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Microsoft Excel LibreOffice Calc

Automatic Data Processing Inc. (NASDAQ:ADP)


Analysis of Income Taxes

Advanced level


Accounting Policy on 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 ADP’s Consolidated Financial Statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). ADP is subject to the continuous examination of the 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 ADP’s 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 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, 2019 and 2018, ADP’s liabilities for unrecognized tax benefits, which include interest and penalties, were $54.2 million and $45.2 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 $3 million and expected cash payments could be up to $10 million in the next twelve months. The liability related to cash payments expected to be paid within the next 12 months has been reclassified from other liabilities to current liabilities on the Consolidated Balance Sheets. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. ADP continually assesses the likelihood and amount of potential adjustments and adjusts 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.

Source: 10-K (filing date: 2019-08-09).


Income Tax Expense (Benefit)

Automatic Data Processing Inc., income tax expense (benefit), continuing operations

US$ in thousands

Microsoft Excel LibreOffice Calc
12 months ended Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Federal
Foreign
State
Current
Federal
Foreign
State
Deferred
Provision for income taxes

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Item Description The company
Current Amount of current income tax expense (benefit) pertaining to taxable income (loss) from continuing operations. Automatic Data Processing Inc.’s current decreased from 2017 to 2018 but then increased from 2018 to 2019 not reaching 2017 level.
Deferred Amount of deferred income tax expense (benefit) pertaining to income (loss) from continuing operations. Automatic Data Processing Inc.’s deferred decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.
Provision for income taxes Amount of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. Automatic Data Processing Inc.’s provision for income taxes decreased from 2017 to 2018 but then increased from 2018 to 2019 not reaching 2017 level.

Effective Income Tax Rate (EITR)

Automatic Data Processing Inc., effective income tax rate (EITR) reconciliation

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
U.S. federal statutory tax rate
State taxes, net of federal tax benefit
U.S. tax on foreign income
Utilization of foreign tax credits
Section 199, Qualified production activities
Section 199, Qualified production activities and research tax credit refund claim, net of reserves
Resolution of tax matters, Section 199 Qualified production activities and research tax credit refund claim
Foreign rate differential
Excess tax benefit, Stock-based compensation
Other
Effective tax rate

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Item Description The company
Effective tax rate Percentage of current income tax expense (benefit) and deferred income tax expense (benefit) pertaining to continuing operations. Automatic Data Processing Inc.’s effective tax rate decreased from 2017 to 2018 and from 2018 to 2019.

Components of Deferred Tax Assets and Liabilities

Automatic Data Processing Inc., components of deferred tax assets and liabilities

US$ in thousands

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Accrued expenses not currently deductible
Stock-based compensation expense
Foreign tax credits
Net operating losses
Unrealized investment losses, net
Retirement Benefits
Other
Deferred tax assets
Valuation allowances
Deferred tax assets, net
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 assets (liabilities)

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Item Description The company
Deferred tax assets Amount before allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. Automatic Data Processing Inc.’s deferred tax assets decreased from 2017 to 2018 and from 2018 to 2019.
Deferred tax assets, net Amount after allocation of valuation allowances of deferred tax asset attributable to deductible temporary differences and carryforwards. Automatic Data Processing Inc.’s deferred tax assets, net decreased from 2017 to 2018 and from 2018 to 2019.
Net deferred tax assets (liabilities) Amount, after allocation of valuation allowances and deferred tax liability, of deferred tax asset attributable to deductible differences and carryforwards, without jurisdictional netting. Automatic Data Processing Inc.’s net deferred tax assets (liabilities) increased from 2017 to 2018 but then decreased significantly from 2018 to 2019.

Deferred Tax Assets and Liabilities, Classification

Automatic Data Processing Inc., deferred tax assets and liabilities, classification

US$ in thousands

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Current deferred tax assets (included in Other current assets)
Current deferred tax liabilities (included in Accrued expenses and other current liabilities)
Long-term deferred tax assets (included in Other assets)
Long-term deferred tax liabilities

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Item Description The company
Long-term deferred tax assets (included in Other assets) Amount, after allocation of valuation allowances and deferred tax liability, of deferred tax asset attributable to deductible differences and carryforwards, with jurisdictional netting and classified as noncurrent. Automatic Data Processing Inc.’s long-term deferred tax assets (included in Other assets) decreased from 2017 to 2018 and from 2018 to 2019.
Long-term deferred tax liabilities Amount, after deferred tax asset, of deferred tax liability attributable to taxable differences, with jurisdictional netting and classified as noncurrent. Automatic Data Processing Inc.’s long-term deferred tax liabilities decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.

Adjustments to Financial Statements: Removal of Deferred Taxes

Automatic Data Processing Inc., adjustments to financial statements

US$ in thousands

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Adjustment to Current Assets
Current assets (as reported)
Less: Current deferred tax assets, net
Current assets (adjusted)
Adjustment to Total Assets
Total assets (as reported)
Less: Current deferred tax assets, net
Less: Noncurrent deferred tax assets, net
Total assets (adjusted)
Adjustment to Current Liabilities
Current liabilities (as reported)
Less: Current deferred tax liabilities, net
Current liabilities (adjusted)
Adjustment to Total Liabilities
Total liabilities (as reported)
Less: Current deferred tax liabilities, net
Less: Noncurrent deferred tax liabilities, net
Total liabilities (adjusted)
Adjustment to Stockholders’ Equity
Stockholders’ equity (as reported)
Less: Net deferred tax assets (liabilities)
Stockholders’ equity (adjusted)
Adjustment to Net Earnings
Net earnings (as reported)
Add: Deferred income tax expense (benefit)
Net earnings (adjusted)

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).


Automatic Data Processing Inc., Financial Data: Reported vs. Adjusted


Adjusted Financial Ratios: Removal of Deferred Taxes (Summary)

Automatic Data Processing Inc., adjusted financial ratios

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Current Ratio
Reported current ratio
Adjusted current ratio
Net Profit Margin
Reported net profit margin
Adjusted net profit margin
Total Asset Turnover
Reported total asset turnover
Adjusted total asset turnover
Financial Leverage
Reported financial leverage
Adjusted financial leverage
Return on Equity (ROE)
Reported ROE
Adjusted ROE
Return on Assets (ROA)
Reported ROA
Adjusted ROA

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Financial ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Automatic Data Processing Inc.’s adjusted current ratio deteriorated from 2017 to 2018 and from 2018 to 2019.
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Automatic Data Processing Inc.’s adjusted net profit margin ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.’s adjusted financial leverage ratio increased from 2017 to 2018 but then decreased significantly from 2018 to 2019.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Automatic Data Processing Inc.’s adjusted ROE improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Automatic Data Processing Inc., Financial Ratios: Reported vs. Adjusted


Adjusted Current Ratio

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Current assets
Current liabilities
Liquidity Ratio
Current ratio1
Adjusted for Deferred Taxes
Selected Financial Data (US$ in thousands)
Adjusted current assets
Adjusted current liabilities
Liquidity Ratio
Adjusted current ratio2

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 Current ratio = Current assets ÷ Current liabilities
= ÷ =

2 Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= ÷ =

Liquidity ratio Description The company
Adjusted current ratio A liquidity ratio calculated as adjusted current assets divided by adjusted current liabilities. Automatic Data Processing Inc.’s adjusted current ratio deteriorated from 2017 to 2018 and from 2018 to 2019.

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings
Revenues
Profitability Ratio
Net profit margin1
Adjusted for Deferred Taxes
Selected Financial Data (US$ in thousands)
Adjusted net earnings
Revenues
Profitability Ratio
Adjusted net profit margin2

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 Net profit margin = 100 × Net earnings ÷ Revenues
= 100 × ÷ =

2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Revenues
= 100 × ÷ =

Profitability ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by total revenue. Automatic Data Processing Inc.’s adjusted net profit margin ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Revenues
Total assets
Activity Ratio
Total asset turnover1
Adjusted for Deferred Taxes
Selected Financial Data (US$ in thousands)
Revenues
Adjusted total assets
Activity Ratio
Adjusted total asset turnover2

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= ÷ =

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= ÷ =

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Total assets
Stockholders’ equity
Solvency Ratio
Financial leverage1
Adjusted for Deferred Taxes
Selected Financial Data (US$ in thousands)
Adjusted total assets
Adjusted stockholders’ equity
Solvency Ratio
Adjusted financial leverage2

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 Financial leverage = Total assets ÷ Stockholders’ equity
= ÷ =

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity
= ÷ =

Solvency ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.’s adjusted financial leverage ratio increased from 2017 to 2018 but then decreased significantly from 2018 to 2019.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings
Stockholders’ equity
Profitability Ratio
ROE1
Adjusted for Deferred Taxes
Selected Financial Data (US$ in thousands)
Adjusted net earnings
Adjusted stockholders’ equity
Profitability Ratio
Adjusted ROE2

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 ROE = 100 × Net earnings ÷ Stockholders’ equity
= 100 × ÷ =

2 Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted stockholders’ equity
= 100 × ÷ =

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Automatic Data Processing Inc.’s adjusted ROE improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings
Total assets
Profitability Ratio
ROA1
Adjusted for Deferred Taxes
Selected Financial Data (US$ in thousands)
Adjusted net earnings
Adjusted total assets
Profitability Ratio
Adjusted ROA2

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × ÷ =

2 Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × ÷ =

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.