What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-05-01 · 152 added, 217 removed, 219 unchanged (63% of the section changed)

24 unchanged sentences

These risks and uncertainties, along with the risk factors discussed under “Item 1A.

- Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (“fiscal 2019”) and within this Form 10-Q, and in other written or oral statements made from time to time by ADP, should be considered in evaluating any forward-looking statements contained herein.

- Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (“fiscal 2020”), 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

4 unchanged sentences

EXECUTIVE OVERVIEW

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic.

As the situation has developed over the past few months, our priority has been and continues to be the safety of our associates as well as the needs of our clients.

As a result, we implemented our Business Continuity Plan and took steps to shift over 98% of our workforce to work from home or off-site locations to ensure uninterrupted service to our clients across our solutions.

In addition, on March 22, 2020, we announced for our employees, excluding corporate officers, a one-time global associate assistance payment of $1,000 (or equivalent, based on the average wage parity in each country) in response to COVID-19, totaling $50.4 million, which was not contemplated in our outlook issued on January 29, 2020.

This one-time global associate assistance payment was made pursuant to the Stafford Disaster Relief and Emergency Assistance Act, and is tax-free to associates in the United States and tax-deductible to ADP.

We are also deeply embedded in our local communities and continue to support COVID-19 relief efforts through financial donations and donations of medical supplies for hospital workers globally.

As a leading global provider of cloud-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.

Highlights from the three months ended September 30, 2020 include:

We are a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions to employers around the world.

The global COVID-19 pandemic has had a significant impact on the global business environment and on our clients, but our priority has been and continues to be the safety of our associates and the needs of our clients, and we have continued to provide HCM services, including process payroll and tax obligations, to our clients during this time.

ADP's efforts have also been focused on providing information and tools to help clients understand and navigate the governmental relief that has been adopted globally.

For example, the federal government 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 non-stop to provide support for all employers on the relief available under both laws.

This includes an Employer Preparedness Toolkit that helps explain the federal and state government relief, as well as a website dedicated to providing critical information about the Small Business Administration Paycheck Protection Program ("PPP").

Additionally, ADP has prepared reports and added

custom paycodes globally to help clients comply with regulatory changes and stimulus plans.

Further, ADP call volumes increased significantly beginning in March with clients seeking assistance on a variety of matters.

As the global economy continues to evolve for our clients, whether due to legislative changes or other factors, ADP is committed to supporting our clients to help them navigate these challenges.

The significant impact the COVID-19 pandemic is having on our clients and the broader economy is in turn having an effect on our reported metrics, and in a much more abrupt fashion as compared to previous macroeconomic slowdowns.

Employer Services New Business Bookings is down 9% and 1% for the three and nine months ended March 31, 2020, respectively, as we saw bookings decline significantly and rapidly in mid-March due to the global social distancing guidelines coupled with the delayed decision making of our clients and prospects.

The PEO average number of Worksite Employees increased 7% for the three and nine months ended March 31, 2020, respectively;

however, we are expecting slower growth in the fourth quarter due to layoffs and furloughs at our clients and an anticipated increase in out-of-business losses.

Our pays per control metric, which represents growth of the employee base for a large portion of our client base, showed a decline in March resulting in deceleration of growth to 1.9% and 2.2% for the three and nine months ended March 31, 2020, respectively.

We expect further deterioration in our pays per control in the fourth quarter.

In addition, though we had continued strong retention as of March 31, 2020, we are expecting deterioration in retention in the fourth quarter due to an increase in out-of-business losses.

These trends are anticipated to have an adverse impact on our future financial results.

See Risk Factors identified in Part II, Item 1A "Risk Factors" in this Form 10-Q, for further discussion of the possible impact of the COVID-19 pandemic on our business.

Highlights from the nine months ended March 31, 2020 include:

Employer Services New Business Bookings PEO Average Number of Worksite Employees

â 1% á 7% to 579,000

Revenues Revenues

á 5% to $11.2 billion á 6% organic constant currency

EBIT Margin Adjusted EBIT Margin

á 130 basis points to 23.6% á 70 basis points to 24.0%

Diluted earnings per share ("EPS") Adjusted diluted EPS

á 14% to $4.74 á 11% to $4.77

Our shareholder friendly actions continued as we returned approximately:

$1,080 million $1,010 million

via dividends via share repurchases

While the challenges presented by COVID-19 may affect the timing of our execution of parts of our strategy, we remain on a transformation journey, and our initiatives are yielding efficiencies and are focu sed on changing how we work.

We continued to deliver balanced revenue and profit growth during the nine months ended March 31, 2020.

We will continue to monitor macro trends based on external and internal available data and are using these indicators to drive real-time de cisions as we remain committed to our long-term strategy.

We have a strong business model, a highly cash generative business with low capital intensity, and sell a suite of products that provide critical support to our clients’ HR and management functions.

We generate sufficient free cash flow to satisfy our modest debt obligations and our cash dividend which enables us to absorb the impact of downturns and keep steadfast in our reinvestments, our longer term strategy, and our commitments to shareholder friendly actions.

We are committed to building upon our past successes by investing in our business through enhancements in research and development and by driving

meaningful transformation in the way we operate.

Our financial condition remains solid at March 31, 2020 and we remain well positioned to support our associates and our clients .

In addition, we released a Return to Workplace solution that assists our clients in bringing their employees back to work safely through a comprehensive set of tools designed to streamline the entire process.

Despite on-going headwinds related to COVID-19, we have seen some improvements in our reported metrics.

Our pays per control metric, which represents growth of the employee base for a large portion of our client base, showed a decline of 9% in the three months ended September 30, 2020 compared to a decline of 11% in the three months ended June 30, 2020.

Employer Services New Business Bookings grew 2% for the three months ended September 30, 2020, as economic conditions began to stabilize and we saw our clients and prospects show a greater willingness to engage and invest in new HCM solutions.

The PEO average number of Worksite Employees decreased 3% for the three months ended September 30, 2020.

In addition, we continue to move forward with our digital and procurement transformation initiatives and delivered profit growth and margin expansion for the three months ended September 30, 2020.

We continue to drive innovation by anticipating our clients' evolving needs as the world of work changes as we are always designing for people.

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

We further enable these solutions by supplementing them with organic, differentiated investments such as the ADP Marketplace and ADP Datacloud, and through our compliance expertise.

The recognition we have received in the market for our next gen payroll platform and in winning this year's HR Executive 'Top HR Product' award reflect our commitment to innovation and strong execution by our associates.

We have a strong business model, a highly cash generative business with low capital intensity, and offer a suite of products that provide critical HCM support to our clients.

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 September 30, 2020 and we remain well positioned to support our associates and our clients.

RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

For the three and nine months ended March 31, respectively:

For the three months ended September 30:

Organic constant currency:

Revenues for the three and nine months ended March 31, 2020 increased due to new business started from New Business Bookings and continued strong retention, partially offset by business losses.

For the nine months ended March 31, 2020, our revenue growth includes abo ut one percentage point of unfavorability from foreign currency partially offset by benefits from acquisitions.

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

Total revenues for the three months ended March 31, 2020 include consolidated interest on funds held for clients of $158.9 million, as co mpared to $167.4 million for the three months ended March 31, 2019.

The decrease in the consolidated interest earned on funds held for clients resulted from a decrease in the average interest rate earned to 2.0% for the three months ended March 31, 2020, as compared to 2.2% for the three months ended March 31, 2019.

The decrease is partially offset by an increase in our average client funds balance of 4.3% to $31.3 billion for th e three months ended March 31, 2020, as compared to the three months ended March 31, 2019.

Total revenues for the nine months ended March 31, 2020 include consolidated interest on funds held for clients of $430.4 million, as compared to $415.0 million for the nine months ended March 31, 2019.

The increase in the consolidated interest earned on funds held for clients resulted from an increase in our average client funds balan ce of 5.7% to $26.7 billion fo r the nine months ended March 31, 2020, as compared to the nine months ended March 31, 2019.

Revenues for the three months ended September 30, 2020 decreased due to an impact from lower New Business Bookings during the fourth quarter of fiscal 2020, a decrease in our pays per control and a decrease in our interest earned on funds held for clients discussed below.

These decreases were partially offset by strong retention .

Refer to “Analysis of Reportable Segments” for additional discussion of the changes in revenue for both of our reportable segments, Employer Services and Professional Employer Organization (“PEO”) Services, respectively.

Total revenues for the three months ended September 30, 2020 include interest on funds held for clients of $106.5 million, as co mpared to $133.9 million for the three months ended September 30, 2019.

The decrease in the consolidated interest earned on funds held for clients resulted from th e decrease in our average interest rate earned to 1.9% for the three months ended September 30, 2020, as compared to 2.3% for the three months ended September 30, 2019, coupled wi th a decrease in our average client funds balance of 7.2% to $22.0 billion for th e three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

Total Expenses

Three Months Ended Nine Months Ended

March 31, March 31,

Change 2020 2019 %

Three Months Ended

September 30,

Costs of revenues:

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Selling, general and administrative expenses 681.0 726.5 (6) %

Interest expense 20.0 21.7 n/m 91.5 96.2 n/m

Interest expense 15.1 39.9 (62) %

Total expenses $ 2,730.4 $ 2,811.2 (3) %

n/m - not meaningful

For the three months ended March 31, 2020, our total expenses increased due to the increase in PEO Services zero-margin benefits pass-through costs, a one-time global associate assistance payment in response to COVID-19 of $50.4 million ("associate assistance payment"), an increase in our allowance for doubtful accounts of $26.0 million as a result of an increase in estimated credit losses related to the impact of COVID-19 on our clients ("increase in our allowance for doubtful accounts"), an increase in selling and marketing expenses, and an increase in amortization expense.

The increase was partially offset by reduced incentive compensation costs, a decrease in net charges related to our transformation initiatives, operating efficiencies as a result of our continued successful execution on transformation initiatives, and the impact of foreign currency in t he three months ended March 31, 2020.

For the nine months ended March 31, 2020, our total expenses increased due to the increase in PEO Services zero-margin benefits pass-through costs, selling and marketing expenses, an associate assistance payment, an increase in our allowance for doubtful accounts, and an increase in amortization expense .

The increase was partially of fset by reduced incentive compensation costs, a decrease in net charges related to our transformation initiatives, operating efficiencies as a result of our continued successful execution on transformation initiatives, and the impact of foreign currency in the nine months ended March 31, 2020.

Operating expe nses increased as our PEO Services zero-margin benefits pass-through costs increased to $747.9 million and $2,169.4 million fro m $665.3 million and $1,965.5 million for the three and nine months ended March 31, 2020 and 2019, respectively.

Additionally, operating expenses increased due to an associate assistance payment.

The increase was partially offset by reduced incentive compensation costs and impact of foreign currency in the three and nine months ended March 31, 2020.

Systems development and programming costs increased for the three and nine months ended March 31, 2020 due to increased investments and costs to develop, support, and maintain our products, partially offset by capitalization of costs related to our strategic projects, including our next gen platforms.

Depreciation and amortization expense increased related to the amortization of our internally developed software and acquisitions of intangibles.

Selling, general and administrative expenses increased for the three months ended March 31, 2020 due to an increase in our allowance for doubtful accounts, increased selling expenses as a result of in vestments in our sales force and an associate assistance payment.

This increase was partially offset by reduced incentive compensation costs.

Selling, general and administrative expenses increased for the nine months ended March 31, 2020 due to increased selling and marketing expenses as a result of investments in our sales force and our brand, an increase in our allowance for doubtful accounts and an associate assistance payment .

The increase was partially offset by reduced incentive compensation costs, broad-based efficiencies as a result of our transformation initiatives and a decrease in net charges related to our transformation initiatives in the nine months ended March 31, 2020.

Other Income, net

Three Months Ended Nine Months Ended

March 31, March 31,

2020 2019 $ Change 2020 2019 $ Change

Operating expe nses decreased due to reduced costs from certain cost and headcount actions as a result of our broad-based transformation initiatives, including digital and procurement transformation initiatives, and excess capacity headcount actions.

Additionally, operating expenses decreased due to reduced travel and entertainment expenses, decreased pension costs as a result of eliminated U.S.

pension service costs with the July 1, 2020 cessation of U.S.

participants accruing any future service benefits, and a favorable c hange in our estimated losses related to ADP Indemnity in the three months ended September 30, 2020 .

These decreases were partially offset by an increase in our PEO Services zero-margin benefits pass-through costs to $741.0 million fro m $699.1 million for the three months ended September 30, 2020 and 2019, respectively.

Systems development and programming costs were flat for the three months ended September 30, 2020 due to increased investments and costs to develop, support, and maintain our products, offset by capitalization of costs related to our strategic projects, including our next gen platforms.

Depreciation and amortization expense increased due to the amortization of our acquisitions of intangibles and internally developed software.

Selling, general and administrative expenses decreased for the three months ended September 30, 2020 due to decreased selling and marketing expenses and reduced facilities costs and travel and entertainment expenses.

Additionally, selling, general and administrative expenses decreased due to reduced costs from certain cost and headcount actions as a result of our broad-based transformation initiatives, including procurement transformation initiatives, and excess capacity headcount actions.

Interest expense decreased for the three months ended September 30, 2020 due to a decrease in average interest rates for commercial paper borrowings to 0.1% for the three months ended September 30, 2020, as compared to 2.3% for the three months ended September 30, 2019 coupled with a decrease in average daily borrowings under our commercial paper program to $2.4 billion for the three months ended September 30, 2020, as compared to $4.0 billion for the three months ended September 30, 2019 .

Other (Income)/Expense, net

Three Months Ended

September 30,

2020 2019 $ Change

Interest income on corporate funds $ (13.8) $ (32.3) $ (18.5)

Realized gains on available-for-sale securities (2.9) (0.6) 2.3 (13.0) (1.2) 11.8

Realized losses on available-for-sale securities 0.4 0.5 0.1 1.1 2.6 1.5

Impairment of intangible assets — — — — 12.1 12.1

Realized (gains) / losses on available-for-sale securities, net (0.3) (2.3) (2.0)

Impairment of assets 2.8 — (2.8)

Gain on sale of assets (0.2) (1.9) (1.7)

Gain on sale of investment — — — (0.2) — 0.2

Non-service components of pension expense, net (30.0) (5.9) 24.1 (61.1) (5.3) 55.8

Other income, net $ (44.6) $ (21.0) $ 23.6 $ (145.2) $ (67.5) $ 77.7

Other income, n et, increased $23.6 million and $77.7 million for the three and nine months ended March 31, 2020, as compared to the three and nine months ended March 31, 2019.

Th e increase was primarily due to the non-service components of pension expense, net during the three and nine months ended March 31, 2020.

Additionally, in fiscal 2019, we wrote down $12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of an acquisition offset by the gain on sale of assets of $4.1 million in relation to the Service Alignment Initiative.

Earnings before Income Taxes ( “ EBIT ” )

For the three months ended March 31:

For the nine months ended March 31:

Non-service components of pension income, net (13.4) (18.1) (4.7)

Other (income)/expense, net $ (24.9) $ (54.6) $ (29.7)

Other (income)/expense, net, decreased $29.7 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019.

The decrease is primarily due to a decrease in interest income on corporate funds due to lower interest rates earned, a decrease in non-service components of pension income, net, and impairment charges of $2.8 million recorded in the three months ended September 30, 2020 as a r esult of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale.

Earnings Before Income Taxes

For the three months ended September 30:

Earnings bef ore income taxes increased for the three months ended September 30, 2020 due to the decreases in expenses discussed above.

Margin increased for the three months ended September 30, 2020 as a result of reduced costs from certain cost and headcount actions as a result of our broad-based transformation initiatives, including digital and procurement transformation initiatives, and excess capacity headcount actions.

In addition, our margin improvement was aided by decreased interest expense, decreased selling and marketing expenses, reduced facilities costs and travel and entertainment expenses, decreased pension costs and a change in our estimated losses related to ADP Indemnity.

These were partially offset by incremental pressure from growth in our zero-margin benefits pass-throughs and an increase in amortization expense.

Adjusted Earnings before certain Interest and Taxes ("Adjusted EBIT")

For the three months ended September 30:

á 5% á 120bps

Earnings before inco me taxes increased for the three and nine months ended March 31, 2020 due to the increases in revenues partially offset by increases in expenses discussed above.

Overall margin increased for the three and nine months ended March 31, 2020 as a result of our continued successful execution of our broad-based transformation initiatives as well as operating efficiencies.

In addition, our margin improvement was aided by lower transformation initiative related charge s of $11.7 million and $72.7 million for the three and nine months ended March 31, 2020, respectively, reduced incentive compensation costs and selling expenses which increased at a reduced rate.

These were partially of fset by incremental pressure from growth in our zero-margin benefits pass-throughs, an associate assistance payment, an increase in our allowance for doubtful accounts and amortization expense.

Adjusted EBIT

For the three months ended March 31:

For the nine months ended March 31:

Adjusted EBIT excludes net charges related to our transformation initiatives in the respective periods for the three and nine months ended March 31, 2020 and 2019, reflecting a decrease in net ch arges of $11.7 million and $72.7 million d uring the three and nine months ended March 31, 2020, respectively, as compared to the three and nine months ended March 31, 2019, respectively.

For the three and nine months ended March 31, 2020, adjusted EBIT increased due to the increases in revenues offset by the increases in expenses discussed above.

Our adjusted EBIT margin reflects changes described above in our EBIT margin.

Adjusted EBIT and Adjusted EBIT margin exclude certain interest amounts, net charges related to our broad-based transformation initiatives and the impact of the net severance charges related to excess capacity as applicable in the respective periods.

Provision for Income Taxes

The effective tax rate for the three months ended March 31, 2020 and 2019 was 23.8% and 23.4%, respectively.

The increase is primarily due to tax credits related to research and development activities in the three months ended March 31, 2019 and foreign withholding taxes on future distributions and an increase in reserves for uncertain tax positions in the three months ended March 31, 2020, partially offset by the benefits of a foreign tax law change and a reduction in the operating tax rate due to the mix between domestic and foreign earnings in the three months ended March 31, 2020.

The effective tax rate for the nine months ended March 31, 2020 and 2019 was 22.5% and 23.4%, respectively.

The decrease in the effective tax rate is primarily due to the release of a valuation allowance related to foreign tax credit carryforwards, a

reduction in the operating tax rate due to the mix between domestic and foreign earnings and the benefit of a foreign tax law change partially offset by foreign withholding taxes on future distributions.

The effective tax rate for the three months ended September 30, 2020 and 2019 was 21.3% and 21.2%, respectively.

The increase in the effective tax rate is primarily due to a decrease in the excess tax benefit on stock-based compensation partially offset by favorable adjustments to prior year tax liabilities in the three months ended September 30, 2020.

Adjusted Provision for Income Taxes

The adjusted effective tax rate for the three months ended March 31, 2020 and 2019 was 23.8% and 23.5%, respectively.

The adjusted effective tax rate for the nine months ended March 31, 2020 and 2019 was 22.5% and 23.5%, respectively.

The adjusted effective tax rate for the three months ended September 30, 2020 and 2019 was 21.3% and 21.2%, respectively.

The drivers of the adjusted effective tax rate are the same as the drivers of the effective tax rate discussed above.

Net Earnings and Diluted EPS

For the three months ended March 31:

For the nine months ended March 31:

For the three and nine months ended March 31, 2020, the net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.

For the three and nine months ended March 31, 2020, diluted EPS increased as a result of an increase in net earnings and the impact of fewer shares outstanding resulting from the repurchase of approxima tely 6.2 million shares during the nine months ended March 31, 2020 and 5.4 million shares for the nine months ended March 31, 2019, partially offset by the issuances of shares under our employee benefit plans.

For the three months ended September 30:

For the three months ended September 30, 2020, net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.

For the three months ended September 30, 2020, diluted EP S increased as a result of an increase in net earnings and the impact of fewer shares outstanding resulting from the repurchase of approxima tely 1.7 million shares during the three months ended September 30, 2020 and 1.9 million shares for the three months ended September 30, 2019, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted EPS

For the three months ended March 31:

For the nine months ended March 31:

For the three and nine months ended March 31, 2020, adjusted net earnings reflect the changes described above in our adjusted EBIT and our adjusted effective tax rate.

For the three and nine months ended March 31, 2020, adjusted diluted EPS reflects the changes described above in our adjusted net earnings and shares outstanding.

For the three months ended September 30:

For the three months ended September 30, 2020, adjusted net earnings reflect the changes described above in our adjusted EBIT and our adjusted effective tax rate.

For the three months ended September 30, 2020, adjusted diluted EPS reflects the changes described above in our adjusted net earnings and shares outstanding.

ANALYSIS OF REPORTABLE SEGMENTS

Three Months Ended % Change Nine Months Ended

March 31, March 31, % Change

Reported Organic constant currency 2020 2019 As

Three Months Ended

September 30, % Change

Reported Organic constant currency

1 unchanged sentence

PEO Services 1,095.9 1,056.9 4 % 4 %

Other (2.2) (6.4) n/m n/m (7.4) (11.9) n/m n/m

Other (2.0) (2.6) n/m n/m

$ 3,470.7 $ 3,495.7 (1) % (1) %

1 unchanged sentence

Three Months Ended %

Change Nine Months Ended %

March 31, March 31,

2020 2019 As Reported 2020 2019 As

September 30,

Employer Services $ 689.3 $ 679.4 1 %

PEO Services 159.4 149.3 7 %

Other (120.9) (133.3) n/m (310.2) (419.3) n/m

Other (83.5) (89.6) n/m

$ 765.2 $ 739.1 4 %

1 unchanged sentence

Employer Services

Revenues increased for the three months ended March 31, 2020 due to new business started from New Business Bookings and continued strong retention, partially offset by business losses and a decrease in interest earned on funds held for clients.

Our revenue growth includes one percentage point of unfavorability from foreign currency.

Our revenues also increased due to an increase in the number of employees on our clients’ payrolls as our pays per control increased 1.9% for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Revenues decreased for the three months ended September 30, 2020 due to an impact from lower New Business Bookings during the fourth quarter of fiscal 2020, a decrease in our pays per control of 9% and a decrease in interest earned on funds held for clients.

These decreases were partially offset by strong retention.

Our pays per control metric measures the number of employees on our clients' payrolls as measured on a same-store-sales basis utilizing a representative subset of payrolls ranging from small to large businesses that are reflective of a broad range of U.S.

geographic regions.

Revenues increased for the nine months ended March 31, 2020 due to new business started from New Business Bookings and continued strong retention, partially offset by business losses.

Our revenues also increased due to increased interest earned on funds held for clients as a result of growth in average client funds balances, and an increase in the number of employees on our clients’ payrolls as our pays per control in creased 2.2% fo r the nine months ended March 31, 2020, as compared to the nine months ended March 31, 2019.

Earnings before Income Taxes

Employer Services’ earnings before income taxes increased for the three months ended March 31, 2020 due to increased revenues discussed above, offset by increased expenses due to an increase in our allowance for doubtful accounts, an increase in selling expenses as a result of investments in our sales force and amortization expense.

These increases in expen ses were partially offset by reduced incentive compensation costs, operating efficiencies as a result of our transformation initiatives and the impact from foreign currency.

Employer Services' earnings before income taxes increased for the nine months ended March 31, 2020 due to increased revenues discussed above, offset by increased expenses due t o an increase in selling and marketing expenses as a result of investments in our sales force and our brand, an increase in our allowance for doubtful acco unts and amortization expense.

These increases in expenses were partially offset by reduced incentive compensation costs, operating efficiencies as a result of our transformation initiatives and the impact from foreign currency.

For the three and nine months ended March 31, respectively:

á 100bps á 60bps

Employer Services' overall margin increased for the three and nine months ended March 31, 2020 as a result of the continued successful execution of our broad-based transformation initiatives, as well as operating efficiencies, reduced incentive compensation costs and selling expenses which increased at a reduced rate .

This increase was partially offset by an increase in our allowance for doubtful accounts and amortization expense.

Three Months Ended Change Nine Months Ended Change

March 31, March 31,

Employer Services' earnings before income taxes increased for the three months ended September 30, 2020 due to decreases in expenses.

The decreases in expenses were due to reduced costs from certain cost and headcount actions as a result of our broad-based transformation initiatives, including digital and procurement transformation initiatives, and excess capacity headcount actions.

Additionally, decreases in expenses were due to a decrease in selling and marketing expenses and reduced facilities costs and travel and entertainment expenses.

These decreases were partially offset by an increase in amortization expense.

For the three months ended September 30, respectively:

Employer Services' m argin increased for the three months ended September 30, 2020 as a result of reduced costs from certain cost and headcount actions as a result of our broad-based transformation initiatives, including digital and procurement initiatives, and excess capacity headcount actions.

In addition, our margin improvement was aided by decreased selling and marketing expenses and reduced travel and entertainment expenses.

These were partially offset by an increase in amortization expense.

Three Months Ended Change

September 30,

2020 2019 $ %

2 unchanged sentences

PEO Services' revenues excluding zero-margin benefits pass-throughs $ 354.9 $ 357.8 $ (2.9) (1) %

PEO Services' revenues increased 11% and 9% for the three and nine months ended March 31, 2020, respectively, due to a 7% increase in the average number of Worksite Employees for the three and nine months ended March 31, 2020, respectively, driven by an increase in the number of new PEO Services clients and growth of our existing clients.

PEO Services' revenue excluding zero-margin benefits pass-throughs increased 9% and 8% for the three and nine months ended March 31, 2020, respectively, and includes pressure from lower workers compensation and State Unemployment Insurance (“SUI”) costs and related pricing.

PEO Services' revenu es increased 4% fo r the three months ended September 30, 2020, due to an increase in zero-margin benefits pass-throughs partially offset by a 3% decrease in the average number of Worksite Employees for the three months ended September 30, 2020.

Additionally, PEO Services' revenues, excluding zero-margin benefits pass-through costs, decrea sed by 1% for the three months ended September 30, 2020.

Earnings before Income Taxes

PEO Services' earnings before income taxes increased 12% for the three months ended March 31, 2020 due to the increased revenues discussed above offset by an increase in expenses .

T he increase in expenses was related to the increase in zero-margin benefits pass-through costs of $82.6 million described above as well as increased costs to service our client base.

PEO Services' earnings before income taxes increased 7% for the nine months ended March 31, 2020 due to the increased revenues discussed above offset by an increase in expenses .

The increase in expenses was related to the increase in zero-margin benefits pass-through costs of $203.9 million describ ed above, increased selling expenses a nd a decrease of $2.8 million in pre-tax benefit related to ADP Indemnity in the nine months ended March 31, 2020, as compared to the nine months ended March 31, 2019.

For the three and nine months ended March 31, respectively:

á 10bps â 30bps

PEO Services' overall margin increased due to operating and selling expense which increased at a reduced rate in the three months ended March 31, 2020, as compared to the three months ended March 31, 2019.

PEO Services' overall margin decreased due t o increased selling expenses an d a decrease of $2.8 million in pre-tax benefit from ADP Indemnity in the nine months ended March 31, 2020, as compared to the nine months ended March 31, 2019.

PEO Services' earni ngs before income taxes increased 7% for the three months ended September 30, 2020 due to a change in our estimated losses related to ADP Indemnity and a decrease in selling expenses in the three months ended September 30, 2020, as com pared to the three months ended September 30, 2019.

For the three months ended September 30, respectively:

PEO Services' ma rgin increased for the three months ended September 30, 2020 , due to a change in our estimated losses related to ADP Indemnity and a decrease in selling expenses in the three months ended September 30, 2020, as compared to the three months ended September 30, 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.

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

The Company had no drawdowns during the nine months ended March 31, 2020 and March 31, 2019, respectively, under the letters of credit.

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

ADP Indemnity recorded a pre-tax benefit of approximately $5.6 million and $13.6 million for the three and nine months ended March 31, 2020, compared to $6.0 million and $16.4 million for the three and nine months ended March 31, 2019.

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.

ADP Indemnity recorded a pre-tax benefit of approximately $10.4 million for the three months ended September 30, 2020, compared to approximately $3.4 million for the three months ended September 30, 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 .

For the nine months ended March 31, 2020, ADP Indemnity paid a premium of $215.0 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2020 policy year on terms substantially similar to the fiscal 2019 reinsurance policy.

The primary components of the “Other” segment are certain corporate overhead charges and expenses that have not been allocated to the reportable segments, including corporate functions, costs related to our transformation office, an associate assistance payment, non-recurring gains and losses, the elimination of intercompany transactions, and interest expense.

For the three months ended September 30, 2020, ADP Indemnity paid a premium of $240 million t o enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the 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, severance costs, non-recurring gains and losses, the elimination of intercompany transactions, and other interest expense.

Non-GAAP Financial Measures

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

Three Months Ended % Change Nine Months Ended % Change

March 31, March 31,

2020 2019 As Reported 2020 2019 As Reported

Three Months Ended % Change

September 30,

2020 2019 As Reported

Net earnings $ 602.1 $ 582.4 3 %

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All other interest income (a) (1.8) (8.4)

Gain on sale of assets — — (0.2) —

Transformation initiatives (b) 0.8 (0.6)

Excess capacity severance charges (c) 2.4 —

Adjusted EBIT $ 780.7 $ 744.9 5 %

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Provision for income taxes $ 163.1 $ 156.7 4 %

Gain on sale of assets (c) — — (0.1) —

Transformation initiatives (c) 2.7 5.6 4.8 22.8

Tax Cuts and Jobs Act (d) — — — 0.5

Transformation initiatives (d) 0.2 (0.2)

Excess capacity severance charges (d) 0.6 —

Adjusted provision for income taxes $ 163.9 $ 156.5 5 %

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Net earnings $ 602.1 $ 582.4 3 %

Gain on sale of assets — — (0.2) —

Income tax provision on gain on sale of assets (c) — — 0.1 —

Transformation initiatives (b) 0.8 (0.6)

Income tax provision for transformation initiatives (c) (2.7) (5.6) (4.8) (22.8)

Tax Cuts and Jobs Act (d) — — — (0.5)

Income tax (benefit)/ provision for transformation initiatives (d) (0.2) 0.2

Excess capacity severance charges (c) 2.4 —

Income tax benefit for excess capacity severance charges (d) (0.6) —

Adjusted net earnings $ 604.5 $ 582.0 4 %

Diluted EPS $ 1.40 $ 1.34 4 %

Gain on sale of assets (c) — — — —

Transformation initiatives (b) (c) 0.02 0.04 0.03 0.16

Tax Cuts and Jobs Act (d) — — — —

Transformation initiatives (b) (d) — —

Excess capacity severance charges (c) (d) — —

Adjusted diluted EPS $ 1.41 $ 1.34 5 %

(a) We include the interest income earned on investments associated with our client funds extended investment strategy and interest expense on borrowings related to our client funds extended investment strategy as we believe these amounts to be fundamental to the underlying operations of our business model.

The adjustments in the table above represent the interest income and interest expense that is not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”

(b) The transformation initiatives include net charges related to severance, Voluntary Early Retirement Program (“VERP”) and other transformation initiatives.

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

(c) The tax provision (benefit) on transformation initiatives and gain on sale of assets was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.

(d) There was no impact from the Tax Cuts and Jobs Act in the three and nine months ended March 31, 2020.

The adjustments in the table above represent the interest income and interest expense that are not related to our client funds extended investment strategy and are labeled as “All other interest expense” and “All other interest income.”

(b) In the three months ended September 30, 2020 , transformation initiatives include charges of $2.8 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 net reversals of charges related to transformation initiatives of $2.0 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.

(d) The income tax (benefit)/ provision was calculated based on the annualized marginal rate in effect during the quarter of the adjustment.

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

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The PEO segment is not impacted by acquisitions, dispositions or foreign currency.

Three Months Ended Nine Months Ended

March 31, March 31,

Three Months Ended

September 30,

Consolidated revenue growth as reported (1) %

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2020, cash and cash equivalents were $1.7 billion, which were primarily invested in time deposits and money market funds.

For corporate liquidity, we expect existing cash, cash equivalents, short-term marketable securities, and 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 our regular quarterly dividends, share repurchases, and capital expenditures for the foreseeable future.

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.

As of September 30, 2020, cash and cash equivalents w ere $1.6 billion, which were primarily invested in time deposits and money market funds.

For corporate liquidity, we expect existing cash, cash equivalents, short-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 September 30, 2020 and we have sufficient liquidity as noted above;

how ever, given the continuing 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.

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Operating, Investing and Financing Cash Flows

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the nine months ended March 31, 2020 and 2019, respectively, are summarized as follows:

Nine Months Ended

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the three months ended September 30, 2020 and 2019, respectively, are summarized as follows:

Three Months Ended

September 30,

2020 2019 $ Change

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 3,308.1 $ (4,524.0) $ 7,832.1

Net cash flows provided by operating activities for the nine months ended March 31, 2020 and March 31, 2019 include cash payments for reinsurance agreements of $215.0 million and $218.0 million, respectively, which represent the policy premium for the entire fiscal year.

The increase in operating cash provided is due to growth in our business supplemented by a growth in non-cash expenses within operating activities, as compared to the nine months ended March 31, 2019.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securiti es of $1,490.5 million, low er payments made related to acquisitions of business and intangibles partially offset by payments related to capital expenditures in the nine months ended March 31, 2020.

Net cash flows from financing activities changed due to a net decrease in client fund obligations of $7,260.5 million, wh ich is due to the timing of impounds from our clients and payments to our clients' employees and other payees, more cash returned to shareholders via dividends and share repurchases and a repayment of reverse repurchase agreements for the nine months ended March 31, 2020.

We purchase d 6.2 million sha res of our common stock at an average price per share of $160.61 duri ng the nine months ended March 31, 2020, as compared to purchases of 5.4 million shares at an average price per share of $139.11 during the nine months ended March 31, 2019.

From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs.

Net cash flows provided by operating activities for the three months ended September 30, 2020 and September 30, 2019 include cash payments for reinsurance agreements of $240.0 million and $215.0 million, respectively, which represent the policy premium for the entire fiscal ye ar.

The increase in operating cash provided is primarily due to growth in our business supplemented by net favorable change in the components of working capital as compared to the three months ended September 30, 2019.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $140.1 million, lower payments related to acquisitions of intangibles and payments related to capital expenditures partially offset by lower proceeds from the sale of assets i n the three months ended September 30, 2020.

Net cash flows from financing activities changed due to a net increase in the cash flow from client funds obligations of $11,266.6 million, w hich is due to the timing of impounds from our clients and payments to our clients' employees and other pay ees, proceeds from debt issuance, and less cash paid for share repurchases.

These were partially offset by a decrease of net proceeds of commercial paper, payments of debt, a net repayment of reverse repurchase agreements, more cash returned to shareholders via dividends, and settlement of cash flow hedges in the three months ended September 30, 2020.

We purchase d approxima tely 1.7 million shares of our common stock at an average pric e per share of $136.55 duri ng the three months ended September 30, 2020, as compared to purchases of 1.9 million shares at an average price per share of $164.80 during the three months ended September 30, 2019.

From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase program.

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

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These ratings denote the highest quality commercial paper securities.

Maturities of commercial paper can range from overnight to up to 364 days.

At March 31, 2020 and June 30, 2019, the Company had no commercial paper borrowing outstanding.

Details of the borrowings under the commercial paper program are as follows:

Three Months Ended Nine Months Ended

March 31, March 31,

2020 2019 2020 2019

Maturities of commercial paper can range from overnight to up to 364 day s.

At September 30, 2020 and June 30, 2020, the Company had no commercial paper borrowing outstanding.

Det ails of the borrowings under the commercial paper program are as follows:

Three Months Ended

September 30,

Average daily borrowings (in billions) $ 2.4 $ 4.0

Weighted average interest rates 0.1 % 2.3 %

Weighted average maturity (approximately in days) 1 day 1 day 2 days 2 days

Weighted average maturity (approximately in days) 1 day 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.

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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 March 31, 2020, there were no outstanding obligations related to reverse repurchase agreements.

At June 30, 2019, the Company had $262.0 million of outstanding obligations related to the reverse repurchase agreements, which were fully paid in early July 2019.

At September 30, 2020, there were no outstanding obligations related to reverse repurchase agreements.

At June 30, 2020, the Company had $13.6 million of outstanding obligations related to the reverse repurchase agreements.

Details of the reverse repurchase agreements are as follows:

Three Months Ended Nine Months Ended

March 31, March 31,

2020 2019 2020 2019

Three Months Ended

September 30,

Average outstanding balances $ 152.4 $ 426.6

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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 March 31, 2020 under the credit facilities.

We had no borrowings through September 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 collatera l.

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

All collateral on asset-backed securities is performing as expected.

In addition, we own senior debt directly issued by Federal Farm Credit Banks and Fede ral Home Loan Banks.

In addition, we own senior debt directly issued by Federal Farm Credit Banks and Federal Home Loan Banks.

Our client funds investment strategy is structured to allow us to average our way through an interest rate cycle by laddering the maturities of our investments out to five years (in the case of the extended portfolio) and out to ten years (in the case of the long portfolio).

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See Note 6 of our Consolidated Financial Statements for a description of our corporate investments and funds held for clients.

Capital expenditures for the nine months ended March 31, 2020 were $ 133.5 million, as compared to $116.8 million for the nine months ended March 31, 2019.

Capital expenditures for fiscal 2020 are expected to be about $17 5 million, as compared to $163 million in fiscal 2019.

Capital expenditures for the three months ended September 30, 2020 were $45.2 million , as compared to $52.2 million for the three months ended September 30, 2019.

We expect capital expenditures in fiscal 2021 to be between $175 million and $200 million , as compared to $168.3 million in fiscal 2020.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Our overall investment portfolio is comprised of corporate investments (cash and cash equivalents, short-term marketable securities) and client funds assets (funds that have been collected from clients but have not yet been 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.

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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 credit ratings), and our ability to engage in reverse repurchase agreement transactions and available borrowings under our $10.3 billion committed credit facilities.

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.

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Details regarding our overall investment portfolio are as follows:

Three Months Ended Nine Months Ended

March 31, March 31,

2020 2019 2020 2019

Three Months Ended

September 30,

Average investment balances at cost:

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Total 1.8 % 2.2 %

Realized gains on available-for-sale securities $ (2.9) $ (0.6) $ (13.0) $ (1.2)

Realized losses on available-for-sale securities 0.4 0.5 1.1 2.6

Net realized (gains)/losses on available-for-sale securities $ (0.3) $ (2.3)

March 31, 2020 June 30, 2019

September 30, 2020 June 30, 2020

Net unrealized pre-tax gains on available-for-sale securities $ 851.9 $ 876.8

Total available-for-sale securities at fair value $ 21,205.1 $ 21,576.6

Beginning in March 2020, we halted all new reinvestment of maturities in our client long and extended portfolio.

In April 2020, the Company made a decision to sell certain available-for-sale securities in the funds held for clients as the Company anticipates client fund obligations will 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 will reduce its holdings of available-for-sale securities in the funds held for clients.

As of May 1, 2020, the Company sold approximately $1.3 billion of its available-for-sale securities, resulting in a net realized gain of $0.7 million.

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 rates earned on our entire portfolio decreased from 2.2% for the nine months ended March 31, 2019 t o 2.1% fo r the nine months ended March 31, 2020.

A hypothetical change in 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 im pact to earnings before income taxes over the ensuing twelve-month period ending March 31, 2021.

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 the three months ended September 30, 2019 to 1.8% for t he three months ended September 30, 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 $22 million im pact to earnings before income taxes over the ensuing twelve-month period ending September 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 $7 million impact to earnings before income taxes over the ensuing twelve-month period ending September 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-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 77% of our available-for-sale securities held a AAA-rating or AA-rating at March 31, 2020.

Approxi mately 79% of ou r available-for-sale securities held a AAA-rating or AA-rating at September 30, 2020.

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

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

In addition, as the duration and severity of the 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.

Refer to Note 2 of our Consolidated Financial Statements for changes to our accounting policies effective for the fiscal 2021.

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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-Q

Item 2. Management’s Discussion and Analysis