AUTOMATIC DATA PROCESSING, INC. Prior period total revenues and total costs of revenues reflect the impact of the revision to PEO revenues for comparability. Refer to Note 1 to our Consolidated Financial Statements for more information on this revision.
The following section discusses our year endedJune 30, 2020 ("fiscal 2020"), as compared to year endedJune 30, 2019 ("fiscal 2019"). A detailed review of our fiscal 2019 performance compared to our fiscal 2018 performance is set forth in Part II, Item 7 of our Form 10-K for the fiscal year endedJune 30, 2019 .
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;
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; and 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," 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
Highlights from the year endedJune 30, 2020 include: [[Image Removed: adp-20200630_g15.jpg]] The global COVID-19 pandemic has continued to evolve and our priority has been and continues to be the safety of our associates and the needs of our clients. InMarch 2020 , 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. While we are well-prepared to continue operating this way, we are in the early stages of bringing back a small portion of our workforce to the office on a volunteer-only basis. Our sales force will continue to primarily engage with prospects and clients virtually; however, we are beginning to conduct face-to-face meetings in certain geographies to the extent our employees, clients, and prospects are ready to do so. 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 . 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 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 to provide support to 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"). During the second half of fiscal 2020, we rolled out a range of tools and reports to help our clients through the crisis and prepare for the recovery. We implemented over 1,000 feature changes to our products in response to 2,000 legislative updates in 60 countries, and we also had approximately 400,000 clients run over 2 million PPP reports for total loan values up to$115 billion dollars . Many of those clients have also now run the necessary payroll reports to apply for their loans to be forgiven. As the global economy and landscape 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. Despite the fact that we have seen improvement as countries and states are in various stages of reopening and businesses gradually begin to bring a portion of their workers back, we've seen the impact on our full year fiscal 2020 results. Employer Services New Business Bookings was down 21% for fiscal 2020 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 which continued into the fourth quarter. We also adjusted gross bookings as a result of client delays on implementation and the expectation that fewer client employees would come on board compared to when the business was originally signed. The PEO average number of Worksite Employees increased 4% for fiscal 2020. Our pays per control metric, which represents growth of the employee base for a large portion of our client base, showed a decline in the fourth quarter -------------------------------------------------------------------------------- resulting in annual growth of negative 1.0% for fiscal 2020. In addition, we saw deterioration in Employer Services retention in fiscal 2020 of 20 basis points to 90.5% due to an increase in out-of-business losses. 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. In fiscal 2020, we executed on our Workforce Optimization program and Procurement Transformation initiatives. For fiscal 2021, we are moving forward with a digital implementation and servicing initiative that leverages many of the capabilities we highlighted at ourFebruary 2020 Innovation Day. Despite a challenging end to fiscal 2020, we continued to deliver profit growth during the year endedJune 30, 2020 . We will continue to monitor macro trends based on externally and internally 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 offer a suite of products that provide critical support to our clients' HCM functions. We generate sufficient free cash flow to satisfy our cash dividend and our modest debt obligations, which enables us to absorb the impact of downturns and remain 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 meaningful transformation in the way we operate. Our financial condition remains solid atJune 30, 2020 and we remain well positioned to support our associates and our clients.
RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS
Total Revenues
For the year ended
[[Image Removed: adp-20200630_g16.jpg]]
Growth: á 3%
Organic constant currency: á 4%
Revenues for fiscal 2020 increased due to new business started from New Business
Bookings, partially offset by business losses. Our revenue growth includes one
percentage point of pressure from foreign currency. 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 2020 include interest on funds held for clients of
$545.2 million , as compared to $561.9 million in fiscal 2019. The decrease in
the consolidated interest earned on funds held for clients resulted from the
decrease in our average interest rate earned to 2.1% in fiscal 2020, as compared
to 2.2% in fiscal 2019. The decrease is partially offset by an increase in our
average client funds balances of 2.1% to $26.0 billion in fiscal 2020 as
compared to fiscal 2019.
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Total Expenses
Years Ended
June 30,
%
2020 2019 Change
Costs of revenues:
Operating expenses $ 7,404.1 $ 7,080.9 5 %
Systems development and programming costs 674.1 636.3 6 %
Depreciation and amortization 366.9 304.4 21 %
Total costs of revenues 8,445.1 8,021.6 5 %
Selling, general and administrative expenses
3,003.0 3,064.2 (2) %
Interest expense 107.1 129.9 n/m
Total expenses $ 11,555.2 $ 11,215.7 3 %
n/m - not meaningful
Operating expenses increased as our PEO Services zero-margin benefits
pass-through costs increased to $2,907.7 million from $2,647.5 million in fiscal
2020 and 2019, respectively. Additionally, operating expenses increased due to a
change of $59.2 million in our estimated losses related to ADP Indemnity and a
one-time global associate assistance payment in response to COVID-19 ("associate
assistance payment"). The increase was partially offset by the impact of foreign
currency, reduced incentive compensation costs and reduced costs due to certain
cost actions as a result of our transformation initiatives including procurement
transformation initiatives in fiscal 2020.
Systems development and programming costs increased for fiscal 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 acquisitions of intangibles and
internally developed software.
Selling, general and administrative expenses decreased for fiscal 2020 due to
reduced incentive compensation costs, broad-based efficiencies as a result of
our transformation initiatives including procurement transformation initiatives,
a decrease in net charges related to our transformation initiatives, reduced
facilities costs as a result of COVID-19, and impact of foreign currency. The
decrease was partially offset by increased selling expenses, 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"), severance cost as a result
of COVID-19 of $25.4 million , a legal settlement accrual of $25.0 million , and
an associate assistance payment.
Other Income, net
(In millions)
Years ended June 30, 2020 2019 $ Change
Interest income on corporate funds $
(84.5)
Realized (gains) / losses on available-for-sale securities, net (12.9) 0.9 13.8 Impairment of assets 29.9 12.1 (17.8) Gain on sale of assets (5.8) (4.1) 1.7 Gain on sale of investment (0.2) (15.7) (15.5) Non-service components of pension (income)/expense, net (74.5) (6.7) 67.8 Other income, net$ (148.0) $ (111.1) $ 36.9 Other income, net, increased$36.9 million in fiscal 2020, as compared to fiscal 2019 due to the change in non-service components of pension (income)/expense, net, and the items described below. See Note 10 of our Consolidated Financial Statements for further details on non-service components of pension (income)/expense, net. In fiscal 2020, the Company recorded impairment charges of$29.9 million , which is comprised of$25.3 million as a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale and vacating -------------------------------------------------------------------------------- certain leased locations early and recorded total impairment charges of$4.6 million to operating right-of-use assets and certain related fixed assets associated with the vacated locations. In fiscal 2019, the Company wrote down$12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition. In fiscal 2019, the Company recognized a gain of$15.7 million in relation to the sale of an investment held at cost acquired in prior years and subsequently sold during fiscal 2019.
Earnings before Income Taxes ("EBIT")
For the year ended
[[Image Removed: adp-20200630_g17.jpg]][[Image Removed: adp-20200630_g18.jpg]]
Growth: á 6% á 50bps
Earnings before income taxes increased in fiscal 2020 due to the increases in revenues partially offset by the increases in expenses discussed above.
Overall margin increased in fiscal 2020 as a result of our continued successful execution of our broad-based transformation initiatives including our procurement transformation initiatives as well as operating efficiencies. In addition, our margin improvement was aided by reduced incentive compensation costs, lower transformation initiative related charges of$60.9 million , and reduced facilities costs as result of COVID-19. These were partially offset by incremental pressure from growth in our zero-margin benefits pass-throughs, an increase in selling expenses, an increase in amortization expense, a change in our estimated losses related to ADP Indemnity, an associate assistance payment, an increase in our allowance for doubtful accounts, severance costs as a result of COVID-19, and a legal settlement accrual.
Adjusted EBIT
For the year ended
[[Image Removed: adp-20200630_g19.jpg]][[Image Removed: adp-20200630_g20.jpg]]
Growth: á 6% á 60bps
-------------------------------------------------------------------------------- Adjusted EBIT excludes certain interest amounts, net charges related to our transformation initiatives, the impact of the severance charges related to COVID-19, accrual for legal settlement, and the gain on sale of assets in the respective periods. For fiscal 2020, adjusted EBIT increased due to increases in revenues offset by the increases in expenses discussed above. Our adjusted EBIT margin reflects changes described above in our EBIT margin excluding the net charges noted above. Provision for Income Taxes The effective tax rate in fiscal 2020 and 2019 was 22.5% and 23.7%, 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 reduction in the operating tax rate due to the mix between domestic and foreign earnings, the benefit of a foreign tax law change and lower reserves for uncertain tax positions during fiscal 2020 partially offset by favorable adjustments to prior year tax liabilities during fiscal 2019. Refer to Note 11, Income Taxes, within the Notes to the Consolidated Financial Statements for further discussion.
Adjusted Provision for Income Taxes
The adjusted effective tax rate in fiscal 2020 and 2019 was 22.6% and 23.8%, 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 Earnings per Share
For the year ended
[[Image Removed: adp-20200630_g21.jpg]][[Image Removed: adp-20200630_g22.jpg]]
Growth: á 8% á 9%
For fiscal 2020, the net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.
For fiscal 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 in fiscal 2020 and 6.5 million shares in fiscal 2019, partially offset by the issuances of shares under our employee benefit plans.
Adjusted Net Earnings and Adjusted Diluted Earnings per Share
For the year ended
[[Image Removed: adp-20200630_g23.jpg]][[Image Removed: adp-20200630_g24.jpg]]
Growth: á 7% á 9%
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For fiscal 2020, adjusted net earnings reflect the changes described above in our adjusted EBIT and our adjusted effective tax rate.
For fiscal 2020, our adjusted diluted EPS reflects the changes described above in our adjusted net earnings and shares outstanding.
ANALYSIS OF REPORTABLE SEGMENTS
Revenues
Years Ended
June 30, % Change
Organic
Constant
2020 2019 As Reported Currency
Employer Services $ 10,086.6 $ 9,942.8 1 % 2 %
PEO Services 4,511.5 4,177.7 8 % 8 %
Other (8.3) (10.3) n/m n/m
$ 14,589.8 $ 14,110.2 3 % 4 %
Earnings before Income Taxes
Years Ended
June 30, % Change
2020 2019 As Reported
Employer Services $ 3,063.0 $ 2,960.9 3 %
PEO Services 605.5 616.2 (2) %
Other (485.9) (571.5) n/m
$ 3,182.6 $ 3,005.6 6 %
n/m - not meaningful
Employer Services
Revenues
Revenues increased in fiscal 2020 due to new business started from New Business
Bookings, partially offset by business losses and a decrease in interest earned
on funds held for clients. Our revenue growth includes one percentage point of
pressure from foreign currency. Our revenue growth was also partially offset by
a decrease in the number of employees on our clients' payrolls as our pays per
control decreased 1.0% in fiscal 2020, as compared to fiscal 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. In addition, the Employer Services client
revenue retention rate for fiscal 2020 declined 20 basis points to 90.5% as
compared to our rate for fiscal 2019, driven by an increase in out-of-business
losses.
Earnings before Income Taxes
Employer Services' earnings before income taxes increased in fiscal 2020 due to
increased revenues discussed above and partially offset by increased expenses
due to an increase in selling expenses, an increase in amortization expense, and
an increase in our allowance for doubtful accounts. These increases in expenses
were partially offset by reduced incentive compensation costs, impact from
foreign currency and operating efficiencies as a result of our transformation
initiatives including our procurement transformation initiatives.
--------------------------------------------------------------------------------
For the year ended
[[Image Removed: adp-20200630_g25.jpg]]
Growth: á 60bps
Employer Services' overall margin increased for fiscal 2020 as a result of the
continued successful execution of our broad-based transformation initiatives
including our procurement transformation initiatives, as well as operating
efficiencies and reduced incentive compensation costs. This increase was
partially offset by an increase in selling expenses, amortization expense and
our allowance for doubtful accounts.
PEO Services
Revenues
PEO Revenues
Years Ended
June 30, Change
2020 2019 $ %
PEO Services' revenues $ 4,511.5 $ 4,177.7 $ 333.8 8 % Less: PEO zero-margin benefits pass-throughs 2,907.7 2,647.5 260.2 10 % PEO Services' revenues excluding zero-margin benefits pass-throughs$ 1,603.8 $ 1,530.2 $ 73.6 5 % PEO Services' revenues increased 8% in fiscal 2020 due to a 4% increase in the average number of Worksite Employees in fiscal 2020 driven by an increase in the number of new PEO Services clients and growth in our existing clients. Additionally, PEO Services' revenues, excluding zero-margin benefits pass-through costs, increased 5% in fiscal 2020 and includes pressure from lower workers compensation andState Unemployment Insurance ("SUI") costs and related pricing.
Earnings before Income Taxes
PEO Services' earnings before income taxes decreased 2% in fiscal 2020 due to the increase in expenses partially offset by the increase in revenues discussed above. The increase in expenses was due to the increase in zero-margin benefits pass-through costs of$260.2 million described above and a change of$59.2 million in our estimated losses related to ADP Indemnity in fiscal 2020, as compared to fiscal 2019.
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For the year ended
[[Image Removed: adp-20200630_g26.jpg]]
Growth: â 130bps
PEO Services' overall margin decreased for fiscal 2020 due to a change 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. 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 loss of approximately$20 million in fiscal 2020 and a pre-tax benefit of approximately$39 million in fiscal 2019, which were primarily a result of changes in our estimated actuarial losses. Beginning in fiscal year 2013, 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. During fiscal 2020, ADP Indemnity paid a premium of$215 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 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$240 million inJuly 2020 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for fiscal 2021 policy year on terms substantially similar to the fiscal 2020 reinsurance policy.
Other
The primary components of "Other" 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, a legal settlement accrual, non-recurring gains and losses, the elimination of intercompany transactions, and other interest expense.
Non-GAAP Financial Measures
In addition to our GAAP results, we use the adjusted results and other non-GAAP
metrics set forth in the table below to evaluate our operating performance in
the absence of certain items and for planning and forecasting of future periods:
Adjusted Financial Measures 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 withU.S. GAAP, they should not be considered in isolation from, as a substitute for, or superior to their correspondingU.S. GAAP measures, and they may not be comparable to similarly titled measures at other companies. Years Ended June 30, % Change 2020 2019 As Reported Net earnings$ 2,466.5 $ 2,292.8 8 % Adjustments: Provision for income taxes 716.1 712.8 All other interest expense (a) 59.2
59.9
All other interest income (a) (20.5) (32.4) Gain on sale of assets (0.2) (15.7) Transformation initiatives (b) 77.4 138.3 COVID-19 related charges (c) 25.4 - Legal settlement (d) 25.0 - Adjusted EBIT$ 3,348.9 $ 3,155.7 6 % Adjusted EBIT Margin 23.0 % 22.4 % Provision for income taxes$ 716.1 $ 712.8 - % Adjustments: Gain on sale of assets (e) (0.1) (3.9) Transformation initiatives (e) 19.2
34.5
COVID-19 related charges (e) 6.3 - Legal settlement (e) 6.2 - Tax Cuts and Jobs Act (f) - 0.5 Adjusted provision for income taxes$ 747.7 $ 743.9 1 % Adjusted effective tax rate (g) 22.6 % 23.8 % Net earnings$ 2,466.5 $ 2,292.8 8 % Adjustments: Gain on sale of assets (0.2) (15.7) Income tax provision on gain on sale of assets (e) 0.1 3.9 Transformation initiatives (b) 77.4
138.3
Income tax benefit for transformation initiatives (e) (19.2)
(34.5)
COVID-19 related charges (c) 25.4 - Income tax benefit for COVID-19 related charges (e) (6.3) - Legal settlement (d) 25.0 - Income tax benefit for legal settlement (e) (6.2) - Tax Cuts and Jobs Act (f) - (0.5) Adjusted net earnings$ 2,562.5 $ 2,384.3 7 % Diluted EPS$ 5.70 $ 5.24 9 % Adjustments: Gain on sale of assets (e) -
(0.03)
Transformation initiatives (b) (e) 0.13
0.24
COVID-19 related charges (c) (e) 0.04 - Legal settlement (d) (e) 0.04 - Tax Cuts and Jobs Act (f) - - Adjusted diluted EPS$ 5.92 $ 5.45 9 % (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 are not related to our client funds extended investment strategy and are labeled as "All other interest expense" and "All other interest income." (b) In fiscal 2020, transformation initiatives include: (i) charges of$29.9 million related to impairment charges as a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale and impairment charges of operating right-of-use assets and certain related fixed assets associated with the vacating of certain leased locations; (ii) charges of$29.1 million related to severance; (iii) charges of$28.5 million related to other transformation initiatives; all of which were partially offset by net reversals of charges related to Voluntary Early Retirement Program ("VERP") and Service Alignment Initiative ("SAI") of$10.1 million . Unlike certain other severance charges in prior periods that 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 initiatives. (c) Represents severance charges related to the impact of COVID-19 pandemic. Unlike other severance charges in prior periods that 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 initiatives to address excess capacity across our business and functions due to the COVID-19 pandemic.
(d) Represents a legal settlement accrual related to the Illinois Biometric Privacy Act matter. Refer to Note 12 of our Consolidated Financial Statements for additional detail.
(e) The income tax provision/(benefit) was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.
(f) There was no impact from the Tax Cuts and Jobs Act in fiscal 2020.
(g) 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.
Year Ended
June 30,
2020
Consolidated revenue growth as reported 3 %
Adjustments:
Impact of acquisitions - %
Impact of foreign currency 1 %
Consolidated revenue growth, organic constant currency 4 %
Employer Services revenue growth as reported 1 %
Adjustments:
Impact of acquisitions - %
Impact of foreign currency 1 %
Employer Services revenue growth, organic constant currency 2 %
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of
For corporate liquidity, we expect existing cash, cash equivalents, long-term marketable securities, cash flow from operations together with our$9.7 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 dividends, share repurchases, and capital expenditures for the foreseeable future. Our financial condition remains solid atJune 30, 2020 and have sufficient liquidity as note above; however, given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 pandemic, we will continue to evaluate the nature and extent of the impact to our financial condition and liquidity. For client funds liquidity, we have the ability to borrow through our financing arrangements under ourU.S. short-term commercial paper program and ourU.S. , Canadian andUnited Kingdom short-term reverse repurchase agreements, together with our$9.7 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, including with respect to the COVID-19 pandemic, related to our client funds extended investment strategy. See Note 8 of our Consolidated Financial Statements for a description of our short-term financing including 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 2020 and 2019
are summarized as follows:
Years
ended
2020 2019 $ Change
Cash provided by (used in):
Operating activities $ 3,026.2 $ 2,688.3 $ 337.9
Investing activities 3,156.3 (2,197.7) 5,354.0
Financing activities (5,890.6) (207.7) (5,682.9)
Effect of exchange rate changes on cash, cash
equivalents, restricted cash, and restricted cash
equivalents (34.5) (28.8) (5.7)
Net change in cash, cash equivalents, restricted
cash, and restricted cash equivalents $ 257.4 $ 254.1 $ 3.3
Net cash flows provided by operating activities in fiscal 2020 and fiscal 2019
include cash payments for reinsurance agreements of $215.0 million and $218.0
million , respectively, which represent the policy premium for the entire fiscal
year. The increase in operating cash provided is primarily due to growth in our
business supplemented by a growth in non-cash expenses within operating
activities and net favorable change in the components of working capital as
compared to fiscal 2019.
Net cash flows from investing activities changed due to the timing of proceeds
and purchases of corporate and client funds marketable securities of $5,256.9
million , proceeds from the sale of assets and lower payments related to
acquisitions of business, partially offset by payments related to acquisitions
of intangibles and payments related to capital expenditures in fiscal 2020.
Net cash flows from financing activities changed due to a net decrease in the
cash flow from client funds obligations of $4,909.2 million , which is due to the
timing of impounds from our clients and payments to our clients' employees and
other payees, more cash returned to shareholders via dividends and share
repurchases and a net repayment of reverse repurchase agreements in fiscal 2020.
We purchased approximately 6.2 million shares of our common stock at an average
price per share of $160.61 during fiscal 2020, as compared to purchases of 6.5
million shares at an average price per share of $143.02 during fiscal 2019. From
time to time, the Company may repurchase shares of its common stock under its
authorized share repurchase program. The Company considers several factors in
determining when to execute share repurchases, including, among other things,
actual and potential acquisition activity, cash balances and cash flows,
issuances due to employee benefit plan activity, and market conditions.
Capital Resources and Client Fund Obligations
On July 15, 2020 , the Company gave notice to the current holders of our
intention to redeem the $1.0 billion 2.25% Senior Notes due September 15, 2020
on the call date of August 15, 2020 . It is the Company's intent to issue new
long-term notes to fund this redemption and which also may be used for general
corporate purposes. If necessary in the interim, the Company intends to issue
commercial paper to fund the Notes' redemption until such time as the new notes
are issued.
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We have $2.0 billion of senior unsecured notes with maturity dates in 2020 and
2025. We may from time to time revisit the long-term debt market to refinance
existing debt, finance investments including acquisitions for our growth, and
maintain the appropriate capital structure. However, there can be no assurance
that volatility in the global capital and credit markets would not impair our
ability to access these markets on terms acceptable to us, or at all. See Note 9
of our Consolidated Financial Statements for a description of our notes.
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. In June 2020 , the Company decreased
its U.S. short-term commercial paper program to provide for the issuance of up
to $9.7 billion from $10.3 billion in aggregate maturity value. Our commercial
paper program is rated A-1+ by Standard and Poor's and Prime-1 ("P-1") by
Moody's. These ratings denote the highest quality commercial paper securities.
Maturities of commercial paper can range from overnight to up to 364 days. At
June 30, 2020 and 2019, we had no commercial paper borrowing outstanding.
Details of the borrowings under the commercial paper program are as follows:
Years ended June 30, 2020 2019
Average daily borrowings (in billions)$ 2.7 $ 2.8 Weighted average interest rates 1.6 % 2.2 % Weighted average maturity (approximately in days) 2 days
2 days
OurU.S. , Canadian, andUnited Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities. These agreements generally have terms ranging from overnight to up to five business days. We have successfully borrowed through the use of reverse repurchase agreements on an as-needed basis to meet short-term funding requirements related to client funds obligations. AtJune 30, 2020 and 2019, the Company had$13.6 million and$262.0 million , respectively, of outstanding obligations related to the reverse repurchase agreements. Details of the reverse repurchase agreements are as follows: Years ended June 30, 2020 2019 Average outstanding balances$ 263.4 $ 316.7 Weighted average interest rates 1.6 % 1.9 % We vary the maturities of our committed credit facilities to limit the refinancing risk of any one facility. We have a$3.2 billion , 364-day credit agreement that matures inJune 2021 with a one year term-out option. In addition, we have a five-year$3.75 billion credit facility and a five-year$2.75 billion credit facility maturing inJune 2023 andJune 2024 , 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 throughJune 30, 2020 under the credit facilities. We believe that we currently meet all conditions set forth in the revolving credit agreements to borrow thereunder, and we are not aware of any conditions that would prevent us from borrowing part or all of the$9.7 billion available to us under the revolving credit agreements. See Note 8 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 primarily fixed rate auto loan, credit card, equipment lease, and rate reduction receivables, secured predominantly by prime collateral. All collateral on asset-backed securities is performing as expected. In addition, we own senior debt directly issued by Federal Home Loan Banks and Federal Farm Credit Banks. Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio). This investment strategy is supported by our short-term financing arrangements necessary to satisfy short-term funding requirements relating to client funds obligations. See Note 4 of our Consolidated Financial Statements for a description of our corporate investments and funds held for clients. -------------------------------------------------------------------------------- Capital expenditures for fiscal 2020 were$168.3 million , as compared to$162.7 million for fiscal 2019. We expect capital expenditures in fiscal 2021 to be between$175 million and$200 million .
Contractual Obligations
The following table provides a summary of our contractual obligations at
Payments due by period
Less than 1-3 3-5 More than
Contractual Obligations 1 year years years 5 years Unknown Total
Debt Obligations (1) $ 1,046.8 $ 69.4 $ 40.3 $ -
$ - $ - $ -
$ 415.6 $ 165.3 $ 32.1 $ 0.2 $ -$ 613.2 Obligations Related to Unrecognized Tax Benefits (5)$ 3.7 $ - $ - $ -$ 58.6 $ 62.3 Other Long-Term Liabilities Reflected on our Consolidated Balance Sheets: Compensation and Benefits (6)$ 34.0 $ 63.3 $ 59.2 $ 308.4 $ 27.7 $ 492.6 Total$ 1,645.9 $ 466.8 $ 261.4 $ 1,425.2 $ 86.3 $ 3,885.6
(1)These amounts represent the principal and interest payments of our debt.
(2)During fiscal 2020, we entered into a series of treasury rate lock transactions with an aggregate notional amount totaling$400.0 million , to hedge our exposure to changes in interest rates in anticipation of the refinancing of our fixed-rate notes dueSeptember 15, 2020 . These amounts represent the aggregate fair value as ofJune 30, 2020 , and is included in other current liabilities on our Consolidated Balance Sheet. Refer to Note 9 of our Consolidated Financial Statements for additional information. (3)Included in these amounts are various facilities and equipment leases. We enter into operating leases in the normal course of business relating to facilities and equipment. 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. (4)Purchase obligations are comprised of a$240 million reinsurance premium with Chubb for the fiscal 2021 policy year, as well as obligations related to software subscription licenses and purchase and maintenance agreements on our software, equipment, and other assets.
(5)Based on current estimates, we expect to make cash payments up to
(6)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
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 ofJune 30, 2020 , the obligations relating to these matters, which are expected to be paid in fiscal 2021, total$25,831.6 million and were recorded in client funds obligations on our Consolidated Balance Sheets. We had$26,708.1 million of cash and cash equivalents and marketable securities that were impounded from our clients to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as ofJune 30, 2020 . Separately, ADP Indemnity paid a premium of$240 million inJuly 2020 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2021 policy year. AtJune 30, 2020 , ADP Indemnity had total assets of$548.7 million to satisfy the actuarially estimated unpaid losses of$487.7 million for the policy years sinceJuly 1, 2003 . ADP Indemnity paid claims of$4.4 million and$4.0 million , net of insurance recoveries, in fiscal 2020 and 2019, respectively. Refer to the "Analysis of Reportable Segments - PEO Services" 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
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performance of our services and products. We do not expect any material losses related to such representations and warranties.
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