UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________

FORM 10-Q

______________

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended December 31, 2009

                                         OR
 

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From              to             

 

Commission File Number 1-5397

 

___________________

AUTOMATIC DATA PROCESSING, INC.

(Exact name of registrant as specified in its charter)

______________

 

Delaware	22-1467904
(State or other jurisdiction of incorporation or	(IRS Employer Identification No.)
organization)
One ADP Boulevard, Roseland, New Jersey	07068
(Address of principal executive offices)	(Zip Code)

                           

Registrant’s telephone number, including area code: (973) 974-5000
 

______________

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x                                                                                                             Accelerated filer o               

Non-accelerated filer o (Do not check if a smaller reporting company)                                      Smaller reporting company o     

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o       No  x

The number of shares outstanding of the registrant’s common stock as of January 31, 2010 was 504,832,209.

          

Part I. Financial Information

Item 1. Financial Statements.
 

Automatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Earnings

(In millions, except per share amounts)
(Unaudited)

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2009			2008			2009			2008
REVENUES:
Revenues, other than interest on funds held for clients and PEO revenues		$	1,767.8		$	1,772.6		$	3,448.8		$	3,525.0
Interest on funds held for clients			127.7			147.3			255.6			299.2
PEO revenues (A)			308.9			283.4			602.8			560.5
TOTAL REVENUES			2,204.4			2,203.3			4,307.2			4,384.7
EXPENSES:
Costs of revenues:
Operating expenses			1,050.4			1,007.1			2,057.2			2,054.1
Systems development and programming costs			121.0			123.1			247.1			253.4
Depreciation and amortization			59.9			57.3			120.4			116.7
TOTAL COSTS OF REVENUES			1,231.3			1,187.5			2,424.7			2,424.2
Selling, general and administrative expenses			520.1			573.1			1,012.9			1,099.8
Interest expense			2.5			8.1			5.6			27.4
TOTAL EXPENSES			1,753.9			1,768.7			3,443.2			3,551.4
Other income, net			(29.6	)		(38.6	)		(63.4	)		(81.2	)
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			480.1			473.2			927.4			914.5
Provision for income taxes			164.3			172.8			327.5			336.2
NET EARNINGS FROM CONTINUING OPERATIONS		$	315.8		$	300.4		$	599.9		$	578.3
Earnings (loss) from discontinued operations, net of (benefit) provision for income taxes of $(0.1) for the three months ended December 31, 2008, and $1.0 for the six months ended December 31, 2008			-			0.1			-			(1.0	)
NET EARNINGS		$	315.8		$	300.5		$	599.9		$	577.3
Basic Earnings Per Share from Continuing Operations		$	0.63		$	0.60		$	1.20		$	1.14
Basic Earnings Per Share from Discontinued Operations			-			-			-			-
BASIC EARNINGS PER SHARE		$	0.63		$	0.60		$	1.20		$	1.14
Diluted Earnings Per Share from Continuing Operations		$	0.62		$	0.59		$	1.19		$	1.14
Diluted Earnings Per Share from Discontinued Operations			-			-			-			-
DILUTED EARNINGS PER SHARE		$	0.62		$	0.59		$	1.19		$	1.13
Basic weighted average shares outstanding			502.0			503.4			501.7			505.4
Diluted weighted average shares outstanding			506.2			506.1			504.8			509.4
Dividends declared per common share		$	0.3400		$	0.3300		$	0.6700		$	0.6200

(A) Professional Employer Organization (“PEO”) revenues are net of direct pass-through costs, primarily consisting of payroll wages and payroll taxes, of $3,814.5 and $3,283.4 for the three months ended December 31, 2009 and 2008, respectively, and $6,615.6 and $6,082.0 for the six months ended December 31, 2009 and 2008, respectively.

     See notes to the consolidated financial statements.

 

Automatic Data Processing, Inc. and Subsidiaries

Consolidated Balance Sheets

(In millions, except per share amounts)
(Unaudited)

		December 31,			June 30,
Assets		2009			2009
Current assets:
Cash and cash equivalents		$	1,741.1		$	2,265.3
Short-term marketable securities			40.6			30.8
Accounts receivable, net			1,089.4			1,055.4
Other current assets			673.3			921.1
Assets held for sale			6.6			12.1
Total current assets before funds held for clients			3,551.0			4,284.7
Funds held for clients			21,375.4			16,419.2
Total current assets			24,926.4			20,703.9
Long-term marketable securities			90.6			92.4
Long-term receivables, net			142.0			162.6
Property, plant and equipment, net			707.4			734.5
Other assets			761.0			702.7
Goodwill			2,413.2			2,375.5
Intangible assets, net			558.3			580.1
Total assets		$	29,598.9		$	25,351.7
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	101.4		$	130.3
Accrued expenses and other current liabilities			728.9			778.5
Accrued payroll and payroll related expenses			386.4			402.3
Dividends payable			167.4			162.1
Short-term deferred revenues			326.8			329.8
Obligation under commercial paper borrowing			-			730.0
Income taxes payable			40.5			230.7
Total current liabilities before client funds obligations			1,751.4			2,763.7
Client funds obligations			20,809.1			15,992.6
Total current liabilities			22,560.5			18,756.3
Long-term debt			41.8			42.7
Other liabilities			444.9			477.1
Deferred income taxes			328.2			254.5
Long-term deferred revenues			475.6			498.5
Total liabilities			23,851.0			20,029.1
Stockholders' equity:
Preferred stock, $1.00 par value:
Authorized, 0.3 shares; issued, none			-			-
Common stock, $0.10 par value:
Authorized, 1,000.0 shares; issued 638.7shares at December 31, 2009 and June 30, 2009; outstanding, 502.9 and 501.7 shares at December 31, 2009 and June 30, 2009, respectively			63.9			63.9
Capital in excess of par value			468.7			520.0
Retained earnings			10,979.2			10,716.6
Treasury stock - at cost: 135.8 and 137.0 shares at December 31, 2009 and June 30, 2009, respectively			(6,075.0	)		(6,133.9	)
Accumulated other comprehensive income			311.1			156.0
Total stockholders’ equity			5,747.9			5,322.6
Total liabilities and stockholders’ equity		$	29,598.9		$	25,351.7

See notes to the consolidated financial statements.

 

Automatic Data Processing, Inc. and Subsidiaries

Statements of Consolidated Cash Flows

(In millions)
(Unaudited)

		Six Months Ended
		December 31,
		2009			2008
Cash Flows from Operating Activities:
Net earnings		$	599.9		$	577.3
Adjustments to reconcile net earnings to cash flows provided by operating activities:
Depreciation and amortization			155.0			151.2
Deferred income taxes			44.8			(52.4	)
Stock-based compensation expense			36.7			62.6
Net pension expense			17.4			16.8
Net realized loss from the sales of marketable securities			1.9			8.3
Net amortization of premiums and accretion of discounts on available-for-sale securities			29.2			28.9
Impairment losses on available-for-sale securities			5.3			-
Gain on sale of building			(1.5	)		(2.2	)
Loss on sale of discontinued businesses, net of tax			-			1.0
Other			31.7			(4.2	)
Changes in operating assets and liabilities, net of effects from acquisitions and divestitures of businesses:
Increase in accounts receivable			(32.6	)		(213.8	)
Decrease (increase) in other assets			144.9			(41.4	)
Decrease in accounts payable			(16.3	)		(32.0	)
(Decrease) increase in accrued expenses and other liabilities			(343.5	)		181.5
Net cash flows provided by operating activities			672.9			681.6
Cash Flows from Investing Activities:
Purchases of corporate and client funds marketable securities			(1,481.7	)		(1,735.6	)
Proceeds from the sales and maturities of corporate and client funds marketable securities			1,693.0			1,496.4
Net increase in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations			(4,938.9	)		(9,162.6	)
Capital expenditures			(54.3	)		(83.6	)
Additions to intangibles			(67.8	)		(35.9	)
Acquisitions of businesses, net of cash acquired			(3.8	)		(7.2	)
Reclassification from cash and cash equivalents to short-term marketable securities			-			(211.1	)
Other			8.2			4.3
Proceeds from the sale of property, plant and equipment			3.1			19.9
Net cash flows used in investing activities			(4,842.2	)		(9,715.4	)
Cash Flows from Financing Activities:
Net increase in client funds obligations			4,687.6			10,159.5
Proceeds from issuance of debt			-			12.5
Payments of debt			(0.9	)		(13.4	)
Net purchases of reverse repurchase agreements			-			(11.8	)
Net repayment of commercial paper borrowing			(730.0	)		-
Repurchases of common stock			(151.9	)		(451.2	)
Proceeds from stock purchase plan and exercises of stock options			151.4			99.1
Dividends paid			(330.8	)		(297.2	)
Net cash flows provided by financing activities			3,625.4			9,497.5
Effect of exchange rate changes on cash and cash equivalents			19.7			(76.3	)
Net change in cash and cash equivalents			(524.2	)		387.4
Cash and cash equivalents, beginning of period			2,265.3			917.5
Cash and cash equivalents, end of period		$	1,741.1		$	1,304.9

See notes to the consolidated financial statements.

Automatic Data Processing, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(Tabular dollars in millions, except per share amounts)
(Unaudited)

Note 1. Basis of Presentation
 

The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. Adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes of Automatic Data Processing, Inc. and subsidiaries (“ADP” or the “Company”) as of and for the year ended June 30, 2009 (“fiscal 2009”). The results of operations for the three and six months ended December 31, 2009 may not be indicative of the results to be expected for the fiscal year ending June 30, 2010 (“fiscal 2010”).
 

Note 2. New Accounting Pronouncements
 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”) 105.10.05, “Generally Accepted Accounting Principles” (“ASC 105.10.05”). ASC 105.10.05 establishes the FASB ASC as the single source of authoritative generally accepted accounting principles (“GAAP”). Pursuant to the provisions of ASC 105.10.05, the Company has updated references to GAAP in its financial statements issued subsequent to September 15, 2009. The adoption of ASC 105.10.05 did not have any impact on the Company’s consolidated results of operations, financial condition or cash flows.
 

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-6, “Improving Disclosures about Fair Value Investments.” ASU 2010-6 amends the disclosure requirements in ASC 820.10 “Fair Value Measurements and Disclosures,” which the Company adopted on July 1, 2008, and requires new disclosures regarding transfers in and out of Level 1 and 2 asset categories as well as more detailed information for the Level 3 reconciliation of activity, if required. Since the Company adopted ASC 820.10, the Company has not had any transfers in or out of Level 1 or Level 2, nor has the Company had any Level 3 assets or liabilities. ASU 2010-6 also clarifies existing disclosure requirements regarding the level of disaggregation expected, valuation techniques and inputs to fair value measurements. ASU 2010-6 is effective for interim and annual reporting periods beginning after December 15, 2009. The Company does not anticipate the adoption of ASU 2010-6 will have any impact on its consolidated results of operations, financial condition or cash flows.
 
In October 2009, the FASB issued ASU 2009-13, “Multiple Deliverable Revenue Arrangements.” ASU 2009-13 modifies the guidance related to accounting for arrangements with multiple deliverables by providing an alternative when vendor specific objective evidence (“VSOE”) or third-party evidence (“TPE”) does not exist to determine the selling price of a deliverable. The alternative when VSOE or TPE does not exist is the best estimate of the selling price of the deliverable. Consideration for multiple deliverables is then allocated based upon the relative selling price of the deliverables and revenue is recognized as earned for each deliverable. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, unless the election is made to adopt ASU 2009-13 retrospectively. In either case, early adoption is permitted. The Company is currently evaluating the impact, if any, that the adoption of ASU 2009-13 will have on its consolidated results of operations, financial condition or cash flows.
 
In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements that Include Software Elements” (“ASU 2009-14”). ASU 2009-14 modifies the scope of the software revenue recognition guidance to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s functionality. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, unless the election is made to adopt ASU 2009-14 retrospectively. In either case, early adoption is permitted. The Company is currently evaluating the impact, if any, that the adoption of ASU 2009-14 will have on its consolidated results of operations, financial condition or cash flows.
 

In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 provides additional guidance which clarifies measuring liabilities at fair value under ASC 820.10. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after August 2009. On October 1, 2009, the Company adopted ASU 2009-05 and the adoption did not have a material impact on its consolidated results of operations, financial condition or cash flows.

In December 2008, the FASB issued ASC 715.20.65, “Retirement Benefits – Defined Benefit Plans.” ASC 715.20.65 requires additional disclosures in relation to plan assets of defined benefit pension or other postretirement plans. ASC 715.20.65 is effective for fiscal years ending after December 15, 2009 with early application permitted. The Company does not anticipate the adoption of ASC 715.20.65 will have a material impact on its consolidated results of operations, financial condition or cash flows.
 

In June 2008, the FASB issued ASC 260.10.45, “Earnings per Share.” ASC 260.10.45 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260.10.45 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, companies are required to retrospectively adjust earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to provisions of ASC 260.10.45. On July 1, 2009, the Company adopted ASC 260.10.45 and the adoption did not have a material impact on its consolidated results of operations, financial condition or cash flows.

In April 2008, the FASB issued ASC 350.30, “Intangibles – Goodwill and Other.” ASC 350.30 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. ASC 350.30 also requires expanded disclosure related to the determination of intangible asset useful lives. ASC 350.30 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years for intangible assets acquired after the effective date. On July 1, 2009, the Company adopted ASC 350.30 and the adoption did not have a material impact on its consolidated results of operations, financial condition or cash flows.

In December 2007, the FASB issued ASC 805.10, “Business Combinations.” ASC 805.10 establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any controlling interest in the business and the goodwill acquired. ASC 805.10 further requires that acquisition-related costs and costs associated with restructuring or exiting activities of an acquired entity will be expensed as incurred. ASC 805.10 also establishes disclosure requirements that will require disclosure on the nature and financial effects of the business combination. Additionally, in April 2009, the FASB issued ASC 805.20, “Identifiable Assets and Liabilities, and Any Noncontrolling Interest.” ASC 805.20 amends and clarifies ASC 805.10 to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. On July 1, 2009, the Company adopted ASC 805.10 and ASC 805.20 and the adoption did not have a material impact on its consolidated results of operations, financial condition or cash flows as no business combinations had been completed at the time of adoption.

In September 2006, the FASB issued ASC 820.10. ASC 820.10 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. ASC 820.10 is effective for fiscal years beginning after November 15, 2007, except for non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis, for which the effective date is fiscal years beginning after November 15, 2008. On July 1, 2008, the Company adopted ASC 820.10 for assets and liabilities recognized or disclosed at fair value on a recurring basis. On July 1, 2009, the Company adopted ASC 820.10 for non-financial assets that are recognized or disclosed on a non-recurring basis. The adoption of ASC 820.10 did not have an impact on its consolidated results of operations, financial condition or cash flows.

Note 3. Earnings per Share (“EPS”)
 

					Effect of			Effect of			Effect of
					Employee			Employee			Employee
					Stock			Stock			Restricted
					Option			Purchase			Stock
		Basic			Shares			Plan Shares			Shares			Diluted
Three months ended December 31,
2009
Net earnings from continuing operations		$	315.8		$	-		$	-		$	-		$	315.8
Weighted average shares (in millions)			502.0			2.7			-			1.5			506.2
EPS from continuing operations		$	0.63											$	0.62
2008
Net earnings from continuing operations		$	300.4		$	-		$	-		$	-		$	300.4
Weighted average shares (in millions)			503.4			0.8			-			1.9			506.1
EPS from continuing operations		$	0.60											$	0.59
Six months ended December 31,
2009
Net earnings from continuing operations		$	599.9		$	-		$	-		$	-		$	599.9
Weighted average shares (in millions)			501.7			1.6			-			1.5			504.8
EPS from continuing operations		$	1.20											$	1.19
2008
Net earnings from continuing operations		$	578.3		$	-		$	-		$	-		$	578.3
Weighted average shares (in millions)			505.4			2.0			-			2.0			509.4
EPS from continuing operations		$	1.14											$	1.14

Options to purchase 15.6 million and 35.2 million shares of common stock for the three months ended December 31, 2009 and 2008, respectively, and 22.5 million and 25.1 million shares of common stock for the six months ended December 31, 2009 and 2008, respectively, were excluded from the calculation of diluted earnings per share because their exercise prices exceeded the average market price of outstanding common shares for the respective period.

Note 4. Other Income, net

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2009			2008			2009			2008
Interest income on corporate funds		$	(31.2	)	$	(43.3	)	$	(67.5	)	$	(89.5	)
Realized gains on available-for-sale securities			(2.2	)		(1.5	)		(10.2	)		(2.6	)
Realized losses on available-for-sale securities			4.8			9.0			12.1			10.9
Realized (gain) loss on investment in Reserve Fund			(0.4	)		-			(0.4	)		3.3
Impairment losses on available-for-sale securities			-			-			5.3			-
Gain on sales of buildings			-			(2.2	)		(1.5	)		(2.2	)
Other, net			(0.6	)		(0.6	)		(1.2	)		(1.1	)
Other income, net		$	(29.6	)	$	(38.6	)	$	(63.4	)	$	(81.2	)

Proceeds from sales and maturities of available-for-sale securities were $1,693.0 million and $1,496.4 million for the six months ended December 31, 2009 and 2008, respectively.

The Company has an outsourcing agreement with Broadridge Financial Solutions, Inc. (“Broadridge”) pursuant to which the Company provides data center outsourcing services, which principally consist of information technology services and service delivery network services. As a result of the outsourcing agreement, the Company recognized income of $26.2 million and $26.0 million for the three months ended December 31, 2009 and 2008, respectively, which is offset by expenses directly associated with providing such services of $25.6 million and $25.4 million, respectively, both of which were recorded in other income, net, on the Statements of Consolidated Earnings. The Company recognized income of $52.2 million and $51.8 million for the six months ended December 31, 2009 and 2008, respectively, which is offset by expenses directly associated with providing such services of $51.1 million and $50.7 million. The Company had a receivable on the Consolidated Balance Sheets from Broadridge for the services under this agreement of $8.8 million and $8.7 million as of December 31, 2009 and June 30, 2009, respectively.
 

At September 30, 2009, the Company concluded that it had the intent to sell certain securities for which unrealized losses of $5.3 million were previously recorded in accumulated other comprehensive income on the Consolidated Balance Sheets. As such, the Company realized impairment losses of $5.3 million in other income, net on the Statements of Consolidated Earnings during the three and six months ended December 31, 2009. During October 2009, the Company sold these securities.

During the six months ended December 31, 2008, the Company recorded a $3.3 million loss to other income, net on the Statements of Consolidated Earnings related to the Primary Fund of the Reserve Fund (the “Reserve Fund”).
 

During the six months ended December 31, 2009, the Company sold a building and, as a result, recorded a gain of $1.5 million in other income, net, on the Statements of Consolidated Earnings. Additionally, during the three and six months ended December 31, 2008, the Company sold a building and, as a result, recorded a gain of $2.2 million in other income, net on the Statements of Consolidated Earnings. These buildings were previously reported in assets held for sale on the Consolidated Balance Sheets.
 

Note 5. Acquisitions
 

The Company acquired one business during the six months ended December 31, 2009 for approximately $4.5 million. The purchase price includes $1.5 million in accrued contingent payments expected to be paid in future periods. This acquisition resulted in approximately $3.9 million of goodwill. Intangible assets acquired, which totaled approximately $0.7 million, consisted of customer contracts and lists and software that are being amortized over a weighted average life of approximately 4 years. The acquisition was not material to the Company’s results of operations, financial position or cash flows.
 
The Company made $0.7 million of contingent payments relating to previously consummated acquisitions during the six months ended December 31, 2009.

Note 6. Divestitures

During the three and six months ended December 31, 2008, the Company recorded income of $0.1 million and expenses of $1.0 million, respectively, within earnings (loss) from discontinued operations on the Statements of Consolidated Earnings, both of which related to a change in estimated provision for income taxes associated with the divestitures of businesses.
 

There were no assets or liabilities of discontinued operations as of December 31, 2009 or June 30, 2009.

Note 7. Corporate Investments and Funds Held for Clients

Corporate investments and funds held for clients at December 31, 2009 and June 30, 2009 are as follows:
 

		December 31, 2009
					Gross			Gross
		Amortized			Unrealized			Unrealized
		Cost			Gains			Losses			Fair Value
Type of issue:
Money market securities and other cash
equivalents		$	8,495.1		$	-		$	-		$	8,495.1
Available-for-sale securities:
U.S. Treasury and direct obligations of
U.S. government agencies			5,154.4			230.5			(6.4	)		5,378.5
Corporate bonds			4,762.9			214.9			(7.4	)		4,970.4
Asset-backed securities			1,175.1			51.0			-			1,226.1
Canadian government obligations and
Canadian government agency obligations			1,039.2			35.5			(0.6	)		1,074.1
Other securities			2,040.4			68.9			(5.8	)		2,103.5
Total available-for-sale securities			14,172.0			600.8			(20.2	)		14,752.6
Total corporate investments and funds
held for clients		$	22,667.1		$	600.8		$	(20.2	)	$	23,247.7

		June 30, 2009
					Gross			Gross
		Amortized			Unrealized			Unrealized
		Cost			Gains			Losses			Fair Value
Type of issue:
Money market securities and other cash
equivalents		$	4,077.5		$	-		$	-		$	4,077.5
Available-for-sale securities:
U.S. Treasury and direct obligations of
U.S. government agencies			5,273.0			268.3			(1.4	)		5,539.9
Corporate bonds			4,647.6			135.9			(35.3	)		4,748.2
Asset-backed securities			1,482.2			44.2			(4.7	)		1,521.7
Canadian government obligations and
Canadian government agency obligations			929.2			41.4			(0.1	)		970.5
Other securities			1,961.6			48.2			(59.9	)		1,949.9
Total available-for-sale securities			14,293.6			538.0			(101.4	)		14,730.2
Total corporate investments and funds
held for clients		$	18,371.1		$	538.0		$	(101.4	)	$	18,807.7

At December 31, 2009, U.S. Treasury and direct obligations of U.S. government agencies primarily include debt directly issued by Federal Home Loan Banks, Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) with fair values of $1,912.2 million, $1,241.4 million and $1,289.3 million, respectively. At June 30, 2009, U.S. Treasury and direct obligations of U.S. government agencies primarily include debt directly issued by Federal Home Loan Banks, Freddie Mac and Fannie Mae with fair values of $1,906.4 million, $1,463.6 million and $1,352.5 million, respectively. U.S. Treasury and direct obligations of U.S. government agencies represent senior, unsecured, non-callable debt that primarily carries a credit rating of AAA, as rated by Moody’s and Standard & Poor’s and has maturities ranging from January 2010 through August 2019.
 
At December 31, 2009, asset-backed securities include senior tranches of securities with predominately prime collateral of fixed rate credit card, rate reduction, auto loan and equipment lease receivables with fair values of $681.1 million, $364.7 million, $157.4 million and $23.0 million, respectively. At June 30, 2009, asset-backed securities include senior tranches of securities with predominately prime collateral of fixed rate credit card, rate reduction, auto loan, student loan and equipment lease receivables with fair values of $808.4 million, $384.2 million, $244.9 million, $49.8 million and $34.4 million, respectively. These securities are collateralized by the cash flows of the underlying pools of receivables. The primary risk associated with these securities is the collection risk of the underlying receivables. All collateral on such asset-backed securities has performed as expected through December 31, 2009.
 
At December 31, 2009, other securities and their fair value primarily represent AAA rated commercial mortgage-backed securities of $735.5 million, municipal bonds of $442.4 million, AAA rated mortgage-backed securities of $172.4 million that are guaranteed by Fannie Mae and Freddie Mac, Canadian provincial bonds of $202.5 million, supranational bonds of $262.6 million, corporate bonds backed by the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program of $132.6 million and sovereign bonds of $133.3 million. At June 30, 2009, other securities and their fair value primarily represent AAA rated commercial mortgage-backed securities of $759.3 million, municipal bonds of $462.0 million, AAA rated mortgage-backed securities of $186.8 million that are guaranteed by Fannie Mae and Freddie Mac, Canadian provincial bonds of $170.2 million, supranational bonds of $160.0 million, corporate bonds backed by the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program of $137.6 million and sovereign bonds of $51.8 million. The Company’s AAA rated mortgage-backed securities represent an undivided beneficial ownership interest in a group or pool of one or more residential mortgages. These securities are collateralized by the cash flows of 15-year and 30-year residential mortgages and are guaranteed by Fannie Mae and Freddie Mac as to the timely payment of principal and interest.
 
Classification of corporate investments on the Consolidated Balance Sheets is as follows:
 

		December 31,			June 30,
		2009			2009
Corporate investments:
Cash and cash equivalents		$	1,741.1		$	2,265.3
Short-term marketable securities			40.6			30.8
Long-term marketable securities			90.6			92.4
Total corporate investments		$	1,872.3		$	2,388.5

Funds held for clients represent assets that, based upon the Company’s intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to our payroll and payroll tax filing services, which are classified as client funds obligations on our Consolidated Balance Sheets. Funds held for clients have been invested in the following categories:

		December 31,			June 30,
		2009			2009
Funds held for clients:
Restricted cash and cash equivalents held
to satisfy client funds obligations		$	6,639.2		$	1,575.6
Restricted short-term marketable securities held
to satisfy client funds obligations			2,669.6			2,564.6
Restricted long-term marketable securities held
to satisfy client funds obligations			11,951.8			12,042.4
Other restricted assets held to satisfy client
funds obligations			114.8			236.6
Total funds held for clients		$	21,375.4		$	16,419.2

Client funds obligations represent the Company’s contractual obligations to remit funds to satisfy clients’ payroll and tax payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client funds obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client funds obligations as a current liability on the Consolidated Balance Sheets totaling $20,809.1 million and $15,992.6 million as of December 31, 2009 and June 30, 2009, respectively. The Company has classified funds held for clients as a current asset since these funds are held solely for the purposes of satisfying the client funds obligations.
 
The Company has reported the cash flows related to the purchases of corporate and client funds marketable securities and related to the proceeds from the sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash inflows and outflows related to client funds investments with original maturities of 90 days or less on a net basis within net increase in restricted cash and cash equivalents and other restricted assets held to satisfy client funds obligations in the investing section of the Statements of Consolidated Cash Flows. The Company has reported the cash flows related to the cash received from and paid on behalf of clients on a net basis within net increase in client funds obligations in the financing section of the Statements of Consolidated Cash Flows.
 
At December 31, 2009, approximately 83% of the available-for-sale securities held an AAA or AA rating, as rated by Moody’s, Standard & Poor’s and, for Canadian securities, Dominion Bond Rating Service. All available-for-sale securities were rated as investment grade at December 31, 2009 with the exception of the Reserve Fund investment discussed below.
 

Available-for-sale securities that have been in an unrealized loss position for periods of less than and greater than 12 months as of December 31, 2009 are as follows:
 

		Unrealized						Unrealized
		losses			Fair market			losses			Fair market			Total gross
		less than			value less than			greater than			value greater			unrealized			Total fair
		12 months			12 months			12 months			than 12 months			losses			market value
U.S. Treasury and direct obligations of
U.S. government agencies		$	(5.9	)	$	511.2		$	(0.5	)	$	4.0		$	(6.4	)	$	515.2
Corporate bonds			(7.3	)		470.5			(0.1	)		16.3			(7.4	)		486.8
Asset backed securities			-			0.8			-			7.4			-			8.2
Canadian government obligations and
Canadian government agency obligations			(0.6	)		109.2			-			-			(0.6	)		109.2
Other securities			(2.2	)		216.4			(3.6	)		131.3			(5.8	)		347.7
		$	(16.0	)	$	1,308.1		$	(4.2	)	$	159.0		$	(20.2	)	$	1,467.1

Expected maturities of available-for-sale securities at December 31, 2009 are as follows:
 

Due in one year or less		$	2,710.3
Due after one year to two years			3,250.8
Due after two years to three years			3,290.5
Due after three years to four years			2,516.2
Due after four years			2,984.8
Total available-for-sale securities		$	14,752.6

The Company has an investment in a money market fund called the Reserve Fund. During the quarter ended September 30, 2008, the net asset value of the Reserve Fund decreased below $1 per share as a result of the full write-off of the Reserve Fund’s holdings in debt securities issued by Lehman Brothers Holdings, Inc., which filed for bankruptcy protection on September 15, 2008. The Reserve Fund has suspended redemptions and is in the process of being liquidated. In fiscal 2009, the Company reclassified $211.1 million of its investment from cash and cash equivalents to short-term marketable securities on the Consolidated Balance Sheet due to the fact that these assets no longer met the definition of a cash equivalent. Additionally, the Company reflected the impact of such reclassification on the Statements of Consolidated Cash Flows for fiscal 2009 as reclassification from cash equivalents to short-term marketable securities. During fiscal 2009, the Company recorded an $18.3 million loss to other income, net, on the Statement of Consolidated Earnings to recognize its pro-rata share of the estimated losses of the Reserve Fund, of which $3.3 million was recorded during the six months ended December 31, 2008. As of December 31, 2009, the Company had received distributions in excess of what was previously recognized in short-term marketable securities, net of previously recognized losses, in the amount of $0.4 million. As such, $0.4 million was recognized as realized gains on available-for-sale securities during the six months ended December 31, 2009. Additionally, during January 2010, the Company received an additional distribution in excess of what was previously recorded in short-term marketable securities of $14.8 million. Such amount will be recognized as realized gains on available-for-sale securities during the three months ending March 31, 2010.

 

At December 31, 2009, the Company evaluated the unrealized losses of $20.2 million related to the debt securities in an unrealized loss position, for which the Company did not have the intent to sell such securities and that it was not more likely than not that the Company would be required to sell such securities before recovery, in order to determine whether such losses were due to credit losses. The securities with unrealized losses of $20.2 million were primarily comprised of corporate bonds, U.S. Treasury and direct obligations of U.S. government agencies, and commercial mortgage backed securities. The Company evaluated such securities utilizing a variety of quantitative and qualitative factors including whether the Company expects to collect all amounts due under the contractual terms of the security, information about current and past events of the issuer, and the length of time and the extent to which the fair value has been less than the cost basis. At December 31, 2009, the Company concluded that unrealized losses on available-for-sale securities held at December 31, 2009 were not credit losses and were attributable to other factors, including changes in interest rates. As a result, the Company concluded that the $20.2 million in unrealized losses on such securities should be recorded in accumulated other comprehensive income on the Consolidated Balance Sheets at December 31, 2009.

Note 8. Fair Value Measurements

On July 1, 2008, the Company adopted ASC 820.10 for assets and liabilities recognized or disclosed at fair value on a recurring basis. On July 1, 2009, the Company adopted ASC 820.10 for non-financial assets that are recognized or disclosed on a non-recurring basis. The guidance in ASC 820.10 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. ASC 820.10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820.10 establishes market or observable inputs as the preferred source of fair value, followed by assumptions based on hypothetical transactions in the absence of market inputs.

The valuation techniques required by ASC 820.10 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest priority.

	Level 1	Fair value is determined based upon closing prices for identical instruments that are traded on active exchanges.
	Level 2	Fair value is determined based upon quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.
	Level 3	Fair value is determined based upon significant inputs to the valuation model that are unobservable.

Available-for-sale securities included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of our Level 2 investments, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. Over 99% of our Level 2 investments are valued utilizing inputs obtained from a pricing service. The Company reviews the values generated by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations from at least one other observable source. The Company has not adjusted the prices obtained from the independent pricing service. The Company has no available-for-sale securities included in Level 3.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value hierarchy. The significant input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
The following table presents the Company’s assets measured at fair value on a recurring basis at December 31, 2009. Included in the table are available-for-sale securities within corporate investments of $131.2 million and funds held for clients of $14,621.4 million. Refer to Note 7 for additional disclosure in relation to corporate investments and funds held for clients.

		Level 1			Level 2			Level 3			Total
U.S Treasury and direct obligations of
U.S. government agencies		$	-		$	5,378.4		$	-		$	5,378.4
Corporate bonds			-			4,970.4			-			4,970.4
Asset-backed securities			-			1,226.2			-			1,226.2
Canadian government obligations and
Canadian government agency obligations			-			1,074.1			-			1,074.1
Other securities			10.1			2,093.4			-			2,103.5
Total available-for-sale securities		$	10.1		$	14,742.5		$	-		$	14,752.6

Note 9. Receivables

The Company’s receivables include notes receivable for the financing of the sale of computer systems, most of which are due from automotive, heavy truck and powersports dealers. These notes receivable are reflected on the Consolidated Balance Sheets as follows:

		December 31, 2009						June 30, 2009
		Current			Long-term			Current			Long-term
Receivables		$	126.2		$	169.7		$	136.8		$	193.4
Less:
Allowance for doubtful accounts			(9.7	)		(17.0	)		(9.9	)		(18.0	)
Unearned income			(11.6	)		(10.7	)		(13.3	)		(12.8	)
		$	104.9		$	142.0		$	113.6		$	162.6

Accounts receivable is recorded based upon the gross amount the Company expects to receive from its clients, which is net of an allowance for doubtful accounts of $51.5 million and $47.8 million at December 31, 2009 and June 30, 2009, respectively. Long-term receivables represent our notes receivable that are recorded based upon the gross amount the Company expects to receive from its clients, which is net of an allowance for doubtful accounts of $17.0 million and $18.0 million at December 31, 2009 and June 30, 2009, respectively, and unearned income of $10.7 million and $12.8 million at December 31, 2009 and June 30, 2009, respectively, and represents the excess of the gross receivables over the sales price of the computer systems financed. The unearned income is amortized using the effective interest method. The carrying value of notes receivable approximates fair value.

Note 10. Assets Held for Sale
 

During fiscal 2009, the Company reclassified assets related to three buildings as assets held for sale on the Consolidated Balance Sheets. Such assets were previously reported in property, plant and equipment, net on the Consolidated Balance Sheets. The Company has sold two of the buildings and currently expects to complete the sale of the remaining building during fiscal 2010.
 
At December 31, 2009, the Company had $6.6 million classified as assets held for sale on the Consolidated Balance Sheets related to the remaining building.

 

Note 11. Goodwill and Intangible Assets, net

Changes in goodwill for the six months ended December 31, 2009 are as follows:
 

		Employer			PEO			Dealer
		Services			Services			Services			Total
Balance as of June 30, 2009		$	1,567.0		$	4.8		$	803.7		$	2,375.5
Additions and other adjustments, net			4.1			-			0.8			4.9
Currency translation adjustments			18.1			-			14.7			32.8
Balance as of December 31, 2009		$	1,589.2		$	4.8		$	819.2		$	2,413.2

Components of intangible assets, net, are as follows:

		December 31,			June 30,
		2009			2009
Intangible assets:
Software and software licenses		$	1,114.9		$	1,085.2
Customer contracts and lists			643.7			623.1
Other intangibles			211.2			197.3
			1,969.8			1,905.6
Less accumulated amortization:
Software and software licenses			(910.8	)		(858.5	)
Customer contracts and lists			(358.6	)		(328.6	)
Other intangibles			(142.1	)		(138.4	)
			(1,411.5	)		(1,325.5	)
Intangible assets, net		$	558.3		$	580.1

Other intangibles consist primarily of purchased rights, covenants, patents and trademarks (acquired directly or through acquisitions). All of the intangible assets have finite lives and, as such, are subject to amortization. The weighted average remaining useful life of the intangible assets is 7 years (3 years for software and software licenses, 9 years for customer contracts and lists, and 7 years for other intangibles). Amortization of intangible assets totaled $38.1 million and $36.7 million for the three months ended December 31, 2009 and 2008, respectively and totaled $76.1 million and $74.5 million for the six months ended December 31, 2009 and 2008, respectively. Estimated future amortization expense of the Company’s existing intangible assets is as follows:
 

		Amount
Six months ending June 30, 2010		$	89.0
Twelve months ending June 30, 2011		$	141.6
Twelve months ending June 30, 2012		$	96.9
Twelve months ending June 30, 2013		$	56.2
Twelve months ending June 30, 2014		$	44.6
Twelve months ending June 30, 2015		$	33.3

The Company did not incur significant costs to renew or extend the term of acquired intangible assets during the six months ended December 31, 2009.

 

Note 12. Short-term Financing

The Company has a $2.25 billion, 364-day credit agreement with a group of lenders that matures in June 2010. In addition, the Company has a $1.5 billion credit facility and a $2.25 billion credit facility that mature in June 2010, June 2011, respectively, each of which are five-year facilities that contain accordion features under which the aggregate commitments can each be increased by $500.0 million, subject to the availability of additional commitments. The interest rate applicable to the committed borrowings is tied to LIBOR, the federal funds effective rate or the prime rate depending on the notification provided by the Company to the syndicated financial institutions prior to borrowing. The Company is also required to pay facility fees on the credit agreements. The primary uses of the credit facilities are to provide liquidity to the commercial paper program and to provide funding for general corporate purposes, if necessary. The Company had no borrowings through December 31, 2009 under the credit agreements.

The Company’s U.S. short-term funding requirements related to client funds are sometimes obtained through a short-term commercial paper program, which provides for the issuance of up to $6.0 billion in aggregate maturity value of commercial paper. The Company’s commercial paper program is rated A-1+ by Standard and Poor’s and Prime-1 by Moody’s. These ratings denote the highest quality commercial paper securities. Maturities of commercial paper can range from overnight to up to 364 days. At December 31, 2009, there was no commercial paper outstanding. At June 30, 2009, the Company had $0.7 billion in commercial paper outstanding that matured and was repaid on July 1, 2009. For the three months ended December 31, 2009 and 2008, the Company’s average borrowings were $2.2 billion and $2.5 billion, respectively, at a weighted average interest rate of 0.2% and 0.7%, respectively. For the six months ended December 31, 2009 and 2008, the Company’s average borrowings were $2.4 billion for both periods, at a weighted average interest rate of 0.2% and 1.4%, respectively. The weighted average maturity of the Company’s commercial paper during each of the three and six months ended December 31, 2009 and 2008 was less than two days.

The Company’s U.S. and Canadian short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities. These agreements generally have terms ranging from overnight to up to five business days. At December 31, 2009 and June 30, 2009, the Company had no obligation outstanding related to reverse repurchase agreements. For the three months ended December 31, 2009 and 2008, the Company had average outstanding balances under reverse repurchase agreements of $477.8 million and $617.4 million, respectively, at a weighted average interest rate of 0.2% and 1.1%, respectively. For the six months ended December 31, 2009 and 2008, the Company had average outstanding balances under reverse repurchase agreements of $495.2 million and $578.5 million, respectively, at a weighted average interest rate of 0.2% and 1.8%, respectively.

Note 13. Debt
 

Components of long-term debt are as follows:

		December 31,			June 30,
		2009			2009
Industrial revenue bonds		$	26.5		$	26.5
Secured financing			18.1			19.0
			44.6			45.5
Less: current portion			(2.8	)		(2.8	)
		$	41.8		$	42.7

The fair value of the industrial revenue bonds and other debt, included above, approximates carrying value.

Note 14. Employee Benefit Plans

A. Stock Plans. The Company recognizes stock-based compensation expense in net earnings based on the fair value of the award on the date of grant. Stock-based compensation consists of the following:
 

·

Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company’s common stock on the dates of grant. Stock options are issued under a grade vesting schedule. Options granted prior to July 1, 2008 generally vest ratably over five years and have a term of 10 years. Options granted after July 1, 2008 generally vest ratably over four years and have a term of 10 years. Compensation expense for stock options is recognized over the requisite service period for each separately vesting portion of the stock option award.

·

Employee Stock Purchase Plan.

o

Prior to January 1, 2009, the Company offered an employee stock purchase plan that allowed eligible employees to purchase shares of common stock at a price equal to 85% of the market value for the common stock at the date the purchase price for the offering was determined. Compensation expense related to this stock purchase plan concluded on December 31, 2009 upon completion of the vesting period of the final offering under such plan.

o

Subsequent to January 1, 2009, the Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company’s common stock on the last day of the offering period. This plan has been deemed non-compensatory and therefore no compensation expense has been recorded.

·

Restricted Stock.

o

Time-Based Restricted Stock. The Company has issued time-based restricted stock to certain key employees. These shares are restricted as to transfer and in certain circumstances must be returned to the Company at the original purchase price. The Company records stock compensation expense relating to the issuance of restricted stock over the period in which the transfer restrictions exist, which is up to five years from the date of grant. The value of the Company’s time-based restricted stock, based on market prices on the date of grant, is recognized as compensation expense over the restriction period on a straight-line basis.

o

Performance-Based Restricted Stock. The performance-based restricted stock programs contain either a one-year or two-year performance period, both of which have a subsequent six-month service period.  Under these programs, the Company communicates “target awards” to employees at the beginning of a performance period and, as such, dividends are not paid in respect of the “target awards” during the performance period.  After the performance period, if the performance targets are achieved, associates are eligible to receive dividends on any shares awarded under the program.  The performance target is based on EPS growth over the performance period, with possible payouts ranging from 0% to 125% of the “target awards”.  Stock-based compensation expense is measured based upon the fair value of the award on the grant date.  Compensation expense is recognized on a straight-line basis over the vesting terms of approximately 18 months and 30 months, for the one-year and two-year plans, respectively, based upon the probable performance target that will be met.

The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company’s employee stock purchase plan and restricted stock awards. Stock-based compensation expense of $19.3 million and $34.7 million was recognized in earnings from continuing operations for the three months ended December 31, 2009 and 2008, respectively, as well as related tax benefits of $5.7 million and $9.8 million, respectively. Stock-based compensation expense of $36.7 million and $62.6 million was recognized in earnings from continuing operations for the six months ended December 31, 2009 and 2008, respectively, as well as related tax benefits of $10.8 million and $17.9 million, respectively.

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2009			2008			2009			2008
Operating expenses		$	3.7		$	7.9		$	6.5		$	14.0
Selling, general and administrative expenses			12.7			21.0			25.4			38.1
System development and programming costs			2.9			5.8			4.8			10.5
Total pretax stock-based compensation expense		$	19.3		$	34.7		$	36.7		$	62.6

As of December 31, 2009, the total remaining unrecognized compensation cost related to non-vested stock options and restricted stock awards amounted to $16.1 million and $64.8 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 1.4 years and 1.7 years, respectively.

During the six months ended December 31, 2009, the following activity occurred under our existing plans:
 

Stock Options:
		Number			Weighted
		of Options			Average Price
		(in thousands)			(in dollars)
Options outstanding at
July 1, 2009			45,320		$	41
Options granted			285		$	40
Options exercised			(3,549	)	$	37
Options canceled			(2,963	)	$	42
Options outstanding at
December 31, 2009			39,093		$	41

Performance-Based Restricted Stock:
		Number
		of Shares
		(in thousands)
Restricted shares outstanding
at July 1, 2009			2,632
Restricted shares granted			1,005
Restricted shares vested			(26	)
Restricted shares forfeited			(82	)
Restricted shares outstanding
at December 31, 2009			3,529

The fair value of each stock option issued prior to January 1, 2005 was estimated on the date of grant using a Black-Scholes option pricing model. For stock options issued on or after January 1, 2005, the fair value of each stock option was estimated on the date of grant using a binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial model are based on a combination of implied market volatilities, historical volatility of the Company’s stock price and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.
 
The fair value for stock options granted was estimated at the date of grant with the following assumptions:
 

		Six Months Ended
		December 31,
		2009			2008
Risk-free interest rate			2.3% -2.6%			2.5% - 3.1%
Dividend yield			3.2% -3.4%			2.6% - 3.3%
Weighted average volatility factor			28.3% -30.4%			25.3% - 30.4%
Weighted average expected life (in years)			5.0			5.0
Weighted average fair value (in dollars)		$	7.73		$	8.52

B. Pension Plans.

The components of net pension expense were as follows:

		Three months ended						Six months ended
		December 31,						December 31,
		2009			2008			2009			2008
Service cost – benefits earned during the period		$	11.9		$	11.5		$	23.8		$	23.1
Interest cost on projected benefits			14.8			13.7			29.6			27.7
Expected return on plan assets			(19.1	)		(17.2	)		(38.3	)		(34.6	)
Net amortization and deferral			1.1			0.3			2.3			0.6
Net pension expense		$	8.7		$	8.3		$	17.4		$	16.8

During the six months ended December 31, 2009, the Company made $107.7 million in contributions to the pension plans and expects to contribute an additional $2.7 million during the remainder of fiscal 2010.

Note 15. Income Taxes

The effective tax rate for the three months ended December 31, 2009 and 2008 was 34.2% and 36.5%, respectively.  The effective tax rate for the three months ended December 31, 2009 includes a reduction in the provision for income taxes of $12.2 million in connection with the resolution of certain tax matters.   Further, the effective tax rate is lower due to lower accrued interest as a result of the agreement reached during fiscal 2009 with the Internal Revenue Service (“IRS”) regarding all outstanding audit issues for the tax years 1998 through 2006. These decreases are partially offset by an unfavorable mix in income among state and foreign tax jurisdictions.
 
The effective tax rate for the six months ended December 31, 2009 and 2008 was 35.3% and 36.8%, respectively.  The effective tax rate for the six months ended December 31, 2009 includes a reduction in the provision for income taxes of $12.2 million in connection with the resolution of certain tax matters.  Further, the effective tax rate is lower due to lower accrued interest as a result of the agreement reached during fiscal 2009 with the IRS regarding all outstanding audit issues for the tax years 1998 through 2006. These decreases are partially offset by an unfavorable mix in income among state and foreign tax jurisdictions.

In January 2010, the Company reached an agreement with the IRS regarding all outstanding tax audit issues in dispute for the tax years 2007 and 2008. The Company does not expect a material impact to the effective tax rate as a result of this agreement.

Note 16. Commitments and Contingencies

The Company is subject to various claims and litigation in the normal course of business. The Company does not believe that the resolution of these matters will have a material impact on the consolidated financial statements.
 

In the normal course of business, the Company also enters into contracts in which it makes representations and warranties that relate to the performance of the Company’s services and products. The Company does not expect any material losses related to such representations and warranties.
 

The Company has obligations under various facilities and equipment leases and software license agreements that were disclosed in its Annual Report on Form 10-K for the year ended June 30, 2009. In December 2009, the Company extended the term of a contract, which resulted in incremental obligations of $34.2 million, $73.1 million and $74.3 million for the fiscal years ending June 30, 2013, 2014 and 2015, respectively.
 

Note 17. Foreign Currency Risk Management Programs

The Company is exposed to market risk from changes in foreign currency exchange rates that could impact our consolidated results of operations, financial position or cash flows.  The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.  The Company uses derivative financial instruments as risk management tools and not for trading purposes. 
 

The Company is exposed to foreign exchange fluctuations on U.S. Dollar denominated short-term intercompany amounts payable by a Canadian subsidiary to a U.S. subsidiary of the Company.  From July 2009 through December 2009, the amounts payable were $178.6 million U.S. Dollars. During December 2009, a portion of the amounts payable were paid by the Canadian subsidiary to the U.S. subsidiary. Subsequent to the payment, the amounts payable were $29.4 million U.S. Dollars. During July 2009, in order to manage the exposure related to the foreign exchange fluctuations between the Canadian Dollar and the U.S. Dollar, the Canadian subsidiary entered into a foreign exchange forward contract, which obligated the Canadian subsidiary to buy $178.6 million U.S. Dollars at a rate of 1.15 Canadian Dollars to each U.S. Dollar on December 1, 2009.  Upon settlement of such contract on December 1, 2009, an additional foreign exchange forward contract was entered into that, as of December 31, 2009, obligates the Canadian subsidiary to buy $29.4 million U.S. Dollars at a rate of 1.06 Canadian Dollars to each U.S. Dollar on February 26, 2010. The losses on the foreign exchange forward contracts of $3.4 million and $16.6 million for the three and six months ended December 31, 2009, respectively, have been recognized in current period earnings, which substantially offset the foreign currency mark-to-market gains on the related short-term intercompany amounts payable.
 
At December 31, 2009, the fair value of the outstanding derivative financial instrument of $0.1 million was recorded in accrued expenses and other current liabilities on the Consolidated Balance Sheet. As the fair value of the forward contract was determined using an observable market input (i.e., the current forward rate), the Company has classified the related liability as Level 2.
 

		Level 1			Level 2			Level 3			Total
Derivative financial instrument		$	-		$	0.1		$	-		$	0.1

The Company had no derivative financial instruments outstanding at June 30, 2009.

Note 18. Comprehensive Income

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2009			2008			2009			2008
Net earnings		$	315.8		$	300.5		$	599.9		$	577.3
Other comprehensive income:
Currency translation adjustments			18.3			(159.2	)		60.8			(267.8	)
Unrealized gain (loss) on available-for-sale
securities, net of tax			(47.8	)		152.0			92.8			33.9
Pension liability adjustment, net of tax			0.7			1.1			1.5			1.6
Comprehensive income		$	287.0		$	294.4		$	755.0		$	345.0

Note 19. Interim Financial Data by Segment

The Company’s strategic business units are aggregated into the following three reportable segments: Employer Services, PEO Services and Dealer Services. The primary components of “Other” are financing transactions related to the sale of computer systems, corporate allocations and certain expenses that have not been charged to the reportable segments, including stock-based compensation expense. Certain revenues and expenses are charged to the reportable segments at a standard rate for management reasons. Other costs are recorded based on management responsibility. The prior year reportable segments’ revenues and earnings from continuing operations before income taxes have been adjusted to reflect updated budgeted foreign exchange rates for the fiscal year ending June 30, 2010. In addition, there is a reconciling item for the difference between actual interest income earned on invested funds held for clients and interest credited to Employer Services and PEO Services at a standard rate of 4.5%. The reportable segments’ results also include an internal cost of capital charge related to the funding of acquisitions and other investments. All of these adjustments/charges are reconciling items to the Company’s reportable segments’ revenues and/or earnings from continuing operations before income taxes and results in the elimination of these adjustments/charges in consolidation.

Segment Results:

		Revenues
		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2009			2008			2009			2008
Employer Services		$	1,571.4		$	1,609.1		$	3,063.4		$	3,141.2
PEO Services			311.2			285.4			607.4			564.7
Dealer Services			311.0			329.0			624.5			655.8
Other			3.9			4.7			8.1			8.2
Reconciling items: