What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-29 compared with 2021-04-30 · 131 added, 177 removed, 241 unchanged (56% of the section changed)

30 unchanged sentences

EXECUTIVE OVERVIEW

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

Highlights from the three months ended September 30, 2021 include:

10% 150 basis points

Revenue Growth Earnings Before Income Taxes Margin Expansion Diluted EPS Growth

10% 140 basis points

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

7% Employer Services

Pays Per Control 15% PEO Services

Average Worksite Employee Growth

Cash Returned via Shareholder Friendly Actions

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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 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.

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

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

The recognition we have received in the market for our next gen payroll platform and in winning the 2020 HR Executive 'Top HR Product' award reflect our commitment to innovation and strong execution by our associates.

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

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

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

operational transformation.

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

In the first quarter, we continued to advance our market-leading solutions and achieved some new milestones.

We completed the initial roll-out of our new user experience for RUN Powered by ADP® , which represents the most comprehensive refresh we’ve done since its initial launch, and we seamlessly moved hundreds of thousands of clients over to a new, better, user experience.

We also won our 7th consecut ive Top HR Product award, this time for our innovative Diversity, Equity, and Inclusion solution on our DataCloud platform.

Innovation is part of ADP’s DNA, and we have a growing, agile research and development organization committed to delivering solutions in the market that push the boundary of what HCM solutions can do for employers.

For the three months ended September 30, 2021, we drove solid revenue growth of 10% for the quarter and managed any non-essential spend prudently.

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, grew 7% for the t hree months ended September 30, 2021 as compared to the three months ended September 30, 2020 .

The PEO average worksite e mployees increased 15% for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

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

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

We are committed to building upon our past successes by investing in our business through enhancements in research and development and by driving meaningful transformation in the way we operate.

Our financial condition remains solid at September 30, 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 nine months ended March 31, respectively:

Organic constant currency:

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.

For the three months ended September 30, respectively:

á 10% YoY Growth

á 10% YoY Growth, Organic Constant Currency

Revenues for the three months ended September 30, 2021 increased due to strong retention, new business started from New Business Bookings, an increase in zero-margin benefits pass-throughs, and an increase 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 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 revenues for the three months ended September 30, 2021 include interest on funds held for clients of $101.1 million, as compared to $106.5 million for the three months ended September 30, 2020.

The decrease in the interest earned on funds held for clients resulted from the decrease in our average interest rate earned to 1.5% for the three months ended September 30, 2021, as compared to 1.9% for the three months ended September 30, 2020, partially offset by an increase in our average client funds balances of 22.2% to $26.9 billion for the three months ended September 30, 2021.

Total Expenses

Three Months Ended Nine Months Ended

March 31, March 31,

Change 2021 2020 %

Three Months Ended

September 30,

Costs of revenues:

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Total expenses $ 2,960.3 $ 2,730.4 8 %

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”).

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 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.

For the three months ended September 30, 2021, operating expenses increased due to an increase in our PEO Services zero-margin benefits pass-through costs to $839.5 million from $741.0 million for the three months ended September 30, 2021 and 2020, respectively.

Additionally, operating expenses increased due to increased costs to service our client base in support of our growing revenue, and the impact of foreign currency, partially offset by a decrease in incentive compensation.

Systems development and programming costs increased for the three months ended September 30, 2021 due to increased investments and costs to develop, support, and maintain our products.

Selling, general and administrative expenses increased for the three months ended September 30, 2021 due to increased selling expenses as a result of investments in our sales organization, increased marketing expenses, and increased travel expenses.

The increases were partially offset by capitalization of costs to obtain a contract under ASC 606 and a decrease in bad debt expense.

Interest expense increased for the three months ended September 30, 2021 primarily due to the issuance of a 7-year fixed-rate note totaling $1.0 billion issued in fiscal 2021, as compared to the three months ended September 30, 2020.

Other (Income)/Expense, net

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 $ Change 2021 2020 $ Change

Three Months Ended

September 30,

2021 2020 $ Change

Interest income on corporate funds $ (9.7) $ (13.8) $ (4.1)

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Other (income)/expense, net $ (28.8) $ (24.9) $ 3.9

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.

Other (income)/expense, net, increased $3.9 million for the three months ended September 30, 2021, as a result of the changes in non-service components of pension (income)/expense and impairment of assets, partially offset by a net decrease in interest income on corporate funds primarily due to lower interest rates earned.

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

Earnings Before Income Taxes

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 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.

For the three months ended September 30, respectively:

á 18% YoY Growth

á 150 bps YoY Growth

Earnings before income taxes increased for the three months ended September 30, 2021 due to the components discussed above.

Margin increased for the three months ended September 30, 2021 due to increases in revenues, discussed above, and operating efficiencies, partially offset by incremental pressure from growth in our zero-margin benefits pass-throughs, and a decrease in interest earned on funds held for clients.

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

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.

For the three months ended September 30, respectively:

á 17% YoY Growth

á 140 bps YoY Growth

Adjusted EBIT and Adjusted EBIT margin exclude interest income and interest expense that are not related to our client funds extended investment strategy, 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 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.

The effective tax rate for the three months ended September 30, 2021 and 2020 was 22.2% and 21.3%, respectively.

The increase in the effective tax rate is primarily due to favorable adjustments to prior year tax liabilities in the three months ended September 30, 2020 partially offset by an increase in the excess tax benefit on stock-based compensation in the three months ended September 30, 2021.

Adjusted Provision for Income Taxes

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 adjusted effective tax rate for the three months ended September 30, 2021 and 2020 was 22.2% and 21.3%, respectively.

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

Net Earnings and Diluted EPS

For the three months ended March 31:

For the nine months ended March 31:

For the three and nine months ended March 31, 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.

For the three months ended September 30, respectively:

á 16% YoY Growth

á 18% YoY Growth

For the three months ended September 30, 2021, net earnings reflect the changes described above in our earnings before income taxes and our effective tax rate.

For the three months ended September 30, 2021, diluted EPS increased as a result of the impact of fewer shares outstanding resulting from the repurchase of approximately 2.6 million shares during the three months ended September 30, 2021 and 1.7 million shares during the three months ended September 30, 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 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.

For the three months ended September 30, respectively:

á 16% YoY Growth

á 17% YoY Growth

For the three months ended September 30, 2021, adjusted net earnings and adjusted diluted EPS reflect the changes in components described above.

ANALYSIS OF REPORTABLE SEGMENTS

Three Months Ended % Change Nine Months Ended

March 31, March 31, % Change

Reported Organic constant currency 2021 2020 As

Three Months Ended

September 30, % Change

Reported Organic constant currency

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PEO Services 1,264.1 1,095.9 15 % 15 %

Other (2.1) (2.2) n/m n/m (5.1) (7.4) n/m n/m

Other (3.3) (2.0) n/m n/m

$ 3,832.3 $ 3,470.7 10 % 10 %

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Three Months Ended %

Change Nine Months Ended %

March 31, March 31,

2021 2020 As Reported 2021 2020 As

September 30,

Employer Services $ 784.0 $ 689.3 14 %

PEO Services 193.0 159.4 21 %

Other (112.5) (120.6) n/m (309.2) (309.0) n/m

Other (76.2) (83.5) n/m

$ 900.8 $ 765.2 18 %

1 unchanged sentence

Employer Services

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.

Revenues increased for the three months ended September 30, 2021 due to strong retention and new business started from New Business Bookings, and an increase in our pays per control of 7%, partially offset by a decrease in interest earned on funds held for clients.

Earnings before Income Taxes

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 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,

Employer Services' earnings before income taxes increased for the three months ended September 30, 2021 due to increased revenues discussed above, partially offset by increases in expenses.

The increases in expenses were due to increased costs to service our client base in support of our growing revenue, increases in selling expenses, and the impact of foreign currency.

These increases in expenses were partially offset by a decrease in bad debt expense and a decrease in incentive compensation costs.

For the three months ended September 30, respectively:

á 150 bps YoY Growth

Employer Services' margin increased for the three months ended September 30, 2021 due to increases in revenues, discussed above, and operating efficiencies, partially offset by a decrease in interest earned on funds held for clients.

Three Months Ended Change

September 30,

2021 2020 $ %

2 unchanged sentences

PEO Services' revenues excluding zero-margin benefits pass-throughs $ 424.6 $ 354.9 $ 69.7 20 %

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.

PEO Services' revenue increased 15% for the three months ended September 30, 2021 due to an increase in zero-margin benefits pass-throughs, and a 15% increase in the average worksite employees for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020.

Earnings before Income Taxes

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 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.

PEO Services' earnings before income taxes increased 21% for the three months ended September 30, 2021, due to increased revenues discussed above, partially offset by increases in zero-margin benefits pass-through costs of $98.5 million.

For the three months ended September 30, respectively:

á 70 bps YoY Growth

PEO Services' margin increased for the three months ended September 30, 2021 due to an increase in revenues, discussed above, and operating efficiencies.

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.

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 .

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.

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

ADP Indemnity recorded a pre-tax benefit of approximately $10.8 million for the three months ended September 30, 2021, compared to approximately $10.4 million for the three months ended September 30, 2020, which were primarily a result of changes in our estimated actuarial losses.

In July 2021, ADP Indemnity paid a premium of $260 million t o enter into a reinsurance arrangement with Chubb Limited to cover substantially all losses incurred by ADP Indemnity for the fiscal 2022 policy year on terms substantially similar to the fiscal 2021 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 Nine Months Ended % Change

March 31, March 31,

2021 2020 As Reported 2021 2020 As Reported

Three Months Ended % Change

September 30,

2021 2020 As Reported

Net earnings $ 700.5 $ 602.1 16 %

2 unchanged sentences

All other interest income (a) (1.3) (1.8)

Gain on sale of assets — — — (0.2)

Transformation initiatives (b) (2.1) 0.8

Excess capacity severance charges (c) — — 2.9 —

Excess capacity severance charges — 2.4

Adjusted EBIT $ 915.2 $ 780.7 17 %

1 unchanged sentence

Provision for income taxes $ 200.3 $ 163.1 23 %

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

Transformation initiatives (d) (0.3) 2.7 0.7 4.8

Excess capacity severance charges (d) — — 0.7 —

Transformation initiatives (c) (0.6) 0.2

Excess capacity severance charges (c) — 0.6

Adjusted provision for income taxes $ 199.7 $ 163.9 22 %

Adjusted effective tax rate (e) 23.9 % 23.8 % 22.7 % 22.5 %

Adjusted effective tax rate (d) 22.2 % 21.3 %

Net earnings $ 700.5 $ 602.1 16 %

Gain on sale of assets — — — (0.2)

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

Transformation initiatives (b) (2.1) 0.8

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

Excess capacity severance charges (c) — — 2.9 —

Income tax benefit for excess capacity severance charges (d) — — (0.7) —

Income tax provision/(benefit) for transformation initiatives (c) 0.6 (0.2)

Excess capacity severance charges — 2.4

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

Adjusted net earnings $ 699.0 $ 604.5 16 %

Diluted EPS $ 1.65 $ 1.40 18 %

Gain on sale of assets — — — —

Transformation initiatives (b) (d) — 0.02 0.01 0.03

Excess capacity severance charges (c) (d) — — 0.01 —

Transformation initiatives (b) (c) — —

Excess capacity severance charges (c) — —

Adjusted diluted EPS $ 1.65 $ 1.41 17 %

1 unchanged sentence

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 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.

(b) In the three months ended September 30, 2021, transformation initiatives include 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.

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

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

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

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

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

The impact of acquisitions and dispositions is calculated by excluding the current year revenues of acquisitions until the one-year anniversary of the transaction and by excluding the prior year revenues of divestitures for the one-year period preceding the transaction.

The impact of acquisitions and dispositions is calculated by excluding the current year revenues of acquisitions until the one-year anniversary of the

transaction and by excluding the prior year revenues of divestitures for the one-year period preceding the transaction.

The impact of foreign currency is determined by calculating the current year result using foreign exchange rates consistent with the prior year.

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

Three Months Ended Nine Months Ended

March 31, March 31,

Three Months Ended

September 30,

Consolidated revenue growth as reported 10 %

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCE S

As of March 31, 2021, cash and cash equivalents were $1.9 billion, which were primarily invested in time deposits and money market funds.

As of September 30, 2021, cash and cash equivalents were $1.6 billion , which were primarily invested in time deposits and money market funds.

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

Our financial condition remains solid at 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.

Our financial condition remains solid at September 30, 2021 and we have sufficient liquidity.

For client funds liquidity, we have the ability to borrow through our financing arrangements under our U.S.

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Operating, Investing and Financing Cash Flows

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the nine months ended March 31, 2021 and 2020, respectively, are summarized as follows:

Nine Months Ended

Our cash flows from operating, investing, and financing activities, as reflected in the Statements of Consolidated Cash Flows for the three months ended September 30, 2021 and 2020, respectively, are summarized as follows:

Three Months Ended

September 30,

2021 2020 $ Change

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Net change in cash, cash equivalents, restricted cash, and restricted cash equivalents $ 10,049.1 $ 3,308.1 $ 6,741.0

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.

Net cash flows provided by operating activities decreased due to a net unfavorable change in the components of operating assets and liabilities as compared to the three months ended September 30, 2020, primarily as a result of an increase in incentive compensation payments.

Net cash flows from investing activities changed due to the timing of proceeds and purchases of corporate and client funds marketable securities of $1,517.4 million, and higher payments related to acquisitions of intangibles, offset by proceeds from the sale of property, plant, and equipment in the three months ended September 30, 2021.

Net cash flows from financing activities changed due to a net increase in the cash flow from client funds obligations of $8,897.3 million, which is due to the timing of impounds from our clients and payments to our clients' employees and other payees, net proceeds from reverse repurchase agreements, and settlement of cash flow hedges in the three months ended September 30, 2020.

These were partially offset by an increase in repurchases of common stock in the three months ended September 30, 2021.

We purchased approximately 2.6 million sh ares of our common stock at an average price per share of $205.66 duri ng the three months ended September 30, 2021, as compared to purchases of 1.7 million shares at an average price per share of $136.55 during the three months ended September 30, 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 March 31, 2021 and June 30, 2020, the Company had no commercial paper borrowing outstanding.

At September 30, 2021 and June 30, 2021, the Company had no commercial paper borrowing outstanding.

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

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 2021 2020

Three Months Ended

September 30,

Average daily borrowings (in billions) $ 2.0 $ 2.4

Weighted average interest rates 0.1 % 0.1 %

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

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

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.

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 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.

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 obligatio ns.

At September 30, 2021 and June 30, 2021, the Company had $45.8 million and $23.5 million, respectively, of outstanding obligations related to the reverse repurchase agreements.

Details of the reverse repurchase agreements are as follows:

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 2021 2020

Three Months Ended

September 30,

Average outstanding balances $ 195.1 $ 152.4

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The primary uses of the credit facilities are to provide liquidity to the commercial paper program and funding for general corporate purposes, if necessary.

We had no borrowings through March 31, 2021 under the credit facilities.

We had no borrowings through September 30, 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 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.

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

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

Capital expenditures for the three months ended September 30, 2021 were $34.6 million, as compared to $45.2 million for the three months ended September 30, 2020.

We expect capital expenditures in fiscal 2022 to be between $200 million and $225 million, as compared to $178.3 million in fiscal 2021.

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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 funds obligations.

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 funds obligations.

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

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Details regarding our overall investment portfolio are as follows:

Three Months Ended Nine Months Ended

March 31, March 31,

2021 2020 2021 2020

Three Months Ended

September 30,

Average investment balances at cost:

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Net realized (gains)/losses on available-for-sale securities $ (0.1) $ (0.3)

March 31, 2021 June 30, 2020

September 30, 2021 June 30, 2021

Net unrealized pre-tax gains on available-for-sale securities $ 371.8 $ 502.2

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

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.

The annu alized interest rate earned on our entire p ortfolio decreased from 1.8% for the three months ended September 30, 2020 to 1.4% for the three months ended September 30, 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 $24 million impact to earnings before income taxes over the ensuing twelve-month period ending September 30, 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 $9 million impact to earnings before income taxes over the ensuing twelve-month period ending September 30, 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 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