What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-30 compared with 2021-02-01 · 133 added, 129 removed, 285 unchanged (48% of the section changed)

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the adequacy, effectiveness and success of our business transformation initiatives;

and the impact of and uncertainties related to major natural disasters or catastrophic events, including the coronaviru s ("COVID-19") pandemic.

and the impact of any uncertainties related to major natural disasters or catastrophic events, including the coronaviru s ("COVID-19") pandemic.

ADP disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

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EXECUTIVE OVERVIEW

Highlights from the six months ended December 31, 2020 include:

Highlights from the nine months ended March 31, 2021 include:

Revenue Growth Earnings Before Income Taxes Margin Expansion Diluted EPS Growth

Organic Constant Currency

Revenue Growth Adjusted EBIT Margin Expansion Adjusted Diluted EPS Growth

1% Employer Services (2)% PEO Services

New Business Bookings Growth Average Worksite Employee Growth

Cash Returned via Shareholder Friendly Actions

$1.2B Dividends | $0.9B Share Repurchases

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

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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.

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 execute well as we start to lap the impact of the pandemic.

This quarter, our Employer Services new business bookings reaccelerated and we delivered 7% growth in the quarter, which resulted in 1% growth for the nine months ended March 31, 2021.

We ended the quarter on a particularly strong note with record March bookings performance in Employer Services, well above pre-pandemic fiscal 2019 levels, which we see as a positive signal for client decision-making in the quarters ahead.

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, was slightly lower than expected as it remained relatively flat from the 6% decline in the prior quarter and rounded to a decline of 7% in the nine months ended March 31, 2021.

The PEO average number of Worksite Employees was flat on a year-over-year basis for the three months ended March 31, 2021 and decreased 2% for the nine months ended March 31, 2021.

We continue to invest in headcount to support our growing client base, while focusing on prudent cost control and continuing to execute well on our transformation initiatives.

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

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operational transformation.

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

Our financial condition remains solid at March 31, 2021, and we remain well positioned to support our associates and our clients.

RESULTS AND ANALYSIS OF CONSOLIDATED OPERATIONS

Total Revenues

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

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

Organic constant currency:

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.

Revenues for the three months ended March 31, 2021 increased due to an increase in zero-margin benefits pass-throughs, partially offset by one percentage point of pressure from our interest earned on funds held for clients, discussed below.

Revenues for the nine months ended March 31, 2021 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 pressure 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 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 revenues for the three months ended March 31, 2021 include interest on funds held for clients of $107.4 million, a s co mpared to $158.9 million for the three months ended March 31, 2020.

The decrease in the interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 1.3% for the three months ended March 31, 2021, as compared to 2.0% for the three months ended March 31, 2020.

The decrease was partially offset by an increase in our average client funds balances of 6.0% to $33.2 billion for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020.

Total revenues for the nine months ended March 31, 2021 include interest on funds held for clients of $319.2 million , as compared to $430.4 million for the nine months ended March 31, 2020.

The decrease in the interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 1.6% for the nine months ended March 31, 2021, as compared to 2.2% for the nine months ended March 31, 2020.

Total Expenses

Three Months Ended Six Months Ended

December 31, December 31,

Three Months Ended Nine Months Ended

March 31, March 31,

Change 2021 2020 %

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Total expenses $ 3,054.6 $ 3,015.7 1 % $ 8,677.0 $ 8,706.9 — %

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.

For the thr ee months ended March 31, 2021, operating expenses increased due to an increase in PEO zero-margin benefits pass-through costs to $784.7 million from $747.9 million for the three months ended March 31, 2021 and 2020, respectively, and the impact of foreign currency.

The increases were partially offset by r educed 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 reduced costs from excess capacity headcount actions.

Additionally, increases were further offset by decreases in incentive compensation due to a one-time global associate assistance payment in response to COVID-19 in the three months ended March 31, 2020.

For the nine months ended March 31, 2021, operating expenses were flat due to an increase in our PEO Services zero-margin benefits pass-through costs to $2,291.7 million from $2,169.4 million for the nine months ended March 31, 2021 and 2020, respectively, the impact of foreign currency, and an increase in incentive compensation costs due to decreases in the prior year.

These increases were offset by reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions, reduced travel expenses and decreased pension costs as a result of U.S.

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

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.

Systems development and programming costs increased for the three and nine months ended March 31, 2021 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 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.

Selling, general and administrative expenses increased for the three months ended March 31, 2021 due to an increase in incentive compensation costs, partially offset by a decrease in bad debt expense, reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions for non-sales associates, and decreased selling expense as a result of reduced travel expenses.

Selling, general and administrative expenses decreased for the nine months ended March 31, 2021 due to decreased selling expenses as a result of reduced travel expenses, capitalization of costs to obtain a contract under ASC 606 and reduced marketing expenses.

Expenses were further reduced as a result of our broad-based transformation initiatives and excess capacity headcount actions for non-sales associates and a decrease in bad debt expense .

The decreases were partially offset by an increase in incentive compensation costs and investments in our sales organization.

Interest expense decreased for the three and nine months ended March 31, 2021 due to a decrease in average interest rates for commercial paper borrowings to 0.1% and 0.1% for the three and nine months ended March 31, 2021, respectively, as compared to 1.5% and 1.9% for the three and nine months ended March 31, 2020, respectively.

This was coupled with a decrease in average daily borrowings under our commercial paper program to $0.7 billion and $1.6 billion for the three and nine months ended March 31, 2021, respectively, as compared to $1.2 billion and $2.9 billion for the three and nine months ended March 31, 2020, respectively.

Other (Income)/Expense, net

Three Months Ended Six Months Ended

December 31, December 31,

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 $ Change 2021 2020 $ Change

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Other (income)/expense, net $ (18.8) $ (44.6) $ (25.8) $ (72.7) $ (145.2) $ (72.5)

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.

Other (income)/expense, net, decreased $25.8 million and $72.5 million for the three and nine months ended March 31, 2021, respectively, as a result of a decrease in interest income on corporate funds due to lower interest rates earned and the change in non-service components of pension (income)/expense, net.

See Note 11 for further details on non-service components of pension (income)/expense, net.

Earnings Before Income Taxes

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.

For the three months ended March 31:

For the nine months ended March 31:

Earnings before income taxes decreased for the three months ended March 31, 2021 and was flat for the nine months ended March 31, 2021 due to the components discussed above.

Margin decreased for the three months ended March 31, 2021 as a result of an increase in incentive compensation costs and incremental pressure from growth in our zero-margin benefits pass-throughs.

The margin decrease was partially offset by a decrease in bad debt expense, reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions, decreased selling expenses as a result of reduced travel expenses, 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.

Margin was flat for the nine months ended March 31, 2021 due to reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions, decreased selling expenses as a result of reduced travel expenses, decreased interest expense, decreased pension costs as a result of the U.S.

pension freeze, and a decrease in bad debt expense.

These were offset by an increase in incentive compensation costs and incremental pressure from growth in our zero-margin benefits pass-throughs.

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

For the three months ended December 31:

For the six months ended December 31:

For the three months ended March 31:

For the nine months ended March 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 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.

The effective tax rate for the three months ended March 31, 2021 and 2020 was 24.0% and 23.8%, respectively.

The increase in the effective tax rate is primarily due to the benefit of a foreign tax law change in the three months ended March 31, 2020 and a decrease in the excess tax benefit on stock-based compensation, partially offset by higher reserves for uncertain tax positions and foreign withholding taxes on future distributions in the three months ended March 31, 2020.

The effective tax rate for the nine months ended March 31, 2021 and 2020 was 22.7% and 22.5%, respectively.

The increase in the effective tax rate is primarily due to the ben efit from a valuation allowance release related to foreign tax credits carryforwards in the nine months ended March 31, 2020 and a decrease in the excess tax b enefit on stock-based compensation,

partially offset by favorable adjustments to prior year tax liabilities and the benefits from a foreign tax election in the nine months ended March 31, 2021.

Adjusted Provision for Income Taxes

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 adjusted effective tax rate for the three months ended March 31, 2021 and 2020 was 23.9% and 23.8%, respectively.

The adjusted effective tax rate for the nine months ended March 31, 2021 and 2020 was 22.7% and 22.5%, 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 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.

For the three months ended March 31:

For the nine months ended March 31:

For the three and nine months ended March 31, 2021, net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.

For the three months ended March 31, 2021, diluted EPS was flat as a result of fewer shares outstanding resulting from the repurchase of approximat e ly 2.5 million shares during the three months ended March 31, 2021 and 2.5 million shares during the three months ended March 31, 2020, offset by the issuances of shares under our employee benefit plans and a decrease in net earnings.

For the nine months ended March 31, 2021, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 5.7 million shares during the nine months ended March 31, 2021 and 6.2 million shares during the nine months ended March 31, 2020, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted EPS

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.

For the three months ended March 31:

For the nine months ended March 31:

For the three and nine months ended March 31, 2021, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

ANALYSIS OF REPORTABLE SEGMENTS

Three Months Ended % Change Six Months Ended

December 31, December 31, % Change

Three Months Ended % Change Nine Months Ended

March 31, March 31, % Change

Reported Organic constant currency 2021 2020 As

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Three Months Ended %

Change Six Months Ended %

December 31, December 31,

Change Nine Months Ended %

March 31, March 31,

2021 2020 As Reported 2021 2020 As

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Employer Services

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.

R evenues decreased for the three months ended March 31, 2021 due to two per centage points of pressure from our interest earned on funds held for clients and a decrease in our pays per c ontrol of 6%.

The decrease was partially offset by strong retention, new business started from New Business Bookings and one percentage point of benefit from foreign currency.

R evenues decreased for the nine months ended March 31, 2021 due to one percentage point of pressure from our interest earned on funds held for clients and a decrease in our pays per c ontrol of 7%.

The decrease was offset by strong retention and new business started from New Business Bookings.

Earnings before Income Taxes

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.

Employer Services' earnings before income taxes decreased for the three months ended March 31, 2021 due to decreased revenues discussed above combined with increases in expenses.

The increases in expenses were due to an increase in incentive compensation costs, the impact of foreign currency, and an increase in amortization expense.

The increases in expenses were partially offset by a decrease in bad debt expense, reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions and decreases in selling expenses as a result of reduced travel expenses.

Employer Services' earnings before income taxes decreased for the nine months ended March 31, 2021 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 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,

Additionally, decreases in expenses were due to a decrease in selling expenses as a result of reduced travel expenses and a decrease in bad debt expense.

These decreases in expenses were partially offset by an increase in incentive compensation costs, an increase in amortization expense, and the impact of foreign currency.

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

â 120bps Flat

Employer Services' margin decreased for the three months ended March 31, 2021 due to increases in incentive compensation costs.

The margin decrease was partially offset by reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions, and a decrease in bad debt expense.

Employer Services' margin was flat for the nine months ended March 31, 2021 due to reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions, a decrease in bad debt expense, and a decrease in selling expenses as a result of reduced travel expenses.

This was offset by an increase in incentive compensation costs and an increase in amortization expense.

Three Months Ended Change Nine Months Ended Change

March 31, March 31,

2021 2020 $ % 2021 2020 $ %

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PEO Services' revenues excluding zero-margin benefits pass-throughs $ 539.4 $ 490.4 $ 49.0 10 % $ 1,314.4 $ 1,260.4 $ 54.0 4 %

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.

PEO Services' revenue increased 7% and 5% for the three and nine months ended March 31, 2021, respectively, due to an increase in zero-margin benefits pass-throughs and higher wages per worksite employee.

Earnings before Income Taxes

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:

PEO Services' earni ngs before i ncome taxes increased 14% and 11% for the three and nine months ended March 31, 2021, respecti vely, due to increased revenues discussed above, partially offset by increases in expenses.

The increases in expenses were related to increases in zero-margin benefits pass-through cost s of $36.8 million and $122.3 million, respectively, described above, partially offset by a decrease in selling expenses.

In addition, the increase in expenses for the three and nine months ended March 31, 2021 was partially offset by changes in our estimated losses related to ADP Indemnity.

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

á 100bps á 80bps

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.

PEO Services' margin increased for the three and nine months ended March 31, 2021 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.

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

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

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.

ADP Indemnity recorded a pre-tax benefit of approximately $12.0 million and $27.2 million for the three and nine months ended March 31, 2021, respectively, compared to approximately $5.6 million and $13.6 million for the three and nine months ended March 31, 2020, 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.

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

Three Months Ended % Change Six Months Ended % Change

December 31, December 31,

Three Months Ended % Change Nine Months Ended % Change

March 31, March 31,

2021 2020 As Reported 2021 2020 As Reported

18 unchanged sentences

Transformation initiatives (b) (0.6) 11.1 3.5 19.6

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

Income tax (benefit) provision for transformation initiatives (d) 0.3 (2.7) (0.7) (4.8)

Excess capacity severance charges (c) — — 2.9 —

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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 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.

(b) In the three months ended March 31, 2021, transformation initiatives include gain on sale of assets and net reversals related to other transformation initiatives, including severance.

This is partially offset by impairment charges as a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale.

In the nine months ended March 31, 2021, transformation initiatives include 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.

Unlike other 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 Six Months Ended

December 31, December 31,

Three Months Ended Nine Months Ended

March 31, March 31,

Consolidated revenue growth as reported 1 % — %

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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.

As of March 31, 2021, cash and cash equivalents were $1.9 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 December 31, 2020 and we have sufficient liquidity as noted above;

Our financial condition remains solid at March 31, 2021 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 six months ended December 31, 2020 and 2019, respectively, are summarized as follows:

Six Months Ended

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, 2021 and 2020, respectively, are summarized as follows:

Nine Months Ended

2021 2020 $ Change

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 13,068.2 $ 1,722.8 $ 11,345.4

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.

Net cash flows provided by operating activities increase d due to a net favorable change in the components of working capital as compared to the nine months ended March 31, 2020.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $2,844.0 million, and lower payments related to acquisitions of intangibles in the nine months ended March 31, 2021.

Net cash flows from financing activities changed due to a net increase in the cash flow from client funds obligations of $13,648.4 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, less 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 nine months ended March 31, 2021.

We purchase d approxim ately 5.7 million shares of our common stock at an average price per share of $159.72 duri ng the nine months ended March 31, 2021, as compared to purchases of 6.2 million shares at an average price per share of $160.61 during the nine months ended March 31, 2020.

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

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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.

At March 31, 2021 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,

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 2021 2020

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Weighted average interest rates 0.1 % 1.5 % 0.1 % 1.9 %

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

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

1 unchanged sentence

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

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

At March 31, 2021, 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 Six Months Ended

December 31, December 31,

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 2021 2020

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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 December 31, 2020 under the credit facilities.

We had no borrowings through March 31, 2021 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 primarily fixed rate auto loan, credit card, equipment lease, and rate reduction receivables, secured predominantly by prime collateral.

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

We own AAA-rated senior tranches of securities with predominately prime collateral of fixed-rate auto loan, credit card, equipment lease, and rate reduction receivables.

All collateral on asset-backed securities has performed as expected through March 31, 2021.

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

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

Capital expenditures for the nine months ended March 31, 2021 were $144.4 million, as compared to $133.5 million for the nine months ended March 31, 2020.

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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Details regarding our overall investment portfolio are as follows:

Three Months Ended Six Months Ended

December 31, December 31,

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 2021 2020

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Net realized (gains)/losses on available-for-sale securities $ 0.4 $ (2.5) $ (7.6) $ (11.9)

December 31, 2020 June 30, 2020

March 31, 2021 June 30, 2020

Net unrealized pre-tax gains on available-for-sale securities $ 448.0 $ 876.8

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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.

The annu alized interest rate earned on our entire portfolio decreased from 2.1% for the nine months ended March 31, 2020 to 1.5% for the nine months ended March 31, 2021.

A hypothetical change in both short-term interest rates (e.g., overnight interest rates or the federal funds rate) and intermediate-term interes t rates of 25 basis points applied to the estimated average investment balances and any related short-term borrowings would result in approximately a $20 million impact to earnings before income taxes over the ensuing twelve-month period ending March 31, 2022.

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 March 31, 2022.

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 December 31, 2020.

Approxi mately 74% of our available-for-sale securities held a AAA-rating or AA-rating at March 31, 2021.

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