What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-08-05 compared with 2019-08-09 · 286 added, 322 removed, 177 unchanged (77% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

(Tabular dollars are presented in millions, except per share amounts)

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 ended June 30, 2020 (“fiscal 2020”), as compared to year ended June 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 ended June 30, 2019.

FORWARD-LOOKING STATEMENTS

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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 coronaviru s ( “ 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.

1 unchanged sentence

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 our U.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

We are a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions - including payroll, talent management, Human Resources management, benefits administration, and workforce management - to employers around the world.

As a leader in this industry, we deliver on our global HCM strategy and invest in highly strategic

areas and technology in order to strengthen our underlying business model and prospects for continued growth.

Highlights from the year ended June 30, 2019 (“fiscal 2019”) include:

Employer Services New Business Bookings increased 8%

Average number of Worksite Employees increase d 8% to 547,000

Revenue increase d 6%

EBIT Margin improved 410 basis points to 21.2% and Adjusted EBIT Margin improved 160 basis points to 22.3%

Diluted earnings per share (“EPS”) increase d 23% to $5.24 ;

adjusted diluted EPS increase d 20% to $5.45

Our shareholder friendly actions continued as we returned approximately $1.3 billion via dividends and approximately $940 million via share repurchases

In fiscal 2019, we launched our new brand platform which represents an evolution in our journey to enhance the employee experience through innovation and insights designed with the worker as a central theme.

At ADP, we are always designing for people and we continue to innovate by anticipating our clients' evolving needs as the world of work changes.

We are reshaping the HCM industry with leading innovations like our next gen platforms and driving growth through our strategic cloud-based HCM solutions.

We are further enabling these solutions through strategic acquisitions such as Global Cash Card, Work Market and Celergo, which we supplement with organic, differentiated investments such as the ADP Marketplace and ADP Datacloud, and through our compliance expertise.

With these investments, we are enhancing our position as a leading global HCM provider that can help businesses address the entire worker spectrum from full-time to freelancer through hire to retire.

As the HCM market continues to evolve rapidly, we remain focused on rethinking a better, more personalized world at work and helping our clients and their workers achieve their full potential.

As we continue our transformation journey, our Voluntary Early Retirement Program (“VERP”) and Workforce Optimization initiatives are yielding operating efficiencies in conjunction with our Service Alignment Initiatve, which is focused on changing how we work.

Through our transformation initiatives, we remain on track to continue to deliver balanced revenue growth, profit growth and margin expansion, and ultimately drive long-term shareholder value.

We are pleased with our progress and execution on these initiatives while also delivering improvements in our client satisfaction scores yielding an improvement in Employer Services revenue retention of 40 basis points to 90.8% .

Also, our Employer Services New Business Bookings increased 8% in fiscal 2019 , as compared to fiscal 2018 , and our PEO Services' average number of Worksite Employees increase d 8% to 547,000 in fiscal 2019 , as compared to fiscal 2018 .

We have a strong business model and operate in a growing global market.

We continue to generate a high percentage of recurring revenues, healthy and improving margins, and consistent strong cash flows.

Our financial condition and balance sheet remain solid at June 30, 2019 .

Through our investments in technology, service, and distribution, we are positioned to maintain our positive momentum into fiscal 2020.

RESULTS OF OPERATIONS

ANALYSIS OF CONSOLIDATED OPERATIONS

Prior period amounts have been restated for the impact of certain accounting standards adopted (refer to Note 1 of our Consolidated Financial Statements for additional information).

(In millions, except per share amounts)

Constant Currency Basis

Highlights from the year ended June 30, 2020 include:

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.

In March 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-based Human 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 in the 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 our February 2020 Innovation Day.

Despite a challenging end to fiscal 2020, we continued to deliver profit growth during the year ended June 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 at June 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 June 30, respectively:

Organic constant currency:

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.

Total Expenses

Costs of revenues:

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Total costs of revenues 8,445.1 8,021.6 5 %

Selling, general and administrative costs

Interest expense

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 %

Other (income)/expense, net

Earnings before income taxes

n/m - not meaningful

Operating expenses increase d as our PEO Services zero-margin benefits pass-through costs increased to $2,907.7 million fr om $2,647.5 million in fiscal 2020 and 2019, respectivel y.

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 in centive 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, a nd impact of foreign currency.

The decrease was partially offset by increased selling expenses, an increase in our allowance for doubtful acco unts 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) $ (97.6) $ (13.1)

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 r esult 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 June 30:

Earnings before income taxes increased in fiscal 2020 due to t he 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 June 30:

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 ex penses discussed abov e.

Our adjusted EBIT margin reflects changes described above in our EBIT margin excluding the net charges noted above.

Provision for Income Taxes

Effective tax rate

Diluted earnings per share

*See Note 1 of the Consolidated Financial Statements for a summary of adjustments.

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 t o Note 11, Income Taxes, within the Notes to the Consolidated Financial Statements for further discussion.

Adjusted Provision for Income Taxe s

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 June 30:

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 ear nings and the impact of fewer shares outstanding, resulting from the repurchase of approximate ly 6.2 million sha res 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 June 30:

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

June 30, % Change

2020 2019 As Reported Organic Constant 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

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

Non-GAAP measures

Employer Services

Revenues increase d 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 com pared 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 fis cal 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 increase d 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 June 30, respectively:

Employer Services' overall margin increase d 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.

Years Ended Change

2020 2019 $ %

PEO Services' revenues $ 4,511.5 $ 4,177.7 $ 333.8 8 %

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 av erage number of Worksite Employees in fiscal 2020 d riven 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 and State 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 describe d abov e and a change of $59.2 million in our estimated losses related to ADP Indemnity in fiscal 2020, as compared to fiscal 2019.

For the year ended June 30, respectively:

PEO Services' overall margin decreased for fiscal 2020 due to a change of $59.2 million in our estimated losses related to ADP Indemnity in fisc al 2020 as compared to fiscal 2019.

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 with ACE 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 in July 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.

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

Adjusted Financial Measures U.S.

GAAP Measures

Adjusted EBIT

Adjusted provision for income taxes

Provision for income taxes

Adjusted net earnings

Adjusted diluted earnings per share

Diluted earnings per share

Adjusted effective tax rate

Effective tax rate

Constant Currency Basis

GAAP P&L line items

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 are for specific items that are not fundamental to our underlying business operations.

The nature of these exclusions is for specific items that are not fundamental to our underlying business operations.

Since these adjusted financial measures and other non-GAAP metrics are not measures of performance calculated in accordance with U.S.

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GAAP measures, and they may not be comparable to similarly titled measures at other companies.

Constant Currency Basis (h)

June 30, % Change

2020 2019 As Reported

Net earnings $ 2,466.5 $ 2,292.8 8 %

Provision for income taxes 716.1 712.8

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All other interest income (a) (20.5) (32.4)

Gain on sale of businesses

Gain on sale of assets (0.2) (15.7)

Transformation initiatives (b) 77.4 138.3

Proxy contest matters (c)

COVID-19 related charges (c) 25.4 —

Legal settlement (d) 25.0 —

Adjusted EBIT $ 3,348.9 $ 3,155.7 6 %

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Provision for income taxes $ 716.1 $ 712.8 — %

Gain on sale of businesses (d)

Gain on sale of assets (e) (0.1) (3.9)

Transformation initiatives (e) 19.2 34.5

Proxy contest matters (e)

COVID-19 related charges (e) 6.3 —

Legal settlement (e) 6.2 —

Tax Cuts and Jobs Act (f) — 0.5

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Adjusted effective tax rate (g) 22.6 % 23.8 %

Gain on sale of businesses

Provision for income taxes on gain on sale of businesses (d)

Net earnings $ 2,466.5 $ 2,292.8 8 %

Gain on sale of assets (0.2) (15.7)

Provision for income taxes on gain on sale of assets (e)

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)

Proxy contest matters (c)

Income tax benefit for proxy contest matters (e)

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 %

Gain on sale of businesses (d)

Diluted EPS $ 5.70 $ 5.24 9 %

Gain on sale of assets (e) — (0.03)

Transformation initiatives (b) (e) 0.13 0.24

Proxy contest matters (c) (e)

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 %

*See Note 1 of the Consolidated Financial Statements for a summary of adjustments.

(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

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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) The charges within transformation initiatives are comprised of charges related to our VERP, Service Alignment Initiative, Workforce Optimization and other transformation initiatives.

Charges related to our VERP in fiscal 2019 include $48.2 million for non-cash pension settlement charges and special termination benefits, and $23.6 million of expenses related to the continuing health coverage, respectively.

We also recorded severance charges in accordance with ASC 712 totaling $33.6 million primarily relating to our Workforce Optimization initiative to reduce management layers and increase spans of controls and $56.8 million related to our other transformation initiatives during fiscal 2019.

These charges were partially offset by net reversals of charges and gain on sale of assets related to our Service Alignment Initiative totaling $23.9 million for fiscal 2019.

Unlike certain other severance charges in prior periods which are not included as an adjustment to get to adjusted results, these specific charges relate to actions that are part of our broad-based, company-wide transformation initiatives.

Refer to Note 5 and 12 of the Consolidated Financial Statements for a description of charges associated with Service Alignment Initiative and VERP.

(d) The taxes on the gains on the sale of the businesses were calculated based on the annualized marginal rate in effect during the quarter of the adjustment.

The tax amount was adjusted for a book vs.

tax basis difference for the year ended June 30, 2017 due to the derecognition of goodwill upon the sale of the business.

(e) The tax benefit/provision on the transformation initiatives, gain on sale of asset, and non-operational charges related to proxy contest matters was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.

(f) The net benefit for fiscal 2018 is comprised of the re-measurement of deferred tax balances resulting in a one-time benefit, primarily as a result of ASC 606, using the lower tax rates enacted under the Tax Cuts and Jobs Act (“Act”), adjustments to the one-time transition tax on the earnings and profits of our foreign subsidiaries, foreign withholding taxes, and a valuation allowance against our foreign tax credits which may not be realized under the Act.

(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.

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.

(g) The Adjusted effective tax rate is calculated as our Adjusted provision for income taxes divided by our Adjusted net earnings plus our Adjusted provision for income taxes.

(h) “Constant currency basis” provides information that isolates the actual growth of our operations.

“Constant currency basis” is determined by calculating the current year result using foreign exchange rates consistent with the prior year.

Fiscal 2019 Compared to Fiscal 2018

Total Revenues

Our revenues increased 6% in fiscal 2019 , as compared to fiscal 2018 .

Our revenue growth includes one percentage point of pressure from foreign currency partially offset by benefits from acquisitions.

Revenues in fiscal 2019 increased primarily due to new business started from Employer Services New Business Bookings and continued strong retention.

Total revenues in fiscal 2019 include interest on funds held for clients of $561.9 million , as compared to $466.5 million in fiscal 2018 .

The increase in the consolidated interest earned on funds held for clients resulted from the increase in our average interest rate earned to 2.2% in fiscal 2019 , as compared to 1.9% in fiscal 2018 , coupled with the increase in our average client funds balances of 4.6% to $25.5 billion in fiscal 2019 as compared to fiscal 2018 .

Total Expenses

Our total expenses increased 4% in fiscal 2019 , as compared to fiscal 2018 .

The increase is primarily due to an increase in PEO Services zero-margin benefits pass-through costs, costs related to our acquisitions, increased selling and marketing expenses related to our brand efforts and the impact of net charges related to our transformation initiatives.

The increase was partially offset by the impact of foreign currency, operating efficiencies as a result of our continued successful execution on our broader transformation initiatives, and costs related to proxy contest matters in fiscal 2018 .

Operating expenses increase d 4% in fiscal 2019 , as compared to fiscal 2018 .

PEO Services zero-margin benefits pass-through costs were $2,712.5 million for fiscal 2019 and $2,463.1 million for fiscal 2018 .

Additionally, operating expenses increase d due to costs related to our acquisitions partially offset by the impact of foreign currency and operating efficiencies as a result of our continued successful execution on our broader transformation initiatives.

Systems development and programming costs were flat for fiscal 2019 , as compared to fiscal 2018 , due to the impact of foreign currency translation and reduced costs as a result of our transformation initiatives offset by increased investments in product innovation, primarily in our next gen platforms.

Selling, general and administrative expenses increased 4% in fiscal 2019 , as compared to fiscal 2018 .

The increase was primarily due to increased selling and marketing expenses related to our brand efforts and increased costs related to our transformation initiatives and acquisitions.

These increases were partially offset by efficiencies as a result of our transformation initiatives, the impact of foreign currency translation in fiscal 2019 and costs related to proxy contest matters in fiscal 2018 .

Other (Income)/Expense, net

(In millions)

Years ended June 30,

Interest income on corporate funds

Realized gains on available-for-sale securities

Realized losses on available-for-sale securities

Impairment of intangible assets

Gain on sale of assets

Gain on sale of investment

Non-service components of pension expense, net

Other (income)/expense, net

During fiscal 2019 , we retrospectively adopted Accounting Standards Update (“ASU”) 2017-07 and as a result we reclassified the non-service cost components of the net periodic benefit cost from within the respective line items of our Statement of Consolidated Earnings to Other (income)/expense, net.

During fiscal 2019 , non-service components of pension expense included $48.2 million of non-cash settlement charges and special termination benefits, partially offset by $54.9 million related to other components of net periodic pension cost.

See Note 1 and Note 12 of our Consolidated Financial Statements for additional details.

Other (income)/expense, net, increase d $283.2 million in fiscal 2019 , as compared to fiscal 2018 .

The increase was primarily due to the charges within non-service components of pension expense in fiscal 2018 noted in the table above and the gain on sale of assets of $4.1 million in relation to the Service Alignment Initiative and the gain on sale of investment of $15.7 million in relation to the sale of an investment held at cost acquired in prior years and subsequently sold in fiscal 2019 .

These are partially offset by the write down of $12.1 million related to 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 .

Earnings before Income Taxes

Earnings before income taxes increased 32% in fiscal 2019 primarily due to increases in revenues partially offset by increases in expenses discussed above.

Overall margin increased from 17.1% in fiscal 2018 to 21.2% in fiscal 2019 primarily due to operating efficiencies and aided by an increase in interest earned on funds held for clients, a decrease in charges of $266.5 million related to our transformation initiatives and the impact of costs related to proxy contest matters in fiscal 2018 , partially offset by costs related to our acquisitions and incremental pressure from growth in our zero-margin benefits pass-throughs in fiscal 2019 .

The efficiencies driving margin performance are the result of our continued successful execution of our broader transformation initiatives, including VERP and improvements in our systems infrastructure spend and automation efforts.

Adjusted EBIT

In fiscal 2019 , adjusted EBIT increase d 15% due to increases in revenues offset by the increases in expenses discussed above.

Overall adjusted EBIT margin increase d due to continued execution of transformation initiatives discussed above and aided by an increase in interest earned on funds held for clients, partially offset by incremental pressure from growth in our zero-margin benefits pass-throughs and costs related to our acquisitions.

Provision for Income Taxes

The effective tax rate in fiscal 2019 and 2018 was 23.7% and 17.4% , respectively.

The increase in the effective tax rate is primarily due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the release of reserves for uncertain tax positions during fiscal 2018 and the loss of qualified production activities tax deductions as a result of the Act during fiscal 2019 .

This is partially offset by reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1% as a result of the Act.

Refer to Note 13 , 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 2019 and 2018 was 23.8% and 26.2% , respectively.

The decrease in the adjusted effective tax rate is primarily due to the reduction in the federal corporate statutory tax rate to 21% from our blended rate for fiscal 2018 of 28.1%, partially offset by the loss of qualified production activities tax deductions as a result of the Act in fiscal 2019 , the release of reserves for uncertain tax positions and the benefit of a tax accounting method change filed with the IRS in fiscal 2018 .

Net Earnings and Diluted Earnings per Share

Net earnings increased 22% in fiscal 2019 when compared to fiscal 2018 due to an increase in earnings before income taxes described above partially offset by an increase in our effective tax rate.

Diluted earnings per share increased 23% in fiscal 2019 as a result of an increase in net earnings and the impact of fewer shares outstanding, resulting from the repurchase of approximately 6.5 million shares in fiscal 2019 and 8.5 million shares in fiscal 2018 , partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted Earnings per Share

Adjusted net earnings increase d 19% in fiscal 2019 , when compared to fiscal 2018 , due to the increase in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above.

For fiscal 2019 , our adjusted diluted EPS increase d 20% and reflects the changes described above in our net earnings and shares outstanding.

Fiscal 2018 Compared to Fiscal 2017

Total Revenues

Our revenues increased 8% in fiscal 2018, as compared to fiscal 2017.

Our revenue growth includes two percentage points of combined benefit from foreign currency and acquisitions, partially offset by the impact of the disposition of our COBRA and CHSA businesses in fiscal 2017.

Revenues in fiscal 2018 increased primarily due to new business started from Employer Services New Business Bookings.

Refer to “Analysis of Reportable Segments” for additional discussion of the increases in revenue for both of our reportable segments, Employer Services and PEO Services.

Total revenues in fiscal 2018 include interest on funds held for clients of $466.5 million, as compared to $397.4 million in fiscal 2017.

The increase in the consolidated interest earned on funds held for clients resulted from the increase in our average interest rate earned to 1.9% in fiscal 2018, as compared to 1.7% in fiscal 2017, coupled with the increase in our average client funds balances of 5.7% to $24.3 billion in fiscal 2018 as compared to fiscal 2017.

Total Expenses

Our total expenses increased 8% in fiscal 2018, as compared to fiscal 2017.

The increase is primarily due to an increase in PEO Services zero-margin benefits pass-through costs, increased costs to service our client base in support of our growing revenue, and increases in selling expense.

Total expenses also increased due to costs related to acquisitions, the impact of foreign currency, and costs related to proxy contest matters in fiscal 2018.

Operating expenses increased 8% in fiscal 2018, as compared to fiscal 2017.

PEO Services zero-margin benefits pass-through costs were $2,463.1 million for fiscal 2018 and $2,173.9 million for fiscal 2017.

Additionally, operating expenses increased due to costs related to acquisitions, higher costs to service our client base in support of our growing revenue as well as the impact of foreign currency.

Systems development and programming costs increased 1% in fiscal 2018, as compared to fiscal 2017, due to increased investments in product innovation and costs to develop, support, and maintain our products, impact of foreign currency translation, partially offset by a higher proportion of capitalized costs of our strategic projects.

Selling, general and administrative expenses increased 7% in fiscal 2018, as compared to fiscal 2017.

The increase was primarily due to increases in selling expense to support our 8% new business bookings growth, charges related to our transformation initiatives, costs related to acquisitions, costs related to proxy contest matters, and the impact of foreign currency translation.

Other Expense/(Income), net

(In millions)

Years ended June 30,

Interest income on corporate funds

Realized gains on available-for-sale securities

Realized losses on available-for-sale securities

Gain on sale of businesses (see Note 4 of the Consolidated Financial Statements)

Gain on sale of assets

Non-service components of pension expense, net

Other expense/(income), net

*Restated for impact of ASU 2017-07.

During fiscal 2018, non-service components of pension expense included $319.6 million of special termination benefits related to our VERP, partially offset by $65.8 million related to other components of net periodic pension cost.

See Note 1 and Note 12 of our Consolidated Financial Statements for additional details.

Other expense/(income), net, decrease d $515.3 million in fiscal 2018, as compared to fiscal 2017.

The decrease was primarily due to the charges within non-service components of pension expense discussed above in fiscal 2018 and the gain on sale of the CHSA and COBRA businesses of $205.4 million in fiscal 2017.

Earnings before Income Taxes

Earnings before income taxes decreased 13% primary due to $319.6 million related to the special termination benefit charges and $17.5 million of other charges related to our VERP in fiscal 2018 and the gain on the sale of the CHSA and COBRA businesses in fiscal 2017 offset by the increases in revenues and increases in expenses discussed above.

Overall margin decreased from 21.2% in fiscal 2017 to 17.1% in fiscal 2018 primarily due to $319.6 million related to the special termination benefit charges and $17.5 million of other charges related to our VERP in fiscal 2018, the gain on the sale of the CHSA and COBRA businesses in fiscal 2017, costs related to acquisitions and incremental pressure from growth in our zero-margin benefits pass-through revenues in fiscal 2018.

These drivers were partially offset by operating and selling efficiencies in fiscal 2018.

Adjusted EBIT

In fiscal 2018, adjusted EBIT increase d 9% due to the increases in revenues offset by the increases in expenses discussed above.

Overall adjusted EBIT margin increased slightly due to operating and selling efficiencies offset by pressure from fiscal 2018 acquisitions and incremental pressure from growth in our zero-margin benefits pass-through revenues.

Provision for Income Taxes

The effective tax rate in fiscal 2018 and 2017 was 17.4% and 31.7% , respectively.

The decrease in the effective tax rate is due to the one-time benefit recognized on the re-measurement of deferred tax balances, primarily as a result of ASC 606, using the lower tax rates enacted under the Act, the reduction in the federal corporate statutory tax rate to 28.1% from 35% as a result of the Act and the release of reserves for uncertain tax positions, partially offset by the impact in the prior period of the sale of the CHSA and COBRA businesses and the impact of the benefit due to tax incentives associated with the domestic production activity deduction and research tax credit in fiscal 2017.

Refer to Note 13 , 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 2018 and 2017 was 26.2% and 31.1% , respectively.

The decrease in the adjusted effective tax rate is due to the reduction in the blended federal corporate statutory tax rate to 28.1% from 35% as a result of the Act and the release of reserves for uncertain tax positions in fiscal 2018, partially offset by the impact of a benefit due to tax incentives associated with the domestic production activity deduction and research tax credit in fiscal 2017.

Net Earnings and Diluted Earnings per Share

Net earnings increased 5% in fiscal 2018 due to the reduction in our effective tax rate described above, offset by $319.6 million related to the special termination benefit charges and $17.5 million of other charges related to our VERP in fiscal 2018 and the gain on the sale of the CHSA and COBRA businesses in fiscal 2017.

Diluted earnings per share increased 7% as a result of an increase in net earnings and the impact of fewer shares outstanding, resulting from the repurchase of approximately 8.5 million shares in fiscal 2018 and 13.5 million shares in fiscal 2017, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted Earnings per Share

Adjusted net earnings increase d 17% in fiscal 2018 due to the increase in adjusted EBIT combined with the reduction in our adjusted effective tax rate described above when compared to fiscal 2017.

For fiscal 2018, our adjusted diluted EPS increase d 19% and reflects the changes described above in our adjusted net earnings and shares outstanding.

ANALYSIS OF REPORTABLE SEGMENTS

In the first quarter of fiscal 2019, our chief operating decision maker (“CODM”) began reviewing segment results reported at actual interest rates and the results of the PEO segment inclusive of the results of ADP Indemnity.

Additionally, the CODM reviews results with the effects of changes to certain corporate allocations.

These changes represent a change in the measure of segment performance.

Effective July 1, 2018, we adopted ASC 606 (see Note 1 of the Consolidated Financial Statements).

The segment results in the table below reflect the impacts of the adoption of ASC 606, the inclusion of client funds interest in our segments at actual interest rates, the inclusion of ADP Indemnity in the PEO segment, and changes to certain corporate allocations.

We reflected these new segment measures beginning in fiscal 2019 and prior period segment results are restated for comparability.

(In millions)

Constant Currency Basis

Employer Services

Earnings before Income Taxes

(In millions)

Constant Currency Basis

Employer Services

Fiscal 2019 Compared to Fiscal 2018

Employer Services' revenues increase d 5% in fiscal 2019 , as compared to fiscal 2018 .

Revenues increased primarily due to new business started from New Business Bookings and continued strong retention.

Our revenue growth includes one percentage point of pressure from foreign currency offset by benefits from acquisitions.

Our revenues also increase d due to the interest earned on funds held for clients, which benefited from improvement in the average yield earned on our client funds investments and growth in average client funds balances, and an increase in the number of employees on our clients' payrolls as our pays per control increased 2.7% in fiscal 2019 , as compared to fiscal 2018 .

geographic regions.

In addition, the Employer Services client revenue retention rate for fiscal 2019 improved 40 basis points to 90.8% as compared to our rate for fiscal 2018.

This improvement was driven by higher retention across our cloud-based solutions and our focus on improving the client experience.

Earnings before Income Taxes

Employer Services’ earnings before income taxes increase d 14% in fiscal 2019 , as compared to fiscal 2018 .

The increase was due to increase d revenues discussed above and partially offset by increase s in expenses of $129.1 million , which were primarily due to increased selling and marketing expenses, costs related to acquisitions offset by operating efficiencies and impact from foreign currency.

Employer Services' overall margin increase d from 27.5% to 29.7% for fiscal 2019 , as compared to fiscal 2018 .

This increase is primarily due to operating efficiencies and aided by an increase in interest earned on funds held for clients, partially offset by increased costs related to our acquisitions.

Fiscal 2018 Compared to Fiscal 2017

Employer Services' revenues increase d 6% in fiscal 2018 , as compared to fiscal 2017 .

Revenues increased primarily due to new business started from new business bookings.

Our revenues also benefited from the impact of an increase in the number of employees on our clients’ payrolls as our pays per control increased 2.7% in fiscal 2018 as compared to fiscal 2017.

Employer Services client revenue retention rate for fiscal 2018 improved 50 basis points to 90.4% as compared to our rate for fiscal 2017.

This improvement was driven by higher retention across our cloud-based solutions, our focus on improving the client experience, and the loss of a large client within our former CHSA business in fiscal 2017.

Earnings before Income Taxes

Employer Services’ earnings before income taxes increase d 8% in fiscal 2018 , as compared to fiscal 2017 .

The increase was due to increase d revenues discussed above, which was partially offset by an increase in expenses of $339.3 million , primarily due to investments in operational resources to support our revenue growth coupled with increased selling expenses in fiscal 2018.

Employer Services' overall margin increased from 26.9% to 27.5% for fiscal 2018, as compared to fiscal 2017.

This 60 basis point increase was driven by operating efficiencies in fiscal 2018 partially offset by the impact of costs related to acquisitions.

Fiscal 2019 Compared to Fiscal 2018

PEO Services' revenues increased 9% in fiscal 2019 , as compared to fiscal 2018 .

PEO Services' revenues, excluding zero-margin benefits pass-through costs, increased from $1,419.2 million to $1,530.2 million for fiscal 2019 .

The increase was due to an 8% increase in the average number of Worksite Employees in fiscal 2019 driven by an increase in the number of new PEO Services clients and growth in our existing clients.

PEO Services' revenues includes zero-margin benefits pass-through costs associated with benefits coverage, which increased to $2,712.5 million in fiscal 2019 from $2,463.1 million in fiscal 2018 .

Earnings before Income Taxes

PEO Services’ earnings before income taxes increased 14% in fiscal 2019 , as compared to fiscal 2018 .

The increase was due to the increase d revenues discussed above offset by an increase in expenses of $284.9 million .

This increase in expenses was primarily related to an increase in zero-margin benefits pass-through costs of $249.4 million described above.

PEO Services' overall margin increased from 14.0% to 14.6% for fiscal 2019 , as compared to fiscal 2018 , due to operating efficiencies partially offset by increases in selling expenses and changes in our estimated incurred losses related to ADP Indemnity in fiscal 2019 as compared to fiscal 2018 .

ADP Indemnity provides workers’ compensation and employer’s liability deductible reimbursement insurance protection for PEO Services’ worksite employees up to $1 million per occurrence.

The Company has obtained approximately $242 million of irrevocable standby letters of credit in favor of licensed insurance companies of AIG to secure TotalSource workers’ compensation obligations if ADP were to fail to reimburse AIG for workers’ compensation payments.

The Company had no drawdowns during June 30, 2019 and 2018 under the letters of credit.

We utilize historical loss experience and actuarial judgment to determine the estimated claim liability, and changes in estimated ultimate incurred losses are included in the PEO segment.

ADP Indemnity recorded a pre-tax benefit of approximately $39 million in fiscal 2019 , $40 million in fiscal 2018 and $20 million in fiscal 2017, which is primarily a result of changes in our estimated incurred losses.

For the fiscal years 2013 to 2019 , ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE 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 2019 , ADP Indemnity paid a premium of $218.0 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2019 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 $215.0 million in July 2019 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for fiscal 2020 policy year on terms substantially similar to the fiscal 2019 reinsurance policy.

Fiscal 2018 Compared to Fiscal 2017

PEO Services' revenues increase d 12% in fiscal 2018 , as compared to fiscal 2017 .

PEO Services' revenues excluding zero-margin benefits pass-through costs increased from $1,294.5 million to $1,419.2 million for fiscal 2018 .

The increase in revenues was due to a 9% increase in the average number of Worksite Employees, driven by an increase in the number of new PEO Services clients.

PEO Services' revenues includes zero-margin benefits pass-through costs associated with benefits coverage, which increased to $2,463.1 million in fiscal 2018 from $2,173.9 million in fiscal 2017 .

Earnings before Income Taxes

PEO Services’ earnings before income taxes increase d 18% in fiscal 2018 , as compared to fiscal 2017 .

The increase was due to the increase d revenues discussed above, which was partially offset by an increase in expenses of $332.7 million .

This increase in expenses was primarily related to an increase in zero-margin benefits pass-through costs of $289.2 million.

PEO Services' overall margin increased from 13.4% to 14.0% for fiscal 2018 , as compared to fiscal 2017 , due to reductions in selling expenses and changes in our estimated incurred losses related to ADP Indemnity in fiscal 2018 as compared to fiscal 2017, partially offset by pressure from growth in our zero-margin benefits pass-through revenues.

For impact of ADP Indemnity to PEO services, refer to discussion above.

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, non-recurring gains and losses, the elimination of intercompany transactions, and other interest expense.

(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.

Consolidated revenue growth as reported 3 %

Impact of acquisitions

Impact of foreign currency

Consolidated revenue growth, organic constant currency 4 %

Employer Services revenue growth as reported 1 %

Impact of acquisitions

Impact of foreign currency

Employer Services revenue growth, organic constant currency 2 %

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

For corporate liquidity, we expect existing cash, cash equivalents, short-term marketable securities, long-term marketable securities, cash flow from operations together with our $10.3 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.

As of June 30, 2020, cash and cash equivalent s were $1.9 billion, which were primarily invested in time deposits and money market funds.

For corporate liquidity, we expect existing cash, cash equivalents, long-term marketable securities, cash flow from operations together with our $9.7 billion of co mmitted 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 at June 30, 2020 and have sufficient liquidity as note above;

how ever, 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 our U.S.

short-term commercial paper program and our U.S., Canadian and United 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 of our client funds investment strategy.

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.

As of June 30, 2019 , cash and cash equivalents were $1.9 billion , which were primarily invested in time deposits and money market funds.

Operating, Investing and Financing Cash Flows

Operating, Investing and Financing Cash Flow s

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:

(In millions)

Years ended June 30,

2020 2019 $ Change

Cash provided by (used in):

4 unchanged sentences

Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 257.4 $ 254.1 $ 3.3

Fiscal 2019 Compared to Fiscal 2018

Net cash flows provided by operating activities in fiscal 2019 and fiscal 2018 include cash payments for reinsurance agreements of $218.0 million and $235.0 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 offset by a net decrease in the components of working capital as compared to fiscal 2018 .

Net cash flows from investing activities changed due to lower payments made related to acquisitions, the timing of proceeds offset by purchases of corporate and client funds marketable securities of $91.8 million , and reduced capital expenditures, partially offset by the payments made related to acquisitions of intangible assets in fiscal 2019 .

Net cash flows from financing activities changed primarily due to a net increase in the cash flow from client funds obligations of $1,355.6 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 in fiscal 2019 , partially offset by an increase in net proceeds from reverse repurchase agreements and less cash paid for share repurchases.

We purchased approximately 6.5 million shares of our common stock at an average price per share of $143.02 during fiscal 2019 , as compared to purchases of 8.5 million shares at an average price per share of $116.07 during fiscal 2018 .

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 f or 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 com pared 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 i n 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 pay ees, 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 fis cal 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.

considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions.

Fiscal 2018 Compared to Fiscal 2017

Net cash flows provided by operating activities in fiscal 2018 increased primarily due to growth in our underlying business (net income adjusted for non-cash adjustments such as the VERP in fiscal 2018 and the gain on the sale of COBRA and CHSA in fiscal 2017).

Net cash flows from investing activities changed due to the timing of proceeds offset by purchases of corporate and client funds marketable securities of $632.6 million, payments made related to acquisitions in fiscal 2018 and proceeds from the sale of the CHSA and COBRA businesses of $234.0 million in fiscal 2017.

Net cash flows from financing activities changed due to net increase in the cash flow from client funds obligations of $6,461.0 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees and less cash paid for share repurchases.

We purchased approximately 8.5 million shares of our common stock at an average price per share of $116.07 during fiscal 2018 as compared to purchases of 13.5 million shares at an average price per share of $94.42 during fiscal 2017 .

The increased cash flow from client fund obligations and reduced share repurchases were partially offset by cash returned to shareholders via dividends, which increased by $68.5 million from fiscal 2017.

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.

We have $2.0 billion of senior unsecured notes with maturity dates in 2020 and 2025.

1 unchanged sentence

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 11 of our Consolidated Financial Statements for a description of our long-term financing.

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 2019, the Company increased its U.S.

See Note 9 of our Consolidated Financial Statements for a description of our notes.

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.

Our c ommercial 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.

In fiscal 2019 and 2018 , our average daily borrowings were $2.8 billion at a weighted average interest rate of 2.2% and 1.4% , respectively.

The weighted average maturity of our commercial paper during fiscal 2019 and 2018 was approximately two days .

At June 30, 2019 and 2018 , we had no outstanding obligations under our short-term commercial paper program.

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

Our U.S., Canadian, and United 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.

1 unchanged sentence

We have successfully borrowed through the use of reverse repurchase agreements on an as-needed basis to meet short-term funding requirements related to client funds obligations.

At June 30, 2019 , the Company had $262.0 million of outstanding obligations related to the reverse repurchase agreements.

All outstanding reverse repurchase obligations matured and were fully paid in early July 2019.

At June 30, 2018 , there were no outstanding obligations related to the reverse repurchase agreements.

For fiscal 2019 and 2018 , we had average outstanding balances under reverse repurchase agreements of $316.7 million and $374.4 million , respectively, at weighted average interest rates of 1.9% and 1.3% , respectively.

See the Consolidated Balance Sheets of our Consolidated Financial Statements for client fund investments used as collateral for reverse repurchase agreements.

At June 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.

1 unchanged sentence

In addition, we have a five-year $3.75 billion credit facility and a five-year $2.75 billion credit facility maturing in June 2023 and June 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 through June 30, 2019 under the credit facilities.

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 ha d no borrowings thr ough June 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.

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Our investment portfolio does not contain any asset-backed securities with underlying collateral of sub-prime mortgages, alternative-A mortgages, sub-prime auto loans or sub-prime home equity loans, collateralized debt obligations, collateralized loan obligations, credit default swaps, derivatives, auction rate securities, structured investment vehicles or non-investment grade fixed-income securities.

We own AAA rated senior tranches of fixed rate auto loan, credit card, equipment lease, and rate reduction receivables, secured predominantly by prime collateral.

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.

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Capital expenditures for fiscal 2020 were $168.3 million , as compared to $162.7 million for fiscal 2019.

We expect capital expenditures in fiscal 2020 to be about $175 million.

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 June 30, 2020:

(In millions)

Payments due by period

Contractual Obligations

(In millions) Payments due by period

Contractual Obligations Less than

years More than

5 years Unknown Total

Debt Obligations (1) $ 1,046.8 $ 69.4 $ 69.6 $ 1,019.8 $ — $ 2,205.6

Cash Flow Hedges (2) $ 40.3 $ — $ — $ — $ — $ 40.3

Operating Lease Obligations (3) $ 105.5 $ 168.8 $ 100.5 $ 96.8 $ — $ 471.6

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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 due September 15, 2020.

These amounts represent the aggregate fair value as of June 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.

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As of June 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.

$29,434.2 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 of June 30, 2019 .

Separately, ADP Indemnity paid a premium of $215.0 million in July 2019 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2020 policy year.

We had $26,708.1 million of cash and cash e quivalents 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 of June 30, 2020.

Separately, ADP Indemnity paid a p remium of $240 million in Ju ly 2020 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2021 policy year.

At June 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 since July 1, 2003.

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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 performance of our services and products.

In the normal course of business, we also enter into contracts in which we make representations and warranties that relate to the

performance of our services and products.

We do not expect any material losses related to such representations and warranties.

Quantitative and Qualitative Disclosures about Market Risk

Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, short-term and long-term marketable securities) and client funds assets (funds that have been collected from clients but not yet remitted to the applicable tax authorities or client employees).

Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, and long-term marketable securities) and client funds assets (funds that have been collected from clients but have not yet remitted to the applicable tax authorities or client employees).

Our corporate investments are invested in cash and cash equivalents and highly liquid, investment-grade marketable securities.

These assets are available for repurchases of common stock for treasury and/or acquisitions, as well as other corporate operating purposes.

All of our short-term and long-term fixed-income securities are classified as available-for-sale securities.

These assets are available for our regular quarterly dividends, share repurchases, capital expenditures and/or acquisitions, as well as other corporate operating purposes.

All of our long-term fixed-income securities are classified as available-for-sale securities.

Our client funds assets are invested with safety of principal, liquidity, and diversification as the primary objectives.

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As part of our client funds investment strategy, we use the daily collection of funds from our clients to satisfy other unrelated client funds obligations, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.

In circumstances where we experience a reduction in employment levels due to a slowdown in the economy, we may make tactical decisions to sell certain securities in order to reduce the size of the funds held for clients to correspond to client fund obligations.

We minimize the risk of not having funds collected from a client available at the time such client’s obligation becomes due by impounding, in virtually all instances, the client’s funds in advance of the timing of payment of such client’s obligation.

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However, our investments are made with the safety of principal, liquidity, and diversification as the primary goals to minimize the risk of not having sufficient funds to satisfy all of our client funds obligations.

We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our $10.3 billion commercial paper program (rated A-1+ by Standard and Poor’s and P-1 by Moody’s, the highest possible short-term credit ratings), our ability to engage in reverse repurchase transactions and available borrowings under our $10.3 billion committed credit facilities.

The reduced availability of financing during periods of economic turmoil, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business.

We also believe we have significantly reduced the risk of not having sufficient funds to satisfy our client funds obligations by consistently maintaining access to other sources of liquidity, including our corporate cash balances, available borrowings under our $9.7 billion commercial paper program (rated A-1+ by Standard and Poor’s and P-1 by Moody’s, the highest possible short-term credit ratings), and our ability to engage in reverse repurchase agreement transactions and available borrowings under our $9.7 billion committed credit facilities.

The reduced availability of financing during periods of economic turmoil, including the COVID-19 pandemic, even to borrowers with the highest credit ratings, may limit our ability to access short-term debt markets to meet the liquidity needs of our business.

In addition to liquidity risk, our investments are subject to interest rate risk and credit risk, as discussed below.

We have established credit quality, maturity, and exposure limits for our investments.

The minimum allowed credit rating for corporate, Canadian government agency and Canadian provincial bonds is BBB, for asset-backed securities is AAA, and for municipal bonds is A.

The minimum allowed credit rating at time of purchase for corporate, Canadian government agency and Canadian provincial bonds is BBB, for asset-backed securities is AAA, and for municipal bonds is A.

The maximum maturity at time of purchase for BBB-rated securities is 5 years, for single A rated securities is 7 years, and for AA-rated and AAA-rated securities is 10 years.

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Details regarding our overall investment portfolio are as follows:

(In millions)

Years ended June 30, 2020 2019

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Funds held for clients 25,990.3 25,458.5

Total $ 30,550.6 $ 30,275.8

Average interest rates earned exclusive of realized

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Funds held for clients 2.1 % 2.2 %

Total 2.1 % 2.2 %

Realized gains on available-for-sale securities $ (50.5) $ (1.8)

Realized losses on available-for-sale securities 37.6 2.7

Net realized losses/(gains) on available-for-sale securities

Net realized (gains)/losses on available-for-sale securities $ (12.9) $ 0.9

As of June 30:

Net unrealized pre-tax gains/(losses) on available-for-sale securities

Net unrealized pre-tax gains on available-for-sale securities $ 876.8 $ 287.5

Total available-for-sale securities at fair value $ 21,576.6 $ 24,859.1

During the three months ended June 30, 2020, the Company made a decision to sell certain available-for-sale securities in the funds held for clients as the Company anticipated client fund obligations would decline due to reduction in employment levels from a slowdown in the economy as a result of the COVID-19 pandemic.

To maintain the size of the funds held for clients in line with client fund obligations, the Company reduced its holdings of available-for-sale securities in the funds held for clients and sold approximately $1.6 billion of its available-for-sale securities.

We are exposed to interest rate risk in relation to securities that mature, as the proceeds from maturing securities are reinvested.

Factors that influence the earnings impact of interest rate changes include, among others, the amount of invested funds and the overall portfolio mix between short-term and long-term investments.

This mix varies during the fiscal year and is impacted by daily interest rate changes.

The annualized interest rate earned on our entire portfolio increased from 1.9% for fiscal 2018 to 2.2% for fiscal 2019 .

This mix varies during the fiscal year and is impacted by daily interest rat e changes.

The annualized interest rate earned on our entire portfolio decreased from 2.2% for fiscal 2019 to 2.1% for fiscal 2020.

A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-term interest rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $17 million impact to earnings before income taxes over the ensuing twelve-month period ending June 30, 2021.

A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated average short-term investment balances and any related short-term borrowings would result in approximately a $5 million impact to earnings before income taxes over the ensuing twelve-month period ending June 30, 2020 .

A hypothetical change in only short-term interest rates of 25 basis points applied to the estimated average short-term investment balances and any related short-term borrowings would result in approximately an $8 million impact to earnings before income taxes over the ensuing twelve-month period ending June 30, 2021.

We are exposed to credit risk in connection with our available-for-sale securities through the possible inability of the borrowers to meet the terms of the securities.

We limit credit risk by investing in investment-grade securities, primarily AAA and AA- rated securities, as rated by Moody’s, Standard & Poor’s, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial-mortgage-backed securities.

Approximately 79% of our available-for-sale securities held a AAA or AA rating at June 30, 2019 .

We limit credit risk by investing in investment-grade securities, primarily AAA-rated and AA- rated securities, as rated by Moody’s, Standard & Poor’s, DBRS for Canadian dollar denominated securities, and Fitch for asset-backed and commercial-mortgage-backed securities.

Approxi mately 79% of our a vailable-for-sale securities held a AAA-rating or AA-rating at June 30, 2020.

In addition, we limit amounts that can be invested in any security other than U.S.

government and government agency, Canadian government and United Kingdom Gilt securities.

government and government agency, Canadian government, and United Kingdom government securities.

We operate and transact business in various foreign jurisdictions and are therefore exposed to market risk from changes in foreign currency exchange rates that could impact our consolidated results of operations, financial position, or cash flows.

We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.

We manage our exposure to these market risks through our regular operating and financing activities and, when deemed

appropriate, through the use of derivative financial instruments.

We may use derivative financial instruments as risk management tools and not for trading purposes.

We had no derivative financial instruments outstanding at June 30, 2019 or 2018 .

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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Actual amounts and results could differ from these estimates made by management.

In addition, as the duration and severity of COVID-19 pandemic are uncertain, certain of our estimates could require further judgment or modification and therefore carry a higher degree of variability and volatility.

As events continue to evolve, our estimates may change materially in future periods.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are Revenue Recognition (including Deferred Costs), Goodwill and Income Taxes.

Refer to Note 1, Summary of Significant Accounting Policies, of Notes to the Consolidated Financial Statements for discussion of our policies.

Refer to Note 1, Summary of Significant Accounting Policies, of Notes to the Consolidated Financial Statements for discussion of our policies for Revenue Recognition (including Deferred Costs), Goodwill and Income Taxes.

Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired.

Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired.

The Company’s annual goodwill impairment assessment as of June 30, 2020 was performed for all reporting units using a quantitative approach by comparing the fair value of each reporting unit to its carrying value.

We estimated the fair value of each reporting unit using, as appropriate, the income approach, which is derived using the present value of future cash flows discounted at a risk-adjusted weighted-average cost of capital, and the market approach, which is based upon using market multiples of companies in similar lines of business.

Significant assumptions used in determining the fair value of our reporting units include projected revenue growth rates, profitability projections, working capital assumptions, the weighted average cost of capital, the determination of appropriate market comparison companies, and terminal growth rates.

Several of these assumptions including projected revenue growth rates and profitability projections are dependent on our ability to upgrade, enhance, and expand our technology and services to meet client needs and preferences.

As such, the determination of fair value requires management to make significant estimates and assumptions related to forecasts of future revenue and operating margins.

Based upon the quantitative assessment, the Company has concluded that goodwill is not impaired.

As the assumptions used in the income approach and market approach can have a material impact on the fair value determinations, we performed a sensitivity analysis and determined that a one percentage point increase in the weighted-average cost of capital would not result in an impairment of goodwill for all reporting units and their fair values substantially exceeded their carrying values.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis