in out-of-business losses. These trends are anticipated to have an adverse impact on our future financial results. See Risk Factors identified in Part II, Item 1A "Risk Factors" in this Form 10-Q, for further discussion of the possible impact of the COVID-19 pandemic on our business.
Highlights from the nine months ended
Employer Services New Business Bookings PEO
Average Number of Worksite Employees
â 1% á 7% to 579,000
Revenues Revenues
á 5% to $11.2 billion á 6% organic constant currency
EBIT Margin Adjusted EBIT Margin
á 130 basis points to 23.6% á 70 basis points to 24.0%
Diluted earnings per share ("EPS") Adjusted diluted EPS
á 14% to $4.74 á 11%
to
Our shareholder friendly actions continued as we returned approximately:
$1,010 million via dividends
via share repurchases
While the challenges presented by COVID-19 may affect the timing of our execution of parts of our strategy, we remain on a transformation journey, and our initiatives are yielding efficiencies and are focused on changing how we work. We continued to deliver balanced revenue and profit growth during the nine months endedMarch 31, 2020 . We will continue to monitor macro trends based on external and internal available data and are using these indicators to drive real-time decisions as we remain committed to our long-term strategy. We have a strong business model, a highly cash generative business with low capital intensity, and sell a suite of products that provide critical support to our clients' HR and management functions. We generate sufficient free cash flow to satisfy our modest debt obligations and our cash dividend which enables us to absorb the impact of downturns and keep steadfast in our reinvestments, our longer term strategy, and our commitments to shareholder friendly actions. We are committed to building upon our past successes by investing in our business through enhancements in research and development and by driving 27 -------------------------------------------------------------------------------- meaningful transformation in the way we operate. Our financial condition remains solid atMarch 31, 2020 and we remain well positioned to support our associates and our clients.
RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS
Total Revenues
For the three and nine months ended
[[Image Removed: adp-20200331_g2.jpg]][[Image Removed: adp-20200331_g3.jpg]]
Growth: á 6% á 5%
Organic constant currency: á 6% á 6%
Revenues for the three and nine months ended March 31, 2020 increased due to new
business started from New Business Bookings and continued strong retention,
partially offset by business losses. For the nine months ended March 31, 2020 ,
our revenue growth includes about one percentage point of unfavorability from
foreign currency partially offset by benefits from acquisitions. Refer to
"Analysis of Reportable Segments" for additional discussion of the increases in
revenue for both of our reportable segments, Employer Services and Professional
Employer Organization ("PEO") Services.
Total revenues for the three months ended March 31, 2020 include consolidated
interest on funds held for clients of $158.9 million , as compared to $167.4
million for the three months ended March 31, 2019 . The decrease in the
consolidated interest earned on funds held for clients resulted from a decrease
in the average interest rate earned to 2.0% for the three months ended March 31,
2020 , as compared to 2.2% for the three months ended March 31, 2019 . The
decrease is partially offset by an increase in our average client funds balance
of 4.3% to $31.3 billion for the three months ended March 31, 2020 , as compared
to the three months ended March 31, 2019 .
Total revenues for the nine months ended March 31, 2020 include consolidated
interest on funds held for clients of $430.4 million , as compared to $415.0
million for the nine months ended March 31, 2019 . The increase in the
consolidated interest earned on funds held for clients resulted from an increase
in our average client funds balance of 5.7% to $26.7 billion for the nine months
ended March 31, 2020 , as compared to the nine months ended March 31, 2019 .
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Total Expenses
Three Months Ended Nine Months Ended
March 31, March 31,
% %
2020 2019 Change 2020 2019 Change
Costs of revenues:
Operating expenses $ 1,974.1 $ 1,855.3 6 % $ 5,597.8 $ 5,324.8 5 %
Systems development and programming costs 172.1 160.1 7 % 509.0 474.2 7 %
Depreciation and amortization 92.9 77.2 20 % 271.2 221.5 22 %
Total costs of revenues 2,239.1 2,092.6 7 % 6,378.0 6,020.5 6 %
Selling, general and administrative
expenses 756.6 750.4 1 % 2,237.4 2,209.4 1 %
Interest expense 20.0 21.7 n/m 91.5 96.2 n/m
Total expenses $ 3,015.7 $ 2,864.7 5 % $ 8,706.9 $ 8,326.1 5 %
n/m - not meaningful
For the three months ended March 31, 2020 , our total expenses increased due to
the increase in PEO Services zero-margin benefits pass-through costs, a one-time
global associate assistance payment in response to COVID-19 of $50.4 million
("associate assistance payment"), an increase in our allowance for doubtful
accounts of $26.0 million as a result of an increase in estimated credit losses
related to the impact of COVID-19 on our clients ("increase in our allowance for
doubtful accounts"), an increase in selling and marketing expenses, and an
increase in amortization expense. The increase was partially offset by reduced
incentive compensation costs, a decrease in net charges related to our
transformation initiatives, operating efficiencies as a result of our continued
successful execution on transformation initiatives, and the impact of foreign
currency in the three months ended March 31, 2020 .
For the nine months ended March 31, 2020 , our total expenses increased due to
the increase in PEO Services zero-margin benefits pass-through costs, selling
and marketing expenses, an associate assistance payment, an increase in our
allowance for doubtful accounts, and an increase in amortization expense. The
increase was partially offset by reduced incentive compensation costs, a
decrease in net charges related to our transformation initiatives, operating
efficiencies as a result of our continued successful execution on transformation
initiatives, and the impact of foreign currency in the nine months ended
March 31, 2020 .
Operating expenses increased as our PEO Services zero-margin benefits
pass-through costs increased to $747.9 million and $2,169.4 million from $665.3
million and $1,965.5 million for the three and nine months ended March 31, 2020
and 2019, respectively. Additionally, operating expenses increased due to an
associate assistance payment. The increase was partially offset by reduced
incentive compensation costs and impact of foreign currency in the three and
nine months ended March 31, 2020 .
Systems development and programming costs increased for the three and nine
months ended March 31, 2020 due to increased investments and costs to develop,
support, and maintain our products, partially offset by capitalization of costs
related to our strategic projects, including our next gen platforms.
Depreciation and amortization expense increased related to the amortization of
our internally developed software and acquisitions of intangibles.
Selling, general and administrative expenses increased for the three months
ended March 31, 2020 due to an increase in our allowance for doubtful accounts,
increased selling expenses as a result of investments in our sales force and an
associate assistance payment. This increase was partially offset by reduced
incentive compensation costs.
Selling, general and administrative expenses increased for the nine months ended
March 31, 2020 due to increased selling and marketing expenses as a result of
investments in our sales force and our brand, an increase in our allowance for
doubtful accounts and an associate assistance payment. The increase was
partially offset by reduced incentive compensation costs, broad-based
efficiencies as a result of our transformation initiatives and a decrease in net
charges related to our transformation initiatives in the nine months ended
March 31, 2020 .
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Other Income, net
Three Months Ended Nine Months Ended
March 31, March 31,
2020 2019 $ Change 2020 2019 $ Change
Interest income on corporate funds $ (12.1) $ (15.0) $ (2.9) $ (70.1) $ (71.6) $ (1.5)
Realized gains on available-for-sale
securities (2.9) (0.6) 2.3 (13.0) (1.2) 11.8
Realized losses on
available-for-sale securities 0.4 0.5 0.1 1.1 2.6 1.5
Impairment of intangible assets - - - - 12.1 12.1
Gain on sale of assets - - - (1.9) (4.1) (2.2)
Gain on sale of investment - - - (0.2) - 0.2
Non-service components of pension
expense, net (30.0) (5.9) 24.1 (61.1) (5.3) 55.8
Other income, net $ (44.6) $ (21.0) $ 23.6 $ (145.2) $ (67.5) $ 77.7
Other income, net, increased $23.6 million and $77.7 million for the three and
nine months ended March 31, 2020 , as compared to the three and nine months ended
March 31, 2019 . The increase was primarily due to the non-service components of
pension expense, net during the three and nine months ended March 31, 2020 .
Additionally, in fiscal 2019, we wrote down $12.1 million of internally
developed software which was determined to have no future use due to redundant
software identified as part of an acquisition offset by the gain on sale of
assets of $4.1 million in relation to the Service Alignment Initiative.
Earnings before Income Taxes ("EBIT")
For the three months ended
[[Image Removed: adp-20200331_g4.jpg]][[Image Removed: adp-20200331_g5.jpg]]
Growth: á 9% á 90bps
For the nine months ended
[[Image Removed: adp-20200331_g6.jpg]][[Image Removed: adp-20200331_g7.jpg]]
Growth: á 12% á 130bps
Earnings before income taxes increased for the three and nine months ended
30
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Overall margin increased for the three and nine months ended March 31, 2020 as a
result of our continued successful execution of our broad-based transformation
initiatives as well as operating efficiencies. In addition, our margin
improvement was aided by lower transformation initiative related charges of
$11.7 million and $72.7 million for the three and nine months ended March 31,
2020 , respectively, reduced incentive compensation costs and selling expenses
which increased at a reduced rate. These were partially offset by incremental
pressure from growth in our zero-margin benefits pass-throughs, an associate
assistance payment, an increase in our allowance for doubtful accounts and
amortization expense.
Adjusted EBIT
For the three months ended
[[Image Removed: adp-20200331_g8.jpg]][[Image Removed: adp-20200331_g9.jpg]]
Growth: á 8% á 60bps
For the nine months ended
[[Image Removed: adp-20200331_g10.jpg]][[Image Removed: adp-20200331_g11.jpg]]
Growth: á 8% á 70bps
Adjusted EBIT excludes net charges related to our transformation initiatives in
the respective periods for the three and nine months ended March 31, 2020 and
2019, reflecting a decrease in net charges of $11.7 million and $72.7 million
during the three and nine months ended March 31, 2020 , respectively, as compared
to the three and nine months ended March 31, 2019 , respectively. For the three
and nine months ended March 31, 2020 , adjusted EBIT increased due to the
increases in revenues offset by the increases in expenses discussed above. Our
adjusted EBIT margin reflects changes described above in our EBIT margin.
Provision for Income Taxes
The effective tax rate for the three months endedMarch 31, 2020 and 2019 was 23.8% and 23.4%, respectively. The increase is primarily due to tax credits related to research and development activities in the three months endedMarch 31, 2019 and foreign withholding taxes on future distributions and an increase in reserves for uncertain tax positions in the three months endedMarch 31, 2020 , partially offset by the benefits of a foreign tax law change and a reduction in the operating tax rate due to the mix between domestic and foreign earnings in the three months endedMarch 31, 2020 . The effective tax rate for the nine months endedMarch 31, 2020 and 2019 was 22.5% and 23.4%, respectively. The decrease in the effective tax rate is primarily due to the release of a valuation allowance related to foreign tax credit carryforwards, a 31 -------------------------------------------------------------------------------- reduction in the operating tax rate due to the mix between domestic and foreign earnings and the benefit of a foreign tax law change partially offset by foreign withholding taxes on future distributions.
Adjusted Provision for Income Taxes
The adjusted effective tax rate for the three months endedMarch 31, 2020 and 2019 was 23.8% and 23.5%, respectively. The adjusted effective tax rate for the nine months endedMarch 31, 2020 and 2019 was 22.5% and 23.5%, respectively. The drivers of the adjusted effective tax rate are the same as the drivers of the effective tax rate discussed above.
Net Earnings and Diluted EPS
For the three months ended
[[Image Removed: adp-20200331_g12.jpg]][[Image Removed: adp-20200331_g13.jpg]]
Growth: á 9% á 10%
For the nine months ended
[[Image Removed: adp-20200331_g14.jpg]][[Image Removed: adp-20200331_g15.jpg]]
Growth: á 13% á 14%
For the three and nine months ended March 31, 2020 , the net earnings reflect the
changes described above in our earnings before income taxes and our effective
tax rate.
For the three and nine months ended March 31, 2020 , diluted EPS increased as a
result of an increase in net earnings and the impact of fewer shares outstanding
resulting from the repurchase of approximately 6.2 million shares during the
nine months ended March 31, 2020 and 5.4 million shares for the nine months
ended March 31, 2019 , partially offset by the issuances of shares under our
employee benefit plans.
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Adjusted Net Earnings and Adjusted Diluted EPS
For the three months ended
[[Image Removed: adp-20200331_g16.jpg]][[Image Removed: adp-20200331_g17.jpg]]
Growth: á 8% á 8%
For the nine months ended
[[Image Removed: adp-20200331_g18.jpg]][[Image Removed: adp-20200331_g19.jpg]]
Growth: á 10% á 11%
For the three and nine months ended
For the three and nine months ended
ANALYSIS OF REPORTABLE SEGMENTS
Revenues
Three Months Ended Nine Months Ended
March 31 , % Change March 31 , % Change
Organic Organic
As constant As constant
2020 2019 Reported currency 2020 2019 Reported currency Employer Services$ 2,811.7 $ 2,719.1 3 % 4 %$ 7,790.6 $ 7,507.7 4 % 4 % PEO Services 1,238.3 1,115.5 11 % 11 % 3,429.8 3,135.1 9 % 9 % Other (2.2) (6.4) n/m n/m (7.4) (11.9) n/m n/m$ 4,047.8 $ 3,828.2 6 % 6 %$ 11,213.0 $ 10,630.9 5 % 6 % 33
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Earnings before Income Taxes
Three Months Ended % Nine Months Ended %
March 31, Change March 31, Change
As
2020 2019 As Reported 2020 2019 Reported
Employer Services $ 1,025.0 $ 963.1 6 % $ 2,473.4 $ 2,335.9 6 %
PEO Services 172.6 154.7 12 % 488.1 455.7 7 %
Other (120.9) (133.3) n/m (310.2) (419.3) n/m
$ 1,076.7 $ 984.5 9 % $ 2,651.3 $ 2,372.3 12 %
n/m - not meaningful
Employer Services
Revenues
Revenues increased for the three months ended March 31, 2020 due to new business
started from New Business Bookings and continued strong retention, partially
offset by business losses and a decrease in interest earned on funds held for
clients. Our revenue growth includes one percentage point of unfavorability from
foreign currency. Our revenues also increased due to an increase in the number
of employees on our clients' payrolls as our pays per control increased 1.9% for
the three months ended March 31, 2020 as compared to the three months ended
March 31, 2019 . Our pays per control metric measures the number of employees on
our clients' payrolls as measured on a same-store-sales basis utilizing a
representative subset of payrolls ranging from small to large businesses that
are reflective of a broad range of U.S. geographic regions.
Revenues increased for the nine months ended March 31, 2020 due to new business
started from New Business Bookings and continued strong retention, partially
offset by business losses. Our revenues also increased due to increased interest
earned on funds held for clients as a result of growth in average client funds
balances, and an increase in the number of employees on our clients' payrolls as
our pays per control increased 2.2% for the nine months ended March 31, 2020 , as
compared to the nine months ended March 31, 2019 .
Earnings before Income Taxes
Employer Services' earnings before income taxes increased for the three months endedMarch 31, 2020 due to increased revenues discussed above, offset by increased expenses due to an increase in our allowance for doubtful accounts, an increase in selling expenses as a result of investments in our sales force and amortization expense. These increases in expenses were partially offset by reduced incentive compensation costs, operating efficiencies as a result of our transformation initiatives and the impact from foreign currency. Employer Services' earnings before income taxes increased for the nine months endedMarch 31, 2020 due to increased revenues discussed above, offset by increased expenses due to an increase in selling and marketing expenses as a result of investments in our sales force and our brand, an increase in our allowance for doubtful accounts and amortization expense. These increases in expenses were partially offset by reduced incentive compensation costs, operating efficiencies as a result of our transformation initiatives and the impact from foreign currency. 34
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For the three and nine months ended
[[Image Removed: adp-20200331_g20.jpg]][[Image Removed: adp-20200331_g21.jpg]]
Growth: á 100bps á 60bps
Employer Services' overall margin increased for the three and nine months ended
March 31, 2020 as a result of the continued successful execution of our
broad-based transformation initiatives, as well as operating efficiencies,
reduced incentive compensation costs and selling expenses which increased at a
reduced rate. This increase was partially offset by an increase in our allowance
for doubtful accounts and amortization expense.
PEO Services
Revenues
PEO Revenues
Three Months Ended Nine Months Ended
March 31 , Change March 31 , Change
2020 2019 $ % 2020 2019 $ %
PEO Services' revenues $ 1,238.3 $ 1,115.5 $ 122.8 11 % $ 3,429.8 $ 3,135.1 $ 294.7 9 %
Less: PEO zero-margin benefits
pass-throughs 747.9 665.3 82.6 12 % 2,169.4 1,965.5 203.9 10 %
PEO Services' revenues excluding
zero-margin benefits pass-throughs
9 % $ 1,260.4 $ 1,169.6 $ 90.8 8 %
PEO Services' revenues increased 11% and 9% for the three and nine months ended
March 31, 2020 , respectively, due to a 7% increase in the average number of
Worksite Employees for the three and nine months ended March 31, 2020 ,
respectively, driven by an increase in the number of new PEO Services clients
and growth of our existing clients. PEO Services' revenue excluding zero-margin
benefits pass-throughs increased 9% and 8% for the three and nine months ended
March 31, 2020 , respectively, and includes pressure from lower workers
compensation and State Unemployment Insurance ("SUI") costs and related pricing.
Earnings before Income Taxes
PEO Services' earnings before income taxes increased 12% for the three months endedMarch 31, 2020 due to the increased revenues discussed above offset by an increase in expenses. The increase in expenses was related to the increase in zero-margin benefits pass-through costs of$82.6 million described above as well as increased costs to service our client base. PEO Services' earnings before income taxes increased 7% for the nine months endedMarch 31, 2020 due to the increased revenues discussed above offset by an increase in expenses. The increase in expenses was related to the increase in zero-margin benefits pass-through costs of$203.9 million described above, increased selling expenses and a decrease of$2.8 million in pre-tax benefit related to ADP Indemnity in the nine months endedMarch 31, 2020 , as compared to the nine months endedMarch 31, 2019 . 35 --------------------------------------------------------------------------------
For the three and nine months ended
[[Image Removed: adp-20200331_g22.jpg]][[Image Removed: adp-20200331_g23.jpg]]
Growth: á 10bps â 30bps
PEO Services' overall margin increased due to operating and selling expense
which increased at a reduced rate in the three months ended
PEO Services' overall margin decreased due to increased selling expenses and a
decrease of
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. The Company has obtained approximately$242 million of irrevocable standby letters of credit in favor of licensed insurance companies of AIG to secure TotalSource workers' compensation obligations if ADP were to fail to reimburse AIG for workers' compensation payments. The Company had no drawdowns during the nine months endedMarch 31, 2020 andMarch 31, 2019 , respectively, under the letters of credit. We utilize historical loss experience and actuarial judgment to determine the estimated claim liability, and changes in estimated ultimate incurred losses are included in the PEO segment. ADP Indemnity recorded a pre-tax benefit of approximately$5.6 million and$13.6 million for the three and nine months endedMarch 31, 2020 , compared to$6.0 million and$16.4 million for the three and nine months endedMarch 31, 2019 . For the fiscal years 2013 to 2019, ADP Indemnity paid premiums to enter into reinsurance arrangements withACE American Insurance Company , a wholly-owned subsidiary of Chubb Limited, to cover substantially all losses incurred by ADP Indemnity during these policy years. Each of these reinsurance arrangements limits our overall exposure incurred up to a certain limit. We believe the likelihood of ultimate losses exceeding this limit is remote. For the nine months endedMarch 31, 2020 , ADP Indemnity paid a premium of$215.0 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2020 policy year on terms substantially similar to the fiscal 2019 reinsurance policy.
Other
The primary components of the "Other" segment are certain corporate overhead
charges and expenses that have not been allocated to the reportable segments,
including corporate functions, costs related to our transformation office, an
associate assistance payment, non-recurring gains and losses, the elimination of
intercompany transactions, and interest expense.
36
--------------------------------------------------------------------------------Non-GAAP Financial Measures
In addition to our
Adjusted Financial Measure U.S. GAAP Measures
Adjusted EBIT Net earnings
Adjusted provision for income taxes Provision for income taxes Adjusted net earnings
Net earnings
Adjusted diluted earnings per share Diluted earnings per share
Adjusted effective tax rate Effective tax rate
Organic constant currency Revenues
We believe that the exclusion of the identified items helps us reflect the
fundamentals of our underlying business model and analyze results against our
expectations and against prior period, and to plan for future periods by
focusing on our underlying operations. We believe that the adjusted results
provide relevant and useful information for investors because it allows
investors to view performance in a manner similar to the method used by
management and improves their ability to understand and assess our operating
performance. The nature of these exclusions is for specific items that are not
fundamental to our underlying business operations. Since these adjusted
financial measures and other non-GAAP metrics are not measures of performance
calculated in accordance with U.S. GAAP, they should not be considered in
isolation from, as a substitute for, or superior to their corresponding U.S.
GAAP measures, and they may not be comparable to similarly titled measures at
other companies.
37
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Three Months Ended Nine Months Ended
March 31 , % Change March 31 , % Change
2020 2019 As Reported 2020 2019 As ReportedNet earnings$ 820.9 $ 753.7 9 %$ 2,054.9 $ 1,817.4 13 % Adjustments: Provision for income taxes 255.8 230.8 596.4 554.9 All other interest expense (a) 14.8 14.8 44.3
44.8
All other interest income (a) (5.1) (8.7) (18.9) (22.9) Gain on sale of assets - - (0.2) - Transformation initiatives (b) 11.1 22.8 19.6 92.3 Adjusted EBIT$ 1,097.5 $ 1,013.4 8 %$ 2,696.1 $ 2,486.5 8 % Adjusted EBIT Margin 27.1 % 26.5 % 24.0 % 23.4 % Provision for income taxes$ 255.8 $ 230.8 11 %$ 596.4 $ 554.9 7 % Adjustments: Gain on sale of assets (c) - - (0.1) - Transformation initiatives (c) 2.7 5.6 4.8 22.8 Tax Cuts and Jobs Act (d) - - - 0.5 Adjusted provision for income taxes$ 258.5 $ 236.4 9 %$ 601.1 $ 578.2 4 % Adjusted effective tax rate (e) 23.8 % 23.5 % 22.5 % 23.5 % Net earnings$ 820.9 $ 753.7 9 %$ 2,054.9 $ 1,817.4 13 % Adjustments: Gain on sale of assets - - (0.2) - Income tax provision on gain on sale of assets (c) - - 0.1
-
Transformation initiatives (b) 11.1 22.8 19.6
92.3
Income tax provision for transformation initiatives (c) (2.7) (5.6) (4.8) (22.8) Tax Cuts and Jobs Act (d) - - - (0.5) Adjusted net earnings$ 829.3 $ 770.9 8 %$ 2,069.6 $ 1,886.4 10 % Diluted EPS$ 1.90 $ 1.73 10 %$ 4.74 $ 4.15 14 % Adjustments: Gain on sale of assets (c) - - - - Transformation initiatives (b) (c) 0.02 0.04 0.03 0.16 Tax Cuts and Jobs Act (d) - - - - Adjusted diluted EPS$ 1.92 $ 1.77 8 %$ 4.77 $ 4.31 11 % (a) We include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model. The adjustments in the table above represent the interest income and interest expense that is not related to our client funds extended investment strategy and are labeled as "All other interest expense" and "All other interest income." (b) The transformation initiatives include net charges related to severance, Voluntary Early Retirement Program ("VERP") and other transformation initiatives. Unlike other severance charges which are not included as an adjustment to get to adjusted results, these specific charges relate to actions that are part of our broad-based, company-wide transformation initiative. (c) The tax provision (benefit) on transformation initiatives and gain on sale of assets was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.
(d) There was no impact from the Tax Cuts and Jobs Act in the three and nine
months ended
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(e) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by the sum of our Adjusted net earnings plus our Adjusted provision for income taxes. The following table reconciles our reported growth rates to the non-GAAP measure of organic constant currency, which excludes the impact of acquisitions, the impact of dispositions, and the impact of foreign currency. The impact of acquisitions and dispositions is calculated by excluding the current year revenues of acquisitions until the one-year anniversary of the transaction and by excluding the prior year revenues of divestitures for the one-year period preceding the transaction. The impact of foreign currency is determined by calculating the current year result using foreign exchange rates consistent with the prior year. The PEO segment is not impacted by acquisitions, dispositions or foreign currency.
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