What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-08-04 compared with 2020-08-05 · 149 added, 161 removed, 302 unchanged (51% of the section changed)

1 unchanged sentence

Tabular dollars are presented in millions, except per share amounts

Prior period total revenues and total costs of revenues reflect the impact of the revision to PEO revenues for comparability.

Refer to Note 1 to our Consolidated Financial Statements for more information on this revision.

The following section discusses our year ended June 30, 2021 (“fiscal 2021”), as compared to year ended June 30, 2020 (“fiscal 2020”).

3 unchanged sentences

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” “is designed to” and other words of similar meaning, are forward-looking statements.

These statements are based on management’s expectations and assumptions and depend upon or refer to future events or conditions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed.

These statements are based on

management’s expectations and assumptions and depend upon or refer to future events or conditions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed.

Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements or that could contribute to such difference include:

4 unchanged sentences

changes in, or interpretations of, existing legislation or regulations;

overall market, political and economic conditions, including interest rate and foreign currency trends;

overall market, political and economic conditions, including interest rate and foreign currency trends and inflation;

competitive conditions;

5 unchanged sentences

the impact of new acquisitions and divestitures;

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

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

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

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.

8 unchanged sentences

Highlights from the year ended June 30, 2021 include:

The global COVID-19 pandemic has continued to evolve and our priority has been and continues to be the safety of our associates and the needs of our clients.

In March 2020, we implemented our Business Continuity Plan and took steps to shift over 98% of our workforce to work from home or off-site locations to ensure uninterrupted service to our clients across our solutions.

While we are well-prepared to continue operating this way, we are in the early stages of bringing back a small portion of our workforce to the office on a volunteer-only basis.

Our sales force will continue to primarily engage with prospects and clients virtually;

however, we are beginning to conduct face-to-face meetings in certain geographies to the extent our employees, clients, and prospects are ready to do so.

We announced for our employees, excluding corporate officers, a one-time global associate assistance payment of $1,000 (or equivalent, based on the average wage parity in each country) in response to COVID-19, totaling $50.4 million.

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

As a leading global provider of cloud-based Human Capital Management (“HCM”) technology solutions to employers around the world, we have continued to process payroll and tax obligations and provide other HCM services to our clients, despite the unexpected challenges that our clients and their employees around the world are facing.

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

For example, the federal government in the United States enacted the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

ADP has been working to provide support to all employers on the relief available under both laws.

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

During the second half of fiscal 2020, we rolled out a range of tools and reports to help our clients through the crisis and prepare for the recovery.

We implemented over 1,000 feature changes to our products in response to 2,000 legislative updates in 60 countries, and we also had approximately 400,000 clients run over 2 million PPP reports for total loan values up to $115 billion dollars.

Many of those clients have also now run the necessary payroll reports to apply for their loans to be forgiven.

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

The significant impact the COVID-19 pandemic is having on our clients and the broader economy is in turn having an effect on our reported metrics.

Despite the fact that we have seen improvement as countries and states are in various stages of reopening and businesses gradually begin to bring a portion of their workers back, we've seen the impact on our full year fiscal 2020 results.

Employer Services New Business Bookings was down 21% for fiscal 2020 as we saw bookings decline significantly and rapidly in mid-March due to the global social distancing guidelines coupled with the delayed decision making of our clients and prospects which continued into the fourth quarter.

We also adjusted gross bookings as a result of client delays on implementation and the expectation that fewer client employees would come on board compared to when the business was originally signed.

3% 60 basis points

Revenue Growth Earnings Before Income Taxes Margin Expansion Diluted EPS Growth

2% (40) basis points

Organic Constant Currency

Revenue Growth Adjusted EBIT Margin Expansion Adjusted Diluted EPS Growth

23% Employer Services

New Business Bookings Growth 2% PEO Services

Average Worksite Employee Growth

Cash Returned via Shareholder Friendly Actions

$1.6B Dividends | $1.4B Share Repurchases

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.

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.

During the fiscal year, we continued to advance our market-leading solutions and achieved some new milestones.

Earlier this year, our next-gen payroll solution earned ADP its 6th consecutive “Top HR Product Award” at the annual HR Technology Conference.

This solution features a highly scalable, policy-based framework that enables easy self-service and powerful transparency.

In February, we announced the launch of Roll, a new mobile-first payroll and tax filing product aimed at small businesses, which combines an AI-driven chat-based interface with the power and scale of our payroll and tax filing expertise.

We continued to add to our robust DataCloud platform by introducing the Diversity, Equity and Inclusion (DEI) Dashboard which can help businesses analyze their diversity landscape through a simple Q&A format and user interface that allows them to better set, track and expand their DEI goals.

For our RUN platform, which is a leading solution in the market with approximately 750,000 clients, we began to roll out a new user experience and launched TimeKeeping Plus, an entirely new, native workforce management solution.

This year, we reached 100,000 clients across our workforce management solutions for the first time, as the pandemic reinforced the need for robust workforce management solutions for our clients while they navigate the new norm of increasingly flexible schedules and work arrangements.

Our suite of HRO solutions also continued to deliver steady growth this year, despite the dynamic economic environment.

Within PEO, the average worksite employee count grew 12% in the fourth quarter resulting in annual growth of 2%.

We also have over 2 million worksite employees on our other HRO solutions within our Employer Services segment, as clients look for ways to outsource parts of the HR function to a best-in-class provider like ADP.

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 Datacloud and ADP Marketplace, and through our compliance expertise.

For fiscal 2021, we drove solid revenue growth of 3% for the year, continued to invest for sustainable growth despite market conditions, and managed any non-essential spend prudently.

Employer Services New Business Bookings was up 23% for fiscal 2021.

In addition, the Employer Services client revenue retention rate for fiscal 2021 improved 170 basis points to 92.2% as compared to our rate for fiscal 2020.

The PEO average number of Worksite Employees increased 2% for fiscal 2021.

Our pays per control metric, which represents growth of the employee base for a large portion of our client base, showed a decline in the fourth quarter

resulting in annual growth of negative 1.0% for fiscal 2020.

In addition, we saw deterioration in Employer Services retention in fiscal 2020 of 20 basis points to 90.5% due to an increase in out-of-business losses.

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

In fiscal 2020, we executed on our Workforce Optimization program and Procurement Transformation initiatives.

For fiscal 2021, we are moving forward with a digital implementation and servicing initiative that leverages many of the capabilities we highlighted at our February 2020 Innovation Day.

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

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

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, turned positive in the fourth quarter resulting in annual growth of negative 3% for fiscal 2021.

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

5 unchanged sentences

For the year ended June 30, respectively:

Organic constant currency:

Revenues for fiscal 2020 increased due to new business started from New Business Bookings, partially offset by business losses .

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

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

á 3% YoY Growth

á 2% YoY Growth, Organic Constant Currency

Revenues for fiscal 2021 increased due to strong retention, new business started from New Business Bookings, an increase in zero-margin benefits pass-throughs and one percentage point of favorability from foreign currency.

This increase is partially offset by a one percentage point of pressure from our interest earned on funds held for clients discussed below .

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

Total revenues in fiscal 2021 include interest on funds held for clients of $422.4 million , as compared to $545.2 million in fiscal 2020.

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Selling, general and administrative expenses 3,040.5 3,003.0 1 %

Interest expense 107.1 129.9 n/m

Interest expense 59.7 107.1 (44) %

Total expenses $ 11,740.5 $ 11,555.2 2 %

n/m - not meaningful

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

Additionally, operating expenses increased due to a change of $59.2 million in our estimated losses related to ADP Indemnity and a one-time global associate assistance payment in response to COVID-19 (“associate assistance payment”).

The increase was partially offset by the impact of foreign currency, reduced incentive compensation costs and reduced costs due to certain cost actions as a result of our transformation initiatives including procurement transformation initiatives in fiscal 2020.

Systems development and programming costs increased for fiscal 2020 due to increased investments and costs to develop, support, and maintain our products, partially offset by capitalization of costs related to our strategic projects, including our next gen platforms.

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

Selling, general and administrative expenses decreased for fiscal 2020 due to reduced in centive compensation costs, broad-based efficiencies as a result of our transformation initiatives including procurement transformation initiatives, a decrease in net charges related to our transformation initiatives, reduced facilities costs as a result of COVID-19, a nd impact of foreign currency.

The decrease was partially offset by increased selling expenses, an increase in our allowance for doubtful acco unts of $26.0 million as a result of an increase in estimated credit losses related to the impact of COVID-19 on our clients (“increase in our allowance for doubtful accounts”), severance cost as a result of COVID-19 of $25.4 million, a legal settlement accrual of $25.0 million, and an associate assistance payment.

Other Income, net

For the year ended June 30, 2021, operating expenses increased due to the increase in our PEO Services zero-margin benefits pass-through costs to $3,092.0 million from $2,907.7 million for the year ended June 30, 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 partially offset by reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions in the prior year, a change of $52.5 million in our estimated losses related to ADP Indemnity compared to prior year, 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”).

Systems development and programming costs increased fo r fiscal 2021 due to increased investments and costs to develop, support, and maintain our products, partially offset by capitalization of costs related to our strategic projects, including our next gen platforms.

Depreciation and amortization expe nse increased relat ed to the amortization of our acquisitions of intangibles and internally developed software.

Selling, general and administrative expenses increased for the year ended June 30, 2021 due to an increase in

incentive compensation costs, investments in our sales organization, and the impact of foreign currency, partially offset by a decrease in charges related to transformation initiatives, reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions in the prior year for non-sales associates, capitalization of costs to obtain a contract under ASC 606, reduced travel expenses, legal settlements, and a decrease in bad debt expense.

Interest expense decreased for the year ended June 30, 2021 primarily due to a decrease in average interest rates for commercial paper borrowings to 0.1% for the year ended June 30, 2021, as compared to 1.6% for the year ended June 30, 2020.

This was coupled with a decrease in average daily borrowings under our commercial paper program to $1.6 billion for the year ended June 30, 2021, as compared to $2.7 billion for the year ended June 30, 2020.

Other (Income)/Expense, net

(In millions)

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Gain on sale of investment (1.7) (0.2) 1.5

Non-service components of pension (income)/expense, net (74.5) (6.7) 67.8

Other income, net $ (148.0) $ (111.1) $ 36.9

Other income, net, increased $36.9 million in fiscal 2020, as compared to fiscal 2019 due to the change in non-service components of pension (income)/expense, net, and the items described below.

See Note 10 of our Consolidated Financial Statements for further details on non-service components of pension (income)/expense, net.

certain leased locations early and recorded total impairment charges of $4.6 million to operating right-of-use assets and certain related fixed assets associated with the vacated locations.

In fiscal 2019, the Company wrote down $12.1 million of internally developed software which was determined to have no future use due to redundant software identified as part of a recent acquisition.

In fiscal 2019, the Company recognized a gain of $15.7 million in relation to the sale of an investment held at cost acquired in prior years and subsequently sold during fiscal 2019.

Earnings before Income Taxes ("EBIT")

For the year ended June 30:

Earnings before income taxes increased in fiscal 2020 due to t he increases in revenues partially offset by the increases in expenses discussed above.

Overall margin increased in fiscal 2020 as a result of our continued successful execution of our broad-based transformation initiatives including our procurement transformation initiatives as well as operating efficiencies.

In addition, our margin improvement was aided by reduced incentive compensation costs, lower transformation initiative related charges of $60.9 million, and reduced facilities costs as result of COVID-19.

These were partially offset by incremental pressure from growth in our zero-margin benefits pass-throughs, an increase in selling expenses, an increase in amortization expense, a change in our estimated losses related to ADP Indemnity, an associate assistance payment, an increase in our allowance for doubtful accounts, severance costs as a result of COVID-19, and a legal settlement accrual.

Adjusted EBIT

For the year ended June 30:

Adjusted EBIT excludes certain interest amounts, net charges related to our transformation initiatives, the impact of the severance charges related to COVID-19, accrual for legal settlement, and the gain on sale of assets in the respective periods.

For fiscal 2020, adjusted EBIT increased due to increases in revenues offset by the increases in ex penses discussed abov e.

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

Non-service components of pension income, net (58.6) (74.5) (15.9)

Other (income)/expense, net $ (96.3) $ (148.0) $ (51.7)

Other (income)/expense, net, decreased $51.7 million in fiscal 2021 , as compared to fiscal 2020 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, net, and the items described below.

See Note 10 of our Consolidated Financial Statements for further details on non-service components of pension income, net.

In fiscal 2021, the Company recorded impairment charges of $19.9 million which is comprised of a write down of $10.5 million related to internally developed software which was determined to have no future use, impairment charges of $9.4 million related to operating right-of-use assets and certain related fixed assets associated with vacating certain leased locations early, and recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale.

In fiscal 2020, the Company recorded impairment charges of $29.9 million, which is comprised of $25.3 million as a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale and vacating certain leased locations early and recorded total impairment charges of $4.6 million related to operating right-of-use assets and certain related fixed assets associated with the vacated locations.

Earnings Before Income Taxes

For the year ended June 30, respectively:

á 6% YoY Growth

á 60 bps YoY Growth

Earnings before income taxes increased in fiscal 2021 due to the increases in revenues partially offset by the increases in expenses discussed above.

Overall margin increased in fiscal 2021 as a result of operational efficiencies, coupled with a decrease in charges related to transformation initiatives, legal settlements, reduced costs as a result of our broad-based transformation initiatives and excess capacity headcount actions in the prior year, a change of $52.5 million in our estimated losses related to ADP Indemnity compared to prior year, decreased selling expense, and decreased interest expense.

These were partially offset by an increase in incentive compensation costs, a decrease in interest earned on funds held for clients, and incremental pressure from growth in our zero-margin benefits pass-throughs.

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

For the year ended June 30, respectively:

á 1% YoY Growth

â 40 bps YoY Growth

Adjusted EBIT and Adjusted EBIT margin exclude certain interest amount s, legal settlements, 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 in fiscal 2021 and 2020 was 22.7% and 22.5%, respectively.

The decrease in the effective tax rate is primarily due to the release of a valuation allowance related to foreign tax credit carryforwards, a reduction in the operating tax rate due to the mix between domestic and foreign earnings, the benefit of a foreign tax law change and lower reserves for uncertain tax positions during fiscal 2020 partially offset by favorable adjustments to prior year tax liabilities during fiscal 2019.

The increase in the effective tax rate is primarily due to combined benefits from a valuation allowance release related to foreign tax credit carryforwards and a foreign tax law change during fiscal 2020 as well as a decrease in the excess tax benefit on stock-based compensation, partially offset by favorable adjustments to prior year tax liabilities during fiscal 2021.

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

3 unchanged sentences

Net Earnings and Diluted Earnings per Share

For the year ended June 30:

For fiscal 2020, the net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.

For fiscal 2020, diluted EPS increased as a result of an increase in net ear nings and the impact of fewer shares outstanding, resulting from the repurchase of approximate ly 6.2 million sha res in fiscal 2020 and 6.5 million shares in fiscal 2019, partially offset by the issuances of shares under our employee benefit plans.

For the year ended June 30, respectively:

á 5% YoY Growth

á 6% YoY Growth

For fiscal 2021, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

For fiscal 2021, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 8.2 million shares during fiscal 2021 and 6.2 million shares during fiscal 2020, partially offset by the issuances of shares under our employee benefit plans.

Adjusted Net Earnings and Adjusted Diluted Earnings per Share

For the year ended June 30:

For fiscal 2020, adjusted net earnings reflect the changes described above in our adjusted EBIT and our adjusted effective tax rate.

For fiscal 2020, our adjusted diluted EPS reflects the changes described above in our adjusted net earnings and shares outstanding.

For the year ended June 30, respectively:

á 1% YoY Growth

á 2% YoY Growth

For fiscal 2021, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

ANALYSIS OF REPORTABLE SEGMENTS

14 unchanged sentences

Employer Services

Revenues increase d in fiscal 2020 due to new business started from New Business Bookings, partially offset by business losses and a decrease in interest earned on funds held for clients.

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

Our revenue growth was also partially offset by a decrease in the number of employees on our clients' payrolls as our pays per control decreased 1.0% in fiscal 2020, as com pared to fiscal 2019.

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

geographic regions.

In addition, the Employer Services client revenue retention rate for fis cal 2020 declined 20 basis points to 90.5% as compared to our rate for fiscal 2019, driven by an increase in out-of-business losses.

Revenues increased in fiscal 2021 due to strong retention, business started from New Business Bookings and one percentage point of favorability from foreign currency.

Employer Services client revenue retention rate for fiscal 2021 improved 170 basis points to 92.2% as compared to our rate for fiscal 2020.

Increases in revenues were partially offset by a decrease in interest earned on funds held for clients.

Earnings before Income Taxes

Employer Services’ earnings before income taxes increase d in fiscal 2020 due to increased revenues discussed above and partially offset by increased expenses due to an increase in selling expenses, an increase in amortization expense, and an increase in our allowance for doubtful accounts.

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

Employer Services’ earnings before income taxes was flat in fiscal 2021 due to increased revenues discussed above offset by increases in expenses.

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

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

For the year ended June 30, respectively:

Employer Services' overall margin increase d for fiscal 2020 as a result of the continued successful execution of our broad-based transformation initiatives including our procurement transformation initiatives, as well as operating efficiencies and reduced incentive compensation costs.

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

â 40 bps YoY Growth

Employer Services' overall margin decreased for fiscal 2021 due to an increase in incentive compensation costs, a decrease in interest earned on funds held for clients, and an increase in amortization expense.

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

Years Ended Change

3 unchanged sentences

PEO Services' revenues excluding zero-margin benefits pass-throughs $ 1,726.3 $ 1,603.8 $ 122.5 8 %

PEO Services' revenues increased 8% in fiscal 2020 due to a 4% increase in the av erage number of Worksite Employees in fiscal 2020 d riven by an increase in the number of new PEO Services clients and growth in our existing clients.

Additionally, PEO Services' revenues, excluding zero-margin benefits pass-through costs, increased 5% in fiscal 2020 and includes pressure from lower workers compensation and State Unemployment Insurance (“SUI”) costs and related pricing.

PEO Services' revenues increased 7% and PEO Services' revenues excluding zero-margin benefits pass-through costs increased 8% in fiscal 2021.

PEO Services' revenues increased due to a 2% increase in the average number of Worksite Employees in fiscal 2021 driven by an increase in the number of new PEO Services clients, partially offset by a modest decline in pays per control.

Earnings before Income Taxes

PEO Services’ earnings before income taxes decreased 2% in fiscal 2020 due to the increase in expenses partially offset by the increase in revenues discussed above.

The increase in expenses was due to the increase in zero-margin benefits pass-through costs of $260.2 million describe d abov e and a change of $59.2 million in our estimated losses related to ADP Indemnity in fiscal 2020, as compared to fiscal 2019.

PEO Services’ earnings before income taxes increased 18% in fiscal 2021 due to increased revenues discussed above, partially offset by increases in expenses.

The increases in expenses were due to the increase in zero-margin benefits pass-through costs of $184.3 million described above, partially offset by a change of $52.5 million in our estimated losses related to ADP Indemnity compared to the prior year, and a decrease in selling expenses.

For the year ended June 30, respectively:

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

á 140 bps YoY Growth

PEO Services' overall margin increased for fiscal 2021 due to an increase in revenues as discussed above, a change in our estimated losses related to ADP Indemnity compared to the prior year, and a decrease in selling expenses.

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

PEO Services has secured a workers’ compensation and employer’s liability insurance policy that has a $1 million per occurrence retention and, in fiscal years 2012 and prior, aggregate stop loss insurance that covers any aggregate losses within the $1 million retention that collectively exceed a certain level, from an admitted and licensed insurance company of AIG.

PEO Services has secured a workers’ compensation and employer’s liability insurance policy that caps the exposure for each claim at $1 million per occurrence and has also secured aggregate stop loss insurance that caps aggregate losses at a certain level in fiscal years 2012 and prior from an admitted and licensed insurance company of AIG.

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

ADP Indemnity recorded a pre-tax loss of approximately $20 million in fiscal 2020 and a pre-tax benefit of approximately $39 million in fiscal 2019, which were primarily a result of changes in our estimated actuarial losses.

Beginning in fiscal year 2013, ADP Indemnity paid premiums to enter into reinsurance arrangements with ACE American Insurance Company, a wholly-owned subsidiary of Chubb Limited, to cover substantially all losses incurred by ADP Indemnity during these policy years.

Additionally, starting 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 (“Chubb”), to cover substantially all losses incurred by the Company up to the $1 million per occurrence related to the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' worksite employees.

Each of these reinsurance arrangements limits our overall exposure incurred up to a certain limit.

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

During fiscal 2020, ADP Indemnity paid a premium of $215 million to enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2020 policy year to $1 million per occurrence related to the workers' compensation and employer's liability deductible reimbursement insurance protection for PEO Services' worksite employees.

The Company believes the likelihood of ultimate losses exceeding this limit is remote.

During fiscal 2021, ADP Indemnity paid a premium of $240 million to enter into a reinsurance arrangement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2021 policy year up to $1 million per occurrence.

ADP Indemnity recorded a pre-tax benefit of approximately $32 million in fiscal 2021 and a pre-tax loss of approximately $20 million in fiscal 2020, which were primarily a result of changes in our estimated actuarial losses.

ADP Indemnity paid a premium of $260 million in July 2021 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for fiscal 2022 policy year on terms substantially similar to the fiscal 2021 reinsurance policy.

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

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

Non-GAAP Financial Measures

22 unchanged sentences

Transformation initiatives (b) — 77.4

COVID-19 related charges (c) 25.4 —

Legal settlement (d) 25.0 —

Excess capacity severance charges (c) 2.9 25.4

Legal settlements (d) (30.7) 25.0

Adjusted EBIT $ 3,384.2 $ 3,348.9 1 %

3 unchanged sentences

Transformation initiatives (e) — 19.2

COVID-19 related charges (e) 6.3 —

Legal settlement (e) 6.2 —

Tax Cuts and Jobs Act (f) — 0.5

Excess capacity severance charges (e) 0.5 6.3

Legal settlements (e) (7.5) 6.2

Adjusted provision for income taxes $ 755.7 $ 747.7 1 %

Adjusted effective tax rate (g) 22.6 % 23.8 %

Adjusted effective tax rate (f) 22.7 % 22.6 %

Net earnings $ 2,598.5 $ 2,466.5 5 %

3 unchanged sentences

Income tax benefit for transformation initiatives (e) — (19.2)

COVID-19 related charges (c) 25.4 —

Income tax benefit for COVID-19 related charges (e) (6.3) —

Legal settlement (d) 25.0 —

Income tax benefit for legal settlement (e) (6.2) —

Tax Cuts and Jobs Act (f) — (0.5)

Excess capacity severance charges (c) 2.9 25.4

Income tax benefit for excess capacity severance charges (e) (0.5) (6.3)

Legal settlements (d) (30.7) 25.0

Income tax provision/ (benefit) for legal settlements (e) 7.5 (6.2)

Adjusted net earnings $ 2,577.7 $ 2,562.5 1 %

2 unchanged sentences

Transformation initiatives (b) (e) — 0.13

COVID-19 related charges (c) (e) 0.04 —

Legal settlement (d) (e) 0.04 —

Tax Cuts and Jobs Act (f) — —

Excess capacity severance charges (c) (e) 0.01 0.04

Legal settlements (d) (e) (0.05) 0.04

Adjusted diluted EPS $ 6.02 $ 5.92 2 %

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

fundamental to the underlying operations of our business model.

The adjustments in the table above represent the interest income and interest expense that 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 fiscal 2020, transformation initiatives include:

(i) charges of $29.9 million related to impairment charges as a result of recognizing certain owned facilities at fair value given intent to sell and accordingly classified as held for sale and impairment charges of operating right-of-use assets and certain related fixed assets associated with the vacating of certain leased locations;

(ii) charges of $29.1 million related to severance;

(iii) charges of $28.5 million related to other transformation initiatives;

all of which were partially offset by net reversals of charges related to Voluntary Early Retirement Program (“VERP”) and Service Alignment Initiative (“SAI”) of $10.1 million.

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

Unlike other severance charges in prior periods that are not included as an adjustment to get to adjusted results, these specific charges relate to actions that are part of our broad-based, company-wide initiatives to address excess capacity across our business and functions due to the COVID-19 pandemic.

(d) Represents a legal settlement accrual related to the Illinois Biometric Privacy Act matter.

Refer to Note 12 of our Consolidated Financial Statements for additional detail.

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

(f) There was no impact from the Tax Cuts and Jobs Act in fiscal 2020.

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

(b) In fiscal 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, offset by gain on sale of assets and 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.

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 initiatives to address excess capacity across our business and functions, including charges in fiscal 2020 due to the COVID-19 pandemic.

(d) Represents legal settlements including an insurance recovery in fiscal 2021.

(e) The income tax provision/(benefit) was calculated based on the marginal rate in effect for the year ended June 30, 2021.

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

The following table reconciles our reported growth rates to the non-GAAP measure of organic constant currency, which excludes the impact of acquisitions, the impact of dispositions, and the impact of foreign currency.

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As of June 30, 2021, cash and cash equivalent s were $2.6 billion, which were primarily invested in time deposits and money market funds.

For corporate liquidity, we expect existing cash, cash equivalents, long-term marketable securities, cash flow from operations together with our $9.7 billion of co mmitted credit facilities and our ability to access both long-term and short-term debt financing from the capital markets will be adequate to meet our operating, investing, and financing activities such as regular

quarterly dividends, share repurchases, and capital expenditures for the foreseeable future.

Our financial condition remains solid at June 30, 2020 and have sufficient liquidity as note above;

Our financial condition remains solid at June 30, 2021 and we have sufficient liquidity as noted above;

how ever, given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 pandemic, we will continue to evaluate the nature and extent of the impact to our financial condition and liquidity.

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Operating, Investing and Financing Cash Flow s

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

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows are summarized as follows:

Years ended June 30,

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 6,089.6 $ 257.4 $ 5,832.2

Net cash flows provided by operating activities in fiscal 2020 and fiscal 2019 include cash payments for reinsurance agreements of $215.0 million and $218.0 million, respectively, which represent the policy premium f or the entire fiscal year.

The increase in operating cash provided is primarily due to growth in our business supplemented by a growth in non-cash expenses within operating activities and net favorable change in the components of working capital as com pared to fiscal 2019.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $5,256.9 million, proceeds from the sale of assets and lower payments related to acquisitions of business, partially offset by payments related to acquisitions of intangibles and payments related to capital expenditures i n fiscal 2020.

Net cash flows from financing activities changed due to a net decrease in the cash flow from client funds obligations of $4,909.2 million , which is due to the timing of impounds from our clients and payments to our clients' employees and other pay ees, more cash returned to shareholders via dividends and share repurchases and a net repayment of reverse repurchase agreements in fiscal 2020.

Net cash flows provided by operating activities increase d due to a net favorable change in the components of operating assets and liabilities as compared to the year ended June 30, 2020.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $6,771.2 million.

Net cash flows from financing activities changed due to a net increase in the cash flow from client funds obligations of $11,549.4 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, and proceeds fro m debt issuances.

These were partially offset by payments of debt, more cash returned to shareholders via share repurchases and dividends, and settlement of cash flow hedges in fiscal 2021.

We purchased approximately 8.2 million shares of our common stock at an average price per share of $170.04 during fis cal 2021, as compared to purchases of 6.2 million shares at an average price per share of $160.61 during fiscal 2020.

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Capital Resources and Client Fund Obligations

On July 15, 2020, the Company gave notice to the current holders of our intention to redeem the $1.0 billion 2.25% Senior Notes due September 15, 2020 on the call date of August 15, 2020.

It is the Company's intent to issue new long-term notes to fund this redemption and which also may be used for general corporate purposes.

If necessary in the interim, the Company intends to issue commercial paper to fund the Notes’ redemption until such time as the new notes are issued.

We have $3.0 billion of senior unsecured notes with maturity dates in 2025, 2028, and 2030.

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short-term funding requirements related to client funds are sometimes obtained on an unsecured basis through the issuance of commercial paper, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securiti es.

In June 2020, the Company decreased its U.S.

short-term commercial paper program to provide for the issuance of up to $9.7 billion from $10.3 billion in aggregate maturity value.

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

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

Our c ommercial paper program is rated A-1+ by Standard and Poor’s, Prime-1 (“P-1”) by Moody’s and F1+ by Fitch.

These ratings denote the highest quality commercial paper securities.

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Weighted average interest rates 0.1 % 1.6 %

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

Our U.S., Canadian, and United Kingdom short-term funding requirements related to client funds obligations are sometimes obtained on a secured basis through the use of reverse repurchase agreements, which are collateralized principally by government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.

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

government and government agency securities, rather than liquidating previously-collected client funds that have already been invested in available-for-sale securities.

These agreements generally have terms ranging from overnight to up to five business days.

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

At June 30, 2020 and 2019, the Company had $13.6 million and $262.0 million, respectively, of outstanding obligations related to the reverse repurchase agreements.

At June 30, 2021 and 2020, there were $23.5 million and $13.6 million, respectively, of outstanding obligations related to the reverse repurchase agreements.

Details of the reverse repurchase agreements are as follows:

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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 Home Loan Banks and Federal Farm Credit Banks.

All collateral on asset-backed securities is performing as expected through June 30, 2021.

In addition, we own U.S.

government securities which primarily include 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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Debt Obligations (1) $ 64.2 $ 128.5 $ 1,111.8 $ 2,092.1 $ — $ 3,396.6

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

Operating Lease Obligations (2) $ 103.2 $ 160.7 $ 102.5 $ 100.9 $ — $ 467.3

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(1) These amounts represent the principal and interest payments of our debt.

(2) During fiscal 2020, we entered into a series of treasury rate lock transactions with an aggregate notional amount totaling $400.0 million, to hedge our exposure to changes in interest rates in anticipation of the refinancing of our fixed-rate notes due September 15, 2020.

These amounts represent the aggregate fair value as of June 30, 2020, and is included in other current liabilities on our Consolidated Balance Sheet.

Refer to Note 9 of our Consolidated Financial Statements for additional information.

(2) Included in these amounts are various facilities and equipment leases.

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As of June 30, 2021, the obligations relating to these matters, which are expected to be paid in fiscal 2022, total $34,403.8 million and were recorded in client funds obligations on our Consolidated Balance Sheets.

We had $26,708.1 million of cash and cash e quivalents and marketable securities that were impounded from our clients to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as of June 30, 2020.

We had $34,905.8 million of cas h and cash e quivalents and marketable securities that were impounded from our clients to satisfy such obligations recorded in funds held for clients on our Consolidated Balance Sheets as of June 30, 2021.

Separately, ADP Indemnity paid a p remium of $260 million in Ju ly 2021 to enter into a reinsurance agreement with Chubb to cover substantially all losses incurred by ADP Indemnity for the fiscal 2022 policy year.

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Refer to the “Analysis of Reportable Segments - PEO Services” above for additional information regarding ADP Indemnity.

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

performance of our services and products.

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

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

Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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

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

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

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

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

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

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

As a result of this practice, we have consistently maintained the required level of client funds assets to satisfy all of our obligations.

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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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Total 1.5 % 2.1 %

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

Realized losses on available-for-sale securities 37.6 2.7

Net realized (gains)/losses on available-for-sale securities $ (11.3) $ (12.9)

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Total available-for-sale securities at fair value $ 24,371.7 $ 21,576.6

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

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

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

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

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

appropriate, through the use of derivative financial instruments.

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis