What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-01 compared with 2020-10-30 · 165 added, 122 removed, 249 unchanged (54% of the section changed)

2 unchanged sentences

FORWARD-LOOKING STATEMENTS

This document and other written or oral statements made from time to time by Automatic Data Processing, Inc.

and its subsidiaries (“ADP” or the “Company”) may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

This document and other written or oral statements made from time to time by Automatic Data Processing, Inc., its subsidiaries and variable interest entity (“ADP” or the “Company”) may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could” and other words of similar meaning, are forward-looking statements.

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EXECUTIVE OVERVIEW

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

Highlights from the six months ended December 31, 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.

We have continued to provide HCM services, including the processing of 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.

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 are executing well considering the on-going headwinds related to COVID-19 and our momentum continued to build this quarter as economic activity continued to trend positively.

Our pays per control metric, which represents the number of employees on ADP clients' payrolls in the United States when measured on a same-store-sales basis for a subset of clients ranging from small to large businesses, showed a decline of 7% in the six months ended December 31, 2020;

however, we've seen an improvement sequentially with a decline of 6% in the three months ended December 31, 2020 compared to a decline of 9% in the three months ended September 30, 2020.

For Employer Services New Business Bookings, we are down 2% for the six months ended December 31, 2020, nearly matching the prior fiscal year's first half performance despite the very difficult environment.

For the six months ended December 31, 2020, the PEO average number of Worksite Employees decreased 2%.

Despite the decline for the six months ended December 31, 2020, we have seen some improvements compared to first quarter.

The PEO average number of Worksite Employees decreased 2% for the three months ended December 31, 2020, compared to a decrease of 3% in the three months ended September 30, 2020.

Further, even with the operating challenges brought about by the pandemic, we continue to move forward with our digital and procurement transformation initiatives, which helped us deliver profit growth and margin expansion for the six months ended December 31, 2020.

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

We lead the HCM industry by driving growth through our strategic, cloud-based HCM solutions and developing innovations like our next gen platforms.

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.

The recognition we have received in the market for our next gen payroll platform and in winning the 2020 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 we 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 product investments, 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

operational transformation.

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

RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

For the three months ended September 30:

For the three months and six months ended December 31, respectively:

Organic constant currency:

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 .

Revenues for the three months ended December 31, 2020 increased due to strong retent ion, new business started from New Business Bookings, an increase in zero-margin benefits pass-throughs and one percentage point of favorability from foreign currency.

The increase in revenues was partially offset by one percentage point of unfavorability from our interest earned on funds held for clients discussed below and a de crease in our pays per control.

Revenues for the six months ended December 31, 2020 were flat due to strong retention, new business started from New Business Bookings and an increase in zero-margin benefits pass-throughs, offset by one percentage point of unfavorability from our interest earned on funds held for clients discussed below and a decrease in our pays per control.

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 revenues for the three months ended December 31, 2020 include interest on funds held for clients of $105.4 million, a s co mpared to $137.7 million for the three months ended December 31, 2019.

The decrease in the interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 1.7% for the three months ended December 31, 2020, as compared to 2.2% for the three months ended December 31, 2019.

Total revenues for the six months ended December 31, 2020 include interest on funds held for clients of $211.9 million, as compared to $271.5 million for the six months ended December 31, 2019.

The decrease in the interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 1.8% for the six months ended December 31, 2020, as compared to 2.2% for the six months ended December 31, 2019 coupled with a decrease in our average client funds balances of 3.4% to $23.5 billion for the six months ended December 31, 2020, as compared to the six months ended December 31, 2019.

Total Expenses

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

Change 2020 2019 %

Costs of revenues:

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Total expenses $ 2,892.1 $ 2,880.0 — % $ 5,622.7 $ 5,691.2 (1) %

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.

For the three months ended December 31, 2020, operating expenses increased due to an increase in PEO zero-margin benefits pass-through costs to $765.9 million from $722.4 million for the three months ended December 31, 2020 and 2019, respectively, and an increase in incentive compensation costs due to decreases in the prior year.

The increases were partially offset by reduced costs from certain cost and headcount actions as a result of our broad-based transformation initiatives, including digital and procurement transformation initiatives ( “b road-based transformation initiatives ” ), and excess capacity headcount actions.

Additionally, increases were further offset by reduced travel expenses and 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.

participants accruing any future service benefits ( “ U.S.

pension freeze ” ).

For the six months ended December 31, 2020, operating expenses were flat due to reduced costs as a result of our broad-based transformation initiatives, excess capacity headcount actions, reduced travel expenses, and decreased costs as a result of the U.S.

pension freeze.

These decreases were offset by an increase in our PEO Services zero-margin benefits pass-through costs to $1,507.0 million from $1,421.5 million for the six months ended December 31, 2020 and 2019, respectively, and an increase in incentive compensation costs.

Systems development and programming costs increased for the three and six months ended December 31, 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 .

Selling, general and administrative expenses were flat for the three months ended December 31, 2020 due to an increase in incentive compensation costs and investments in our sales organization, offset by decreased selling expenses as a result of capitalization of costs to obtain a contract under ASC 606, reduced travel expenses, reduced costs as a result of our broad-based transformation initiatives, and excess capacity headcount actions for non-sales associates.

Selling, general and administrative expenses decreased for the six months ended December 31, 2020 due to decreased selling expenses as a result of capitalization of costs to obtain a contract under ASC 606, reduced travel expenses, reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions for non-sales associates, and reduced facilities costs.

The decrease was partially offset by an increase in incentive compensation costs.

Interest expense decreased for the three and six months ended December 31, 2020 due to a decrease in average interest rates for commercial paper borrowings to 0.1% and 0.1% for the three and six months ended December 31, 2020, respectively, as compared to 1.7% and 2.0% for the three and six months ended December 31, 2019, respectively.

This was coupled with a decrease in average daily borrowings under our commercial paper program to $1.8 billion and $2.1 billion for the three and six months ended December 31, 2020, respectively, as compared to $3.5 billion and $3.7 billion for the three and six months ended December 31, 2019, respectively.

Other (Income)/Expense, net

Three Months Ended

September 30,

2020 2019 $ Change

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 $ Change 2020 2019 $ Change

Interest income on corporate funds $ (10.4) $ (25.7) $ (15.3) $ (24.3) $ (58.0) $ (33.7)

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Other (income)/expense, net $ (29.0) $ (46.0) $ (17.0) $ (54.0) $ (100.6) $ (46.6)

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.

Other (income)/expense, net, decreased $17.0 million and $46.6 million for the three and six months ended December 31, 2020 primarily as a result of a decrease in interest income on corporate funds due to lower interest rates earned.

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.

For the three months ended December 31:

For the six months ended December 31:

Earnings before income taxes was flat for the three months ended December 31, 2020 and increased for the six months ended December 31, 2020 due to the components discussed above.

Margin decreased for the three months ended December 31, 2020 as a result of an increase in incentive compensation costs, incremental pressure from growth in our zero-margin benefits pass-throughs, and an increase in amortization expense, partially offset by reduced costs as a result of our broad-based transformation initiatives, and excess capacity headcount actions.

In addition, the margin decrease was offset by decreased selling expenses, reduced travel expenses, decreased interest expense, and decreased pension costs as a result of the U.S.

pension freeze.

Margin increased for the six months ended December 31, 2020 due to reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions.

In addition, our margin improvement was aided by decreased selling expenses, decreased interest expense, reduced travel expenses, decreased pension costs as a result of the U.S.

pension freeze, and reduced facilities costs.

These were partially offset by an increase in incentive compensation costs, 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

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.

For the three months ended December 31:

For the six months ended December 31:

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

Provision for Income Taxes

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.

The effective tax rate for the three months ended December 31, 2020 and 2019 was 22.2% and 22.0%, respectively.

increase in the effective tax rate is primarily due to the benefit from a valuation allowance release related to foreign tax credit carryforwards in the three months ended December 31, 2019, partially offset by the benefits from a foreign tax election in the three months ended December 31, 2020.

The effective tax rate for the six months ended December 31, 2020 and 2019 was 21.8% and 21.6%, respectively.

The increase in the effective tax rate is primarily due to the benefit from a valuation allowance release related to foreign tax credits carryforwards in the six months ended December 31, 2019 and a decrease in the excess tax benefit on stock-based

compensation, partially offset by favorable adjustments to prior year tax liabilities and the benefits from a foreign tax election in the six months ended December 31, 2020.

Adjusted Provision for Income Taxes

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

The adjusted effective tax rate for the three months ended December 31, 2020 and 2019 was 22.2% and 22.0%, respectively.

The adjusted effective tax rate for the six months ended December 31, 2020 and 2019 was 21.8% and 21.6%, 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 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.

For the three months ended December 31:

For the six months ended December 31:

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

For the three months ended December 31, 2020, diluted EPS increased as a result of fewer shares outstanding resulting from the repurchase of approximat ely 1.6 million sha res during the three months ended December 31, 2020 and 1.8 million shares during the three months ended December 31, 2019, partially offset by the issuances of shares under our employee benefit plans and a decrease in net earnings.

For the six months ended December 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 approximat ely 3.2 million sha res during the six months ended December 31, 2020 and 3.7 million shares during the six months ended December 31, 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 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.

For the three months ended December 31:

For the six months ended December 31:

For the three and six months ended December 31, 2020, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

ANALYSIS OF REPORTABLE SEGMENTS

Three Months Ended

September 30, % Change

Three Months Ended % Change Six Months Ended

December 31, December 31, % Change

Reported Organic constant currency 2020 2019 As

Reported Organic constant currency

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PEO Services 1,186.1 1,134.7 5 % 5 % 2,282.0 2,191.5 4 % 4 %

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

Other (1.0) (2.7) n/m n/m (2.9) (5.2) n/m n/m

$ 3,695.7 $ 3,669.5 1 % — % $ 7,166.5 $ 7,165.2 — % — %

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Three Months Ended %

September 30,

Change Six Months Ended %

December 31, December 31,

2020 2019 As Reported 2020 2019 As

Employer Services $ 758.6 $ 766.3 (1) % $ 1,447.8 $ 1,445.7 — %

PEO Services 187.4 168.0 12 % 346.8 317.3 9 %

Other (83.5) (89.6) n/m

Other (113.4) (98.8) n/m (196.8) (188.4) n/m

$ 832.6 $ 835.5 — % $ 1,597.8 $ 1,574.6 1 %

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Employer Services

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.

R evenues decreased for the three months ended December 31, 2020 due to one percentage point of unfavorability from our interest earned on funds held for clients and decreases in our pays per c ontrol of 6%.

These decreases were partially offset by strong retention, new business started from New Business Bookings and one percentage point of favorability from foreign currency.

R evenues decreased for the six months ended December 31, 2020 due to one percentage point of unfavorability from our interest earned on funds held for clients and decreases in our pays per c ontrol of 7%.

These decreases were partially offset by strong retention and new business started from New Business Booking s.

Earnings before Income Taxes

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,

Employer Services' earnings before income taxes decreased for the three months ended December 31, 2020 due to decreased revenues discussed above, partially offset by decreases in expenses.

The decreases in expenses were due to reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions.

Additionally, decreases in expenses were due to a decrease in selling expenses and reduced travel expenses.

These decreases in expenses were partially offset by an increase in incentive compensation costs and an increase in amortization expense.

Employer Services' earnings before income taxes was flat for the six months ended December 31, 2020 due to decreased revenues discussed above, offset by decreases in expenses.

The decreases in expenses were due to reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions.

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

These decreases were partially offset by an increase incentive compensation costs and an increase in amortization expense.

For the three and six months ended December 31, respectively:

Employer Services' margin was flat for the three months ended December 31, 2020 due to reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions, decreased selling expenses, and reduced travel expenses.

These were offset by an increase in incentive compensation costs and an increase in amortization expense.

Employer Services' margin increased for the six months ended December 31, 2020 due to reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions.

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

These were partially offset by an increase in incentive compensation costs and an increase in amortization expense.

Three Months Ended Change Six Months Ended Change

December 31, December 31,

2020 2019 $ % 2020 2019 $ %

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PEO Services' revenues excluding zero-margin benefits pass-throughs $ 420.2 $ 412.3 $ 7.9 2 % $ 775.0 $ 770.0 $ 5.0 1 %

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.

PEO Services' revenues increased 5% and 4% for the three and six months ended December 31, 2020, respectively, due to an increase in zero-margin benefits pass-throughs partially offset by a 2% decrease in the number of Average Worksite Employees for the three and six months ended December 31, 2020, respectively.

Earnings before Income Taxes

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.

PEO Services' earni ngs before income taxes increased 12% and 9% for the three and six months ended December 31, 2020, respectively, due to increased revenues discussed above, partially offset by increases in expenses.

Th e increases in expenses were related to increases in zero-margin benefits pass-through costs of $43.5 million and $85.5 million, respectively, described abo ve, partially offset by decreases in selling expenses.

In addition, the increase in expenses for the six months ended December 31, 2020 was partially offset by changes in our estimated losses related to ADP Indemnity.

For the three and six months ended December 31, respectively:

á 100bps á 70bps

PEO Services' margin increased due to an increase in revenues as discussed above and a decrease in selling expenses in the three months ended December 31, 2020, as compared to the three months ended December 31, 2019.

PEO Services' margin increased due to an increase in revenues as discussed above, a decrease in selling expenses and a change in our estimated losses related to ADP Indemnity in the six months ended December 31, 2020, as compared to the six months ended December 31, 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.

1 unchanged sentence

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 $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.

1 unchanged sentence

We believe the likelihood of ultimate losses exceeding this limit is remote .

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.

ADP Indemnity recorded a pre-tax benefit of approximately $4.8 million and $15.2 million for the three and six months ended December 31, 2020, respectively, compared to approximately $4.7 million and $8.1 million for the three and six months ended December 31, 2019, respectively, which were primarily a result of changes in our estimated actuarial losses.

In July 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.

16 unchanged sentences

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

Three Months Ended % Change

September 30,

2020 2019 As Reported

Three Months Ended % Change Six Months Ended % Change

December 31, December 31,

2020 2019 As Reported 2020 2019 As Reported

Net earnings $ 647.5 $ 651.6 (1) % $ 1,249.6 $ 1,234.0 1 %

2 unchanged sentences

All other interest income (a) (1.5) (5.4) (3.3) (13.8)

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

Transformation initiatives (b) 3.3 9.1 4.1 8.6

3 unchanged sentences

Provision for income taxes $ 185.1 $ 183.9 1 % $ 348.2 $ 340.6 2 %

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

Transformation initiatives (d) 0.8 2.3 1.0 2.1

3 unchanged sentences

Net earnings $ 647.5 $ 651.6 (1) % $ 1,249.6 $ 1,234.0 1 %

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

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

Transformation initiatives (b) 3.3 9.1 4.1 8.6

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

Income tax benefit for transformation initiatives (d) (0.8) (2.3) (1.0) (2.1)

Excess capacity severance charges (c) 0.5 — 2.9 —

2 unchanged sentences

Diluted EPS $ 1.51 $ 1.50 1 % $ 2.91 $ 2.84 2 %

Gain on sale of assets — — — —

Transformation initiatives (b) (d) 0.01 0.02 0.01 0.01

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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) 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.

(b) In the three months ended December 31, 2020, transformation initiatives include charges related to impairment charges of operating right-of-use assets and certain related fixed assets associated with the vacating of certain leased locations (“lease asset impairment”) and net charges related to other transformation initiatives, including severance.

In the six months ended December 31, 2020 , transformation initiatives include charges 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 lease asset impairment charges partially offset by net reversals of charges related to other transformation initiatives, including severance.

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

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

Three Months Ended

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

Consolidated revenue growth as reported 1 % — %

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Employer Services revenue growth, organic constant currency (2) % (2) %

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

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.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCE S

As of December 31, 2020, cash and cash equivalents were $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;

Our financial condition remains solid at December 31, 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.

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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 three months ended September 30, 2020 and 2019, respectively, are summarized as follows:

Three Months Ended

September 30,

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

Six Months Ended

2020 2019 $ Change

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 9,074.9 $ 6,518.9 $ 2,556.0

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.

Net cash flows provided by operating activities increased due to growth in our business supplemented by net favorable change in the components of working capital as compared to the six months ended December 31, 2019.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $842.2 million, lower payments related to acquisitions of intangibles and payments related to capital expenditures partially offset by lower proceeds from the sale of assets in the six months ended December 31, 2020.

Net cash flows from financing activities changed due to a net increase in the cash flow from client funds obligations of $2,942.7 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, proceeds from debt issuance, a net repayment of reverse repurchase agreements and less cash paid for share repurchases.

These were partially offset by payments of debt, more cash returned to shareholders via dividends, and settlement of cash flow hedges in the six months ended December 31, 2020.

We purchase d approxim ately 3.2 million shares of our common stock at an average price per share of $149.39 duri ng the six months ended December 31, 2020, as compared to purchases of 3.7 million shares at an average price per share of $164.99 during the six months ended December 31, 2019.

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

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This commercial paper program provides for the issuance of up to $9.7 billion in aggregate maturity value.

Our commercial paper program is rated A-1+ by Standard & Poor’s and Prime-1 (“P-1”) by Moody’s.

Our commercial paper program is rated A-1+ by St andard & Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch.

These ratings denote the highest quality commercial paper securities.

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,

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

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

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

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Average daily borrowings (in billions) $ 1.8 $ 3.5 $ 2.1 $ 3.7

Weighted average interest rates 0.1 % 1.7 % 0.1 % 2.0 %

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

Weighted average maturity (approximately in days) 1 day 2 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 September 30, 2020, there were no outstanding obligations related to reverse repurchase agreements.

At December 31, 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

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Average outstanding balances $ 83.2 $ 335.9 $ 117.8 $ 381.2

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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 September 30, 2020 under the credit facilities.

We had no borrowings through December 31, 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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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 Federal Home Loan Banks.

All collateral on asset-backed securities has performed as expected through December 31, 2020.

In addition, we own senior, unsecured, non-callable 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 three months ended September 30, 2020 were $45.2 million , as compared to $52.2 million for the three months ended September 30, 2019.

Capital expenditures for the six months ended December 31, 2020 were $79.7 million , as compared to $94.1 million for the six months ended December 31, 2019.

We expect capital expenditures in fiscal 2021 to be between $150 million and $175 million, as compared to $168.3 million in fiscal 2020.

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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 $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.

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, P-1 by Moody’s, and F1+ by Fitch, 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

September 30,

Three Months Ended Six Months Ended

December 31, December 31,

2020 2019 2020 2019

Average investment balances at cost:

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Net realized (gains)/losses on available-for-sale securities $ (7.7) $ (7.1) $ (8.0) $ (9.4)

September 30, 2020 June 30, 2020

December 31, 2020 June 30, 2020

Net unrealized pre-tax gains on available-for-sale securities $ 800.1 $ 876.8

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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 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.

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

The annualized interest rate earned on our entire portfolio decreased from 2.2% for the six months ended December 31, 2019 to 1.7% for the six months ended December 31, 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 $21 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 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 $6 million impact to earnings before income taxes over the ensuing twelve-month period ending December 31, 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 79% of ou r available-for-sale securities held a AAA-rating or AA-rating at September 30, 2020.

Approxi mately 77% of our available-for-sale securities held a AAA-rating or AA-rating at December 31, 2020.

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

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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